CAPITAL CENTURY CO LTD v. EASEWIN PROPERTIES LTD

HCCW100/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO.100 OF 2006

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J U D G M E N T

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I. Introduction

1. The Petitioner seeks to winding-up the Company because of its inability to pay the judgment debt of RMB477,000 and RMB176,000 in HCCT80/2005, an action commenced by the Petitioner against the Company to enforce an arbitral award dated 5 September 2005 (“the Award”) made by the China International Economics and Trade Arbitration Commission (“CIETAC”).  The Company applied for an order to stay or dismiss the petition on the ground that it has a cross claim against the Petitioner.

2. The background leading to the parties’ dispute may be summarized as follows.

II. BACKGROUND

A. The Joint Venture Agreement

3. The Petitioner, the Company and a Mainland third party (“the Third Party”) are parties to a joint venture agreement executed in January 1999 (“the JV Agreement”) in relation to a joint venture vehicle, Cheng Du Sing Kong City Real Estate Co. Ltd (“the JV Company”).  The JV Company has a registered share capital of RMB30,000,000.  Pursuant to Clause 9 of the JV A greement, the capital contribution to be made by the parties is as follows :

Party	Contribution (RMB)	Percentage
The Company	15,900,000	53%
The Petitioner	10,500,000	35%
The Third Party	3,600,000	12%

4. Clause 11 of the JV Agreement requires the parties to pay up their respective capital contribution in full within one month after the signing of the JV Agreement.  If a party defaults in making its capital contribution, it is liable under Clause 44 for “违约金”, calculated at 3% of the contribution, and the other innocent parties are entitled to terminate the JV Agreement and claim for damages.

5. The JV Agreement is governed by the PRC law.  And any disputes between the parties thereunder is to be referred for arbitration by CIETAC : see Clause 48 of the JV Agreement.

B. Regulation 7

6. The parties’ obligations to make capital contribution to the JV Company are further governed by 《中外合资经营企业合营各方出资的若干规定》.  In particular, Regulation 7 (“Regulation 7”) stipulates :

「合营一方未按照合营合同的规定缴付或者缴清其出资的，即构成违约。守约方应当催告违约方在1个月內缴付或者缴清出资。逾期仍未缴付或者缴清的，视同违约方放弃在合营合同中的一切权利，自动退出合营企业。」

C. The Award

7. The Petitioner complained that the Petitioner had failed to make its capital contribution.  On 28 July 2004, it referred the matter to CIETAC for arbitration.  It claimed for “违约金” in the sum of RMB477,000 (RMB15,900,000 x 3%) and a declaration that the Petitioner had, pursuant to Regulation 7, forgone all its rights in the JV Agreement and had automatically withdrawn from the JV Company.

8. CIETAC found that the Petitioner had made a capital contribution to the JV Company of RMB4,311,488 only.  It was therefore liable to pay the Petitioner “违约金” in the sum of RMB477,000.  CITEAC further found that at the time when Petitioner issued demands to the Company for payment of capital contribution, no determination had been made by any relevant authority on the question if the Company had fulfilled its obligation to contribute its share of capital under the JV Agreement.  Absent such determination, CIETAC ruled, there was no valid demand under Regulation 7, which could trigger its application.  The declaration sought by the Petitioner was therefore refused.

9. On costs, CIETAC held that the Petitioner should pay 80% of the costs, that is, RMB176,000.

10. Thus under the Award, the Company had to pay the Petitioner RMB4767,000 and RMB176,000.

D. The Approval Certificate

11. While the arbitration was going on, an application was made to 成都市武侯区对外经济合作局 (“the Authority”) in relation to the shareholding of the JV Company.  By an approval certificate dated 22 May 2005 (“the Approval Certificate”), the Authority approved the transfer to all the 12% shareholding from the Third party to another Mainland party.  In relation to the Company’s 53% shareholding in the JV Company, the Authority stated :

「三、 乙方 (the Company) 因虚假出资，且公司已解散，故[其]所占注册资本53%的股份全部由[丙方] (the Petitioner) 补足。」

12. There is no evidence to suggest that CIETAC was aware of the Authority’s decision or the Approval Certificate at the time.

E. HCCT80/2005

13. As noted, the Petitioner then sought enforcement of the Award in Hong Kong by commencing HCCT80/2005.  Judgment was subsequently obtained on 14 December 2005.

III. The Company’s contentions

14. In the affirmations filed on its behalf in these proceedings, the Company had raised numerous matters.  But at the substantive hearing on 30 August 2006, Mr Chu, counsel appearing for the Company, sought to rely on two points only, namely :

(1)	The Company has a genuine cross claim against the Petitioner, which exceeds the amount of the debt.  As will be seen in a moment, this point is premised on the assertion that the Company still retains an equitable interest in the shareholding of the JV Company.  I will call this the Equitable Interest Point.
(2)	The enforcement of the Award is caught by section 40E(3) of the Arbitration Ordinance, Cap.341, in that the enforcement would be contrary to public policy of Hong Kong.  I will call this the Enforcement Point.

I will consider them in turn below.

A. The Equity Interest Point

15. The Company’s contention, in brief, is this.  It had made capital contribution to the JV Company.  Thus it still retains an equitable interest in the 53% shareholding of the JV Company now registered under the Petitioner’s name.  The purported “transfer” of such shareholding from the Company to the Petitioner as approved by the Authority was made without the Company’s consent or consideration.  The approval was procured by the Petitioner fraudulently.  Had CIETAC been made aware of the purported “transfer”, it might have come to a different conclusion in the arbitral proceedings.  In the circumstances, the Petitioner is holding the 53% shareholding in the JV Company on trust for the Company, the value of which substantially exceeds the judgment debt.  The petition is presented with the ulterior motive of stifling the Company’s cross claim and is causing it prejudice.

16. I will first examine the veracity of the assertion that the Company still retains an equitable interest in the 53% shareholding of the JV Company, which is the very basis of the Company’s contentions.

17. In his 2^nd Affirmation filed on 10 April 2006, Mr J.C. Wang, a director and shareholder of the Company, alleged that the Company had fully paid up its capital contribution of RMB15,900,000.  He relied on an audited report prepared by an audit firm in Chengdu dated 29 April 1994.  However, in an action between the Petitioner and the Company ((2004) 成民初字第811 号), a court in Chengdu had already found that the said audit report was fraudulent and could not be proof that the Company had put up the capital contribution as alleged : see the judgment of the Sichuan Chengdu Intermediate People’s Court dated 22 November 2004 at p.14 (Exhibit “WX-10” to the 3^rd Affirmation of Wang Xiang filed on behalf of the Petitioner on 2 June 2006).

18. In the circumstances, there can no substance at all in Mr J.C. Wang’s allegation that the Company had injected its capital contribution into the JV Company in full.

19. Mr Chu did not seek to rest his submissions on Mr J.C. Wang’s allegation.  Instead, he referred to CIETAC’s finding that the Company had injected RMB4,311,488 as capital contribution into the JV Company and its ruling the Company had not foregone its rights in or withdrawn from the JV Company.  He argued that, as a matter of PRC law, whether the Company retains an equitable interest in the JV Company proportionate to such contribution is still an open question.  In support, he relied on Easewin Properties Limited & Another v. The Registrar of Companies & Others, HCMP92/2004, 1 December 2004, unreported, Tang J (as he then was), where the learned judge observed that whether the Company still retained any interest in the JV Company was open under the PRC law.

20. It should be noted that the question whether as a result of the Company’s contribution of RMB4,311,488 it still retains an equitable interest in the JV Company was not raised before CIETAC.  In refusing the Petitioner the declaratory relief, CIETAC simply ruled that Regulation 7 did not apply because there was no valid demand in the absence of a pre-determination by the relevant authority on the Company’s failure to make capital contribution.  It is not CIETAC’s ruling that Regulation 7 did not apply because the Company still retains some interest in the JV Company.

21. The above question has to be decided by reference to the applicable PRC law.  In this regard, the Petitioner relied on a legal opinion prepared by a Sichuan Chuanda Law Firm (“SCLF”) dated 29 May 2006.  There, SCLF opined that the Company’s partial capital contribution of RMB4,311,488 does not entitle it any interest in the shareholding of the JV Company.  At most, it is a debt due from the JV Company to the Company.  It cannot be said that the Petitioner had misappropriated the Company’s shareholding in the JV Company.  The Company has filed no expert evidence to contradict SCLF’s opinion.

22. Thus, on the undisputed expert evidence before me which I accept, the answer to the above question is plain and obvious.  As a matter of PRC law, the Company does not have any interest in the shareholding of the JV Company arising from its partial capital contribution of RMB4,311,488.

23. Mr Chu’s reliance on Tang J’s observation in Easewin Properties Limited & Another v. The Registrar of Companies & Others, HCMP92/2004, is misplaced.  In those proceedings, the Company applied for restoration to the register of companies under section 291(7) of the Companies Ordinance.  At the time, Tang J did not have the benefit of any expert evidence on the applicable PRC law.  His observation must be properly understood in that context.  Now that the court is provided with the undisputed expert opinion of SCLF, what Tang J had said does not assist the Company a bit. 

24. I next turn to consider Mr Chu’s submissions on the Approval Certificate.

25. Mr Chu described the Petitioner’s taking over of the 53% shareholding in the JV Company from the Company as “transfer”.  But on a more careful reading of the Approval Certificate, what the Authority did was to allow the Petitioner to take up in full (“补足”) the 53% shareholding.  No transfer as such is involved.  Mr Chu’s description of the nature of transaction approved by the Authority is not correct.

26. Turning to the substance of the approval, Mr Chu attacked the two reasons given by the Authority as being unreliable.  On fraudulent injection of capital, it cannot be supported in light of CIETAC’s finding that the Company had made a partial capital contribution of RMB4,311,488.  On dissolution of the Company, it was still in existence although at the time it had been struck off from the register of companies.  The Company has in May 2006 commenced administrative proceedings in the Mainland against the Authority, seeking to set aside the Approval Certificate and to restore to the Company the 53% shareholding in the JV Company. 

27. Mr Chu’s submission has completely ignored the undisputed evidence proffered by the legal opinion of SCLF that the Company does not have any interest in the shareholding of the JV Company.  I therefore have considerable doubt if the Company can succeed in the administrative proceedings.  I further note the substantial delay in issuing the administrative proceedings.  If the Company’s case is genuine, I see no reason why it did not commence the administrative proceedings much earlier.  This reinforces my doubt on the veracity of the Company’s case and leaves me with the impression that starting the administrative proceedings is mere litigation tactics to frustrate this petition.  See In re Zhuang PP Holdings Ltd, CACV288/2005, unreported, 15 June 2006 and In re Sea Wave Hair Design Holdings Ltd [1999] 4 HKC 409 where the courts regarded delay as reflecting on the company’s lack of bona fide and strength on the alleged cross claim. 

28. There is a further technical difficulty.  The Petitioner has been invited by the PRC court to participate in the administrative proceedings as its interest may be affected by the outcome.  But the administrative proceedings do not constitute a cross claim raised by the Company against the Petitioner as such. 

29. In my view, there is no substance in the contention that the Company still retains an equitable interest in the JV Company.  The Company has therefore failed to satisfy me that it has a genuine cross claim on substantial grounds arising from its alleged interest in the JV Company.

30. Mr Chu argued that the court can assume that the Company has a genuine cross claim.  He relied on In re LHF Wools Ltd [1969] 3 All ER 882 in support.  It is not necessary to dwell on this argument.  For it is plainly wrong.  In In re LHF Wools Ltd, the English Court of Appeal took into account all the circumstances of the case and came to a conclusion that the company did have a cross claim with substance.  The Court did not act on assumption as such.

31. What remain are two subsidiary points, namely, motive of presenting the petition and prejudice.  I first look at motive.  It is trite that where there was no dispute of the petitioning debt on substantial grounds, the question of presenting for an ulterior motive is irrelevant : In re Keen Lloyd Resources Ltd [2004] 2 HKC 33.  As I have already ruled that the alleged cross claim lacks substance, the Petitioner’s motive in presenting this petition is irrelevant. 

32. On prejudice, Mr Chu again sought reliance on Tang J’s observation in Easewin Properties Limited & Another v. The Registrar of Companies & Others, HCMP92/2004 at paragraph 35 :

“

35.

To conclude, I am of the view that A2 did feel aggrieved by the striking off of the Company and that it is just that the Company should be restored.  Insofar as I have a discretion in the matter I would exercise my discretion in favour of A2.  In exercising my discretion I take into account all the circumstances.  In particular, I take into account the fact that if the respondents are correct, namely, that as a matter of PRC law it can clearly and easily be established that the Company had no interest or right in the joint venture company then even if I was wrong in reinstating the Company, the prejudice to the respondents would be relatively minor.  The respondents should have no difficulty in causing any such claim to be dismissed.  On the other hand, the prejudice to the company would be substantial if they turn out to be right because if they were not reinstated they would not be in a position to protect their investment in the joint venture company.  In all the circumstances, I believe the Company ought to be restored to the register and at the conclusion of the hearing I made an order to that effect. ….”

It is clear that Tang J took the view that prejudice was possible because on the evidence then before him, whether the Company had any interest in the JV Company was still an open question under the PRC law.  But on the undisputed evidence now before me, that is no longer the case.  I am therefore unable to accept Mr Chu’s contention on prejudice.

B. The Enforcement Point

33. I next turn to the Enforcement Point.

34. Section 40(3) of the Arbitration Ordinance reads :

“Enforcement of a Mainland award may also be refused if the award is in respect of a matter which is not capable of settlement by arbitration under the law of Hong Kong, or if it would be contrary to public policy to enforce the award.”

35. The expression “public policy” is a multi-faceted concept.  Woven into this concept is the principle that courts should recognize the validity of decisions of foreign arbitral tribunals as a matter of comity, and give effect to them, unless to do so would violate the most basic motions of morality and justice : Hebei Import and Export Corporation v. Polytek Engineering Co. Ltd [1999] 1 HKLRD 665, per Litton PJ at p.640F-H.  The party invoking the ground of public policy must show strong compelling reasons that go beyond the minimum which would justify setting aside a domestic judgment or award : Hebei, per Bokhary PJ at p.674I-J.

36. Mr Chu argued that the Company’s share in the JV Company had been misappropriated by the Petitioner by virtue of the Approval Certificate, which was not disclosed to CIETAC.  Had it been made known to it, CIETAC would have made a wholly different award.  The Award was thus obtained by fraud and should not be enforced : JJ Argo Industries (P) Ltd v. Texuna International Ltd [1994] 1 HKLR 89.

37. Counsel’s submission that the Petitioner had misappropriated the Company’s share in the JV Company is flatly contradicted by the undisputed expert evidence of SCLF.  Further, the non-disclosure of the application to the Authority and the Approval Certificate is one thing.  Whether such non-disclosure amounted to fraud is quite another.  On the evidence before me, I am not satisfied that it is necessarily the case.  In any event, I do not think CIETAC would have made a wholly different award even if the disclosure had been made.  For as I have noted above, the question whether the Company had any interest in the JV Company as a result of its partial capital contribution had not been raised before CIETAC.  It simply ruled that, absent a pre-determination by a relevant authority on the Company’s default in making capital contribution, Regulation 7 did not apply.  And according to the undisputed expert evidence of SCLF, the Company does not have any interest in the JV Company arising from its partial capital contribution.

38. The Company has not demonstrated any compelling reason on public policy why section 40E(3) should bite.  The Enforcement Point must fail.

VI. Conclusion

39. For the above reasons, I will allow the petition, make a winding-up order against the Company and dismiss the Company’s application for stay or dismissal of the petition.  I will also make an order nisi that the Petitioner shall have the costs of the entire proceedings, to be taxed if not agreed.