UNITED TECHNOLOGIES FAR EAST LTD v. GST INTERNATIONAL MANAGEMENT LTD AND OTHERS

HCA 1211/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1211 OF 2010

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J U D G M E N T

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The applications

1.  There are two substantive applications for decision before the court:

(i)     The inter partes application by the plaintiff for continuation of a Mareva injunction granted by Sakhrani J on 10 August 2010;

(ii)    A joint application by the plaintiff and the 4^th and 5^th defendants, by summons dated 21 December 2010, for a variation of the terms of that injunction to give effect to a settlement entered into between them.

2.  By Order of this court dated 8 February 2010 these applications were ordered to be heard together, and directions were made as to the filing of evidence and skeleton arguments.

3.  Strictly speaking, a third application of a procedural nature also was in play and was mounted by the 1^st, 2^nd and 3^rd defendants: this was that these substantive matters be adjourned in order to permit the filing of additional evidence in response to evidence but recently filed on behalf of the plaintiff and D4 and D5, and further and in any event that in lieu of hearing the substantive issues which are the subject of the summonses that these be adjourned and that an ‘early trial’ be ordered.

4.  This adjournment application was refused, and the matter thus proceeded to argument, which thanks to the skill of counsel was completed in the course of a morning.  The precise points at issue were short, and why one and a half days was reserved for this debate is unclear.

The background

5.  This litigation represents a dispute between the plaintiff, and five defendants, of which D1 is corporate and the remaining four are significant individual shareholders of D1.

6.  The case has been pleaded out: an Amended Statement of Claim was filed on 2 February 2011, and Amended Defences of the 1^st, 2^nd and 3^rd defendants on 18 February [D2 and D3] and 22 February 2011 [D1].

7.  The background facts may be briefly outlined, and for this purpose I am content to adopt in large part the useful written summation provided by Mr Smith SC, who appears with Mr Chang for D4 and D5.

8.  D1 is a BVI company which is owned by 22 shareholders, of which D2 to D5 were the controlling shareholders owning 81.63% of D1’s issued capital.

9.  In 2008, P agreed to purchase D1’s shareholding in a company called GST Holdings Ltd (‘GST’) which was listed on the Main Board of the Hong Kong Stock Exchange.

10.  As part of this sale of the GST shareholding, D1 to D5 gave warranties in favour of P pursuant to a ‘Deed of Warranties’ dated 2 December 2008.

11.  Clause 6.1 of this Deed provided, inter alia, that 10% of the purchase price – being HK$144,488,026.72 – should be deposited in an Escrow Account with Citibank for a period of 12 months post-completion, and thereafter in normal course this escrow sum was to be released upon a pro rata basis to the 22 shareholders of D1 on 23 August 2010.

12.  That which then occurred was that upon the plaintiff taking control of GST, it claimed that D1 to D5 had breached the warranties as earlier given regarding GST’s financial state.

13.  In turn, this led to the plaintiff making an ex parte application for Mareva relief, in advance of the contractual date of 23 August 2010 for release of the escrow monies, to restrain the defendants to this action from disposing of the monies standing in the Citibank Escrow Account.

14.  To this end, Sakhrani J granted the injunctive relief on 10 August 2010, his Order in this regard being continued, absent argument, by Stone J on the return day, 13 August 2008.

15.  The next relevant event was that on 6 December 2010, the plaintiff and 10 out of the 22 shareholders (which such 10 included D4 and D5), agreed to settle the plaintiff’s claims under the Deed of Warranties, and as a consequence a Deed of Settlement of that date was executed.

16.  Clause 2 of that Deed of Settlement set out the manner of disposal of the monetary share of the 10 shareholders as currently held in the Escrow Account in a total sum of HK$76,381,572.44.

17.  However, the remaining 12 shareholders of D1, including D2 and D3, did not take part in this settlement with the plaintiff, they are not parties to the Deed of Settlement, and in the event, objection now is mounted on behalf of D1, D2 and D3 not only to the continuation of the injunction order per se, but also to the variation of the injunction order to take account of this settlement.

18.  I deal with each application in turn.

Application for continuation of the Mareva injunction

19.  This was objected to by Mr Grossman on behalf of the D1, who helpfully set out in his skeleton argument the reasons he adumbrated for discharging the Order made by Mr Justice Sakhrani, a like exercise being adopted by Mr Maurellet on behalf of D2 and D3.

20.  In this connection Mr Grossman observed that reference to the undisputed facts and to the precise terms of the Deed of Warranties ‑ which indicated that contractually the ‘partial security’ represented by the Citibank Escrow Account temporally was limited to 12 months – indicated that any claims by the plaintiff outwith this period necessarily would be unsecured, and that the plaintiff had provided neither justification nor any legal basis for engaging in what, via the injunctive relief as now existed, effectively represented a unilateral variation of the specific contractual ‘partial security’ arrangements represented by the Escrow Account.

21.  Mr Grossman further submitted that in any event the Order of Sakhrani J was pursued mainly on the basis that there was a real risk that the amount within the Escrow Account would be removed prior to 23 August 2010 (that is, the earliest date on which the 22 shareholders contractually could receive the distribution of these monies), and that the only evidence of ‘risk of dissipation’ was that the shareholders were not residents of Hong Kong, and thus that it was likely that, if distributed, these monies would not remain in the territory – a fact which in itself, leading counsel said, was insufficient to grant a freezing order, variously citing dicta of Clark J (as he then was) in TTMI Ltd of England v ASM Shipping Ltd of India [2005] EWHC 2666 (at paras 25-26), Walker J in Mobil Cerro Negro v Petroleos de Venezuela [2008] 1 Lloyd’s Rep 689 (at paras 35,41), and Colman J in Laemthong International Lines Co Ltd v Artis & ors [2005] 1 Lloyd’s Rep 100 (at para 54) .

22.  Indeed, continued Mr Grossman, there is no explanation as to why any remittance of monies by the 22 shareholders to their home countries now should be viewed as unjustified, and it was not open to the plaintiff to rely upon alleged difficulties of enforcement by reason of the fact that the defendants were not Hong Kong residents.

23.  Leading counsel’s alternative argument – which also had resonance in his argument against the variation of the injunction order ‑ was that, albeit in no sense any concession on the merits, in the alternative a ‘just and convenient’ solution to these two applications would be to order an early trial, which by letter dated 17 February 2011 M/s Kennedys had proposed to the solicitors respectively acting for the opposing parties, M/s Herbert Smith and King & Wood; however, he said, this eminently sensible proposal had not been reciprocated.

24.  To the proposition that the plaintiff implicitly must have agreed that it would have no security – via the Escrow Account ‑ after expiry of the one year period, and thus that the court could not rewrite the contract and thereby extend the security period, Mr Sussex’s response was that this argument ignored the clear basis upon which the injunction was granted, and that the risk of dissipation of the ‘partial consideration’ if distributed in accordance with the Escrow and Distribution Agreement (‘EDA’) specifically had been addressed in the affirmation of Ms Xi Zheng Zheng in support of the application for the original injunctive relief granted by Sakhrani J.

25.  Mr Sussex maintained that “realistically there is not the remotest prospect” of the monies being available to satisfy a judgment if, as reasonably could be apprehended, the monies are returned to Mainland China, noting specifically that it was not suggested by Mr Grossman that, in the absence of the injunction, the so-called ‘partial consideration’ would not be removed from Hong Kong: to the contrary, D1 appeared to put its case in this regard on the basis that the plaintiff knowingly had accepted precisely this contractual risk.

26.  If, as was the case, Mr Sussex continued, it was intended by the relevant documentation, namely the Deed of Warranties and the EDA, that the ‘partial consideration’ should be used to satisfy any claims which the plaintiff might have had under the Deed, it was self-evident that such intention clearly would be undermined if the court were now to discharge the injunction in toto.

27.  In the circumstances it is difficult to disagree with this view, and I do not do so.

28.  Whilst I had (and have) sympathy with Mr Grossman’s stance in terms of a possible order for an early trial, this court made it very clear early in this hearing that, subject to the variation application, it was wholly disinclined to discharge the injunction which now stood in place pending trial.

29.  In my judgment, given the reciprocal undertakings as to damages, there was and is little commercial downside to this course, and it struck me that to lift the injunction at this stage on the basis urged by Mr Grossman, a stance supported by Mr Maurellet for D2 and D3, effectively would be to decide at the interlocutory stage one of the principal issues for trial.

30.  Accordingly, the plaintiff’s formal application for continuation of the injunction was acceded to, and the cross-application to discharge was denied.

31.  Thus, subject to the outcome of the ‘variation application’, to which I now turn, the injunctive relief is to continue until trial or further order.

32.  As to costs, it seems to me that the fairest course in the circumstances is to make an order nisi that the costs of the ‘continuation application’ should be costs in the cause of the continuing dispute between the plaintiff and D1, D2 and D3; the plaintiff having settled with D4 and D5, there no longer remains a lis between these parties, the cause of action having merged into the settlement agreement.

33.  Accordingly, on the ‘continuation application’ there will be an order in terms of paragraphs 31 and 32 above.

The application to vary the terms of the injunction

34.  The joint application by the plaintiff and D4 and D5, by summons dated 21 December 2010, to vary the terms of the injunction is aimed at giving effect to the terms of the Deed of Settlement executed between the plaintiff and the ten ‘settling shareholders’ of D1, and in particular D4 and D5, who hold the largest shareholding within this group of ten.

35.  Mr Grossman for D1 and Mr Maurellet for D2 and D3 are united in their opposition to this course, and to the prospect of removing from the Escrow Account the monies the subject of the settlement which now is to be paid to the plaintiff by the ‘settling defendants’; in purely quantum terms Mr Smith says that the amount to be paid to his two clients, namely D4 and D5, under the Settlement Agreement is in or about HK$51.5 million out of a total of HK$76,381,572.44 as now sought to be released under the variation summons.

36.  Although ‘illegality’ issues under BVI law were but faintly raised, the thrust of the principal argument canvassed in opposition to payment out consequent on the settlement is that, on the assumption that the case now is to continue by the plaintiff against D1 and the ‘non-settling shareholders’ – in this context the largest thereof being D2 and D3 ‑ then if and in so far as these defendants may wish to issue contribution notices against, inter alia, D4 and D5, the total monies (as presently standing enjoined in the Escrow Account) necessarily would have been reduced by reason of any payment out from the Escrow Account, and thus that part of the funds (which in normal course after the expiry of 12 months and absent the injunction would have been distributed by Citibank pro rata to D4 and D5 and to the other shareholders) thus would not be available to be executed against should any such putative contribution notices bear fruit at trial.

37.  Notwithstanding the persuasiveness of Mr Grossman, ably assisted by Mr Maurellet, this ingenious argument – wherein any proprietary interest in the fund of escrow monies specifically (and in my view entirely correctly) was eschewed by both counsel – struck me in effect as constituting a form of ‘reverse Mareva’.

38.  In other words, if successful in their opposition to the contemplated variation the objecting defendants effectively would be standing in the place of the plaintiff in terms of the freezing of that portion of the escrow monies now intended to be paid out to the plaintiff by D4 and D5, together with the other 8 ‘settling shareholders’, consequent upon the settlement, absent themselves making any such application for such Mareva relief, and solely on the basis of contribution proceedings which at this stage remain unissued, and currently represent but a notional/contingent possibility only.

39.  Add to this intriguing mix Mr Grossman’s initial argument (adopted by Mr Maurellet) that there was no basis for the injunction order to continue against his client in any event – a submission which, as I have indicated, this court quickly declined to accept – together with Mr Sussex’s submission that whilst there would be jurisdiction under the Civil Liability (Contribution) Ordinance, Cap. 377, by the same token it would be odd indeed if, pursuant to this Ordinance [vide in particular sections 3(5) and 4(2)], contribution were to be ordered by the court against a settling party in favour of a losing party who had taken the forensic risk, had refused to settle, and instead had chosen to proceed to trial; in addition, observed Mr Sussex, it should not be overlooked that his client, the plaintiff, was entitled to pursue the present defendants on a joint and several basis, and in the event simply now had decided to settle with D4 and D5 (plus the other minor ‘settling shareholders’), and no longer to pursue them to trial for the full joint and several relief claimed, so that were the court now to refuse the variation requested the resultant position would be difficult analytically to justify.

40.  Accordingly, whilst I confess that my instinct prior to this hearing was not to get involved and simply to hold the status quo and to order an early trial, the argument/analysis propounded by Mr Sussex SC and Mr Smith SC – who possibly for the first time in the history of the Commercial Court found themselves in common cause ‑ has served to convince me that there is no reason now not to grasp the nettle, and in the exercise of my discretion to permit the variation as currently sought.

41.  For completeness it remains only to add that at a late stage of the argument, the possibility – to which both Mr Grossman and Mr Maurellet, having taken instructions (albeit making no concessions) indicated that they would not object on behalf of their clients ‑ was canvassed that the terms of the variation summons dated 21 December 2010 be amended so as to permit withdrawal from the Escrow Account of the lesser sum of HK$51,490,600.16 (as opposed to the originally stipulated figure of HK$76,381,572.44), this substitute figure of HK$51.4 million representing, as I understand it, the sum to which D4 and D5 would have been entitled in on a pro rata distribution by Citibank absent the injunction which had prevented such distribution occurring in normal course.

42.  However, the remaining ‘settling shareholders’ are not parties to this action, and I see no good reason to substitute the lesser sum for the greater simply in order to provide a larger sum in so-called ‘security’ at the behest of D1, D2 and D3 in face of potential contribution proceedings which as a matter of hard forensic reality strike me as little more than a chimera, whether or not Mr Sussex is correct in his collateral surmise that this entire “exercise in obstruction” was aimed at driving a harder settlement bargain on behalf of those shareholders who thus far had declined to settle with the plaintiff.

43.  In this context it is also hard to disagree with Mr Smith’s similar parting shot that conceptually the right to contribution from D4 and D5 would not arise unless D1, D2 and D3 lose the action, and are required to pay proportionately more by way of damages than would have been the case had they settled with the plaintiff (as in the case of D4 and D5 at a considerable discount to the pleaded claim), and that it could hardly be suggested that this eventuality would justify either the grant of what effectively would be a Mareva in favour of D1 to D3, or a refusal of the variation now sought, since in this instance it was difficult to imagine the issue of contribution seriously could be said to be relevant. 

44.  Thus, Mr Smith submitted, the repeated threat of a contribution claim and a multiplicity of proceedings (D4 and D5 having been dropped from the main action) simply indicated that D1 to D3 did not expect to win at trial or to keep the final damages below the settlement figure, in which case the unreasonableness of the position in opposing the variation application was patent, given the lack of any realistic prospect of contribution being successfully pursued.

45.  I am minded to agree.

46.  In this circumstances, I find it difficult to see why, in the exercise of my discretion, I should not accede to the variation as now sought.

47.  It follows from the foregoing, therefore, that on the joint variation application by summons dated 21 December 2010, there is to be an order in terms of paragraphs 1 – 5 of the summons.

48.  I note no order as to costs is sought on the face of the summons as between D4 and D5, who are joint applicants for the variation, and D1, D2 and D3, who resist such variation, although in his skeleton argument Mr Smith SC asks for costs against D1, D2 and D3 with Certificate for Two Counsel.

49.  I make an order nisi that the costs of and occasioned by the variation summons as between D4 and D5 of the one part and D1, D2 and D3 of the other part be in the event of this application, such costs to be taxed if not agreed.

50.  I decline the additional (and if I may say so, optimistic) request that the matter be certified as fit for two counsel.