PALOMA CO LTD v. CAPXON ELECTRONIC INDUSTRIAL CO LTD

HCCT 53/2017

[2020] HKCFI 3050

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS NO 53 OF 2017

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R E A S O N S   F O R   D E C I S I O N

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1.  There are before the Court 2 summonses both issued by Paloma Company Limited, the judgment creditor (“Paloma”):

(1)  The summons dated 4 August 2020 (“Receivers Summons”) for appointment of receivers by way of equitable execution over the shares in Lancom Limited (“Lancom”) held by Capxon Electronic Industrial Company Limited, the judgment debtor (“Debtor”); and

(2)  The summons dated 31 July 2020 (“Injunction Summons”) for continuation of the ex parte Mareva injunction granted by Alex Lee J on 30 July 2020 (“Injunction”) against Lancom and Capxon International Electronic Company Limited, a listed company in Hong Kong Limited (“Listco”), up to HK$273 million.

2.  At the hearing, I made an order appointing 2 nominees of Paloma as receivers over the 85,137,200 shares in Lancom (“Shares”), instead of the accountants nominated by Paloma.  Paloma is the single largest creditor of the Debtor[1] and is familiar with the affairs of Lancom and the Debtor, having in the past 6 years been trying to enforce the Judgment (as defined in §8 below) against the assets of the Debtor.  I consider that Paloma is in the best position to consider whether there are viable claims against any third parties and whether it is in the interests of Lancom to pursue such claims.  The potential claims available to Lancom are said to be the most valuable assets of Lancom.  

3.  I decline to continue the Injunction given that its stated purpose, viz., to preserve the assets of Lancom and Listco pending determination of the Receivers Summons, had become spent. 

Background facts

4.  The Debtor was incorporated in Taiwan and is a subsidiary of Listco which held 96.54% of its shares.  Mr Lin Chin Tsun (“Mr Lin”) was its Chairman.  The Debtor is the sole shareholder of Lancom. 

5.  Lancom is a company incorporated in Hong Kong.  It was controlled by Mr Lin and his wife, Ms Chou Chiu Yueh (“Mrs Lin”), who were its directors. 

6.  Listco through Multiple Investments Limited, a wholly owned subsidiary incorporated in the BVI (“MIL”), owned and controlled 2 wholly owned subsidiaries established in the Mainland, being Capxon Electronic (Shenzhen) Co Ltd (“Capxon Electronic”) and Capxon Trading (Shenzhen) Co Ltd (“Capxon Trading”) (together “Mainland Subsidiaries”).   

7.  By an arbitral award made in Japan dated 6 August 2014 (“Award”), the Debtor was ordered to pay JPY 2,427,186,647 to Paloma together with interests and costs.  The Debtor’s attempts to set aside the Award were dismissed by Tokyo District Court (in January 2016), Tokyo High Court (in February 2017), Japan Supreme Court (in May 2017) and Taiwan Shilin District Court (in March 2018). 

8.  By Order dated 12 October 2017, Mimmie Chan J gave leave to Paloma to enforce the Award as a judgment in Hong Kong (“Judgment”).

9.  On 23 November 2017, Paloma obtained a charging order nisi over the Shares. 

10.  In April 2018, the Debtor was put into solvent voluntary liquidation in Taiwan and Mr Lin was appointed as its liquidator.  

11.  On 14 May 2020, Keith Yeung J made the charging order nisi over the Shares absolute (“Charging Order”), and ordered the Debtor to disclose all transactions through which any of its assets or the assets of Lancom of an individual value of HK$100,000 or more have been  disposed of,  transferred or removed from the Debtor or Lancom since August 2014 (“Disclosure Order”). 

12.  On 13 July 2020, Paloma obtained a garnishee order in respect of an account receivable in the amount of NT$88,559,975 (“NTReceivable”) due from Lancom to the Debtor (“Garnishee Order”). 

13.  To date, Paloma has only been able to recover (1) NT$2,727,000 of rent, (2) NT$6,990,338 from sale of landed properties in Taiwan; and (3) NT$205,173 cash.  The Debtor still owed Paloma approximately HK$273 million.   

14.  It is Paloma’s case that with the benefit of the Disclosure Order it was able to discover, for the first time, details of the following transactions which are said to have been made a view to dissipate Lancom’s valuable assets.  These included:

(1)  On 1 August 2014, Lancom resolved to sell its shares in the Mainland Subsidiaries to MIL.  This left Lancom with account receivables of HK$447 million and cash/bank balance of HK$15 million.

(2)  Between 22 and 28 August 2014, Lancom used the cash received from MIL to advance loans in the aggregate sum of US$27.63 million to Listco.

(3)  From January to April 2015, Lancom lent further loans to Listco in the total sum of HK$224 million. 

(4)  On 20 April 2015, Waystech Trading Ltd, a BVI company wholly owned by Listco (“Waystech”), assumed Listco’s obligations to pay RMB 98 million and US$19.6 million to Lancom.  In addition, Lancom lent a further sum of US$8.85 million to Waystech. 

(5)  Lancom gradually ceased operation in that its revenue was reduced from HK$678 million in 2014 to HK$55 million in 2015, and to nil in 2019.    

15.  Mr Jonathan Chang SC (leading Mr Jason Yu) submits that as a result of the above “asset-striping scheme”, Lancom has been transformed from a company with profitable business and valuable assets (i.e. the Mainland Subsidiaries) to a company with no business and its only assets are receivables from Waystech and Capxon Trading (the latter has commenced liquidation on 13 July 2020).  Mr Chang SC contends that the timing and apparent lack of commercial reasons for the above transactions strongly suggest that they were made for the purpose of putting Lancom’s assets out of the reach of Paloma. 

16.  On the other hand, Mr Jose Maurellet SC (leading Ms Esther Mak), counsel for the Debtor, Lancom and Listco, submits that the transactions formed part of the group’s “day-to-day operations for legitimate commercial purposes” and “similar transactions had been consistently carried out by Lancom since its incorporation”.  Specifically, he submits that:

(1)  the Mainland Subsidiaries were transferred from Lancom to MIL in response to unfavourable market conditions, and the transfers served to maximise the group’s profit and offset the losses suffered by the group’s aluminium foil business;

(2)  Lancom derived its revenue as an intermediary, and loans from Lancom to Listco were common and were made to promote the development of Lancom;

(3)  the transfer of Lancom’s receivables from Listco to Capxon Electronic and MIL was “in order to net off the account payables owing from Lancom” to Capxon Electronic and MIL and was “part of the routine accounting practice” of the group;

(4)  the transfer of receivables from Listco to Waystech was part of the group’s effort to increase its investments (through Waystech) in the manufacture of high-end aluminium foil products.  The loans to Waystech were in the interests of Lancom, as more business for the group means “more opportunities for Lancom to act as an intermediary in these dealings and derive profit therefrom”.  Waystech has substantial investment in 2 (other) subsidiaries in Mainland which are valued at US$39.6 million, and will be able to repay funds to Lancom once it receives dividends from such subsidiaries; and

(5)  Lancom ceased its business because of the dispute with Paloma which had deterred customers from placing orders with the group. 

17.  Paloma does not accept the explanations proffered by Lancom and Listco on the basis that they are not supported by contemporaneous documents.  It contends that the impugned transactions show that the persons in control of Lancom acted in breach of their fiduciary duties by sacrificing the interests of Lancom to those of the group.

18.  Against the above background, on 30 July 2020, Paloma obtained the Injunction against Lancom and Listco.  The basis for seeking the Injunction, as described in the ex parte application, was the need to preserve the status quo pending determination of the Receivers Summons. 

Receivers Summons

19.  The applicable principles are not in dispute and have been sufficiently summarised in Cruz City v Unitech [2015] 1 All ER (Comm) 336, §47, per Males J:

“(a) The overriding consideration in determining the scope of the court’s jurisdiction is the demands of justice. Those demands include the promotion of the policy of English law that judgments of the English court and English arbitration awards should be compiled with and, if necessary, enforced.

(b) Nevertheless the jurisdiction is not unfettered. It must be exercised in accordance with established principles, though it is capable of being developed incrementally. It is not limited to situations where equity would have appointed a receiver before the fusion of law and equity pursuant to the 1873 and 1875 Judicature Acts. Specifically, in modern conditions where business is increasingly global in nature, the jurisdiction is ‘unconstrained by rigid expressions of principle and responsive to the demands of justice in the contemporary context’.

(c) The jurisdiction will not be exercised unless there is some hindrance or difficulty in using the normal processes of execution, but there are no rigid rules as to the nature of the hindrance or difficulty required, which may be practical or legal, and it is necessary to take account of all the circumstances of the case. That is all that is meant by dicta which speak of the need for ‘special circumstances’: see in particular the decision of Tomlinson J in Masri cited above and also the decision of Arnold J in UCB Home Loans Corporation Ltd v Grace [2011] EWHC 851 (Ch), [2011] All ER (D) 228 (Mar), holding that there were sufficient ‘special circumstances’ rendering it just and convenient to appoint a receiver by way of equitable execution when it would be ‘difficult for the claimant to enforce its judgment by other means’ and that the appointment of a receiver was the only realistic prospect available to the judgment creditor to enforce its judgment in the short term.

(d) As the statutory source of the court’s power to appoint a receiver speaks of what is ‘just and convenient’, it is impossible to say that convenience is not at least a relevant consideration (albeit not the only one).

(e)  A receiver will not be appointed if the court is satisfied that the appointment would be fruitless, for example because there is no property which can be reached either in law or equity. That is an aspect of the maxim that equity does not act in vain.  However, a receiver may be appointed if there is a reasonable prospect that the appointment will assist in the enforcement of a judgment or award.  It is unnecessary, and will generally be pointless, for the court to attempt to decide hypothetical questions as to the likely effectiveness of any order.  That applies with even greater force where such questions involve disputed issues of foreign law.  It is sufficient that there is a real prospect that the appointment of receivers will serve a useful purpose.”

20.  Mr Chang SC submits that it is just and convenient for the Court to appoint receivers over the Shares for the following reasons. 

21.  First, legal execution of the Judgment has proved to be futile in that:

(1)  Although Paloma obtains the Charging Order over the Shares, it is highly unlikely that the Shares can be sold to any willing buyer, at any rate not without a substantial amount.  This is because the only known assets of Lancom are the receivables due from Waystech and Capxon Trading. Neither of them appears to have any sufficient liquid funds to repay Lancom. 

(2)  As for the Garnishee Order, Lancom does not have any liquid assets to repay the NT Receivable owed to the Debtor.

22.  Second, the Court may empower receivers to exercise a judgment debtor’s right over its shareholdings which are assets of the judgment debtor itself. 

(1)  This includes the exercise of voting rights to appoint directors or to put the subsidiary companies into liquidation so as to obtain a distribution of their surplus assets (Cruz City, §48; Pacific Harbour Advisors Pte Ltd & anor v Winson Federal Limited & ors, HCA 1257/2013, 22 May 2015, §§10, 55). 

(2)  The Court may also empower the receivers to bring proceedings in the name of the owner of the property of which they have been appointed receiver.  In Levermore v Levermore [1979] 1 WLR 1277 at 1282, Balcombe J observed that “it is not uncommon as a matter of practice when a receiver is appointed, whether by way of equitable execution or for the interim preservation of property, to authorise the receiver in an appropriate case to bring any necessary proceedings in the name of the estate owner of the property of the which he has been appointed receiver”. 

(3)  In the present case, the Court can empower the receivers to exercise the voting rights on the Shares to appoint themselves as directors of Lancom so that they can cause Lancom to bring proceedings to recover its assets. 

23.  Third, Lancom has direct claim against Waystech in respect of the amounts due, and potential claims against Mr Lin, Mrs Lin and Listco in respect of the impugned transactions whereby the loans advanced to and repayable by Listco were transferred to Waystech (as described in §14(2)-(4) above).  Such claims may be pursued by the receivers in the name of Lancom for the purpose of recovering the loss said to have been suffered by Lancom.   

24.  In his skeleton submissions, Mr Maurellet SC advances the following points in opposition to the Receivers Summons:

(1)  The burden is on Paloma to satisfy the Court that the potential claims are reasonably arguable, such that there is a reasonable prospect that the appointment would assist in the enforcement of the Judgment (Cruz City, §47(e)). 

(2)  Paloma is not seeking to appoint receivers over the causes in action in which it has interest, but the causes of action which belong to the Debtor and the case of Levermore v Levermore is distinguishable on this basis. 

(3)  Paloma must show a connection between the liability owing to it from the Debtor and the rights it seeks to exercise over Lancom’s board which concern recovery of assets against  third parties. 

(4)  Paloma’s interest in the Shares only arose on 23 November 2017 when it obtained the charging order nisi, but the transactions it seeks to impugn took place at the time when Paloma had no interest in Lancom. 

(5)  The allegation that the impugned transactions constituted misappropriation of Lancom’s assets has no merits as the transactions were carried out for proper and legitimate purposes, consistent with how the group companies have been operated throughout the years.  It is said that the transactions were in the interests of Lancom, to which the group’s interest is “derivatively relevant” (Mortimore, Company Directors, 3^rd ed, §13.15; Nicholas v Soundcraft Electronics Ltd [1993] BCLC 360 (CA) §366-367; Facia Footwear Ltd (in administration) v Hinchliffe [1998] 1 BCLC 218 at 228). 

(6)  Lancom would not be adversely affected by the transfer of the loans from Listco to Waystech, given that under the agreement pursuant to which the transfer was made, Waystech has recourse against Listco.   

(7)  In any event, the sale of the Mainland Subsidiaries and the transfer of the receivables have been adopted and impliedly ratified by the Debtor qua Lancom’s sole shareholder.  The approval by Mr Lin and Mrs Lin qua directors constituted informal authorisation or ratification by the sole shareholder of Lancom (In re Duomatic Ltd [1996] 2 Ch 365 at 373).   

(8)  The Court should be slow to exercise its discretion to appoint receivers, given that it is open to Paloma to institute “special liquidation” in Taiwan and sought the standard order for recognition and assistance in respect of the Debtor’s property in Hong Kong including the Shares.  This notwithstanding, Paloma decides to apply for appointment of receivers whose powers “are capable of conflicting with the development of Taiwan liquidation”.   

25.  It seems to me that this is not the forum for resolving the debates over the merits of the potential claims which may be made in the name of Lancom.  The Court is concerned with whether there is any hindrance or practical difficulty in the legal execution of the Judgment and whether Paloma is unable to obtain the fruits of the Judgment through the Charging Order and Garnishee Order obtained to date. 

26.  In my view, the Charging Order and the Garnishee Order are plainly not sufficient to enable Paloma to obtain the fruits of the Judgment.  As matter now stands, Lancom has been transformed from a profitable company which owned all the equity in the Mainland Subsidiaries to a company with no business and whose assets consisted only of receivables from companies which, on their face, do not have sufficient liquid assets to repay the amounts due to Lancom.  In view of the stance taken by Mr Lin and Mrs Lin throughout the enforcement proceedings, it is clear that they will not take any steps to recover the amounts due to Lancom, still less to commence claims in the name of Lancom against any third parties (including themselves) in respect of the loss said to have been suffered by Lancom in the impugned transactions even if there is merit to do so.  The history of this case shows that unless receivers are appointed over the Shares, Paloma would not be able to recover the real value of the Shares. 

27.  At the hearing, Mr Maurellet SC acknowledges, rightly, that it is difficult to have any sensible opposition to the Receivers Summons. His oral submissions focus on the terms of the order.  He submits that the powers conferred on the receivers should not go beyond the stated purpose of the application, which is to allow the receivers to exercise the voting rights over the Shares to appoint themselves as directors of Lancom.  Once appointed as directors, it is a matter for them to consider what steps should be taken by Lancom with a view to recover its assets or loss said to have been suffered.  I agree.  The terms of the Order (set out in the end of this Decision[2]) are revised to make it clear that the powers given to the receivers would not be taken as the Court giving sanction to the receivers (or the directors to be appointed) to take any proceedings in the name of Lancom, which remains a matter for the directors to decide.  Mr Maurellet SC, on behalf of the Debtor, gives undertakings to the Court to take all reasonable steps to facilitate the transfer of the Shares to the receivers and the appointment of the receivers as directors.  The undertakings are set out in the latter part of Schedule 2 to the Order.   

28.  As for costs, Paloma being the successful party, is entitled to be paid the costs of and occasioned by the Receivers Summons by the Debtor, to be taxed on a party and party basis with certificate for 2 counsel.

Injunction Summons

29.  The principles governing the grant of Mareva injunction are well established.  Paloma must show a good arguable case; a real risk of dissipation of assets on the part of Lancom and Listco; and that balance of convenience is in favour of the grant.  Mareva injunctions are more readily granted after judgment (China CITIC v Li Kwai Chun[2018] HKCFI 1800, §§28, 31). 

30.  Where, as here, the injunction is sought against a non-party against whom no claim for substantive relief is made (“NCAD”) under the Chabra jurisdiction, the Court will be guided by the following principles set out in XY, LLC v Jesse Zhu [2017] 5 HKC 479 at §§24-26:

“24. A convenient starting point is a summary of the Chabra jurisdiction taken from the judgment of Popplewell J in PJSCVseukrainskyi Aktsionernyl Bank v Maksimov [2013] EWHC 422 (Comm) at §7 as approved by Tomlinson LJ in Lakatamia Shipping at §32:

‘(1) The Chabra jurisdiction may be exercised where there is good reason to suppose that assets held in the name of a defendant against whom the claimant asserts no cause of action (the NCAD) would be amenable to some process, ultimately enforceable by the courts, by which the assets would be available to satisfy a judgment against a defendant whom the claimant asserts to be liable on his substantive claim (the CAD).

(2) The test of “good reason to suppose” is to be equated with a good arguable case, that is to say one which is more than barely capable of serious argument, but yet not necessarily one which the judge believes to have a better than 50% chance of success.

(3) In such cases the jurisdiction will be exercised where it is just and convenient to do so. The jurisdiction is exceptional and should be exercised with caution, taking care that it should not operate oppressively to innocent third parties who are not substantive defendants and have not acted to frustrate the administration of justice.

(4) A common example of assets falling within the Chabra jurisdiction is where there is good reason to suppose that the assets in the name of the NCAD are in truth the assets of the CAD. Such assets will be treated as in truth the assets of the CAD if they are held as nominee or trustee for the CAD as the ultimate beneficial owner.

(5) Substantial control by the CAD over the assets in the name of the NCAD is often a relevant consideration, but substantial control is not the test for the existence and exercise of the Chabra jurisdiction. Establishing such substantial control will not necessarily justify the freezing of the assets in the hands of the NCAD. Substantial control may be relevant in two ways. First, evidence that the CAD exercises substantial control over the assets may be evidence from which the court will infer that the assets are held as nominee or trustee for the NCAD as the ultimate beneficial owner. Secondly, such evidence may establish that there is a real risk of dissipation of the assets in the absence of a freezing order, which the claimant will have to establish in order for it to be just and convenient to make the order. But the establishment of substantial control over the assets by the CAD will not necessarily be sufficient: a parent company may exercise substantial control over a wholly owned subsidiary, but the principles of separate corporate personality require the assets to be treated as those of the subsidiary not the parent. The ultimate test is always whether there is good reason to suppose that the assets would be amenable to execution of a judgment obtained against the CAD.’

25. It is pertinent to note that in proposition (4), it was stated that a common example of assets falling within the Chabra jurisdiction is where there is good reason to suppose that the assets in the name of the NCAD are in truth the assets of the CAD. As pointed out by Gloster J in Parbulk II at §46, it is clear that the English court does not regard the Chabra-type jurisdiction as limited to cases where the NCAD holds, or has received, assets beneficially belonging to the CAD or assets in which the CAD has some sort of proprietary entitlement. In this respect, the English court decisions followed the important decision of the High Court of Australia in Paul Cardile v LED Building Proprietary Ltd (1999) 198 CLR 380. At §§57 and 58 of the joint judgment of Gaudron, McHugh, Gummow and Callinan JJA, the High Court of Australia stated:

‘What then is the principle to guide the courts in determining whether to grant Mareva relief in a case such as the present where the activities of third parties are the object sought to be restrained? In our opinion such an order may, and we emphasise the word “may”, be appropriate, assuming the existence of other relevant criteria and discretionary factors, in circumstances in which:

(i) the third party holds, is using, or has exercised or is exercising a power of disposition over, or is otherwise in possession of, assets, including “claims and expectancies”, of the judgment debtor or potential judgment debtor; or

(ii) some process, ultimately enforceable by the courts, is or may be available to the judgment creditor as a consequence of a judgment against that actual or potential judgment debtor, pursuant to which, whether by appointment of a liquidator, trustee in bankruptcy, receiver or otherwise, the third party may be obliged to disgorge property or otherwise contribute to the funds or property of the judgment debtor to help satisfy the judgment against the judgment debtor.

It is that principle which we would apply to this case. Its application is a matter of law, although discretionary elements are involved.’

26.  It is recognized that the second limb of the principle set out in §57(ii) is ‘potentially of extremely wide application.’  As stated by Briggs Jin Revenue & Customs Commissioners v Egleton [2007] 1 All ER 606 at §29, ‘it appears to contemplate that jurisdiction exists to make a freezing order against any potential debtor of an individual or company against whom the claimant has a cause of action, upon the footing that since enforcement of a judgment against the defendant may lead to its liquidation or (if an individual) bankruptcy, and since a liquidator or trustee in bankruptcy may then be able to pursue claims against third parties, then jurisdiction exists to enable the plaintiff to seek a freezing order against any such third parties, always assuming that the other discretionary considerations, such as a risk of dissipation of assets, are satisfied.’”

31.  Mr Chang SC submits that there are good reasons to suppose that the assets held in the name of Lancom and Listco are amenable to enforcement of the Judgment in that:

(1)  The Court has jurisdiction to freeze the assets of third party debtors of the company which the petitioner seeks to wind up (Revenue and Customs Commissioners v Elgeton [2007] 1 All ER 606, §§1-3, 22-42, considered in XY, at §26).  The position is a fortiori where a creditor seeks to appoint receivers by way of execution over the debtor’s assets instead of a winding up order against the debtor. 

(2)  In the present case, there is good reason to suppose that (i) the receivers can be appointed, who can then sue in the name of Lancom; and (ii) Lancom has good arguable claims against Listco which the receivers may cause Lancom to pursue.  There is therefore good reason to suppose that, by this process, the assets of Listco and Lancom will be made available to satisfy the Judgment. 

32.  While one can see that the assets of Lancom may be made available to satisfy the Judgment through the process of appointment of receivers by way of equitable execution (such that there was a valid basis to seek a Mareva injunction against its assets pending determination of the Receivers Summons), the same cannot be said of the assets of Listco. 

(1)  The application for appointment of receivers has nothing to do with Listco, still less its assets. 

(2)  The fact that after appointment of receivers, steps may be taken by the receivers to replace the directors of Lancom who, in turn, may cause Lancom to commence claim against Listco does not make Listco to become a NCAD within the “second limb” of the Chabra jurisdiction as discussed in §26 of XY.  Indeed, if one takes Mr Chang SC’s argument to its logical conclusion, it would mean that the Chabra jurisdiction can be extended to any third party against whom a company owned by the debtor (not the debtor itself) may have a claim, and the threshold for seeking an injunction against such NCAD would be even lower than the threshold for seeking an injunction against a CAD[3] (the latter requires the applicant to demonstrate that it has a good arguable claim against the CAD, but there is no such requirement in the case of an application against a NCAD).  I do not think the “second limb” of the Chabra jurisdiction can be extended in this way. 

(3)  In any event, there is no basis to suggest that Listco’s assets will become amenable to enforcement of the Judgment, whether by the process of winding up or appointment of receivers over Listco. 

33.  Even if, contrary to my view, the Chabra jurisdiction can be extended to the assets of Listco, it has not been shown that there is a real risk of dissipation of assets on the part of Listco for the reasons set out in §§34 to 39 below.

34.  First, Mr Chang SC submits that a real risk of dissipation of assets can be inferred where it is shown that a debtor proposes to take advantage of every opportunity to resist enforcement of a judgment, to evade responsibility to pay a judgment creditor what is due and to put every obstacle in the way to prevent enforcement, citing Marsi v Consolidated Contractors International Co Sal & anor [2008] ILPr 14 at §§82-84.  Further, evidence of dishonest and fraudulent conduct which form the basis of a claim could point powerfully towards inferring a risk of dissipation (Convoy Collateral Ltd v Cho Kwai Chee & ors[2020] HKCA 537 §53). 

35.  Neither consideration discussed in Marsi and Convoy applies to Listco.  All the allegations of wrongdoings are directed against Mr Lin and Mrs Lin who, in turn, controlled the Debtor and Lancom.  By contrast, Listco is under the control of its board of directors, which comprises 8 directors of which 3 are independent non-executive directors.  There is no proper basis to assert that Listco is under the control of Mr Lin and Mrs Lin. 

36.  Second, Mr Chang SC contends that it is easier to infer a risk of dissipation of assets after judgment (China CITIC v Li, §31).  In the present case, all the fixed assets of Lancom were sold within 2 months of the Award, and substantial amounts of Lancom’s funds were paid to Listco in the following months by way of loans, and Lancom’s remaining liquid assets were diverted to Waystech in the form of loans. 

37.  I do not think that one can infer a real risk of dissipation of assets post-Judgment vis-à-vis Listco, given that the Judgment was not against Listco.  In any event, as Mr Chang SC confirms in his oral submissions, there is no allegation that the sale of the Mainland Subsidiaries was made at an undervalue or that Listco would not be able to repay the loans advanced by Lancom.  As for the further loans advanced to Waystech, it is not suggested that Listco had any involvement in making such loans.  That being the case, I am unable to see how one can infer a risk of dissipation of assets on the part of Listco from any of the transactions relied upon by Mr Chang SC.

38.  Third, Mr Maurellet SC submits that a substantial delay in seeking a Mareva injunction and the lack of proper explanation for it militate against any real risk of dissipation of assets.  The Court would not usually grant injunctions where significant time has elapsed and an injunction would in effect be locking the stable door after the horse has bolted (Re Chau Cham Wong Patrick [2016] 2 HKLRD 278 §§33-34, per Peter Ng J).  Paloma has for the past 2 years contended that there had been an “asset-stripping scheme” by Mr Lin and Mrs Lin and that the transfer of the Mainland Subsidiaries constituted a misappropriation of Lancom’s assets.  Mr Lin and Mrs Lin clearly have had knowledge of the claim for a long time and would have disposed of the assets of Lancom or Listco before Paloma applied for the Injunction, should they inclined to do so.  I agree. 

39.  Fourth, as pointed out by Mr Maurellet SC in his oral submissions, the oddity of Paloma’s allegation is that the alleged asset-stripping did not result in dissipation of assets on the part of Listco, as all the assets remain under the companies under the umbrella of Listco.  This reinforces Listco’s contention that there is no risk of dissipation of assets on the part of Listco.  I agree that this factor negates any suggestion of real risk of dissipation of assets on the part of Listco. 

40.  In view of the above conclusions, it is unnecessary to consider whether balance of convenience is in favour of the grant or continuation of the Injunction.  If it is necessary to consider balance of convenience, I think the balance comes against the grant or continuation of the Injunction. 

(1)  The Injunction, although described as an “injunction prohibiting disposal of assets in Hong Kong”, in fact covered (i) Lancom’s assets located outside of Hong Kong, being the receivables from Waystech and Capxon Trading; and (ii) Listco’s direct or indirect shareholding or equity interests in 14 subsidiaries most of which are overseas companies.

(2)  The prejudice to Listco is obvious.  It is no answer for Paloma to say that Listco has in its public announcement stated that the Injunction does not have an adverse impact on the group’s business operations as a whole.  As Mr Maurellet SC submits, the longer the Injunction remains in place, the more likely it is that there would be an economic impact which is always insidious and hard to pin down (Deiulemar Shipping SA v Transfield ER Futures Ltd [2011] 1 HKLRD 75 (CA) at §55, per Stone J).

41.  For the above reasons, I do not think there was a proper basis for Paloma to seek the Injunction against Listco, let alone on an ex parte basis.  Even if it were necessary to consider the Injunction Summons, I would not accede to Paloma’s application for continuation of the Injunction as against Listco.  It follows that the costs of and occasioned by the Injunction Summons should be paid by Paloma to Listco, to be taxed if not agreed, with certificate for 2 counsel. 

42.  As regards Lancom, I consider that there was a proper basis for Paloma to seek the Injunction against Lancom pending determination of the Receivers Summons, given that (1) Lancom comes within the “second limb” of the Chabra jurisdiction, and (2) Lancom had been under the control of Mr Lin and Mrs Lin, who were admittedly involved in approving the impugned transactions, such that one can infer a real risk of dissipation of assets on the part of Lancom.  Were it necessary to do so, I would continue the Injunction.  In the circumstances, a fair costs order should be that there be no order as to costs as between Paloma and Lancom in respect of the Injunction Summons. 

(Linda Chan) Judge of the Court of First Instance High Court

 

APPENDIX

ORDER FOR THE APPOINTMENT OF RECEIVERS BY EQUITABLE EXECUTION

1.  Persons to be nominated by the Judgment Creditor (whose identity shall be confirmed by the Judgment Creditor to the Court within 3 days hereof) (the “Receivers”), be and hereby are appointed as receivers to receive the 85,137,200 ordinary shares in Lancom Limited currently registered in the name of the Judgment Debtor (the “Lancom Shares”) and the dividends, profits and moneys receivable in respect of the Judgment Debtor’s interest in the Lancom Shares (the “Income”).

2.  The Receivers be entitled to do all acts and things as may reasonably be required to receive the Lancom Shares and the Income (if any) and carrying out their functions in relation thereto, including but not limited to the powers set out in Schedule 3 hereto. The powers vested in the Receivers may be exercised jointly or individually.

OBLIGATIONS OF THE JUDGMENT DEBTOR

3.  The Receivers shall have power to request any documentation or information from the Judgment Debtor, Lancom Limited and each of their directors, officers, liquidators and/or agents as the Receivers may reasonably require for the purposes of getting in the Lancom Shares and/or the Income (if any) and carrying out their functions in relation thereto.

4.  The Judgment Debtor and Lancom Limited shall:

(a)  Provide within a reasonable time to the Receivers such information and documentation relating to the Lancom Shares and/or the Income (if any); and

(b)  Do not refrain from doing all such things, including but not limited to the acts and things set out in paragraph 5 of this Order,

as the Receivers may reasonably require for the purposes of getting in the Lancom Shares and/or the Income (if any) and carrying out their functions in relation thereto.

5.  The Judgment Debtor be restrained from taking any steps to dispose, or part with possession, of all the books and records in respect of Lancom Limited, except as requested by the Receivers pursuant to paragraphs 3 and 4 of this Order.

6.  A party who is an individual who is ordered not to do something must not do it himself or in any other way. He must not do it through others acting on his behalf or on his instructions or with his encouragement.

7.  A party which is a corporation and which is ordered not to do something must not do it itself or by its directors, officers, employees or agents, or in any other way.

RECEIVERS’ ACCOUNTS

8.  The Receivers shall within 3 months after the date of this Order, and at such further and other times as may be ordered by the Court submit their accounts to the Judgment Creditor and the Judgment Debtor, and shall within 1 month after their accounts are submitted and at such further and other times as may be hereafter ordered by the Court pay the balance or balances appearing due on the accounts so left, or such part thereof as shall be certified as proper to be so paid, such sums to be paid in or towards satisfaction of what shall for the time being be due in respect of the order of the Honourable Madam Justice Mimmie Chan dated 12 October 2017 for the sum of JPY2,427,186,647 plus interest at the rate of 6% per annum on (i) the sum of JPY1,311,973,002 from 1 January 2011 until payment; (ii) the sum of JPY942,366,339 from 1 July 2012 until payment; (iii) the sum of JPY172,847,306 from 1 December 2012 until payments; and further arbitration related expenses in the sum of JPY23,618,062 (the “Judgment”) and costs of enforcement.

THIRD PARTIES AND PRIOR INCUMBRANCERS 

9.  It is a contempt of court for any person notified of this Order knowingly to assist in or permit a breach of it. Any person doing so may be sent to prison, fined or have his assets seized.

10.  This appointment shall be without prejudice to the rights of any prior incumbrances upon the Lancom Shares who may think proper to take possession of or receive the same by virtue of their respective securities or, if any prior incumbrances is in possession, then without prejudice to such possession.

11.  The Receivers have liberty, if they shall think proper (but not otherwise), out of the dividends, profits and moneys to be received by him to keep down the interest upon the prior incumbrances, according to their priorities, and be allowed such payments, if any, in passing his accounts.

PAYMENT OF BALANCE INTO COURT

12.  The balance (if any) remaining in the hands of the Receivers, after making the several payments referred to in this Order, shall unless otherwise directed by the Court forthwith be paid by the Receivers into Court to the credit of this action, subject to further order.

PERSONS OUTSIDE HONG KONG 

13.  The terms of this Order do not affect or concern anyone outside Hong Kong until it is declared enforceable or is enforced by a court in another jurisdiction and then they are to affect him only to the extent they have been declared enforceable or have been enforced UNLESS such person is:

(a)  a person to whom this Order is addressed or an officer or an agent appointed by power of attorney of such a person, including but not limited to Lin Chin Tsun as liquidator of the Judgment Debtor and director of Lancom Limited and Chou Chiu Yueh as director of Lancom Limited; or

(b)  a person who is subject to the jurisdiction of this Court and (i) has been given written notice of this Order at his residence or place of business within the jurisdiction of this court and (ii) is able to prevent acts or omissions outside the jurisdiction of this court which are a breach or assist in a breach of this Order.

14.  Nothing in this Order shall, in respect of assets located outside Hong Kong, require the Judgment Debtor, Lancom Limited and/or their directors, officers, liquidations and/or agents to disobey the order of any court of competent jurisdiction in relation to such assets.

LIBERTY TO APPLY

15.  Any of the parties be at liberty to apply to the Judge in chambers as there may be occasion.

PRIVACY 

16.  For the avoidance of doubt, the Receivers may use and/or disclose the full terms of this order (including the schedules hereto) as they consider necessary for the purposes of the receivership.

17.  The Receivers shall be permitted to use and/or disclose all information that has come, or will come, into their possession for the purposes of the receivership.

COSTS 

18.  The Judgment Creditor’s costs of and occasioned by the Summons be paid by the Judgment Debtor and taxed on a party and party basis, to be taxed if not agreed, with certificate for two counsel.

 

SCHEDULE 2

Undertakings given to the Court by the Judgment Creditor 

(i)  If the Court later finds that the appointment or any act or omission of the Receivers has caused loss to the Judgment Debtor or any other party and decides that the Judgment Debtor or that other party should be compensated for that loss, the Judgment Creditor undertake that they will comply with any order that the Court may make.

(ii)  Anyone notified of this Order will be given a copy of it by the Judgment Creditor's solicitors.

(iii)  The Judgment Creditor will pay the reasonable costs of anyone other than the Judgment Debtor which have been incurred as a result of this Order including the costs of ascertaining whether that person holds any of the Judgment Debtor’s assets and if the court later finds that this Order has caused such a person loss, and decides that such person should be compensated for that loss, the Judgment Creditor will comply with any order the court may make.

(iv)  If for any reason this Order ceases to have effect, the Judgment Creditor will forthwith take all reasonable steps to inform, in writing, any person or company to whom they have given notice of this Order, or who they have reasonable grounds for supposing may act upon this Order, that it has ceased to have effect.

Undertakings given to the Court by the Judgment Debtor 

The Judgment Debtor undertakes to take all reasonable steps to facilitate the following:

(1)  Transfer and procure the transfer of the registered title of the Lancom Shares to the Receivers;

(2)  Deliver to the Receivers all books and records relating to the Lancom Shares and the Income (if any);

(3)  Appoint and procure the appointment of the Receivers (or their nominees) as directors of Lancom Limited; and

(4)  Remove and procure the removal of Lin Chin Tsun and Chou Chiu Yueh as directors of Lancom Limited.

SCHEDULE 3 

Powers of each of the Receivers (in addition to all other powers vested in each Receiver by virtue of his appointment)

1.  Power to take immediate possession of, collect, get in and receive all or any part of the Lancom Shares and/or the Income (if any).

2.  Power to take all such steps as may be necessary to cause the registration of themselves ( or their nominees) as the registered holders of the Lancom Shares.

3.  Power to transfer any shares, assets, property or ownership rights that are the subject of his appointment to himself or to a suitable person to hold the same on trust or as nominee or agent on his behalf.

4.  Power to exercise such voting or other rights or powers to which the Judgment Debtor as registered holder and/or beneficial owner of the Lancom Shares is entitled, including but not limited to the power to appoint themselves (or their nominees) as directors of Lancom Limited and to remove any existing director of Lancom Limited.

5.  Power to appoint a solicitor,accountant, surveyor, estate or other selling agent, valuer, auctioneer and/or other appropriate person (including his partners, divisions within and employees of his firm) to assist him in the performance of his duties.

6.  Power to appoint any trustee, nominee or agent to take any step which he is unable to do himself or which can more conveniently be done by such person.

7.  Power to effect or maintain policies of insurance in respect of any property or assets within his possession or control．

8.  Power to do any act or execute any deed, receipt or document or to make any payment which is necessary or incidental to his functions or the exercise of the foregoing powers.

HCCT 53/2017

[2020] HKCFI 755

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 53 OF 2017

____________

____________

____________

________________________

D E C I S I O N

________________________

The
“Disclosure Decision”

The Application

1.  This is the hearing of the summons dated 26 September 2018 (the “Disclosure Summons”) taken out by the Judgment Creditor (“Paloma”) for post‑judgment disclosure against the Judgment Debtor (“Capxon”) regarding its assets.

2.  The main issue is whether it is fair and convenient to order the discovery sought.

Affirmatory evidence

3.  Altogether 9 affirmations have been placed before me.  Some of them were filed specifically for the Disclosure Summons, whilst others for certain earlier but related applications.  They are:

 (a) on behalf of Paloma, 2 affirmations of Mr Yamaura (“Yamaura”) of 14 September 2018 and 25 September 2018 (“Yamaura 3^rd” and “Yamaura 4^th” respectively), and 2 affirmations of Mr Nakamura (“Nakamura”) of 23 July 2019 and 18 September 2019 (“Nakamura 1^st” and “Nakamura 2^nd” respectively);

 (b) on behalf of Capxon, 5 affirmations of Mr Lin Chin Tsun (“Lin”) of 16 April 2018, 3 July 2018, 2 of 2 November 2018 and 23 September 2019 (“Lin 1^st” to “Lin 5^th” respectively).

The factual background

4.  The parties have been before me.  On 6 August 2014, Paloma was awarded a sum of JPY 2,427,186,647 plus interest and costs (the “Award” and “Award Sum”) by an Arbitral Tribunal in Japan against Capxon.  On 12 October 2017, Mimmie Chan J granted leave to enforce the Award in Hong Kong (the “Enforcement Order”).  On 2 May 2018, the parties came before me when Capxon sought to set aside the Enforcement Order.  I dismissed Capxon’s application on the same day.  I explained the reasons in my Reasons for Decision handed down on 25 May 2018 (the “25/5 Reasons”[1]). I refer to the 25/5 Reasons for the background of the case, which I will not repeat.

5.  On the strength of the Enforcement Order, Paloma on 23 November 2017 obtained a Charging Order Nisi (the “Charging Order Nisi”) in respect of 85,137,200 shares in Lancom Limited held by Capxon (the “Lancom Shares”).  The hearing to show cause took place before me on 20 November 2018.  Capxon objected to the Charging Order Nisi being made absolute. By another Decision of mine (the “Charging Order Decision”[2]) handed down together with the present one, I made the Charging Order Nisi absolute. I refer also to the Charging Order Decision, which again I will not repeat.

The disclosure sought

6.  The documents and information disclosure of which being sought fall into 2 broad categories.  Mr Jason Yu, counsel for Paloma, has, having taken into account matters which had transpired since the issue of the Disclosure Summons, set them out in the draft order attached to his written submissions (the “Draft Order”).  In gist, they are:

 (a) Information relating to the financial status of and certain transactions relating to Lancom Limited (“Lancom”, and the “Lancom Disclosure”), namely:

 (1) the financial statements and management accounts of Lancom from 2014 — §§1(ii) of the Disclosure Summons and Draft Order;

 (2) documents relating to the transfer by Lancom of its 100% equity interests in Capxon Trading (Shenzhen) Co. Ltd (“Capxon Trading”) to Multiple Investments Ltd (“Multiple Investments”) — §1(iii) of the Disclosure Summons and Draft Order;

 (3) documents relating to the transfer by Lancom of its 37.03% equity interests in Capxon Electronic (Shenzhen) Co. Ltd (“Capxon Electronic”) to Multiple Investments — §1(iv) of the Disclosure Summons) and Draft Order;

 (4) all transactions through which any of the assets of Capxon or Lancom had been disposed of / transferred / removed from Capxon or Lancom since August 2014 — §2(ii) of the Disclosure Summons and Draft Order; and

 (b) General disclosure relating to Capxon’s financial statements, latest balance sheet, latest property inventory, account receivables, and all assets of an individual value of HK$10,000 or more in Hong Kong or anywhere in the world — §§1(i), (v) and 2(i) of the Disclosure Summons and Draft Order (“General Disclosure”).

The parties’ stance

7.  Mr Yu’s submissions are that Capxon has taken repeated steps to hinder Paloma’s enforcement of the Award, and the present application was therefore necessary to assist Paloma’s efforts to enforce the Award, whether by facilitating a sale of the Lancom Shares or locating other valuable assets which may be used to satisfy the Award.

8.  Mr Mike Yeung, counsel for Capxon resists the application.  His primary position is that given the on‑going liquidation of Capxon in Taiwan, there is no need for “self‑enforcement” of the Award by Paloma.  Absent that, there is no need for Paloma to obtain any discovery on Capxon’s assets.  He submits that “any allegation on [Capxon’s] attempt to frustrate or evade the award plainly cannot be made out, absent which there is no ground in support of the [Disclosure Summons]”[3]．  He submits further that it is neither just nor convenient to order the discovery sought “regardless of [Capxon’s] intention” in any event[4].

The applicable legal principle

9.  Section 21L of the High Court Ordinance provides that:

“ (1) The Court of First Instance may by order (whether interlocutory or final) grant an injunction or appoint a receiver in all cases in which it appears to the Court of First Instance to be just or convenient to do so.”

10.  Under that section, the Court may, if it is just or convenient to do so, grant an injunction in mandatory form ordering disclosure of a judgment debtor’s assets.

11.  In Maclaine Watson v International Tin Council [1989] Ch 286, Kerr LJ:

 (a) gave 2 grounds for the grant of such an injunction[5]:

 (1) A judgment creditor has an order of the court against the judgment debtor to pay to the him the amount of its judgment.  The judgment debtor’s failure to do so is a failure to comply with an order of the court and a breach of an obligation owed to the judgment creditor;

 (2) There is an inherent power under S 37(1) of the Supreme Court Act 1981[6] to make any ancillary order, including an order for discovery, to ensure the effectiveness of any other order made by the court.

 (b) rejected the submission that an attitude of total passivity on the part of a judgement debtor involves no invasion of any legal or equitable of the judgment creditor, so that mere passivity can be sufficient for the court to invoke its jurisdiction to compel disclosure[7].

12.  That power to order post‑judgment discovery of assets is a free‑standing one.  In Chinachem Charitable Foundation v Chan Chun Chuen (unrep, HCAP 8/2007, 27 February 2012), Poon J at §39 summarized the law as follows:

“ … in a post‑judgment situation, the jurisdiction to make the disclosure order arises both as a power ancillary to and in support of the injunction and independently of the injunction as a power in support of the execution of the judgment: Gidrxslme Shipping Co Ltd v Tantomar‑Transportes Maritimos Lda [1995] 1 WLR 299, per Colman J at p 310E‑G. His Lordship went on to observe at p 312E‑F that in cases of post‑judgment, ‘it is just and convenient that the judgment or award creditor should normally have all the information he needs to execute the judgment or award anywhere in the world’.”

13.  The applicable legal principles have further been summarized by Deputy Judge Lok J (as the learned Judge then was) in BHP Billiton Marketing AG v Transfield Shipping Inc (unrep, HCA 2124/2011, 29 April 2013 at §30, that

“ (i) unlike the position before judgment, after judgment a plaintiff is able to attach assets of the defendant against whom he has obtained judgment;

(ii) after judgment has been obtained, there is no objection in principle to the judgment debtor being required to give disclosure of his assets worldwide under examination of debtor, injunction or appointment of receiver proceedings;

(iii) the object of ordering such disclosure is to render the judgment effective;

(iv) in a post‑judgment situation, the jurisdiction to make a disclosure order arises both as a power ancillary to and in support of a Mareva injunction and independently of the injunction as a power in support of the execution of the judgment; and

(v)     it is just and convenient for a judgment creditor to have all the information he needs to execute the judgment or award anywhere in the world.”

14.  The above legal principles are not in serious dispute between the parties.  What is in dispute is Mr Yeung’s proposition that to obtain post‑judgment discovery, a judgment creditor has to demonstrate “practical impediment towards enforcement of judgment”.  Mr Yeung relies upon Karaha Bodas Company LLC v Perusahaan Pertambangan Minyak Dan Gas Bumi Negara [2005] 1 HKLRD 21 per Reyes J at §17.  He further relies on BHP, and submits[8] that:

“ Practical impediment towards enforcement of its right as judgment creditor and discovery of information about the judgment debtor’s assets are factors in favour of a post‑judgment disclosure for the purpose of executing the judgment: BHP…per DHCJ Lok at §§31, 35. The corollary therefore is that, short of being able to demonstrate practical impediment towards enforcement of judgment or finding the whereabouts of a judgment debtor’s assets, a post‑judgment disclosure order should not be made.” (emphasis added)

15.  I do not accept that proposition put forward by Mr Yeung:

 (a) No such proposition has been suggested by Deputy Judge Lok in BHP, and it is logically wrong for Mr Yeung to suggest that the proposition is corollarial of Deputy Judge Lok’s observations at §§31 or 35;

 (b) Karaha Bodas was a case on appointment of receivers.  In that case, having considered a number of authorities, Reyes J at §8 set out the principles applicable to the exercise of the Court’s discretion in the appointment of receivers by way of equitable execution, that:

“ (1) A receiver may be appointed when recovery of the judgment debt by normal means of legal execution is ‘not practicable’. In such case the courts grant equitable relief as a means of ‘taking out of the way a hindrance which prevents execution at common law’. An applicant must normally show that circumstances are such as to render it practically difficult, if not impossible, to obtain the fruits of his judgment …

(2) It is not necessary that a judgment debtor have a legal interest in the asset over which a receiver is sought to be appointed. Thus, it is possible to appoint a receiver to recover future debts from a third party, even though at the time of the garnishee order or appointment of a receiver such debts cannot be attached at common law.

(3)  Nonetheless, there must be some difficulty, arising from the nature of the property, which precludes execution at law but which can be overcome by the appointment of a receiver.”

 (c) Mr Yeung has cited to me no authority in support of his stance that those same principles relevant to the appointment of receivers by way of equitable execution are equally applicable to an application for post‑judgment disclosure under s 21L, or that the statutory criterion of “just and convenient” should be so fettered.  Indeed, the authorities cited above (Maclaine Watson, Gidrxslme Shipping,Chinachem and BHP) all suggest that very different considerations are involved and engaged.

Mr Yeung’s objection on the basis that Paloma only had the benefit of a charging order nisi

16.  One limb of Mr Yeung’s objections is made on the basis that Paloma at the time of the application only had the benefit of a charging order nisi (see eg §§8(b) and 22(a) of his written submissions).  Now that I have made the Charging Order Nisi absolute, that limb of his objections goes away.

Irrelevance of “Intention on the part of the Respondent to thwart the Applicant’s enforcement”^[9]

17.  In his written submissions, Mr Yeung spends more than 7 pages of his 24‑page submissions on developing his submissions that Capxon had no intention to thwart Paloma’s enforcement of the Award.  He submits, inter alia, that:

“ 15. As [Paloma] fails to make out a claim of [Capxon’s] bad intention, and given the ongoing Taiwan Court‑controlled liquidation which has and will undoubtedly assist [Paloma] to obtain its just entitlements under the Award/Order, there is plainly no practical impediment towards enforcement of its right as judgment creditor. As such, the need for [Paloma] to take enforcement action simply does not arise.

16. In fact, [Lin’s] previous voluntary disclosure of [Capxon’s] financial information demonstrates strongly that there would not be practical impediment towards [Paloma’s] obtaining of relevant information on [Capxon’s] assets and financial position, should the need legitimately and justly arise…”

18.  Those submissions are premised upon Mr Yeung’s submission on the law which I have rejected.  They have become quite irrelevant.  I will nonetheless consider them in so far as they are relevant to the question of “just and convenient”.

The Lancom Disclosure

19.  I set out the in the following paragraphs factors and considerations which suggest that it is fair and convenient to order the Lancom Disclosure.

20.  The Enforcement Order was made on 12 October 2017. According to Nakamura 1^st, 99% of the Award remains unsatisfied.

21.  The non‑payment has to be viewed in the context of Capxon’s stance that Capxon was, on 10 April 2018 when the resolution was passed for its voluntary winding‑up, financially solvent.  So the non‑settlement of the Award was not the result of insolvency.

22.  One recalls that even mere passivity can be sufficient for the court to invoke its jurisdiction to order post‑judgment discovery.

23.  Lancom used to hold respectively 37.03% and 100% of the shares in Capxon Electronic and Capxon Trading.  On 13 October 2014 and 21 January 2015 respectively, Lancom transferred all those shares to Multiple Investments. Those dates were respectively about 2 months and 6 months from the date when the Award was handed down.

24.  In Lin 3^rd, Lin claims at §§10 to 11 that those transfers “enabled the Group to simplify and rationalize the holding structure for its subsidiaries…”, that they “were conducted in compliance with the applicable Rules Governing the Listing of Securities on the Stock Exchange…”, that “Multiple had duly settled the consideration by cash payment in full…”, and that the transfers “were brought to the attention of the Stock Exchange which had no comments …”.

25.  It is unusual, to say the least, for transactions of the nature described by Lin to be settled by “cash payment”.  Lin has chosen not to reveal the terms of “the transfers” or the amount of that “cash payment”.  In fact, not one single document has been produced in support of his assertions.

26.  Paloma’s concerns about the motives behind those transfers are in my view justified.

27.  Importantly, now that I have made the Charging Order Nisi absolute, and should the Award remain unsatisfied, Paloma will need to make an application for an order for sale of the Lancom Shares.  I agree with Mr Yu’s submissions that unless Paloma and its valuator have a complete set of verifiable information about Lancom’s financial affairs, Paloma will not be able to properly prepare for the application — see Order 88, rule 5A(2)(e) of the RHC, Timmar Co v Erwin Hardy [2001] 3 HKLRD 651 (at §§22‑25) and Ameritax Plus v Denice Foster Harris [2012] 5 HKLRD 757 (at §§20-26).

28.  There is no suggestion that Capxon does not have the documents sought, or that the ordering of the Lancom Disclosure would otherwise be oppressive — compared with Ng Au Yuen Ngar Pamela v Ng Douglas [1977] 2 HKC 465 at 471-472.

29.  I have also considered a number of points raised in objection by Mr Yeung, as follows.

30.  In Lin 4^th at §5, Lin claims that:

“ … given that Paloma is targeting the Lancom Shares as means to enforcing the judgment debt under the Enforcement Order, I verily believe that [the Lancom Disclosure] are completely irrelevant to Paloma’s Charging Order application so long as the latest value of the Lancom Shares, as set out in the balance sheet and property inventory submitted to the Taiwan Shilin District Court for the purpose of [Capxon’s] dissolution and winding‑up, exceeds the amount of the judgment debt owing by [Capxon] to Paloma; and (ii) that, premised upon the foregoing basis, there is at present no necessity for other post‑judgment enforcement action in Hong Kong or elsewhere.”

31.  The “balance sheet” mentioned by Lin there is the Updated Financial Statements I have referred to in the Charging Order Decision.  I agree with Mr Yu in this regard that that document, being a one‑page document with little details, containing as it does only one single entry said to be about the Lancom Shares (“採權益法之投資” stated to be valued at NT$1,234,998,432 at the percentage of 88.57), is hardly sufficient for the purposes which Paloma requires the Lancom Disclosure for.

32.  The so‑called “property inventory” (the “Property Inventory”) is not much better.  It is only a 6 rows by 6 columns table occupying a quarter of an A4 paper, with no breakdown of the assets tabulated there (described in generic terms as “土地”, “房屋及建築”, “房屋附屬設備”, “生財設備” and “其他設備”).  Nor are their whereabouts disclosed. The table verges on being useless for enforcement purpose.

33.  Mr Yeung relies on the existence of the Taiwan Winding‑up.  He submits that:

“ 22(d) There is no evidence before the Court why [Paloma] stands as a better person or in a better position than the Taiwan Court to realise the Lancom Shares or other assets of [Capxon]. Quite simply, the Taiwan Court’s competence or integrity cannot be called into question in the circumstances.

…

22(g)    As the proper recourse for [Paloma] to enforce its judgment debt under the Award/Order is to claim under the relevant liquidation procedures in Taiwan, [Paloma’s] request for the [Lancom Disclosure] for the purpose of an enforced sale is therefore ‘jumping the gun’ and is untenable, and cannot be just and convenient.”

34.  I reject those submissions.  Paloma is not calling into question the competence or integrity of the Taiwan Court.  There is further no basis for Mr Yeung to submit that “the proper recourse” for Paloma is to join the queue in the Taiwan Winding‑up when it has the benefit of the Enforcement Order and the Charging Order Absolute in Hong Kong.  Paloma is justified in taking steps to enforce the Award in Hong Kong.

35.  In all the circumstances, I allow the Lancom Disclosure.

The General Disclosure

36.  In so far that Capxon is seeking to argue that since Paloma has applied for a Charging Order, it cannot now seek disclosure other than information relevant to the Lancom Shares, I accept Mr Yu’s submission on the strength of Diners Club International v Lau Lin Than (unrep, CACV 187/1985, 21 February 1986) that there is no bar in different remedies in execution being concurrently pursued.

37.  In this regard, Mr Yeung submits that the enforcement of the Award by charging order has not at this stage been unsuccessful, and that[10]:

“ …whilst [Capxon] accepts that [Paloma] may elect to apply for different execution remedies concurrently, whether [Paloma] should be granted a disclosure order for information beyond Lancom in light of its continued pursuit of the perfection of the Charging Order Nisi goes back to the question of whether it is just and convenient to do so for facilitating the enforcement of the Award/Order.”

38.  I have explained above why in my view the information so far revealed in the Updated Balance Sheet and the Property Inventory is inadequate.  The inadequacy goes both to the value of the Lancom shares and the financial position of Capxon.  I find it just and convenient for Paloma to at this stage concurrently seek the General Disclosure.

The scope of the disclosure sought

39.  I have considered the scope of the Lancom Disclosure as set out in the Draft Order.  In my view, save §2(ii) which I will come back to, they are in order.

40.  In so far as the General Disclosure is concerned:

 (a) In my view, §1(i) is in order;

 (b) Regarding §1(v):

 (1) Paloma seeks details of “all accounts receivables”;

 (2) I note that the “accounts receivables” are not limited by any threshold value.  In my view, they should be;

 (3) I hence confine the “all accounts receivables” to “all accounts receivables of an individual value of HK$100,000 or more”;

 (c) Regarding §2(i), I find the requested disclosure of “All [Capxon’s] assets of an individual value of HK$10,000” unnecessarily harsh.  I amend the value to HK$100,000;

 (d) Regarding §2(ii):  

 (1) Similar to §1(v), the disposals / transfers / removals are not qualified by any threshold value;

 (2) I similarly put in a starting value of HK$100,000;

 (e) If subsequently there appears to be any need to have the threshold value of HK$100,000 lowered, an application with appropriate supporting evidence may be made.

41.  In so far as the time for compliance is concerned, Paloma in respect of both paragraphs requests “7 days of the date of the order”.  I am prepared to give Capxon 21 days instead, and the Draft Order is amended accordingly.

Disposition

42.  For the reasons given above, I allow the Disclosure Summons, I grant §§1, 2 and 3 of the Draft Order as amended above.

43.  In respect of costs, I make a cost order nisi that the costs of and occasioned by the Disclosure Summons be paid by Capxon to Paloma, to be taxed if not agreed.  Any application for variation should be made within 14 days of the date hereof, response with 14 days of receipt, and reply within 7 days.

HCCT 53/2017

[2020] HKCFI 754

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 53 OF 2017

____________

____________

____________

________________________

D E C I S I O N

________________________

The
“Charging Order Decision”

A. The applications

1.  There are two matters before the court:

 (a) the substantive hearing for the Charging Order: Notice to Show Cause dated 23 November 2017 (the “Charging Order Hearing” and the “Charging Order Nisi”); and

 (b) the first hearing for the summons dated 26 September 2018 taken out by Paloma Company Limited (“Paloma”) for discovery of documents and disclosure of certain information (the “Disclosure Summons”).

B.     Adjournment of the Disclosure Summons

2.  The Disclosure Summons was filed by Paloma on 26 September 2018. It is supported by the 3^rd affirmation of Mr Kouichi Yamaura (“Yamaura” and “Yamaura 3^rd”) filed on the same date.

3.  On 5 November 2018, Mr Lin (“Lin”, the chairman of Capxon Electronic Industrial Company Limited (“Capxon”) up to 10 April 2018 and since that date its liquidator) filed an affirmation in opposition of the Disclosure Summons, while at the same time furnishing some of the information sought.

4.  Mr Joffe, who together with Mr Jason Yu appear for Paloma, submits that it is inappropriate and premature for the Disclosure Summons to be dealt with substantively at the first call‑over hearing because:

 (a) Paloma is entitled to have the last word by way of reply evidence;

 (b) there has been no indication from either party that the Disclosure Summons was to be dealt with substantively at the first call‑over hearing, and the same ought to be adjourned to allow the parties to properly and fully prepare for the same; and

 (c) the appropriateness of the divers disclosure and discovery sought in the Disclosure Summons will be dependent upon the Court’s finding upon the Charging Order Hearing.

5.  Mr Mike Yeung, counsel for Capxon, invites the Court to proceed with the hearing of the Disclosure Summons and to dismiss the same.  However, and upon my enquiry, Mr Yeung confirms that there has been no prior notice from his side that they would be making that invitation during the call‑over hearing.   

6.  In the circumstances, I accept Mr Joffe’s submissions.  I adjourn the substantive hearing of the Disclosure Summons to a date to be fixed.  I give parties directions along the line of the draft placed before me by Mr Joffe.

C.     Background leading to the Charging Order Hearing

7.  The parties first came before me on 2 May 2018.  On that occasion, I adjourned the Charging Order Hearing but proceeded to hear Capxon’s summons (the “Setting Aside Summons”) to set aside the Order of Mimmie Chan J dated 12 October 2017 (the “Enforcement Order”) granting leave to enforce the Arbitral Award dated 6 August 2014 (the “Award”).  Having heard parties, I dismissed that application of Capxon on the same day.  I stated my reasons in my Reasons for Decision handed down on 25 May 2018 (the “25/5 Reasons”[1]). I have also stated therein the relevant background leading to the various applications before me, which I will not repeat.  I will just recapitulate briefly as follows.

8.  Capxon is a subsidiary of Capxon International Electronic Company Limited, a company listed on the Main Board of the Hong Kong Stock Exchange. The registered address of Capxon is in Taiwan.

9.  On 6 August 2014, Paloma obtained in Japan the Award against Capxon in the sum of JPY2,427,186,647 plus interest and costs.

10.  On 12 October 2017, Mimmie Chan J granted the Enforcement Order.

11.  On 23 November 2017, the Charging Order Nisi was granted in respect of 85,137,200 shares in Lancom Limited held by Capxon (the “Lancom Shares”).

12.  The Lancom Shares are the major assets of Capxon.

13.  On 2 May 2018, I adjourned the Charging Order Hearing, proceeded to hear the Settling Aside Summons and dismissed it on the same day.

14.  Now the Charging Order Hearing resumes before me.

D.     The evidence filed

15.  Capxon has filed:

 (a) in support of the Setting Aside Summons, Lin’s 1^st affirmation (“Lin 1^st”).  Lin 1^st remains relevant for the purpose of the present hearing;

 (b) For the Charging Order Hearing, and pursuant leave I granted when adjourning the same:

 (1) on facts, Lin’s 2^nd and 3^rd affirmations (“Lin 2^nd” and “Lin 3^rd” respectively); and

 (2) on Taiwanese law, the 2^nd, 3^rd, and 4^th affirmations of Mr Albert Kao (“Kao”, “2^nd Kao”, “3^rd Kao” and “4^th Kao” respectively).  Kao is a partner of Formosa Transnational, Attorneys at law, a firm of attorneys qualified to practice law in Taiwan;

16.  Paloma has filed for the purpose of the Charging Order Hearing:

 (1) on fact, the 4^th affirmation of Yamaura (“Yamaura 4^th”); and

 (2) on Taiwanese law, the affirmation of Mr Edward YC Liu (“Liu” and “Liu Aff”).  Liu is a partner of Chen & Lin Attorneys‑at‑Law, a firm of attorneys qualified to practice law in Taiwan.

E.     The winding-up of Capxon in Taiwan, and its financial position

17.  As I have set out in the 25/5 Reasons (at §13), during an extraordinary general meeting of shareholders of Capxon convened on 10 April 2018 (the “10/4/18 EGM”), a resolution was passed that Capxon be dissolved, and Lin be appointed as the liquidator for the conduct of the dissolution and liquidation procedure (the “Taiwan Winding‑up”).  That is akin to a members’ voluntary winding‑up in Hong Kong.

18.  In respect of the financial position of Capxon, Lin said at §13 of Lin 1^st that:

“ 13. The balance sheet and property inventory of [Capxon] is now being prepared by Deloitte & Touche for the purpose of the dissolution and liquidation process. I shall make further affirmation to exhibit such document to this Honourable Court once it is ready. Yet, for ease of this Honourable Court’s reference, the financial statements and accountant’s report of [Capxon], prepared by Deloitte & Touche dated 19 March 2018 (the ‘Accountant’s Report’) show that assets of [Capxon] exceeds its liabilities as at 31 December 2017 … In particular, as at 31 December 2017, [Capxon] had total assets of NT$1,425,686,000 and its total liabilities amounted to NT$1,180,178,000. However, 87% of [Capxon’s] total assets at 31 December 2017 were made up by its interests in Lancom Limited. The financial status of [Capxon] has not undergone any material change since 31 December 2017 up to now, and thus the said figures representing [Capxon’s] assets and liabilities would still be applicable for the present application. Accordingly, if the [Lancom Shares] are charged and removed from its assets, [Capxon] will not have enough assets to satisfy its outstanding liabilities owed to its other creditors as at 31 December 2017.”

In that same paragraph, Lin also said that the amount owed to Paloma as at 31 December 2017, converted into NT$, was NT$886,036,000.

19.  In Lin 2^nd, Lin produced the updated financial statements of Capxon as at 10 April 2018 (“Updated Financial Statements”). It shows that although Capxon’s assets had decreased from NT$1,425,686,514 to NT$1,394,327,438 (NT$1,234,998,432 being attributed to the interest in the Lancom Shares) as at 10 April 2018, and its liabilities increased from NT$1,180,178,024 to NT$1,202,738,325 during that same period, Capxon remained balance sheet solvent as at 10 April 2018 when the voluntary winding-up commenced.

F.     Parties’ stances, and the main legal issue arising

20.  Mr Yeung summarizes his position at §3 of his written submissions:

“ In gist, the Charging Order Application comes down to this question — whether, under the present circumstances, making a ruling that ‘solvency for the time being’ is conclusively an exception to the general rule (that an order nisi should not be made absolute if the judgment debtor in the interim enters into voluntary winding up) is fair and equitable to all the various parties involved. [Capxon] submits that the answer is in the negative, in light of: (i) the liquidator’s duty of loyalty and care on the part of the liquidator to satisfy the creditors on a pari passu basis under Taiwanese law; and (ii) … the absolute certainty of fair and unbiased distribution where the Charging Order Nisi is discharged, against the possibility of putting [Paloma] in a more advantageous position to the detriment of all other creditors where the Charging Order Nisi is perfected. In the circumstances, the Charging Order Nisi should be discharged.”

21.  Mr Joffe submits, and not disputed by Mr Yeung, that Capxon bears the burden of showing cause why the Charging Order Nisi should not be made absolute: Hong Kong Civil Procedure 2020 §50/9A/23 p 1065.

22.  The following paragraphs of Mr Joffe’s written submissions summarize his stance:

“ 5. One can observe from the new evidence that it is Capxon’s own case that:

(1) Capxon is balance-sheet solvent …

(2) The Taiwan Shilin District Court granted an order for Paloma to enforce against Capxon’s assets despite the liquidation and rejected Capxon’s objections (in respect of which Capxon has filed further submissions in opposition) …

13. There being no winding up proceedings in Hong Kong, Capxon can only pray in aid the Hong Kong court’s common law power to give assistance to the Taiwanese liquidation.

14. However, Capxon’s attempt to show cause against the Charging Order Nisi is bound to fail given three fundamental limits[2] to the power of assistance:

(1) First, a member’s voluntary winding up of a solvent foreign company is not a collective insolvency proceeding which the Hong Kong court will recognise by refusing creditors’ enforcement.

(2) Second, the Hong Kong court’s power of assistance is subject to local law and policy under which a member’s voluntary winding up of a solvent company has not been regarded as sufficient cause against making a charging order absolute.

(3)     Third, the Hong Kong’s court’s power of assistance to refuse creditors’ enforcement should not be exercised where the foreign court has found insufficient cause to refuse execution or where it has ordered execution notwithstanding the objection by the liquidator.”

23.  The main legal principle that is engaged is how this Court, when considering whether the Charging Order Nisi should be made absolute, should approach the cross‑border, voluntary and balance‑sheet solvent Taiwan Winding‑up.

G. The law relevant to the Three Limitations

G.1.   Singularis

24.  The case Singularis Holdings Ltd v PricewaterhouseCoopers [2015] AC 1675 features heavily in Mr Joffe’s submissions.  It is relevant to all Three Limitations.  I will first endeavor to give an overview of that case before concentrating upon the Three Limitations.

25.  In Singularis:

 (a) a Cayman Islands company was wound up in Cayman Islands.  Liquidators were appointed there;

 (b) In order to trace the company’s assets, the liquidators wished to obtain information relating to the company’s affairs from the company’s auditors.  The company’s auditors were a Bermuda registered partnership;

 (c) The liquidators applied to the Cayman Islands courts.  But under Cayman Islands law, the auditors could only be ordered to deliver up material belonging to the company;

 (d) In order to obtain materials belonging to the auditors themselves, the liquidators made an application in Bermuda for an order requiring the auditors to produce all documents in their possession relating to the affairs of the company.  Under s 195 of the Bermudan Companies Act 1981 (the “Bermudan Companies Act”), the Supreme Court of Bermuda had power to make such an order.  That statutory power however could only be exercised in relation to a company which the court had ordered to be wound up;

 (e) The Supreme Court acceded to the liquidators’ application, exercising what was termed a common law power to order the auditors to produce information which they could have been ordered to produce under s 195 of the Bermudan Companies Act if the company had been wound up in Bermuda;

 (f) The auditors appealed.  The Court of Appeal of Bermuda doubted whether there was any jurisdiction on the part of the Supreme Court to make the order in circumstances where s 195 did not apply (because the company was wound up in Cayman Islands), but set aside the order on the basis that, in any event, it was not an appropriate exercise of discretion because it was an order made in support of a Cayman Islands liquidation which could not have been made by the Cayman Islands court itself;

 (g) The liquidators appealed to the Privy Council;

 (h) Before the Privy Council were three main issues:

 (1) whether there was any common power on the part of the Bermudan courts to “assist a foreign court of insolvency jurisdiction by ordering the production of information in oral or documentary form which is necessary for the administration of a foreign winding up”[3] (the “Common Law Power”);

 (2) whether the Common Law Power existed in Bermuda given the fact that the statutory power to order production under s 195 of the Bermudan Companies Act 1981 was limited to cases where the company had been wound up in Bermuda; and

 (3) whether in any event, the Supreme Court was correct in exercising that power given that the Cayman Islands court could not itself have made the order;

 (i) Ultimately, the Privy Council dismissed the appeal:

 (1) The Board was unified in dismissing the appeal.  The reasons given by the 5 members of the Board however differed;

 (2) Lord Sumption held that the Common Law Power existed (§§10, 19 and 25), that it was not excluded by the Bermudan Companies Act (§28), but the power should not be exercised given the lack of equivalent power on the part of the Cayman Islands court over persons within their jurisdiction (§29);

 (3) Lord Collins held that “there is a principle of the common law that the court has the power to recognize and grant assistance to foreign insolvency proceedings” (§§38 and 51 to 58), but that given the Bermudan Companies Act, “to apply insolvency legislation by analogy ‘as if’ it applied, even though it does not actually apply, would go so far beyond the traditional judicial development of the common law as to be a plain usurpation of the legislative function” (§§64 and 108);

 (4) Lord Clarke dismissed the appeal for the reasons given by Lord Sumption, and agreed specifically that despite the Bermudan Companies Act, the Bermudan court did have the Common Law Power (§110);

 (5) Lord Mance held that the common law power to assist a foreign liquidation did not enable the Bermudan courts to order any person (whether or not an officer or agent of the company) to attend and be interrogated and produce documentation and information on pain of contempt (§§117, 130, 135 and 147), but that in any event, even if that power had existed, it should not have been exercised when the Cayman Island courts had no equivalent power over persons within their jurisdiction (§117 and 148);

 (6) Lord Neuberger agreed that the appeal should be dismissed on the grounds that (1) there was no common law power to apply legislation which applied to domestic insolvencies by analogy to foreign insolvencies and that (2) the Bermudan courts in any event should not have exercised the power given the lack of equivalent powers on the part of Cayman Islands courts.  He expressed the further view that he would, if necessary, have agreed with Lord Mance that the Common Law Power did not exist (§§149, 156 and 162).  In any event, he disagreed with Lord Sumption that the Common Law Power was limited in its application to “court‑ordered liquidation” and had no application to voluntary liquidations (§158, and see also the observations of Lord Mance at §131).   

G.2.   Limitation #1 — The Common Law Power to recognize and assist foreign insolvency not applicable to solvent winding up

26.  Capxon is seeking to rely upon the Taiwan Winding‑up to show cause. 

27.  The Taiwan Winding‑up is a cross‑border one.  Whether it existence may be considered by this Court as sufficient cause for the present purpose depends on whether this Court may recognize and assist the same.

28.  Singularis shows that the courts have a common law power to recognise and assist foreign winding‑up proceedings.  Mr Joffe submits that the exercise of that common law power is however subject to one fundamental limitation — if the foreign winding‑up is a solvent one, solvent winding-up being not a collective insolvency proceeding, the common law power has no application. 

29.  In Singularis, Lord Sumption:

 (a) observed at §10 that:

“ The English courts have for at least a century and a half exercised a power to assist a foreign liquidation by taking control of the English assets of the insolvent company …” (Emphasis added)

 (b) referred to Cambridge Gas Transportation Corpn v Official Committee of Unsecured Creditors of Navigator Holdings plc [2007] 1 AC 508 for the principle of “modified universalism”, namely that the court has a common law power to assist foreign winding up proceedings so far as it properly can (§15);

 (c) observed at §19 that whilst certain other propositions for which Cambridge Gas was authority could no longer be supported, the principle of modified universalism had not been discredited, and had been accepted in principle in Rubin v Eurofinance SA [2013] 1 AC 236.  Lord Sumption then referred to Lord Mance’s summary of the law in Rubin, that:

“ 29. Fourth, at common law the court has power to recognise and grant assistance to foreign insolvency proceedings. The common law principle is that assistance may be given to foreign office‑holders in insolvencies with an international element ...

…

31. The common law assistance cases have been concerned with such matters as the vesting of English assets in a foreign office‑holder, or the staying of local proceedings, or orders for examination in support of the foreign proceedings, or orders for the remittal of assets to a foreign liquidation, and have involved cases in which the foreign court was a court of competent jurisdiction in the sense that the bankrupt was domiciled in the foreign country or, if a company, was incorporated there …

…

33. One group of cases involved local proceedings which were stayed or orders which were discharged because of foreign insolvency proceedings ...”

 (d) set out at §25 the scope and limits of that common law power.  In so far as relevant to the present application, he observed that

“25. In the Board’s opinion, there is a power at common law to assist a foreign court of insolvency jurisdiction by ordering the production of information in oral or documentary form which is necessary for the administration of a foreign winding up. In recognising the existence of such a power, the Board would not wish to encourage the promiscuous creation of other common law powers to compel the production of information. The limits of this power are implicit in the reasons for recognising its existence. In the first place, it is available only to assist the officers of a foreign court of insolvency jurisdiction or equivalent public officers. It would not, for example, be available to assist a voluntary winding up, which is essentially a private arrangement and although subject to the directions of the court is not conducted by or on behalf of an officer of the court. Secondly, it is a power of assistance. It exists for the purpose of enabling those courts to surmount the problems posed for a worldwide winding up of the company’s affairs by the territorial limits of each court’s powers. It is not therefore available to enable them to do something which they could not do even under the law by which they were appointed. Thirdly, it is available only when it is necessary for the performance of the office‑holder’s functions. Fourth, the power is subject to the limitation in In re African Farms Ltd [1906] TS 373 and in HIH [2008] 1 WLR 852 and Rubin [2013] 1 AC 236, that such an order must be consistent with the substantive law and public policy of the assisting court, in this case that of Bermuda …” (emphasis added)

30.  The view that the exercise of that common law power is limited to foreign “insolvent” proceedings is shared by Lord Collins (§§38 and 51) and Lord Clark (who agreed with Lord Sumption, and see §113).  Lord Mance (who Lord Neuberger was in agreement with) also agreed, based upon the principle of modified universalism, that the common law power of assistance exists (§§132 to 133), just that that power should not be extended to assist any foreign liquidation by ordering any person (whether or not an officer or agent of the company) to attend and be interrogated and produce documentation and information on pain of contempt.

31.  One point the Board did not agree upon was whether that power to recognize and assist foreign insolvency proceedings is available to cases of foreign voluntary liquidations.  Lord Sumption observed that it is not. Lord Neuberger disagreed, observing at §158 that:

“ 158. The limitation of the Power to insolvency cases may be seen by many to be questionable. More specifically, the limitation to liquidations which are being conducted by officers of a foreign court seems to me to be potentially arbitrary. Companies may be in court‑imposed liquidation in many jurisdictions when it is ‘just and equitable’ to wind them up, even if they are solvent: I do not see why liquidators in such a case should be able to invoke the Power when other people running solvent companies could not do so. Further, there is no reason why a statutory regime should not provide that voluntary liquidations are to be conducted under the aegis of the court, and, if so, the Power would seem to apply in such cases. And the status of administrators in administrations may be unclear in this connection.”

32.  In Hong Kong, the issue as to whether a foreign insolvent liquidation commenced by a shareholders’ resolution is eligible for common law recognition and assistance in Hong Kong was considered for the first time by Harris J in Re Supreme Tycoon Ltd [2018] 1 HKLRD 1120[4]:

 (a) In that case, though the company concerned was put into liquidation by a shareholders resolution, it was an insolvent and fully court‑supervised liquidation[5];

 (b) One main issue before Harris J was, the liquidation being a voluntary one, whether the common law power of recognition and assistance applied;

 (c) On that main issue, Harris J accepted the dissenting view expressed by Lord Neuberger in Singularis that it did;

 (d) However, and importantly for the purpose of the present discussion, Harris J observed, though obiter, that that common law power has no application to solvent foreign liquidations.  The learned judge observed that:

“ 15. In my view, what matters for cross‑border insolvency assistance is not whether the foreign insolvency officeholder is or is not an officer of the foreign court. What matters is whether the foreign proceeding is collective in nature, in the sense that it is ‘a process of collective enforcement of debts for the benefit of the general body of creditors’. It is with collective insolvency proceedings that the principle of modified universalism is concerned.

^…

17. Therefore the mere fact of a foreign liquidation being a voluntary liquidation is no bar to the Hong Kong court recognising and assisting that liquidation under the principle of modified universalism. However, if the foreign liquidation is a solvent liquidation (for instance, a members’ voluntary liquidation), it would not fall within the principle of modified universalism. A foreign solvent liquidation is not a collective insolvency proceeding, and is more akin to the ‘private arrangement’ the Privy Council was referring to. In this connection, with respect, I agree with Lord Neuberger’s dissenting observations in Singularis...” (Emphasis added)

33.  Mr Yeung has not been able to refer this Court to any decision where a Court has applied the common power of assistance and recognition to stay or refuse execution of judgment in the context of a foreign debtor’s solvent members’ voluntary winding up.

34.  Whilst Mr Yeung has referred to 3 cases which appear to support the recognition of members’ voluntary liquidations abroad[6], those cases were concerned with the interpretation of statutory provisions incorporating the UNCITRAL Model Law on Cross‑Border Insolvency, which has no application in Hong Kong[7].

35.  Mr Yeung then sought to distinguish Singularis on the basis that it related to a specific power, namely the power to assist a foreign liquidation by ordering the auditors to attend and be interrogated and produce documentation and information on pain of contempt.

36.  I am not able to accept Mr Yeung’s submissions in this regard.  As has been explained by Lord Sumption in Singularis at §19 (citing Rubin), whilst the common law assistance cases have been raised in connection with different matters, the underlying principle is the same.  To similar effects are the observations of Lord Collins’ observations at §§54‑58 in Singularis.

37.  I note that the relevant observations made by the Board in Singularis and Harris J in Supreme Tycoon are obiter.  However, they being from the Judicial Committee of the Privy Council, and Harris J, himself an experienced specialist judge, carry a lot of weight and persuasiveness.  The rationale is also, in my respectful view, sound.  As Harris J observed[8], which I respectfully repeat, “if the foreign liquidation is a solvent liquidation…, it would not fall within the principle of modified universalism”.

38.  On the strength and state of authorities cited before me, I accept Mr Joffe’s submissions that the power of recognition and assistance does not apply to cross‑border or foreign solvent liquidation.

G.3. Limitation #2 — Local law and policy not to act on solvent liquidations

39.  In gist, Mr Joffe submits that:

 (a) the common law power of recognizing and assisting cross-border liquidations is in any even subject to local law and policy (“Limb (a) of Limitation #2”); and

 (b) according to the law and policy in Hong Kong, a members’ solvent winding up does not prevent a creditor from making a charging order nisi absolute (“Limb (b) of Limitation #2”).

G.3.i. Limb (a) of Limitation #2 — the law

40.  Limb (a) of Limitation #2 is supported by Singulais.

41.  In Singulais, at §19, Lord Sumption, having referred to Lord Mance’s summary of the law in Rubin, continued to observe that:

“ In the Board’s opinion, the principle of modified universalism is part of the common law, but it is necessary to bear in mind, first, that it is subject to local law and local public policy and, secondly, that the court can only ever act within the limits of its own statutory and common law powers. What are those limits? In the absence of a relevant statutory power, they must depend on the common law, including any proper development of the common law. The question how far it is appropriate to develop the common law so as to recognise an equivalent power does not admit of a single, universal answer. It depends on the nature of the power that the court is being asked to exercise …”

42.  Lord Clarke expressed the same view at §113, that:

“ [The common law power] is subject to the limitation that such an order must be consistent with the substantive law and public policy of the assisting court, in this case that of Bermuda.”

43.  Support can also be found in the local case of Joint Administrators of African Minerals [2015] 4 HKC 215.  In that case:

 (a) an urgent ex parte application on notice was made to the Harris J for an order that would restrain the enforcement of security over certain shares pursuant to a letter of request issued by a judge in the English High Court;

 (b) at §11 of his judgment, Harris J observed that

“ ...although in my opinion the Hong Kong Court can take a generous view of its power to assist a foreign liquidation process this is limited by the extent to which the type of order sought is available to a liquidator in Hong Kong under our insolvency regime and common law and equitable principles. This is explained more fully in para 19 of Lord Sumption’s recent judgment in Singularis … [which paragraph Harris J then proceeded to quote in full]”

 (c) in the end, the learned judge refused the application.  The main reason, as summarized by him at §12, was that:

“ Hong Kong does not currently have any equivalent to administration and no statutory provision which provides for a moratorium on the enforcement of secured debt.”

G.3.ii. Limb (b) of Limitation #2 — local law and policy

44.  In support of Limb (b) of Limitation #2, Mr Joffe cites the following passages from McPherson’s Law of Company Liquidation (4^th ed 2017), that:

“ As the name suggests, with a members’ voluntary winding up the members are the persons who are primarily interested in the results of the winding-up process. As the company must be solvent, the creditors have no real interest in the company as they will be paid in full. With a members’ voluntary the members are in control. Where there is a creditors’ voluntary winding up, the creditors have the primary interest in the winding-up process as they will not be paid in full, the company being insolvent. The creditors have ultimate control in such a process. (§2-004)

In members’ voluntary winding up there is no statutory provision, rule or practice, or consideration of policy to prevent a creditor from garnisheeing the company’s debts at any stage of the liquidation.” (§7-098)

45.  While §7-098 of McPherson’s talks about “garnisheeing the company’s debts”, one notes the summary of the relevant principles set out in the Hong Kong Civil Procedure 2020 (§50/9A/23 at 1065), that:

“ 1. The question whether a charging order nisi should be made absolute is one for the discretion of the court.

…

3. For the purpose of the exercise of the court’s discretion there is, in general, no material difference between the making absolute of a charging order nision the one hand and a garnishee order nisi on the other.”

46.  In Gerard v Worth of Paris Ltd [1936] 2 All E.R. 905[9], a company went into liquidation under a resolution for a member’s voluntary winding up.  To do that, the majority of the directors of the company would have to carry and pass a declaration to the effect that the company was solvent.  As observed by Slesser LJ[10], there was indeed no reason to suppose that the company was not solvent. Despite the practice of staying execution when a company was in liquidation, Slesser LJ observed as follows[11] and made absolute a garnishee order against the company on the basis that the company was solvent so that the distribution of the assets of the company pari passu would not necessarily be interfered with:

“ I have come to the conclusion that this is one of the cases contemplated in Anglo‑Baltic & Mediterranean Bank v Barber & Co where the court in its discretion may properly refuse to grant a stay. I think so for the following reason. It appears from the judgments in that case, which are only stating what I understand to have been laid down in the earlier authorities, that, as Scrutton LJ says, at pp 417–8:

‘ It is now the almost invariable practice when a company is in voluntary liquidation to stay proceedings in an action against it, because the result of allowing a judgment creditor proceed to execution might be that, instead of the assets being divided among the creditors pari passu, the judgment creditor, by enforcing his judgment, would obtain an advantage over the other creditors. … But it is only in very special circumstances such as those that the court will depart from its general practice of staying execution when the company is in voluntary liquidation, for the reason that the execution, if allowed, would necessarily interfere with the distribution of the assets pari passu.’

And Atkin LJ, at p 420, says:

‘ The only ground on which leave to issue execution in this case could be justified would be on the supposition that the judgment creditor had some right in equity over the debt which he seeks to take in execution under the garnishee proceedings.’

In my view this case is not one of those which might produce that mischief which Scrutton LJ intimates might arise were the stay not to be granted; because this is not a case, this company being solvent—and there is no suggestion of other creditors claiming these moneys—where the execution if allowed (to quote Scrutton LJ)‘would necessarily interfere with the distribution of the assets pari passu.’ It does not seem to be a case where there is any danger that, instead of the assets being divided among the creditors, the judgment creditor may obtain an advantage over the other creditors …” (emphasis added)

47.  In this regard, the importance of the imminent prospect of a true pari passu distribution taking place was emphasized by Hunter J in Wardley Ltd v Aik San Reality Ltd [1985] 2 HKC 695 (at 698B-E), that:

“ This line of authority [culminating in Roberts Petroleum Ltd v Bernard Kenny Ltd [1983] 2 AC 192] shows that if the court has a choice between allowing a particular creditor to obtain a preference or ensuring a pari passu distribution of a debtor’s total assets amongst his creditors, it will opt for the latter and equality. But in the case of a corporate debtor no choice arises unless a pari passu distribution will follow from a refusal to take a Charging Order absolute ie because winding‑up proceedings have already been commenced or perhaps because their equivalent in the form of some scheme of arrangement is imminent. Unless these circumstances exist the above choice is not available to the court.

That is the position here.  No one, including the directors of the defendants, has chosen to put either of these companies in liquidation.  What has happened over the past two years cannot be described as an equal distribution.  There have simply been individual settlements on terms unknown with individual creditors.  There is at present no prospect of a true pari passu distribution taking place. So in my judgment these authorities have no application and the master was right.”

48.  Wardley Ltd was approved by the Court of Appeal in Credit Lyonnais v Sakhrani Global (unrep, CACV 167/2003, 30 July 2003) (see §§8(4) and 9.  There, the Court of Appeal held that the possibility or even reasonable prospect of a compromise being reached between the judgment debtor and its creditors in general, or of a restructuring of the judgment debtor’s debts did not provide any reason to order a stay of execution.  A statutory scheme for the pari passu distribution of the judgment debtors’ assets amongst its creditors (whether by winding‑up or scheme of arrangement) has to be either in place or imminent.  As observed by Ma CJHC (as the learned CJ then was):

“ 8. …

(4) The only situation in which the courts have appeared to take into account broader interests when considering question of execution, have been where the judgment debtor was in the process of being wound up or where liquidation or some form of scheme of arrangement was imminent …

9. In applying for a stay, the defendant has in the present case effectively sought a moratorium on its debts to enable restructuring negotiations to take place with its creditors. Neither a winding‑up (there is no petition presented) nor a scheme of arrangement is imminent. For the reasons that Rogers VP articulates in his judgment, this is simply not sufficient. As Hunter J said in Wardley Ltd at 698 :

‘ Unless these circumstances [i.e. winding‑up proceedings or their equivalent in the form of some scheme of arrangement being imminent] exist the above choice is not available to the court.’

10. It is not up to the court to use its inherent jurisdiction to create a regime in which a judgment debtor or insolvent company is able to obtain a moratorium on its debts (or to put it more crudely, to give it some ‘breathing space’ to allow it to negotiate with creditors).  This is a matter for the legislature to contemplate and if seen fit, to legislate on.  The inherent jurisdiction of the court is only to be exercised in the circumstances set out above; it is not there to fill in perceived lacunae in the insolvency legislation.”

49.  When there is no insolvency, or at least when a pari passu distribution is not imminent, there is no undue prejudice to other creditors by the court making absolute a charging order in favour of a particular creditor.  The general rule is that the person who gets in first gets the fruits — see British Arab Commercial Bank v Algosaibi and Bros Co [2011] 2 CLC 736, per Flaux J (as he then was) at §§17, 53-55.

50.  In his submissions, Mr Yeung refers to United Asia Finance Ltd v Yiu Tsz Ngar [2015] 2 HKLRD 189 and Snee Enterprise v HK Shaoji Trade Co Ltd (unrep, HCA 1609 & 1744/2016, 7 October 2016) in support of his submission that “it is well‑established that an order nisi should not be made absolute if, in the interim, (a) the judgment debtor enters into voluntary winding up, or (b) a statutory scheme of assets distribution applies to the creditors of the judgment debtor”[12]. In this regard, I accept Mr Joffe’s submissions[13] that those authorities do not support a wider principle than the one discussed above, as none of them concerned a solvent or members’ voluntary liquidation. 

51.  On the state of the authorities as submitted before me, I am of the view that Limb (b) of Limitation #2 is also made out.

G.3.iii. Limitation #3 — the power of the foreign court and its exercise

52.  In Singularis (at §25, which I have reproduced above), Lord Sumption explained that as the common law power to recognize and assist cross‑border liquidations is a power of assistance, it exists for the purpose of enabling those courts to surmount the problems posed for a worldwide winding up of the company’s affairs by the territorial limits of each court's powers. “It is not therefore available to enable them to do something which they could not do even under the law by which they were appointed ”.

53.  As I have covered in the overview of Singularis above, while the Board did not agree on the scope of the common law power, the Board was clear that given the lack of the equivalent power under Cayman Islands law, the Bermudan Supreme Court erred in making the order concerned. 

54.  Mr Joffe intends to take the matter one step further.  He submits that the Limitation #3 is not restricted to cases where the foreign court has no jurisdiction to grant the order sought.  As a matter of principle, it extends to cases where the foreign court, though with the requisite jurisdiction and power, has found insufficient cause to exercise that jurisdiction and power.  He relies analogically on Deiulemar Shipping v Transfield [2011] 1 HKLR 75 and Beyonics Technology v Goh [2016] 1 HKC 17 where the courts have held that the Hong Kong Court should not grant injunctions in aid of foreign proceedings where it would interfere with the foreign proceedings.

55.  In my view, in the context of the present application where the Court’s discretion to decide whether to make absolute a charging order nisi is engaged, how a foreign court has exercised its power in relation to the execution and enforcement of the debt concerned is clearly a relevant consideration when deciding how the discretion should be exercised.  At least to that extent, I agree with Mr Joffe’s submission.

H. Application of the law

56.  Capxon was solvent as at 31 December 2017.

57.  On 10 April 2018, during the 10/4/18 EGM, a resolution was passed for its liquidation.  Admittedly, the process is akin to a members’ voluntary winding‑up in Hong Kong.

58.  According to the updated information provided by Lin in Lin 2^nd, on 4 April 2018 when the resolution was passed, Capxon remained solvent.

59.  No further update has been provided to this court.  In particular, in Lin 3^rd filed on 5 November 2018, there was still no suggestion that Capxon had become insolvent.

60.  Lin in Lin 3^rd referred to certain deferred tax liabilities which might become payable when the Lancom Shares are sold.  But those deferred liabilities have been included as one of the liabilities in the Updated Financial Statements[14]. Further, whilst Lin at §26 of Lin 3^rd said that “[when] the [Lancom Shares] are subject to a sale or disposal, the [deferred tax liabilities] will be realised”, he immediately afterwards said that “the actual value of which will ultimately depend on the sale price of the shares and I am unable to give an estimate of the actual value of [deferred tax liabilities]at this junction”.

61.  I highlight the fact that the Award, when converted into NT$, and according to the financial information provided by Lin, was NT$886,036,000, and that the value of the Lancom Shares was estimated at NT$1,234,998,432.  The estimated value of the Lancom Shares exceeds the amount of the Award.

62.  What Lin is saying is simply this, that without the Lancom Shares, it would not have been able to pay off all creditors.

63.  But that assumes that upon sale of the Lancom Shares, there would be no surplus left for distribution despite the fact that their estimated value in fact far exceeds that of the Award.

64.  I agree with Mr Joffe’s submission[15]that “Capxon’s case effectively boils down to a speculation that Paloma will sell the Lancom Shares at an undervalue”.  The speculativeness of its case becomes quite clear when one notes:

 (a) what Lin said at §9 of Lin 2^nd, that

“ Once the Charging Order Nisi is made absolute, then [Capxon’s] pool of assets available for distribution to its creditors will be depleted considerably by the value of the Lancom Shares and [Capxon] will not have sufficient assets to satisfy its outstanding liabilities owed to its other creditors as at 10 April 2018. As such, if the Charging Order Nisi is made absolute, Paloma will in effect be able to assert a priority over Lancom Shares. Such a creation of priority in favour Paloma will unfairly prejudice the interests of [Capxon’s] other creditors and/or shareholders and this is contrary to the spirit of pari passu distribution of assets under the dissolution/liquidation laws of Taiwan”;

 (b) Mr Yeung’s submissions[16], that:

“ …if the Lancom Shares are taken away by [Paloma], the remaining pool of assets of [Capxon] will not be sufficient to satisfy the liabilities owed to the statutory and unsecured creditors excluding [Paloma] as at 10 April 2018, leaving a deficit of approximately NT$105,531,341. For this reason, given the uncertainty over when, how and at what price the Lancom Shares would be sold, granting the Charging Order Application (as opposed to refusing it upon which the liquidator would seize the matter and deal with it in accordance with its duties of loyalty and care to treat all creditors fairly and unbiasedly on a pari passu basis), the balance clearly swings towards refusing the Charging Order.” (emphasis added)

65.  The solvent nature of the Taiwan Winding‑up, I respectfully borrow the words of Harris J at §17 of Supreme Tycoon, “would not fall within the principle of modified universalism” (Limitation #1).

66.  The speculative nature of Capxon’s case also falls far short of the requirement of imminence explained in Wardley Ltd and Credit Lyonnais (Limitation #2). 

67.  Capxon’s case does not improve even when the evidence of the its Taiwan law expert is taken into consideration:

 (a) In his Legal Opinion dated 13 April 2018, Kao was asked to give his opinion on the following question:

“ 6. How would the creditors be ranked under the winding up (bearing in mind in particular that one of the creditors is a judgment creditor)? And if the winding up would change the ranking, then when would this amended ranking start to take place. More particularly, will a charging order nisi (i.e. a temporary charging order) in Hong Kong affect the ranking, assuming that the creditors should be ranked pari passu. And if so, when would that take place?”

 (b) The second paragraph of Kao’s answer to that question was:

“ Generally speaking, there is no such thing as ranking if the assets of a company are enough to cover all its indebtedness.”

 (c) In that same Legal Opinion, Kao was further asked to give his opinion on the following question:

“ 7. In the case where the assets (comprising of cash, shares, receivables and other kind) exceeds the liabilities, how (steps and procedures, and consideration, to be taken) would the assets be distributed among the creditors?”

 (d) His answer was:

“ The liquidator has certain discretion right to decide how to dispose the company’s assets. In other words, the liquidator may decide whether or not to satisfy the company’s creditor by directly allocating its existing assets or by selling and distributing the proceeds for the sales of the assets. However, the liquidator may not perform in favour of any of the creditors or satisfy any indebtedness during the 3‑month period for calling upon all creditors to declare their claims. While performing the duty as liquidator after the 3‑month period, the liquidator shall aim for quick completing of the liquidation procedure, follow relevant laws and regulations and take the interest of the creditors and shareholders of the company into consideration. And the liquidator shall fulfill his/her duty faithfully with the care of a good administrator.”

 (e) Then in 4^th Kao, he tried to qualify what he had said. At §8.2, he said:

“ There are still certain limitations as to how the liquidator must perform his duty after the lapse of the 3‑mohth period. For instance, Article 324 of the Company Act stipulates that a liquidator must have the same rights and obligations as a director in handing liquidating matters (his original emphasis), which include settling all pending business, collecting all outstanding debts, paying off all claims, allocating surplus or loss, and allocating the residual assets of the Company… As such, the liquidator must fulfill his/her duty faithfully with the care of a good administrator while handling liquidating matters.”

 (f) I note however that what is “a good administrator”, and how “a good administrator” “must fulfill his/her duty faithfully” remain unclear;

 (g) Then at §8.3 of 4^th Kao, Kao referred to Taipei District Court Civil Ruling No 106年度司字第120號, that:

「 清算人依照同法第334條準用同法第84條規定，有了結現務、收取債權、清償債務、分派盈餘或虧損、分判賸餘財產之職務，是清算人之職務行使，特重於追求公司債權人公平受償與股東受賸餘財產分配利益。」

 (h) Despite Kao’s assertion based on that decision[17] that “when discharging his/her duty, the liquidator shall emphasize treating the creditors on a pari passu basis and shall also take the shareholders’ rights to the residual interest into consideration”, there is neither discussion nor explanation as to whether “公平受償” is the same as the concept of “pari passu”.  In the course of the hearing, Mr Yeung accepted that there is before the court no evidence showing that they are the same;

 (i) Further, whatever “公平受償” or the duty to act “faithfully” mean, the evidence does not suggest that the Taiwan Winding-up is a collective proceeding or regime, but is more akin to a private arrangement.  In the course of the hearing, Mr Yeung further informed the court that he was not going to press the point that “公平受償” or the duty to act “faithfully” is the same as a collective proceeding.

68.  I add two matters:

 (a) Lin claimed that making the Charging Order Nisi would give Paloma priority over the Lancom Shares.  I repeat in this regard the general principle that, in the absence of insolvency and “undue prejudice”, the person who gets in first gets the fruits; and

 (b) Even if I am to make absolute the Charging Order Nisi, that is not going to be the end of the matter.  As Mr Joffe has submitted[18], further down the road, Paloma will still require to obtain an order for sale. Suitable directions can be given at that stage to enable the best price to be obtained for the Lancom Shares and for a sizeable surplus to be returned to Capxon for the payment of its other creditors.

69.  There is further the aspect relating to the powers of the Taiwanese court and certain related proceedings that have been before it.  As revealed in Yamaura 4^th, Paloma has taken steps in Taiwan to enforce the Award.  Both Lin and Kao agree that there are no express laws and or regulations in Taiwan in relation to the suspension of enforcement or execution proceedings or the refusal to grant compulsory execution orders upon the commencement of an ordinary liquidation proceeding.  Kao has pointed to certain provisions suggesting that “parties or other interested parties may oppose a compulsory execution proceeding if the proceeding is either illegal, inappropriate, or may harm the interest of the parties or other interested third parties.  The court will decide whether or not an objection is reasonable on a case‑by‑case basis…”.  Whilst that may be so, the matters are now before the Taiwanese Court, and as things stood at the time of the hearing, though under objections from Capxon, the Taiwanese court had ordered certain enforcement actions.  These are matters that I can take into account when deciding how my discretion should be exercised (Limitation #3).

70.  Having considered the above matters, I form the view that Capxon has failed to discharge the burden on it to show cause why the Charging Order Nisi should not be made absolute.

I. Disposition

71.  In all the circumstances, and having considered the totality of the evidence, I form the view that Capxon has failed to show cause why the Charging Order Nisi should not be made absolute.  I make the Charging Order Nisi absolute.

J. Costs

72.  I make a costs order nisi that all costs of and occasioned by the application be to Paloma, with certificate for 2 counsel, to be taxed if not agreed.  Any party who seeks any variation or summary assessment should file its submissions within 14 days from the date hereof, submissions in response within 14 days of receipt, and reply within 7 days.

HCCT 53/2017

[2018] HKCFI 1147

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS NO 53 OF 2017

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REASONS FOR DECISION

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THE APPLICATIONS

1.  There are two matters before the court:

(a)  the substantive hearing (the“Charging Order Hearing”) for the Charging Order: Notice to Show Cause dated 23 November 2017 (the “Charging Order Nisi”); and

(b)  the hearing for the summons dated 13 March 2018 taken out by Capxon (the “Setting Aside Summons”) for setting aside the Order of Mimmie Chan J dated 12 October 2017 (the “Enforcement Order”) granting leave to enforce the Arbitral Award dated 6 August 2014 (the “Award”).

BACKGROUND LEADING TO THE APPLICATIONS

2.  Paloma Company Limited (“Paloma”) is a company which business address is in Japan.

3.  Capxon Electronic Industrial Company Limited (“Capxon”) is a subsidiary of Capxon International Electronic Company Limited, a company listed on the Main Board of the Hong Kong Stock Exchange.  The registered address of Capxon is in Taiwan.

4.  Capxon and Paloma engaged in the sale and purchase of electrolytic capacitors.  Disputes arose between them in respect of certain capacitors that Capxon had supplied to Paloma. They were defective.  Pursuant to the terms and conditions governing those sales, Paloma on 17 November 2011 commenced arbitration at the Japan Commercial Arbitration Association against Capxon.  Japan is a contracting state of theNew York Convention.  The matter was before a three-member tribunal (the “Arbitral Tribunal”). After 11 meetings (for variably oral arguments, technical explanations and examination of witnesses), and having received written submissions, the Arbitral Tribunal on 6 August 2014 delivered the Award in favor of Paloma in the sum of JPY2,427,186,647 plus interest and costs.

5.  Subsequent to the Award, Capxon sought to have the same set aside in a number of courts.  Its attempts in Japan were dismissed firstly by the Tokyo District Court (on 22 January 2016), then Toyko High Court (on 16 February 2017), and finally Japan Supreme Court (on 31 May 2017).  Its attempt to resist the recognition of the Award in Taiwan was also rejected by the Taiwan Shilin District Court on 9 March 2018.

6.  On 12 October 2017, Mimmie Chan J gave leave to enforce the Award in Hong Kong pursuant to section 87 of the Arbitration Ordinance Cap 609 and Order 73, rule 10(1) of the Rules of the High Court (ie the Enforcement Order).

7.  On 23 November 2017, the Charging Order Nisi was granted in respect of 85,137,200 shares in Lancom Limited held by Capxon (the “Lancom Shares”).  The hearing to show cause was originally set to take place on 22 December 2017.

8.  On 19 December 2017, evidence was filed on behalf of Capxon alleging that the service of the Charging Order Nisi was “ineffective and illegal”. On that basis, Capxon craved that the Court should either refuseto make the Charging Order Nisi absolute, or alternatively that the hearing of 22 December 2017 be adjourned so that further evidence could be filed.

9.  On 22 December 2017, the hearing to show cause was adjourned.

10.  On 13 February 2018, Capxon filed further evidence (affirmation of Ms Chou Chiu-Yueh) concerning the alleged ineffective service of the Charging Order Nisi. Ms Chou also revealed in her affirmation that Capxon intended to make application to have the Enforcement Order set aside.   She claimed that as the service of the Enforcement Order on Capxon was also ineffective, the time for Capxon to apply to set aside the Enforcement Order had not started to run, and the intended application was therefore not out of time.

11.  On 13 March 2018, Capxon ultimately took out the Setting Aside Summons. The grounds upon which the application is premised are stated as follows:

“ 1. There was conflict with public policy by virtue of the following:

a. the tribunal unfairly formed a presumption that the defects of the Applicant’s products were attributable to contamination of the Respondent’s capacitors by chlorine (the ‘Chlorine Contamination’) as a result of the bare hand operation of the Respondent’s workers during the manufacturing process,on the sole basis of an alleged admission or confession by the Respondent in certain reports prepared by it in response to the Applicant’s queries (the ‘Report’);

b. the Respondent did not made admission to the Chlorine Contamination in the Report, and did raise this as an issue;

c. the tribunal failed to consider the issue, and came to a conclusion in favour of the said admission and presumptionwithout giving justification. On the other hand, there werefacts which clearly contradicted the Chlorine Contamination;

d. with the said unjustified presumption, the tribunal reverses the burden of proof to the prejudice of the Respondent, clearly in violation of Japanese law and also a serious procedural irregularity under Hong Kong law;

e. the tribunal also refused to accept evidence proffered by the Respondent which suggested that chlorine contamination was the result of the Applicant’s manufacturing process, without giving any reason; and

f. in the premises, the manner in which the tribunal conducted the Arbitration was clearly against the fundamental conception of morality and justice.

2.   In the event that the presumption was not unfairly established orthe Respondent’s evidence pointing to a default on the part of the Applicant’s manufacturing process as the cause of the chlorine contamination was not unreasonably rejected, the ruling of the tribunal could have been very different.”

12.  On 13 March 2018, Ms Chou Chiu-Yueh filed her 2^nd affirmation in support of the Setting Aside Summons (which was further supplemented by her 3^rd affirmation of 24 April 2018).

13.  Until 16 April 2018, the only basis which Capxon had put forward to resist the Charging Order Nisi being made absolute was the alleged defective service of the same.  That changed on 16 April 2018.  On that day, Mr Lin Chin Tsun, the chairman of Capxon up to 10 April 2018 and since that date its liquidator, filed an affirmation.  He disclosed that pursuant to a board meeting dated 19 March 2018, an extraordinary general meeting of shareholders of Capxon was convened on 10 April 2018.  During that EGM, it was resolved that Capxon be dissolved, and Mr Lin be appointed as the liquidator for the conduct of the dissolution and liquidation procedure.  He produced the financial statements and accountant’s report of Capxon as at 31 December 2017.  He said that whilst Capxon was on the face of those statements solvent, “if the Lancom Shares are charged and removed from its assets, [Capxon] will not have enough assets to satisfy its outstanding liabilities owed to its other creditors as at 31 December 2017.”  He further said that “The balance sheet and property inventory of [Capxon] is now being prepared by Deloitte & Touche for the purpose of the dissolution and liquidation process.  I shall make further affirmation to exhibit such document to his Honourable Court once it is ready.”

14.  On 24 April 2018, Ms Chou Chiu-Yueh filed her 3^rdaffirmation in support of the Setting Aside Summons.

ADJOURNMENT OF THE CHARGING ORDER HEARING

15.  Mr Maurellet SC, who appears for Capxon together with Mr Mike Yeung, invites the Court to initially deal with the issue as to whether Capxon’s liquidation on 10 April 2018 would on its own be a sufficient ground for the Court to decline to make the Charging Order Nisi absolute.   If the Court considers that it is not, the Court is invited not to proceed with the Charging Order Hearing before determination of the Setting Aside Summons.

16.  Mr Jason Yu, counsel for Paloma, takes issue with the late filing of Mr Lin’s affirmation, on the basis that Mr Lin has raised a new point based upon the recent liquidation of Capxon, in respect of which Paloma has had no realistic opportunity to respond.  He submits that the voluntary winding up of Capxon was engineered by its management.  He further submits that whilst the new point cannot be sustained, he reserves the right to file evidence should the matter be adjourned.

17.  Whilst comments can be made on the timing of Capxon’s liquidation and its revelation, I am not prepared to rule on the matter at this stage.  As has been revealed by Mr Lin in his affirmation, the balance sheet and property inventory of Capxon for the purpose of the dissolution and liquidation process is now being prepared by Deloitte & Touche.  Mr Maurellet has informed me that that may take about 6 weeks.  A lot of things are going to hinge on the information that will be disclosed by that set of balance sheet and inventory.  Apart from anything else, the legal principles to be applied may differ depending upon the state of solvency of Capxon.  Further, third party interests’ (ie interests of other creditors) are potentially at stake.  In the end, I have decided to adjourn the Charging Order Hearing with directions on the filing of further evidence.

THE SETTING ASIDE SUMMONS

18.  I proceed to hear the Setting Aside Summons.

The applicable legal principles

19.  The Award is a Convention Award.  The Enforcement Order was sought and granted pursuant to section 87 of the Arbitration Ordinance, Cap 609.

20.  The attitude of the Hong Kong Court towards enforcement of arbitration awards and parties’ agreements to submit their disputes to arbitration has been summarized by Mimmie Chan J in KB v S & Ors [2016] 2 HKC 325, at 328 – 329, that:

“ (1) The primary aim of the court is to facilitate the arbitral process and to assist with enforcement of arbitral awards.

(2) Under the Arbitration Ordinance (Ordinance), the court should interfere in the arbitration of the dispute only as expressly provided for in the Ordinance.

(3) Subject to the observance of the safeguards that are necessary in the public interest, the parties to a dispute should be free to agree on how their dispute should be resolved.

(4) Enforcement of arbitral awards should be ‘almost a matter of administrative procedure’ and the courts should be ‘as mechanisticas possible’ (Re PetroChina International (Hong Kong) Corp Ltd [2011] 4 HKLRD 604).

(5) The courts are prepared to enforce awards except where complaints of substance can be made good. The party opposing enforcement has to show a real risk of prejudice and that its rights are shown to have been violated in a material way(Grand Pacific Holdings Ltd v Pacific China Holdings Ltd [2012] 4 HKLRD 1 (CA)).

(6) In dealing with applications to set aside an arbitral award, or to refuse enforcement of an award, whether on the ground of not having been given notice of the arbitral proceedings, inability to present one’s case, or that the composition of the tribunal or the arbitral procedure was not in accordance with the parties’ agreement, the court is concerned with the structural integrity of the arbitration proceedings. In this regard, the conduct complained of ‘must be serious, even egregious’, before the court would find that there was an error sufficiently serious so as to have undermined due process (Grand Pacific Holdings Ltd v Pacific China Holdings Ltd [2012] 4 HKLRD 1 (CA)).

(7) In considering whether or not to refuse the enforcement of the award, the court does not look into the merits or at the underlying transaction (Xiamen Xingjingdi Group Ltd v Eton PropertiesLtd [2009] 4 HKLRD 353 (CA)).

(8) Failure to make prompt objection to the Tribunal or the supervisory court may constitute estoppel or want of bona fide (Hebei Import & Export Corp v Polytek Engineering Co Ltd (1999) 2 HKCFAR 111).

(9) Even if sufficient grounds are made out either to refuse enforcement or to set aside an arbitral award, the court has a residual discretion and may nevertheless enforce the award despite the proven existence of a valid ground (Hebei Import&Export Corp v Polytek Engineering Co Ltd (1999) 2 HKCFAR111, 136A–B).

(10) The Court of Final Appeal clearly recognized in Hebei Import&Export Corp v Polytek Engineering Co Ltd that parties to the arbitration have a duty of good faith, or to act bona fide (p 120Iand p 137B of the judgment).”

21.  Specifically in respect of an objection to enforcement based on public policy (which Capxon is doing by the Setting Aside Summons to do), the relevant sections in the Arbitration Ordinance are section 81(1) (Article 34 of the UNCITRAL Model Law) and section 89 (Convention awards).

22.  In Hebei Import & Export Corp v Polytek Engineering Co Ltd(1999) 2 HKCFAR 111 (which Mr Maurellet has fairly and properly highlighted for my attention), the Court of Final Appeal held and observedunder the old Arbitration Ordinance, Cap 341 (but equally applicable to the current Arbitration Ordinance, Cap 609) that:

“ The expression public policy as it appears in s.44(3) of the Ordinance is a multi-faceted concept. Woven into this concept is the principle that courts should recognise 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 notions of morality and justice. It would take a very strong case before such a conclusion can be properly reached, when the facts giving rise to the allegation have been made thesubject of challenge in proceedings in the supervisory jurisdiction,and such challenge has failed.” (per Litton PJ at 118D–E)

“ In my judgment, the position is as follows. Before a Convention jurisdiction can, in keeping with its being a party to the Convention, refuse enforcement of a Convention award on public policy grounds, the award must be so fundamentally offensive to that jurisdiction's notions of justice that, despite its being a party to the Convention, it cannot reasonably be expected to overlook the objection.

….

In the present context, I think that a distinction can and should be made between the effect of actual bias and that of apparent bias. (When I say ‘bias’ I mean a lack of the impartiality required of judges and arbitrators.) Actual bias would be more than our courts could overlook even where the award concerned is a Convention award. But short of actual bias, I do not think that the Hong Kong courts would be justifiedin refusing enforcement of a Convention award on public policygrounds as soon as appearances fall short of what we insist uponin regard to impartiality where domestic cases or arbitrations are concerned. Our stance must be that something more serious even than that is required for refusing such enforcement. In adopting such a stance, we would be proceeding in conformity with the stance generally adopted in regard to Convention award enforcement by the commercial jurisdictions whose decisions from around the globe have been cited to us by leading counsel for the buyer.” (per Bokhary PJ at 123H–I and 124B–D)

“ …The Convention, in providing that enforcement of an award may be resisted on certain specified grounds, recognises that, although an award may be valid by the law of the place where it is made, its making may be attended by such a grave departure from basic concepts of justice as applied by the court of enforcement that the award should not be enforced.

….

    However, the object of the Convention was to encourage the recognition and enforcement of commercial arbitration agreements in international contracts and to unify the standardsby which agreements to arbitrate are observed and arbitral awards are enforced (Scherk v Alberto-Culver Co (1974) 417 US 506; Imperial Ethiopian Government v Baruch-Foster Corp (1976) 535 F 2d 334 at p.335).  In order to ensure the attainment of that object without excessive intervention on the part of courts of enforcement, the provisions of art.V, notably art.V2(b) relating to public policy, have been given a narrow construction.  It has been generally accepted that the expression ‘contrary to the public policy of that country’ in art.V2(b) means ‘contrary to the fundamental conceptions of morality and justice’ of the forum.  (Parsons & Whittemore Overseas Co Inc v Societe Generale De L'Industrie Du Papier (RAKTA) (1974) 508 F 2d 969 at p.974 (where the Convention expression was equated to ‘the forum’s most basic notions of morality and justice’); see AJ van den Berg, The New York Convention of 1958 (Kluwer, 1981) at p.376; see also Renusagar Power Co Ltd v General Electric Co (Yearbook Commercial Arbitration XX (1995) 681 at pp.697–702)).”
   (per Sir Anthony Mason NPJ at 136E–F and 139D–H)

23.  On the principles applicable where a party seeks leave to resistenforcement of a Convention award out of time, the Court of Final Appeal in the recent case of Astro Nusantara v PT Ayunda Prima Mitra[2018] HKCFA 12 held that the proper test involves looking at all relevant matters and considering the overall justice of the case, eschewing a rigid mechanistic approach (section E.2 of the Judgment).

24.  When considering the Setting Aside Summons, I apply the principles and considerations set out above.

Discussions

25.  The grounds which Capxon seeks to rely upon are set out in the Setting Aside Summons which I have reproduced above.  In gist, the allegations are that as Paloma was the petitioner, it had the onus of provingthe defects and their causes.  But the Arbitral Tribunal relied upon certainalleged admissions made by Capxon in some reports (“Reports”) that it hadmade and formed a presumption against Capxon for its rebuttal, to the effectthat the defects of the Capxon’s products were attributable to contamination by chlorine as a result of the bare hand operation of Capxon’s workers during the manufacturing process.  The Arbitral Tribunal also ignored a lot of contrary evidence in Capxon’s favour (which Ms Chou endeavored to set out in her 2^nd and 3^rd affirmations).  The Arbitral Tribunal had therefore, Capxon claims and Mr Maurellet submits, reversed the onus of proof. That wrongful reversal of burden of proof, it is further submitted, “clear shows an actual bias” on the part of the Arbitral Tribunal towards Capxon.  As the manner in which the tribunal conducted the Arbitration was clearly against the fundamental conception of morality and justice, to enforce the Award would be contrary to public policy.

26.  I have considered those Reports.  There is no dispute that they were indeed prepared by Capxon in response to Paloma’s complaints about the capacitors concerned.  Mr Yu has taken me through some of their contents, which in my view clearly contain matters and information which were capable of being accepted by the Arbitral Tribunal as evidence against Capxon:

•   “ Defects in the manufacturing process:  When the production records were investigated, there were orders submitted for a short term delivery for large volume in February of 2006, and our company responded through urgent production.  In the assembly process, there was a defect caused by inappropriate tasks conducted by a worker.  According to the dissection analysis, the life will be shortened if the task of bending the aluminum lead board is conducted inappropriately and the term is used for a long period of time because the aluminum lead board is damaged.” [1]

•   “ In the 6^th week of 2006 (C606), the number of orders accepted for LP series (including LP220uF00V 20x26) increased significantly, which caused the response to become tense in the Production Management due to urgent production.  It is estimated that the workers will touch the elements by hand carelessly in the assembly process.” [2]

•   “ In the assembly process in lot C606 of LP220M200L260 which is the aluminum electrolytic capacitor manufactured by our company, individual defects occur due to inappropriate tasks conducted by workers.  Furthermore, there are no defects in the products of other lots.  Our company will take all responsibilities if there are defects in other lots.” [3]

•   “ The aluminum electrolytic capacitor manufactured by us with the specification LP220M200L260 and cycle C606 has a few flaws due to improper operations by personnel during the assembly process, but there are no faults in other cycle.  If there are faults in other cycles, we would like to take full responsibility.” [4]

•   “ The chlorine does not have a very good effect of the characteristic of capacitors.  There is possibility that the quality may be affected if the capacitor is produced by hand, since sweat contains chlorine.” [5]

27.  It is also important to note that Capxon had been afforded opportunities to challenge those Reports.  The authors of those Reports were called as live witnesses before the Arbitral Tribunal.  The witnesses sought to explain that the material contents of the Reports were untrue.  Despite their evidence, but having considered the same, the Arbitral Tribunal decided to place weight upon the Reports.  The material parts of the Arbitral Tribunal’s observations and findings are as follows:

“ Lin I Chu and Factory Manager Lu Yan Cheng who had been in the leading positions in creating the reports for the respondent, endlessly explained that the content of the reports is false and does not reflect the facts as well as the motive leading to the falsification and the circumstances in the report creation, but they cannot be trusted. The statements of Lin I Chu stating that ‘you should really conduct self-examination when pointingout issues in our customers,’ and ‘the problem is in the customers. I instructed to not write in any key words which insinuate that or the keyword chlorine’ in relation to Petitioner’s Evidence 68 does not logically explain why Lin I Chu took this action as a response by a businessman. The statement that ‘there was no defects in the transactions with Higashibara Company” by Lin I Chu clearly contradicts the Respondent’s Evidence 33 which states that there was a defect; this document was created by Hin I Chu himself. Moreover, Lu Yan Cheng gave instructions to Lin I Chu to send a photo of the LP product that was corroded by soaking it in salt water and then applying a large electrical current as the Attachment of Petitioner’s Evidence 56, posing this photo to be the product that was actually corroded; Lu Yan Cheng also agreed to these instructions and contributed to the lie as well. The arbitral tribunal cannot place their trusts in the words of Lin I Chu and Lu Yan Cheng, who conducted actions outside of the realm of common businessmen, and who deny thecontent of the documents they created themselves. The reasons for withdrawal of submitted evidence to the arbitral tribunal (Respondent’s Evidence 11, Respondent’s Evidence 12, and Respondent’s Evidence 15 through Respondent’s Evidence 19) is not entirely convincing. Even with the other evidence submitted by the Respondent, it is not enough to state that the content of the report created by the respondent is false.” [6]

28.  Having considered the evidence and counsel’s submissions, I do not accept Mr Maurellet’s submissions that there has been any impermissible reversal of burden of proof.  I further reject the submissionsthat the evidence or the reasoning of the Arbitral Tribunal shows any actual bias on its part against Capxon.  I do not intent to look further at or into the merits of the Award or the Arbitral Tribunal’s reasoning which led to it.  In fact, I ought not to: KB v S & Ors (paragraph 49).  I accept Mr Yu’s submissions that “the inescapable conclusion is that Capxon is inviting the Court to review errors or explore the reasoning of a tribunal.  This is not permissible.”

29.  On the evidence, I cannot see any error or matter of the naturewhich, according to the elucidations by the Court of Final Appeal in Hebei, come close to justifying the setting aside of the Enforcement Order on the public policy ground.

30.  For completeness sake, I should also mention the question of leave to extend time.  In the Setting Aside Summons, Capxon seeks “leave to extend the time within which the application for the order under this Summons should be made until the date hereof should this Honourable Court consider that such application is made out of time” (emphasis added).  Capxon’s primary contention is that as the service of the Enforcement Order was ineffective, the time for it to apply to have it set aside has not started to run.  I do not intend to go into the issue of service unnecessarilyand on such contingency basis.  I will only say this.  If extension of timeis required, I will refuse to grant any.  I have considered the overall justice of the case.  I avoid the application of any rigid mechanistic approach.  On the basis of my conclusion expressed above on the lack of any basis to challenge the Enforcement Order, it would have been futile for me to grant any extension.

Disposal

31.  At the end of the hearing on 2 May 2018, I dismissed the Setting Aside Summons with costs to Paloma on an indemnity basis.  I promised to hand down my reasons when ready, which I have now done.