Case Detail

HCCT 38/2021

[2024] HKCFI 721

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 38 OF 2021

____________________

IN THE MATTER OF enforcement of order of an arbitral tribunal dated 23 April 2021 and a Partial Award dated 6 April 2023

____________________

BETWEEN
	G	Applicant
	and
	N	Respondent

____________________

Before:

Hon Mimmie Chan J in Chambers

Date of Hearing:	11 December 2023
Date of Decision:	11 December 2023
Date of Reasons for Decision:	11 March 2024

_________________________

REASONS FOR DECISION

___________________________

1. The essential dispute between the Plaintiff G and the Defendant N is set out in a Decision of this Court handed down on 29 December 2023. G and N were parties to a Securities Purchase Agreement (“SPA”) dated 5 October 2020. The placement under the SPA (“Placement”) was, on 3 March 2021, held by the BVI Court to be void under BVI law, and was invalidated by a judgment of the BVI Court. On 12 March 2021, G commenced an arbitration against N in Hong Kong (“Arbitration”) to seek repayment of the Consideration Monies it had paid to N under the SPA for the Placement. By a 1^st Partial Award of 6 April 2023, the arbitrator found the Placement to be illegal, dismissed G’s restitutionary claim, and allowed N’s counterclaim on the basis of G’s conspiracy or dishonest assistance of the directors’ breach of fiduciary duties to N. By a 2^nd Partial Award of 28 July 2023, the arbitrator quantified the damages to be paid by G to N under the latter’s counterclaim, at US $11,096,822 and US $1,924,541.53, with interest and costs.

2. In April and August 2023 respectively, G applied to the Hong Kong Court to set aside the Awards on the grounds that they were contrary to the public policy of Hong Kong, and/or that the Awards contain decisions on matters beyond the scope of the submission to arbitration. After substantive hearings in October 2023 and December 2023, this Court remitted the Awards to the arbitrator under section 81(4) of the Arbitration Ordinance (“Ordinance”), to give the arbitrator an opportunity to resume the proceedings or take such other action as in his opinion will eliminate the ground of public policy relied upon for the setting aside. The application to set aside the Awards on the scope of the submission was dismissed.

3. Leave to appeal the decision to remit the Awards and to stay the enforcement proceedings has been granted by this Court on 4 March 2024. The Arbitration has, in the interim, been resumed.

4. On 30 December 2021, after the Arbitration had been commenced, G had initiated proceedings before the Shenzhen Court on the Mainland (“Shenzhen Proceedings”). N and 3 of its subsidiaries (“Subsidiaries”) were all named as defendants. In the Shenzhen Proceedings, G sought a declaration that it owns the shares in the Subsidiaries in proportion to the amount which N had invested in the Subsidiaries, using the consideration monies N had received from G for the shares issued under the Placement. It was highlighted that the Subsidiaries were not parties to the arbitration agreement contained in the SPA.

5. N challenged the jurisdiction of the Shenzhen Court on the ground that the dispute in the Shenzhen Proceedings was governed by the arbitration clause contained in the SPA, and that G was seeking in the Shenzhen Proceedings the same relief as G did in the Arbitration. The Shenzhen Court dismissed the Shenzhen Proceedings against N, but not against the Subsidiaries.

6. N therefore applied to the tribunal in the Arbitration for urgent relief to restrain the Shenzhen Proceedings and, on 7 July 2023, the arbitrator issued an order to the following effect:

“(G) shall take all necessary steps to dismiss (the Shenzhen Proceedings) between G as plaintiff and (the Subsidiaries).”

Full reasons were set out in the arbitrator’s Interim Order on Discontinuance of the Proceedings, dated 7 July 2023 (“Interim Order”).

7. On 15 August 2023, N applied to and obtained from this Court leave to enforce the Interim Order (“Enforcement Order”), under section 61 of the Ordinance.

8. On 29 August 2023, G applied by its summons to set aside the Enforcement Order (“Summons”), on the purported grounds that:

(1) it was impermissible for the Interim Order to require G to take all necessary steps to dismiss proceedings against non‑parties to the arbitration clause, when there was no expert evidence on PRC law suggesting that those non-parties would be bound by the arbitration clause or the result of the Arbitration; and
(2) in making the Interim Order, the tribunal had overlooked or failed to deal with G’s submissions, which failure caused substantial injustice to G, and it would either be contrary to public policy to enforce same, or the Interim Order contains decisions on matters beyond the scope of the submission to arbitration.

9. At the conclusion of the hearing on 11 December 2023, this Court dismissed G’s application to set aside. The following sets out the reasons for my decision.

Jurisdictional basis

10. N’s application for the Enforcement Order was made under section 61 of the Ordinance. This is for enforcement of “orders and directions” of the arbitral tribunal, and provides as follows:

“(1) An order or direction made, whether in or outside Hong Kong, in relation to arbitral proceedings by an arbitral tribunalis enforceable in the same manner as an order or direction of the Court that has the same effect, but only with the leave of the Court.
(2) Leave to enforce an order or direction made outside Hong Kong is not to be granted unless the party seeking to enforce it can demonstrate that it belongs to a type or description of order or direction that may be made in Hong Kong in relation to arbitral proceedings by an arbitral tribunal.
(3) If leave is granted under subsection (1), the Court may enter judgment in terms of the order or direction.
(4) A decision of the Court to grant or refuse to grant leave under subsection (1) is not subject to appeal.
(5) An order or direction referred to in this section includes an interim measure.” (Emphases added)

11. G’s application to set aside the Enforcement Order was made under sections 45 and 61 of the Ordinance. Section 45 relates to interim measures granted by the Court in relation to arbitral proceedings.

12. The grounds relied upon by G and as stated in the Summons are those provided for in section 81 of the Ordinance, and in particular Article 34(2)(a)(iii) and Article 34(2)(b)(ii) of the Model Law (the award dealing with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or being contrary to public policy). The grounds stated in the Summons also include non-compliance with Order 73 rule 10(7) RHC, which refers to orders made on applications for leave to enforce arbitral awards under section 84 of the Ordinance.

13. Counsel for N highlighted the distinction between awards and procedural orders made in arbitral proceedings, because the Ordinance provides different enforcement regimes governing them. Enforcement of “orders and directions” is governed by section 61, whereas enforcement of “awards” is governed by sections 84, 87 and 92. Sections 43 to 45 of the Ordinance specifically provide for enforcement of interim measures, and as Counsel for N also highlighted, section 43 states that section 61 of the Ordinance has effect in substitution for Article 17H of the Model Law, and Article 17I does not have effect in Hong Kong by express provision in section 44 of the Ordinance.

Nature of an award

14. I accept the submissions made by Counsel for N, that the Interim Order is not an “award”, and that the grounds for setting aside an arbitral award as provided for in section 81 of the Ordinance and Article 34 of the Model Law are not applicable.

15. “Award” is not defined in the Ordinance. However, in principle, an award is a “final determination” of a claim or a particular issue in the arbitration (see Russell on Arbitration 24^th Edition para 6-002). The learned editors of Russell on Arbitration made the distinction between an award and a procedural order, pointing out that an award may be said to be final, in that it determines all the issues (or all the outstanding issues) in the arbitration, or in the sense of its being a complete decision without leaving matters to be dealt with subsequently or by a third party, and in the sense of the award being final and binding on the parties.

16. The learned editors of Arbitration in Hong Kong A Practical Guide 5^th edition considered (see paragraph 19.013) that only awards which contain decisions finally disposing of disputed substantive matters between the parties, rather than procedural awards, may be challenged.

17. In Gingerbread Investments Ltd v Wing Hong Interior Contracting Ltd [2008] 2 HKLRD 436, when considering the meaning of “award”, the Court drew the distinction between procedural and non-procedural issues, but found that the test was to have regard to the subject matter of the order or award (paragraph 9 of the judgment).

18. Mustill and Boyd’s Commercial Arbitration made the distinction between interim and final awards, when the editors considered the different types of awards and the possible recourse to the courts against awards.

19. The Interim Order is an order which directs G to take all necessary steps to dismiss the Shenzhen Proceedings. It is in substance an injunction and was made on the basis of there being a strong prima facie case of N’s entitlement to the injunction to restrain G from pursuing the Shenzhen Proceedings against its Subsidiaries, when the claims in those proceedings fall within the scope of the arbitration agreement contained in the SPA. It was expressly described (at paragraph 27 of the Interim Order) as “an interim measure”, granted to protect the arbitral process, in the interim of the Arbitration which was still continuing then, as the 2^nd Partial Award was only issued on 28 July 2023.

20. The Interim Order is of course binding on the parties in that G is obliged to take all necessary steps to dismiss the Shenzhen Proceedings against the Subsidiaries. However, it is clear that there was no final determination of the issues considered in the application for the Interim Order, whether as to the merits of the claims (or the outstanding claims on quantum) made in the Arbitration, or as to the merits of the claims made in the Shenzhen Proceedings.

21. Mr Pao SC for N has referred to ZCCM Investments Holdings v Kansanshi Holdings [2019] 1 CLC 770, and the relevant factors set out therein for classifying an order as either an award, or an interim order. At paragraph 40 of the judgment, Cockerill J explained:

“A consideration of these authorities ... suggests the following points:
(a) The court will certainly give real weight to the question of substance and not merely to form ...
(b) Thus, one factor in favour of the conclusion that a decision is an award is if the decision is final in the sense that it disposes of the matters submitted to arbitration so as to render the tribunal functus officio, either entirely or in relation to that issue or claim ...
(c) The nature of the issues with which the decision deals is significant. The substantive rights and liabilities of parties are likely to be dealt with in the form of an award whereas a decision relating purely to procedural issues is more likely not to be an award ...
(d) There is a role however for form. The arbitral tribunal’s own description of the decision is relevant, although it will not be conclusive in determining its status ...
(e) It may also be relevant to consider how a reasonable recipient of the tribunal’s decision would have viewed it ...
(f) A reasonable recipient is likely to consider the objective attributes of the decision relevant. These include the description of the decision by the tribunal, the formality of the language used, the level of detail in which the tribunal has expressed its reasoning ...
(g) While the authorities do not expressly say so I also form the view that:
(i) A reasonable recipient would also consider such matters as whether the decision complies with the formal requirements for an award under any applicable rules.
(ii) The focus must be on a reasonable recipient with all the information that would have been available to the parties and to the tribunal when the decision was made. It follows that the background or context in the proceedings in which the decision was made is also likely to be relevant. This may include whether the arbitral tribunal intended to make an award ...” (citations omitted)

22. Applying the factors considered in ZCCM, Counsel argued that as a matter of substance, the Interim Order was an anti-suit injunction against G, and did not in substance decide any of the parties’ rights under the SPA, and it certainly did not render the arbitrator functus officio, as the arbitrator continued to act, inter alia, in deciding on the issues in the 2^nd Interim Award. This is obviously correct.

23. As also highlighted by Counsel, the arbitrator expressed the order he made as “an interim order in the form of an injunction to restrain the (Shenzhen Proceedings) in breach of the arbitration clause” (paragraph 27 of the Interim Order).

24. Mr Pao pointed out that the drafters of the Model Law regarded anti-suit injunctions as interim orders, and referred to The Asian Leading Arbitrators’ Guide to International Arbitration, where the learned authors explained (at p 229, footnote 9) that it was for the purpose of conferring a power on the arbitral tribunal to issue anti-suit injunctions, that Article 17 included in (2)(b) as an interim measure an order against a party to “take action that would prevent, or restrain from taking action that is likely to cause, current imminent harm or prejudice to the arbitral process itself”.

25. I accept Mr Pao’s submissions, that anti-suit injunctions have been treated and granted by the courts in Hong Kong as an interim measure in relation to and in aid of arbitral proceedings (as in Giorgio Armani SpA v Elan Clothes Co Ltd [2019] 2 HKLRD 313, and GM1 v KC [2020] 1 HKLRD 132).

26. Considering the substance, the form, and the nature of the issues decided in the Interim Order, I conclude that it was not a final award but an interim order, granted as an interim measure under Article 17 of the Model Law as applied under section 35 of the Ordinance, during the interim and prior to the issuance of the final award by which all the issues in the dispute in the Arbitration have been finally decided.

Enforcement regime for interim orders

27. The Ordinance is structured and divided into sections governing different aspects of an arbitration.

28. Part 6 of the Ordinance is on “Interim Measures and Preliminary Orders”. Division 1 of Part 6 is on “Interim measures”, including the power of the tribunal to order interim measures and the conditions for granting interim measures. Division 2 of Part 6 deals with “Preliminary orders”. Division 3 sets out provisions applicable to interim measures and preliminary orders, including the power of the tribunal to modify, suspend or terminate an interim measure or a preliminary order it has granted, the provision of security in connection with the interim measure, and the power of the tribunal to require a party to disclose any material change in the circumstances in which an interim measure was granted.

29. Division 4 of Part 6 of the Ordinance sets out provisions for the recognition and enforcement of interim measures. This is separate to the other parts of the Ordinance which relate to the making of an award, set out in Part 8 of the Ordinance, recourse against an award under Part 9, and recognition and enforcement of awards under Part 10.

30. Article 17 of the Model Law has effect by section 35 (under Part 6) of the Ordinance, and this governs the grant of interim measures by the tribunal. An interim measure includes any temporary measure by which, at any time prior to the issuance of the award by which the dispute is finally decided, the tribunal orders a party to maintain or restore the status quo pending determination of the dispute, or to take action which would prevent or is likely to cause imminent harm or prejudice to the arbitral process itself. Section 35(2) expressly provides that an interim measure includes an injunction.

31. Under Division 4, on “recognition and enforcement of interim measures”, section 43 states that section 61 of the Ordinance has effect in substitution for Article 17H of the Model Law, and section 44 also states that Article 17I does NOT have effect.

32. Section 61 is set out in paragraph 10 above, and Counsel for N has drawn attention to its legislative background.

33. Article 17H (excluded by section 61) provides that:

“An interim measure issued by an arbitral tribunal shall be recognized as binding and, unless otherwise provided by the arbitral tribunal, enforced upon application to the competent court, irrespective of the country in which it was issued, subject to the provisions of Article 17I…”

34. Article 17I of the Model Law (which does not have effect in Hong Kong) then provides for specific grounds whereby recognition or enforcement of an interim measure may be refused. These are not the same as but include those set out in Articles 34 and 36 of the Model Law, providing respectively for setting aside and refusal of enforcement of an arbitral award. The grounds to refuse recognition and enforcement of interim measures include, eg, where the court finds that the interim measure is incompatible with the powers conferred upon the court, or where the tribunal’s decision with respect to the provision of security in connection with the interim measure has not been complied with. In footnote 3 to Article 17I, it is stated that:

“The conditions set forth in article 17I are intended to limit the number of circumstances in which the court may refuse to enforce an interim measure. It would not be contrary to the level of harmonization sought to be achieved by these model provisions if a State were to adopt fewer circumstances in which enforcement may be refused.” (Emphases added)

35. When the Ordinance was enacted, Article 17I was disapplied, together with all the grounds for refusal of enforcement which Article 17I provides for. In place of Articles 17H and 17I, section 61 of the Ordinance has effect with regard to the enforcement of the orders and directions of the tribunal. As Mr Pao submitted, sections 61(2), (4) and (5) impose a far more restrictive regime, and there is no express mention of any grounds to refuse enforcement of an interim measure. All that is stated (in section 61(1)) is that an interim measure ordered by the tribunal is enforceable with the leave of the court, and all that is required is that, for an interim measure order made outside Hong Kong, the order or direction sought to be enforced here belongs to a type or description of order or direction that may be made in Hong Kong in relation to arbitral proceedings by an arbitral tribunal (section 61(2)).

36. Under section 61(4), the decision of the Court to grant or refuse leave to enforce the order or direction of the tribunal is not subject to appeal. The restriction of the right of appeal, and the exclusion of the grounds to refuse enforcement provided for in Article 17I, are consistent with and can be explained by the principle and object stated in section 3 of the Ordinance: to facilitate the fair and speedy resolution of disputes by arbitration without unnecessary expense. Arbitrations would inevitably be delayed, if parties were able to challenge interim orders and directions as and when they are applied for and made in the course of the arbitral process. The conduct and progress of the arbitration would be unnecessarily hampered and the issue of the final award would be delayed by the challenges to the Court.

37. Mr Pao pointed out that the Singapore Court adopts the same approach to the recognition of interim orders of a tribunal, as can be seen from the decision of the Court in CXG v CXH [2023] SGHC 244. The International Arbitration Act of Singapore is not the same as the Ordinance, but they are both modelled on the Model Law. In CXG v CXH, the Court explained:

“42. The IAA differentiates interim measures ordered under s 12 from awards. Interim measures do not determine the merits of the dispute between parties but seek to preserve parties’ rights pending the final determination of the dispute by the tribunal. Thus, s 2(1) of the IAA defines ‘award’ to mean ‘a decision of the arbitral tribunal on the substance of the dispute [which] includes any interim, interlocutory or partial award but excludes any orders or directions made under section 12’. By virtue of s 2(2) of the IAA, which provides that ‘a word ... used both in this Part and in the Model Law ... has, in the Model Law, the meaning given by this Part’, this definition of ‘award’ applies to the Model Law as well.
43. The significance of this statutory distinction is that procedural and interim measures issued by a tribunal under s 12(1) are exempt from the usual judicial oversight which applies to awards under the IAA and the Model Law. In particular, the grounds for setting aside an award under Art 34(2) of the Model Law do not apply to domestic interim measures under s 12(6) of the IAA. Neither does s 24 of the IAA, which provides two additional grounds for the setting aside of a Singapore-seated award - if (a) the making of the award was induced or affected by fraud or corruption; or (b) a breach of the rules of natural justice occurred in connection with the making of the award by which the rights of any party have been prejudiced.
44. Thus, Lee J in Pukuafu noted (at [21]) that by introducing s 12(6) of the IAA, Parliament had instituted ‘a sui generis enforcement mechanism [for orders under s 12] without broadening the definition of “award” to allow the court to set aside these orders’. This approach reflected Parliament’s decision to insulate these orders from judicial challenge while lending the coercive powers of the court to their enforcement: Pukuafu at [22]. Thus, the court has no jurisdiction under the IAA to set aside or review interim measures made by an arbitral tribunal. Limiting challenges only to awards that decide the substantive merits of the case would reduce the risk of delay and prevent tactical attempts to obstruct the arbitration process by bringing challenges on interim orders:Pukuafu at [25]. It also reflected the principle that procedural issues fall directly within the province of the arbitral tribunal and should be decided solely by the tribunal: Pukuafu at [23].
45. Indeed, at the drafting stage, the regime for enforcement of interim measures was envisioned to be largely free from judicial interference. The LRC Report, which was adopted by Parliament, recommended (at para 35) that ‘curial assistance should be available such that the interim orders and/or directions may be registered with the courts for enforcement as an administrative process’ ...”

38. Having considered the relevant provisions of the Ordinance which apply to interim measures and the enforcement of such measures, I agree with Mr Pao that section 81, and the grounds set out therein for setting aside, does not apply to the Interim Order at all.

Merits of setting aside

39. If I should be wrong on the question that there is no basis for G to apply to set aside the Interim Order under section 81, I can deal with the merits of the actual grounds relied upon, succinctly.

40. Whether an anti-suit injunction can be made against a party which is not a party to the arbitration agreement sought to be enforced by the Court depends on the construction of the arbitration agreement (“Agreement”), and the underlying contract (“Contract”), to see if the party sought to be injuncted can be considered to have been included by the parties to the Contract and Agreement in question, and if the dispute in the proceedings to be injuncted falls within the scope of the Agreement. Similar injunctions were granted in Giorgio Armani SpAv Elan Clothes Co Ltd [2019] 2 HKLRD 313 and GM1 v KC [2020] 1 HKLRD 132. The Fiona Trust presumption is applicable.

41. It has to be borne in mind that all that is required for the grant of the interim injunction in this case is for the tribunal to be satisfied that there is a strong prima facie case, that the Agreement covers and extends to the Shenzhen Proceedings.

42. It is not a ground to set aside any award of the tribunal on the basis that the arbitrator had applied the wrong tests or threshold in granting the order, or had given erroneous or insufficient weight to any aspect of the evidence, or that the tribunal was wrong in its construction of the relevant provisions of the agreement, as these would at most be errors of law or of fact made by the tribunal.

43. In this case, G sought to argue that it was impermissible for the tribunal to order G to dismiss the Shenzhen Proceedings against the Subsidiaries, in the absence of any expert evidence on PRC law as to whether these parties would be bound by the arbitration agreement or by the award, or whether the award would be enforceable against the Subsidiaries.

44. This is tantamount to saying that the tribunal did not have sufficient evidence to support its decision in granting the Interim Order. That is not a ground to set aside any award.

45. As to whether the Interim Order is enforceable against the Subsidiaries under PRC law, first, the fact that an award or order may not be enforceable or cannot be performed on the Mainland is not by itself a ground to set it aside in Hong Kong. Any question of the Interim Order being unenforceable on the ground of illegality, if it be relevant, would and should have been raised before the tribunal. There is no claim of illegality in this case. At most, it is for the Subsidiaries to take this point of alleged unenforceability to any relevant court in any relevant proceedings on the Mainland, if the Interim Order is sought to be enforced there.

46. As for the other ground relied upon to set aside the Interim Order, that the arbitrator had failed to deal with the key issue of the effect of clause 6.13 of the SPA (as made in G’s submissions dated 8 December 2022), this has no substance. G’s submissions were on the effect of clause 6.13, which provides that the SPA may only be enforced against the entities expressly named as parties.

47. The non-party argument was considered and dealt with by the arbitrator in the Interim Order, where the arbitrator referred (at paragraph 38) to the Subsidiaries as not being parties to the arbitration agreement, and to the argument made by G that the tribunal should not grant an anti-suit injunction. The arbitrator cited the case of Giorgio Armani SPA, and explained (at paragraph 40) that there was a strong prima facie case for the injunction sought. The arbitrator stated that he was satisfied that the claims pursued by G in the Shenzhen Proceedings were covered by the arbitration agreement, that the nature of the SPA and the broadly drafted arbitration clause supports the conclusion that the parties had “made a strong decision in favor of a one-stop arbitration”. The arbitrator pointed out at paragraph 41 that the continuation of the Shenzhen Proceedings against the Subsidiaries would go against the intention of the parties and would be in breach of their agreement to arbitrate.

48. At paragraph 43 of the Interim Order, the arbitrator further explained that the question of whether an award in the arbitration could be enforced over the Subsidiaries on the Mainland is irrelevant to the issue of whether G should be restrained from breaching its own obligations under the arbitration agreement.

49. As the courts have repeatedly emphasized (see eg LY v HW[2022] HKCFI 2267 and CNG v G&G[2024] HKCFI 575), an applicant has a high threshold when it claims that a tribunal has failed to deal with an issue in an award, for the reason that an award has to be read in a reasonable and commercial way expecting, as is usually the case, that they will be no substantial fault that can be found with it (Zermalt Holdings SA v Nu-Life Upholstery Repairs Ltd [1985] 2 EGLR 14), and that any inference sought to be drawn that a tribunal had failed to consider an important issue can only be made if it is clear and virtually inescapable.

50. Having reviewed the Interim Order, I am satisfied that the arbitrator did not fail to consider, and had dealt with and given adequate reasons for his decision on the non-party argument made in reliance on clause 6.13 of the SPA. Any question of his having erred in the construction of the clause is not a ground for setting aside.

51. Moreover, as Counsel for N pointed out, the argument now made for G as to the significance of clause 6.13 is contrary to the submissions made before the arbitrator. The arbitrator had in fact requested the parties on 2 December 2022 for “some guidance on the effect (if any) of clause 6.13 of the SPA on the (application for the injunction)”, and in G’s written submissions filed on 8 December 2022, it was claimed that:

“Clause 6.13 (if it were valid) would in any event highlight the imperative of not affecting non-parties. While G takes the stance that the entire SPA (and not only the placement) is void and clause 6.13 is irrelevant, the clause nonetheless illustrates the need for caution.” (Emphasis added)

G further submitted that “the true issue is not whether Clause 16.3 applies, but whether the tribunal has jurisdiction to grant the (unpleaded) relief in the first place”. According to Counsel for N, G did not argue in its subsequent submissions that Clause 6.13 prevented the arbitrator from making the injunction order sought and there was no mention of Clause 6.13 in the later submissions.

52. From the above, it is clear to me that there is no merit in G’s claim made before the Court that the arbitrator had failed to deal with any key issue. Nor is there any other valid ground to set aside the Enforcement Order on the ground that it is an award which deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or contains matters beyond the scope of the submission. To state the obvious, there is no serious irregularity as alluded to, and nothing shocking to the conscience of the Court to enforce the Interim Order.

Disposition

53. The Summons was accordingly dismissed, with the usual costs order made that G is to pay N’s costs, on indemnity basis, with certificate for 2 Counsel.

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

Mr Jose Maurellet SC and Mr Tom Ng, instructed by Stevenson, Wong & Co, for the applicant

Mr Jin Pao SC and Mr Zenith Chan, instructed by Gall, for the respondent

HCCT 38/2021
HCCT 28/2023
HCCT 52/2023
(dealt with together)

[2023] HKCFI 2437

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 38 OF 2021

____________________

IN THE MATTER OF enforcement of order of an arbitral tribunal dated 23 April 2021 and a Partial Award dated 6 April 2023

____________________

BETWEEN
	G	Applicant
	and
	N	Respondent

____________________

AND

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 28 OF 2023

____________________

IN THE MATTER OF a Partial Award dated 6 April 2023

____________________

BETWEEN
	G	Plaintiff
	and
	N	Defendant

____________________

AND

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 52 OF 2023

____________________

IN THE MATTER OF a Partial Award dated 28 July 2023 (the “2^nd Partial Award”)

____________________

BETWEEN
	G	Plaintiff
	and
	N	Defendant

____________________

Before:

Hon Mimmie Chan J in Chambers

Dates of Written Submissions:	5, 11 and 13 September 2023
Date of Decision:	25 September 2023

_____________

D E C I S I O N

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Background

1. There are before the Court two applications made by the Respondent (“N”) for the Applicant (“G”) to provide firstly security for costs, and secondly fortification in respect of an undertaking given by G to the Court on the grant of leave to enforce an interim preservation order dated 23 April 2021 (“Preservation Order”), which was made by the arbitral tribunal in arbitration Case No HKIAC/A 21053 (“Arbitration”). In brief, the Arbitration was commenced by G against N in October 2020 for return of the consideration money of approximately US$147 million paid under a transaction (“Consideration Money”) entered into by G and N, which was subsequently declared to be void. The Preservation Order was granted by the arbitrator, whereby N was prohibited from disposing of the Consideration Money which was kept in a non-interest-bearing bank account, amounting to nearly US $90 million.

2. In view of the lateness of the applications for security and fortification, and the fact that the substantive hearing of the applications relating to the setting aside of the relevant award will take place in October 2023, this Court issued directions for paper disposal of the interlocutory matters. Submissions have been filed, bundles and a chronology of events have been lodged, but regrettably, they have not been helpful to the Court as not all the relevant papers were included, nor did the chronology refer to pagination of the bundle. It has been extremely time‑consuming for the Court to identify the relevant applications made in the three different sets of proceedings initiated and referred to by the parties. The pertinent applications are now set out below.

3. On 27 April 2021, G applied to this Court under these proceedings (“HCCT 38”) to enforce the Preservation Order, and leave was granted ex parte on 29 April 2021 with an order made by this Court in terms of the Preservation Order (“April 21 Order”). The April 21 Order contained the usual undertaking given by G, that if the arbitral tribunal should later find that the Preservation Order has caused loss to N and decides that N should be compensated for such loss, G will comply with any order which the tribunal may make (“Undertaking”).

4. On 6 April 2023, the arbitrator issued the 1^st Partial Award in the Arbitration which was in favor of N, and found that G was liable to N for payment, but the amount was not yet quantified. It was only later, on 28 July 2023, that the arbitrator issued his 2^nd Partial Award, under which G was held liable to pay to N the sums of US $11,096,822 and US $1,924,541.53, with interest and costs.

5. On 9 April 2023, having issued the 1^st Partial Award, the arbitrator ordered that his interim Preservation Order should be discharged as from 8 May 2023 (“Discharge Order”).

6. On 20 April 2023, G applied by HCCT 28/2023 (“HCCT 28”) to set aside the 1^st Partial Award. It further applied (in both HCCT 28 and HCCT 38) for an order in terms of the Preservation Order (notwithstanding the Discharge Order which had already been made by the arbitrator).

7. On 24 May 2023, N applied by summons in HCCT 38 for leave to enforce both the 1^st Partial Award and the Discharge Order.

8. Upon the issue of the 2^nd Partial Award on 28 July 2023, G then applied by HCCT 52/2023 (“HCCT 52”) on 4 August 2023 to set it aside.

9. On 9 August 2023, N issued summonses in HCCT 38, HCCT 28 and HCCT 52, to seek from G security for costs incurred and to be incurred in all these proceedings, from 20 April 2023 to 4 October 2023 (“Security Application”). By summons issued in HCCT 38 on 14 August 2023, N also applied for fortification of G’s Undertaking (“Fortification Application”). It claims that under the 2^nd Partial Award, significant sums have been found to be due and payable by G to N, with post-award interest at 8.583% per annum, and that coupled with the financial difficulties currently faced by G, it is necessary to seek security and fortification in order to protect the interests of N as there are serious concerns as to G’s ability to pay the amounts of the award and to compensate N for its costs.

10. By order made on the parties’ application, the Security Application and the Fortification Application were directed to be consolidated, and to be heard together, since the substantive hearing of the application to set aside the 1^st Partial Award will take place on 4 October 2023, and the substantive hearing of the application to set aside the 2^nd Partial Award will take place on 15 December 2023.

11. The grounds of N’s Security Application are that G is a foreign company, does not have assets in Hong Kong and is in dire financial position. On N’s evidence, G is a company incorporated in the BVI. It is an indirectly wholly-owned subsidiary of Kaisa Group Holdings Limited (“KG”), a company incorporated in the Cayman Islands and listed on the Hong Kong Stock Exchange, and is a leading property development and management company on the Mainland. When G applied for leave to enforce the Preservation Order, it had claimed that it was financially sound and should not be required to fortify its Undertaking. On its evidence filed in April 2023, G’s balance sheet as at 31 December 2021 revealed total assets of RMB 4.633 billion owned by G, and G claimed in April 2023 that the total assets of G had not materially changed from 31 December 2021 to April 2023.

12. According to N’s evidence filed in support of the Security and Fortification Applications, G had represented in proceedings before the BVI Commercial Court that its principal asset was its claim against N in the Arbitration for US $146.9 million. On N’s case, G’s principal asset is now non-existent, in light of the 1^st Partial Award and the dismissal of G’s claims in the Arbitration. N further referred to the admission made to the BVI Court on 12 April 2022, by counsel for G, that G had no assets as they had been subject to securities which had been enforced.

13. N also relies on G’s financial statement which shows that as at December 2021, G was making losses of RMB 215 million a year, its then current liabilities were approximately RMB 4.438 billion, which significantly outweighed its then current assets of approximately RMB 2.688 billion.

14. Further, it was contended by N that G can no longer rely on KG, its parent company, as KG has itself defaulted in several installments on its offshore bond obligations over several years, amounting to over US $12 billion. Moreover, a winding-up petition was presented in Hong Kong against KG in July 2023, relating to KG’s non-payment of RMB 170 million worth of onshore bonds. Subsidiaries of KG have also defaulted on its debts due under orders of the court, and have been labeled “dishonest judgment debtors” on the Mainland.

15. There is no evidence filed by G in response to the above, nor is there any assertion by G that it has assets in Hong Kong which are available to answer any order for costs, or for payment of any damages under the Undertaking.

16. Apart from challenging the power of the Court to order security on N’s application in these proceedings, and to order dismissal of the applications made by G in default of security, the only argument made on behalf of G is that N’s applications should be discharged on the ground of delay alone (citing Chun Wo Building v Metta Resources [2016] 2 HKLRD 1280, Chinacast Education v Chan Tze Ngon HCA 1062/2012, 26 September 2014, and Crane World Asia v Hontrade Engineering HCA 109, 256 and 462/2014, 5 May 2016).

Fortification

17. I first deal with the Fortification Application.

18. G claims that as early as in June 2022, when N applied to the arbitral tribunal for fortification and/or variation of the interim Preservation Order, it had already sought to rely on G’s financial difficulties. Yet, N had refrained from making any application in these proceedings until August 2023.

19. Although N did not issue its present summons for fortification until 14 August 2023, its solicitors had on 10 May 2023 first written to G’s solicitors to seek fortification of the Undertaking. This was not long after the arbitrator ordered, on 9 April 2023, that the Preservation Order should be discharged as from 8 May 2023, as a result of the issue of the 1^st Partial Award on 6 April 2023. N’s request for fortification was to cover the period between May 2023 to August 2023, on the basis that a hearing of the relevant applications to set aside the 1^st Partial Award and for the continuation of the Preservation Order would not take place before August 2023. G had agreed to N’s request, and on 17 May 2023, a Court Order was made by consent, for fortification to be provided by G. A sum of US $800,000 was paid by G as fortification on 24 May 2023. On behalf of N, Counsel highlighted the fact that N’s solicitors had made it clear in their letter of 10 May 2023, that N’s right to adjust the amount or to seek additional fortification was reserved.

20. The summons for fortification was issued on 14 August 2023, before the expiry of the 3-month period indicated in the request for fortification of 10 May 2023. It cannot be said that G could not have envisaged the request for additional or further fortification after August 2023, to have suffered any prejudice as a result of the August summons.

21. In view of the issue of the 1^st and 2^nd Partial Awards on liability and on quantification of the amounts to be paid by G to N, and considering the undisputed evidence as to the financial circumstances of G and its parent company KG, I agree that it would be necessary for G to provide further fortification. The amount of US $658,982.33 sought by N is calculated on the basis of the interest it would have earned, and lost, on the sum of US $90 million in the bank account as a result of the Preservation Order, for the period from 9 August 2023 up to the hearing on 4 October 2023, at 4.403% per annum which is the prevailing 1-month HK Government bond yield.

22. I am prepared to make an order for additional fortification, for G’s payment of the sum of US $658,982.33 within 7 days.

Security for costs

23. The Court clearly has power under section 86(4) of the Arbitration Ordinance (“Ordinance”) to order security from the party against whom enforcement is invoked. On behalf of G, Counsel has highlighted the fact that section 86(4) states the power of the Court to arise where “an application for the setting aside or suspension of an award has been made” to the competent court. Counsel argued that there is no application to set aside or suspend any award in these proceedings HCCT 38. In HCCT 38, G’s Originating Summons is for enforcement of the initial Preservation Order, which was granted on 29 April 2021. Thereafter, N applied by its summons in HCCT 38 for leave to enforce the 1^st Partial Award and the Discharge Order.

24. In my view, the dispute between the parties in connection with the orders made in the Arbitration has been made unnecessarily complicated and confusing by the 3 sets of proceedings initiated. They all relate to the Arbitration and the awards and orders made by the arbitrator therein, for enforcement or setting aside of these various orders. The relevant applications could all have been made under one set of proceedings.

25. Order 73 rule 1 RHC provides that an application under the Ordinance “must be made by originating summons in Form No 10”. However, Order 73 rule 2 provides that an application to which rule 1 applies “must, if an action is pending, be made by summons in the action”.

26. HCCT 38 was the action initiated by G’s ex parte Originating Summons on 27 April 2021, for leave to enforce the Preservation Order. The application was granted and the April 21 Order was made by the Court, but as no application was made pursuant to paragraph 2 of the April 21 Order (to set aside the order), there has been no substantive hearing of the Originating Summons. It was open to G and N to make further application by summonses for directions, orders and relief related to the Preservation Order, the April 21 Order, and for orders made in the Arbitration to which the Preservation Order relates.

27. In these proceedings under HCCT 38, N is seeking by its summons of 24 May 2023 leave to enforce the 1^st Partial Order and the Discharge Order. The application made by G for an order in terms of the Preservation Order (made by its summons of 20 April 2023 in HCCT 38) is in substance a challenge to and resistance against enforcement of the Discharge Order. If there should be any doubt, G’s stance is made abundantly clear by its application in HCCT 28 to set aside the 1^st Partial Award, and in G’s summons issued in HCCT 38 on 20 April 2023, it referred specifically to its application to set aside the 1^st Partial Award when it sought an order in terms of the Preservation Order.

28. Even if G’s application to set aside the 1^st Partial Award is to be regarded strictly and separately from HCCT 38 as an application made in separate proceedings initiated by HCCT 28, these proceedings are obviously related, and it cannot be said that G has not applied to the court for the setting aside of the 1^st Partial Award, and (by HCCT 52) of the 2^nd Partial Award. I cannot see how it can be argued that the power of ordering security under section 86(4) of the Ordinance has not arisen.

29. In any event, the issue does not arise for the Security Application made by the summonses issued in HCCT 28 and HCCT 52, all heard with the summons in HCCT 38. There are clearly applications made by G in HCCT 28 and HCCT 52 to set aside awards of the tribunal.

30. I do not understand the argument raised by Counsel for G, as to its summonses (issued in HCCT 38 and HCCT 28) for an order in terms of the Preservation Order not being originating summonses, such that no order can be made by the Court to dismiss the summonses for want of security. If the only point is that the Court should not make an order that if security for costs is not made in one of the 3 sets of proceedings, other proceedings in which security is given should be dismissed, this goes to the terms and language of the order for security if any is made.

31. N’s Security Application was only issued for the 3 sets of proceedings on 9 August 2023. G’s applications to set aside the 1^st Partial Award and to continue the effect of the Preservation Order were made as early as on 20 April 2023. The application in HCCT 52 to set aside the 2^nd Partial Award was made on 4 August 2023. The grounds relied upon for security, as to G’s financial condition, were known to N as early as in June 2022 (the time of its application to the tribunal for fortification and variation of the Preservation Order). G’s status and place of incorporation, and its apparent lack of assets in Hong Kong, had been known to N from day one. The 1^st Partial Award on G’s liability was made by the Tribunal on 6 April 2023. Although there had been a request made by N for security in June 2023, it was almost immediately declined by G (on 15 June 2023), and the summons for security was only issued by N 2 months later, and 8 weeks before the substantive hearing of the application to set aside the 1^st Partial Award in October 2023.

32. I accept the submissions made for G, that in the context of the present case, there has been delay in N’s application to the Court for security for its costs in the various proceedings. By the time of the finalization of the parties’ submissions for paper disposal of the Security Application on 13 September 2023, there is only a period of 3 weeks until the substantive hearing in October 2023. By August 2023, when the summons for the Security Application was issued, a substantial portion of the legal costs would have been incurred by N, and the application is not likely to be cost-effective. Counsel would have been briefed for the October hearing by 13 September 2023. If an order for security is to be made at this late stage, with the substantive hearing imminent, there is likely to be real prejudice to G which will have little choice but to furnish the security in order not to abandon and waste all the work done and costs incurred in preparing for the substantive hearing. Following and consistent with the approach adopted by the Court in Haifa International Finance Company Limited v Concorde Strategic Investments Limited, HCA 4442/2003, 7 March 2014, Chinacast Education Corporation & ors v Chan Tze Ngon & ors HCA 1062/2012, 26 September 2014 and Waddington Limited & ors v Chan Chun Hoo Thomas & ors HCA 3291/2003, 7 May 2013, I decline to order security for costs at this late stage.

Disposition

33. The Fortification Application by summons issued in HCCT 38 on 14 August 2023 is granted in terms of paragraph 1 thereof. The period of 7 days may be extended with N’s consent.

34. The Security Application by the 3 summonses issued on 9 August 2023 is dismissed.

35. Orders nisi are made to the effect that the costs of the Fortification Application are to be in the cause, and the costs of the Security Application are to be paid by N to G on party and party basis. These include any costs reserved. There will be certificate for Counsel. The orders will be made absolute unless application for variation is made within 14 days.

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

Mr Tom Ng, instructed by Stevenson, Wong & Co, for the applicant in HCCT 38/2021, the plaintiff in HCCT 28/2023 and the plaintiff in HCCT 52/2023

Mr Jin Pao SC and Mr Zenith Chan, instructed by Gall, for the respondent in HCCT 38/2021, the defendant in HCCT 28/2023 and the defendant in HCCT 52/2023

G v. N

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Files (4)

Dates of Written Submissions:	19 January 2024, 2 February 2024 and
	9 February 2024
Date of Decision:	4 March 2024