7 Jul 2017

Hong Kong Court Appoints Interim Receivers in Support of PRC CIETAC Arbitration

Hong Kong has long been an arbitration-friendly jurisdiction. Since the Arbitration Ordinance took effect from June 2011, as seen from various precedents, the Hong Kong Courts have been very supportive for international arbitration. The Court is willing to grant emergency/interim relief to preserve evidence, assets and the status quo as and when the situation calls for such reliefs, pending the final resolution of the dispute by the arbitral tribunal. The Court’s supportive stance is on full display in the latest case Chen Hongqing v Mi Jingtian & Others (HCMP 972/2017).

Background

The Plaintiff and the Defendants as well as other third parties entered into a series of loan and share pledge agreements, whereby the Defendants pledged their shares in China Shanshui Investment Company Limited (a Hong Kong company) to the Plaintiff. Any transfer of the shares to third parties was expressly prohibited in the agreements. The Plaintiff and the Defendants had some disputes in relation to the exercise of voting rights, and in February 2017 submitted the matter to CIETAC for determination in accordance with the agreements.

In March 2017, the Defendants agreed to sell the shares to the Asia Cement Corporation (ACC). In order to protect his interests, the Plaintiff invoked section 21M of the High Court Ordinance (Cap. 4) and section 45 of the Arbitration Ordinance (Cap. 609) to apply for interim reliefs, including the appointment of receivers over the shares in question and an injunction to restrain the Defendants from taking further steps to transfer the shares.

On 27 June 2017, the Honourable Madam Justice Mimmie Chan handed down judgment, and granted the reliefs sought.

The Requirements for s.21M and s.45 Interim Reliefs

The requirements for granting interim reliefs include:-
1. A serious question to be tried;
2. Risks of dissipation of assets;
3. Balance of convenience (e.g. any delay on the part of the Applicant, third party interests);
4. Enforceability of judgment/award in Hong Kong; and
5. Undertaking as to damages.

In respect of the 1st requirement, there is dispute between the parties as to whether the pledge agreement relied upon by the Plaintiff is effective and legally valid. Since the governing law of the pledge agreement is PRC law, the Court is of the view that it is not appropriate to make factual findings on the above issues. Such issues shall be determined by the arbitral tribunal, and the role of the Hong Kong Courts is to grant appropriate interim reliefs in support of the arbitral proceedings. As it is common ground that the pledge agreement contains an express provision restricting the transfer of the shares in question, the Court agrees that there is a serious issue to be tried.

With respect to the 2nd requirement, the Defendants have already executed the sale and purchase agreements and completed all steps in relation to the transfer, and the only remaining step is for the shares to be registered in ACC’s name. It is clear that there are risks of dissipation.

As regards the 3rd requirement, having considered and struck a balance among various factors, including any third party interests, whether the receivership is an appropriate remedy, and the most appropriate forum, the Court was inclined to grant the reliefs sought.

It is inevitable that the appointment of receivers would involve and affect the third party’s control and disposal (if any) of the shares in question, and as such in this case, ACC (being the purchaser of the shares) as an interested party, was granted leave to intervene in the proceedings to make submissions and adduce evidence. Taking into account the duties of the receivers, the Court held that the receivers had the expertise and independence to preserve the status quo and the value of the shares. The Court was also of the view that if the shares are to be transferred and registered in ACC’s name, and the Plaintiff’s claims to the shares were ultimately accepted by the arbitral tribunal to be valid and enforceable, the transfer of shares in breach of the pledge agreement would defeat the Plaintiff’s security rights and the purpose of the share pledge. Since the share transfer was almost completed but for the last step of registration, receivership should be a necessary remedy to preserve the shares.

This case also showcases the willingness of the Court to grant supplemental reliefs to fill the void of the relatively limited remedies or the lack of equivalent interim measures available in the jurisdiction of the arbitral tribunal. The Defendants submitted that since the arbitral tribunal is within PRC jurisdiction, the PRC Courts should be the most appropriate forum to grant interim reliefs. However, in the instant case the shares are those of a Hong Kong company, in which case the usual protection to share pledge under PRC law becomes inapplicable, and the PRC Courts cannot therefore grant the interim reliefs in respect of a Hong Kong company. Coupled with the fact that ACC was not a party to the arbitration, the arbitral tribunal cannot grant interim reliefs against ACC either. In the circumstances, the Court affirmed the position that the appointment of receivers by the Hong Kong Court will not usurp the jurisdiction of the PRC Courts and in this case, the Court is in a position to grant the relevant supplemental interim reliefs in support of PRC arbitration.

The Court also found that the delay on the part of the Plaintiff would not frustrate his application. With the 4th and the 5h requirements being fulfilled, the Court granted the interim reliefs sought, i.e. the appointment of interim receivers over the shares and the relevant injunctions against the Defendants.

Significance of the Case

As explained above, the Court has carefully weighed various factors in the balance of convenience in great detail. This case could serve as some guidance and set a great example of how the Court shall approach different intricate factors and strike a balance. It is also shown that if it is necessary to preserve assets for the enforcement of arbitral awards, notwithstanding that the measures may affect the interests of third parties, the Court would appoint receivers as an interim relief without hesitation in appropriate cases. The Court also exhibits the willingness to grant supplemental measures in support of international arbitration.

Further, this case also demonstrates that since the available interim measures in the PRC courts are limited, the parties may consider seeking relief from Hong Kong court in aid of PRC arbitration, to preserve assets and maintain status quo.

The litigation team of Stevenson, Wong & Co., led by Partner Ms. Heidi Chui (Head of Dispute Resolution Department), assisted by Senior Associate Ms. Katy Lai, Associate Mr. Kyle Lo, and Trainee Solicitor Mr. Benson Cheung, acted for the Plaintiff in the application and successfully obtained the interim reliefs.

Please contact our Ms. Heidi Chui (heidichui.office@sw-hk.com) for any enquiries or further information.