Arjowiggins Hkk2 Ltd v. Shandong Chenming Paper Holdings Ltd

HCCT 53/2015
[2018] HKCFI 93

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 53 OF 2015

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Before: Hon Mimmie Chan J in Chambers (Open to public)

Date of Hearing: 3 January 2018

Date of Decision: 19 January 2018

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D E C I S I O N

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Background

1.The Claimant seeks an injunction against the Respondent, to restrain it from continuing the civil proceedings commenced in the Intermediate People’s Court of Weifang City in Shandong Province on the Mainland (“Weifang Court”) by the Respondent against the Claimant and Mr Tong Chong, an agent or representative of the Applicant. 

2.The main facts of the dispute between the parties in this case have been set out in my Decision of 12 October 2016 (“October Decision”).  They will not be repeated, and this Decision will adopt the same nomenclature used in the October Decision.  In gist, there is an arbitral Award dated 20 November 2015 made against the Respondent for payment of a sum of RMB 167,860,000 to the Claimant, with interest and costs.  This Court granted leave to the Claimant to enforce the Award as a judgment in Hong Kong, and on 12 October 2016, dismissed the Respondent’s application to set aside the order granting leave for enforcement of the Award.

3.The saga has continued since October 2016, with further proceedings instituted in Hong Kong and on the Mainland, including proceedings instituted by the Respondent in Hong Kong in November 2016, seeking to restrain the Claimant from petitioning for the winding up of the Respondent on the basis of a statutory demand served by the Claimant on the Respondent, for a total sum of RMB 310 million then due from the Respondent to the Claimant, under the Award and other judgments and orders made by the Mainland Courts.  Those proceedings instituted in Hong Kong in November 2016 are referred to, for convenience, simply as the Winding up Proceedings.  The Respondent did not dispute in the Winding up Proceedings that the amount of the Award is payable.  It asserted that it was profitable, and so, was in a position to pay the debt under the Award but, as Harris J highlighted in the Reasons for his Decision made in the Winding up Proceedings on 7 July 2017, the Respondent simply refused to make payment, claiming instead that as a foreign company, the Hong Kong Court has no jurisdiction to make a winding up order against it, since it cannot be shown that the Claimant would derive sufficient benefit from the making of the winding up order here. 

4.For the reasons amply set out on 7 July 2017, Harris J dismissed the Respondent’s application for an injunction (to restrain the Claimant from filing a winding up petition), finding that a winding up order could be made by the Hong Kong Court.  In the scathing judgment of Harris J, the conduct of the Respondent was considered to be “unethical”, its refusal to honour the Award showing disregard for the integrity of the legal system of Hong Kong and contempt for the High Court of Hong Kong.  According to the learned companies judge, the obvious and appropriate step in all the circumstances of the case is the winding up of the Respondent in Hong Kong, and the delisting of its H shares which are listed on the Main Board of the Hong Kong Stock Exchange. 

5.After the Court dismissed the Respondent’s application for the injunction, the petition for winding up the Respondent was filed by the Claimant on 15 June 2017.  On the very next day, a cash dividend totaling RMB 1.162 billion was distributed by the Respondent to its shareholders, on 16 June 2017.  On 12 July 2017, the Respondent filed notice of its appeal against the decision of Harris J.  At the hearing of the winding up petition, on 28 August 2017, the Respondent was required by the Court to make payment into Court of HK$390 million pending the appeal, the amount comprising HK$370 million of the outstanding debt, plus HK$20 million in interest.  The payment was made by the Respondent, as ordered, without any admission or concession that the payment should be made out to the Claimant in satisfaction of the Award, if the appeal is to be dismissed.

6.On 5 July 2017, the Respondent filed proceedings before the Weifang Court (“2017 Proceedings”).  The Respondent is the plaintiff in the 2017 Proceedings, the Claimant is named as 1^st defendant, one Mr Tong Chong (a director of the JV Company nominated by the Claimant) (“Tong”) is named as 2^nd defendant, and the JV Company is named as 3^rd party in the 2017 Proceedings.  The claims made and the parties named in the 2017 Proceedings are in fact identical to those in the proceedings which had been instituted by the Respondent against the Claimant in October 2013, also in the Weifang Court (“2013 Proceedings”), ie against the Claimant and Tong as defendants, also with the JV Company as 3^rd party.  The 2013 Proceedings had been withdrawn by the Respondent in December 2016, at the request of the judge in the Weifang Court and with the Respondent’s agreement – at least according to the Respondent.

7.On 10 October 2017, the Claimant issued its summons for an injunction under s 21L of the High Court Ordinance, to restrain the Respondent from proceeding with the 2017 Proceedings, the ground of its application being that the 2017 Proceedings were instituted in breach of the parties’ arbitration agreement, and that the Respondent’s conduct is vexatious and oppressive, since the claims in the 2017 Proceedings have been raised and decided in the Arbitration leading to the Award, and in the proceedings in Hong Kong whereby the Respondent had attempted unsuccessfully to set aside the Award, and the Respondent is attempting,  by the 2017 Proceedings, to re-litigate in the Weifang Court matters which have been decided by the Tribunal and the Hong Kong Court, and which have been raised in the 2013 Proceedings which were withdrawn by the Respondent.

8.In resisting the Claimant’s application, the Respondent argued that the Respondent is not the real or actual plaintiff in the 2017 Proceedings, since the 2017 Proceedings were instituted by the Respondent in name, but in actual fact and substance on behalf of the JV Company, as in a derivative action.  The claims made by the JV Company in the derivative action have not been decided by the Tribunal.  The Respondent further argued that neither the JV Company nor Tong are parties to the arbitration agreement, which was made between the Claimant and the Respondent, and contained in the JV Contract.  The arbitration agreement and the Award do not bind the JV Company on whose behalf the 2017 Proceedings were brought.  The Tribunal has no jurisdiction over the JV Company, and any findings made by the Tribunal are not binding on either the JV Company, or Tong. 

9.Finally, the Respondent argued that in respect of the JV Company and Tong, since there is no arbitration agreement, Hong Kong is not the forum conveniens for the underlying dispute as to whether the Claimant and Tong have breached provisions of the relevant PRC laws, as the Respondent claims in the 2017 Proceedings, and that these are matters best tried by the Weifang Court.

The claims made in the 2017 Proceedings

10.In the 2017 Proceedings, the Respondent named as plaintiff seeks damages from the defendants, namely the Claimant and Tong, in the sum of RMB 39,590,000.  That is the request named in the initiating document (起訴狀) (“Claim Form”).

11.The Claim Form refers to the JV Contract made between the Claimant and the Respondent, whereby they agreed to set up the JV Company named as 3^rd party in the Claim Form.  The Claimant is referred to as the holder of 70% of the shares in the 3^rd Party, with the Respondent holding 30%, the Claimant as the majority shareholder being responsible for the management and technical support of the JV Company.  The Claim Form further pleads the setting up of the JV Company in December 2005, and Tong being assigned by the Claimant to be a director and the authorized person or representative of the JV Company, with full responsibility for the management and operations of the JV Company.  According to the Claim Form, the Claimant as the majority shareholder, and Tong as the director of the JV Company, exploited their relationship to injure the lawful rights of the JV Company, and dealt with the property of the JV Company without the approval of the board of directors.  It is claimed that Tong is in breach of Articles 148 and 149 of the Company Law, had misappropriated all the assets of the JV Company, and had caused the JV Company to sustain loss of RMB 39,590,000.  The Claim Form pleads that the Claimant and Tong as defendants effectively control the JV Company and its financial information, and had refused to disclose or account for same to the Respondent.

12.The above facts pleaded in the Claim Form are, in substance, the same as the facts pleaded and the claims made in the 2013 Proceedings.  This is not disputed by the Respondent, which claims that the 2017 Proceedings are not new proceedings, but only continuation of the 2013 Proceedings, and that it is common for proceedings on the Mainland to be withdrawn by a party to alleviate pressure on the courts, only to be resumed later.

13.On the Respondent’s case, the issues in the 2017 Proceedings do not arise out of the JV Contract so as to come within the ambit of the arbitration clause.  According to the evidence of the PRC law expert filed on behalf of the Respondent, the 2017 Proceedings is a derivative action, a tortious claim in nature, which is in dispute between the JV Company on the one part, and the Claimant and Tong on the other part, as opposed to the contractual nature of the claims made under the JV Contract, and referred to arbitration between the Claimant and the Respondent.  I reject these claims made on behalf of the Respondent.

14.The claims in the 2017 Proceedings were made by the Respondent as plaintiff, and were not expressly stated as being derivative or representative in nature, made on behalf of the JV Company, which has been in liquidation since about June 2010.  The Claim Form pleads and relies on Articles 148 and 149 of the Company Law for relief.  The Respondent itself claims that the 2017 Proceedings are mere continuation of the 2013 Proceedings, and according to the more detailed Claim Form filed in the 2013 Proceedings, the Respondent as plaintiff claimed that under Article 148 of the Company Law, controlling shareholders should not abuse their shareholders’ powers or relationship to injure the interests of the Company (paragraph 25 of the 2013 Proceedings Claim Form).  The Respondent further claimed in the 2013 Proceedings that directors owe duties of diligence and loyalty to the company, and should not use their relationship to injure the interests of the company.  The Respondent claimed that in breach of the provisions of the Company Law, the Claimant and Tong used their relationship to confer benefits on their related companies, and misappropriated the assets and property of the JV Company, leading to the inability of the JV Company to continue its operations.  Those were stated to be the grounds of the Respondent’s claims against the Claimant and Tong for compensation.  Paragraph 4 of the Claim Form in the 2013 Proceedings does state that the Respondent seeks an order that the Claimant and Tong as defendants should compensate the JV Company (the 3^rd party named) damages of RMB 39,590,000.

15.Expert PRC law evidence has been filed on behalf of both parties as to the alleged nature of the claims made in the 2017 Proceedings, and there is dispute between the experts as to whether the 2017 Proceedings are derivative in nature, seeking remedy on behalf of the JV Company; whether such action can be brought by the Respondent, allegedly on behalf of the JV Company, after the JV Company has been dissolved and a liquidation committee has been formed; and whether procedural requirements such as the service of prior notice or request on the JV Company prior to the commencement of proceedings on its behalf have been complied with, or can be dispensed with.  In my judgment, these issues do not affect the Claimant’s right to the injunction sought.

16.Even if I were to accept the Respondent’s case, that it had instituted the 2017 Proceedings as representative and on behalf of the JV Company, I consider that the claims made by the Respondent in the 2017 Proceedings, despite being made in such “representative” capacity, fall within the scope of the arbitration clause contained in the JV Contract made between the Claimant and the Respondent.  That clause is drafted in wide terms, as follows:

“Any dispute arising out of or in connection with this Contract, including any question regarding its existence, validity or termination or as to rights or obligations of the Parties hereunder which is not settled by friendly discussions pursuant to Article 24.1 shall be referred to and finally resolved by arbitration in Hong Kong in accordance with the Arbitration Rules of the Hong Kong International Arbitration Centre… the arbitral award shall be final and binding on the Parties.” (Emphases added)

17.Irrespective of whether the claims made by the Respondent in the 2013 Proceedings and 2017 Proceedings are representative in nature, and whether such claims are tortious in nature as alleged by the Respondent, they relate to matters in dispute which arose as a result of the investments made by the Claimant and the Respondent, and the setting up and operation of the JV Company, pursuant to the JV Contract made between them.  The allegations as to the Claimant’s misuse of its powers and relationship as shareholder of the JV Company, in misappropriating assets of the JV Company or making improper payments to parties connected with the Respondent, all carried out through Tong, its director appointed to the JV Company pursuant to the JV Contract, and the claims of damage sustained by the Respondent as minority shareholder, and damage sustained by the JV Company, for whom the claims were allegedly made by the Respondent, are all connected with the JV Contract, and the parties’ operations thereunder.  Any claims made or asserted by the Respondent as shareholder of the JV Company, including any right to commence derivative actions on behalf of the JV Company to seek any remedy for the JV Company, arises by virtue of its acquiring shares and becoming a shareholder under the JV Contract.  The claims made by the Respondent in the 2017 Proceedings certainly cannot be said to be “entirely unrelated to” the JV Contract, and the rights assumed and obligations acquired by the parties thereunder (Getwick Engineers Ltd v Pilecon Engineering Ltd HCA 558/2002, 28 October 2002).

18.The 2017 Proceedings fall within the scope of the arbitration clause in the JV Contract between the Claimant and the Respondent, such that the Claimant is contractually entitled to ask for the proceedings to be stayed.

19.I further accept the submissions made by the Claimant, that all the claims made by the Respondent in the 2013 Proceedings and 2017 Proceedings, as to alleged misappropriation, breach of fiduciary duties, breach of the Company Law, have been raised and dealt with in the Arbitration, and determined by the Tribunal in the Award.  As a party in the Arbitration, the Respondent is bound by the findings made by the Tribunal, as to its alleged entitlement as shareholder of the JV Company.  The counterclaim made by the Respondent in the Arbitration was for the sum of RMB 39,590,000, claimed to have been improperly paid by the JV Company, and procured by the Claimant and Tong, to parties related to the Claimant, or were otherwise unauthorized.  This essentially encompassed the claims made in the 2013 Proceedings and the 2017 Proceedings (and referred to by Counsel for the Claimant as the TSA Claim, the Management Cost Claim, and the Excess Payment Claim).  The Respondent’s counterclaim was dismissed by the Tribunal, which found that the Respondent had been made aware of the payments, that no approval by the board of the JV Company was required, and further, that the Claimant was not in breach of the relevant provisions of the PRC Company Law, and not in breach of its fiduciary duties and obligations of good faith under the JV Contract.  The Respondent is clearly and unquestionably bound by these findings made by the Tribunal in the Award.

20.Even if it should be true that there are new claims open to the Respondent to be pursued, as to the Claimant’s alleged misapplication of any assets of the JV Company, these claims should be pursued by arbitration in accordance with the arbitration clause in the JV Contract.

The order sought against Tong

21.On behalf of the Respondent, it was argued that Tong is not a party to any arbitration agreement with the Respondent, nor was he a party in the Arbitration, to be bound by the Award.  The Respondent accordingly submits that the Claimant is not entitled to seek any injunction to restrain the Respondent from conducting the 2017 Proceedings against Tong.

22.In the Arbitration, the Respondent advanced a counterclaim against the Claimant, in respect of its breach of obligations as controlling shareholder under the Company Law (paragraph 7 of the Respondent’s Supplemental Submissions on the Counterclaim), by failing through itself “and its representative directors, in particular, (Tong)” to ensure that the Respondent’s rights as a minority shareholder were respected.

23.The Respondent also alleged in the Arbitration that Tong had failed to act in the best interests of the JV Company, and was in breach of his fiduciary duties owed to the JV Company, inter alia, by procuring or directing the JV Company to enter into agreements with third parties, or procuring unauthorized and improper payments to be made by the JV Company to parties associated with the Claimant/Tong.  The Respondent pleaded and relied on the fact that Tong was a director appointed by the Claimant to the JV Company, and that he was a “representative” of the Claimant as shareholder (see paragraphs 145 to 148 of the Rejoinder dated 14 August 2014, served by the Respondent in the Arbitration).  The Respondent claimed (in paragraph 150 of the Rejoinder) that the Claimant “was either behind (Tong’s) acts or in fact had no different personality from (Tong) and Mr Liu and, as a result, should be liable for all the losses arising from (Tong’s) actions and inactions”.  Tong had been cross-examined by the Respondent in the Arbitration as to all these matters.

24.The Claimant emphasized, however, that the claims made by the Respondent in the Arbitration, in respect of Tong’s acts of breach of duty, were directed against the Claimant - as the only party in the Arbitration against which the counterclaim was made, and that this was on the basis (as the Respondent alleged) that Tong was acting for or as agent of the Claimant, which should be liable for the losses resulting from Tong’s actions and breach.

25.The Award records the Respondent’s submission that the claim made by the Respondent of Tong’s breaches of the Company Law was not against Tong, but against the Claimant, on the premise that the Claimant was vicariously liable for the actions of Tong, particularly as he was acting as a director of the Claimant or as the Claimant’s representative director, such that Tong’s conduct is attributable to the Claimant (see paragraph 16.1 of the Award).  After hearing the evidence and the submissions made by the parties, the Tribunal found that since the payments and transactions of which the Respondent complained had been known to the Respondent and did not require authorisation by the board, the Claimant is not liable for the conduct of Tong complained of.

26.The Respondent had already made claims against Tong in the Arbitration, as a representative and agent of the Claimant, in respect of his acts and alleged omissions as a director of the JV Company, and these are the very same claims which are now repeated in the 2017 Proceedings. The Tribunal has already found that the claims against the Claimant and its agent, Tong, have no basis.  I consider that it would be vexatious and oppressive for the Respondent to reopen the issues determined by the Tribunal, in the context of the claims made against Tong in his capacity as the director representative or agent of the Respondent, by pursuing the 2017 Proceedings.  I agree with the Claimant, that to permit the Respondent to continue the 2017 Proceedings against Tong would be to discredit the findings made in the Award against the Respondent.

27.Tong, who has at all material times been claimed by the Respondent to be the representative and agent, for whom the Claimant should be vicariously liable, should be entitled to the benefit of the arbitration clause contained in the JV Contract between the Claimant and the Respondent.  Like the English Court in ICBCL Financial Leasing v CG Commercial Finance [2014] EWHC 3156 (Comm), I am prepared to extend the injunction sought by the Claimant to restrain the further conduct of the 2017 Proceedings against Tong.

Unconscionable conduct

28.In the context of considering whether the Court should exercise its jurisdiction and discretion to grant an anti-suit injunction, the Respondent argued that the Court should consider whether the conduct of the Respondent, which is sought to be restrained, is in any way unconscionable.

29.The grant of an injunction is an exercise of the Court’s discretionary powers.  As accepted by Counsel for the Respondent, the conduct of the parties is a relevant factor in the Court’s determination of whether its discretion should be exercised in favor of, or against a party which comes to it for aid.  In this case, the conduct of the Respondent has been described by Harris J in no uncertain terms to be unethical, reproachable and unacceptable, as showing disregard and contempt for the Hong Kong Court, and the integrity of our financial and legal system.  I would add that the Respondent has at the same time displayed complete disrespect for the arbitration agreement and the arbitral process to which it had voluntarily agreed under the JV Contract and submitted, by totally refusing to accept its liability under the Award when it is not in its favor.  I share all the sentiments expressed by Harris J in paragraph 31 of his Reasons for Decision dated 7 July 2017, and see no just or fair basis or cause for me to exercise my discretion in favor of the Respondent.  The Court’s authority must be maintained for the due administration of justice, and the Respondent’s intentional and deliberate disregard of the order of this Court and of the Award cannot be countenanced.

Conclusion and orders

30.The injunction sought by the Claimant against the Respondent and Tong is granted in terms of its summons issued on 10 October 2017, which includes an order that the Respondent should pay the costs of the Applicant on an indemnity basis, with certificate for 2 counsel.

The Respondent’s application to file further expert evidence

31.By the order of A Chan J made on 26 October 2017 (“Order”), directions were given for the filing of evidence in respect of the Claimant’s application by summons dated 10 October 2017 for the anti-suit injunction (“Summons”).  Under the Order, the Respondent was to file its evidence in opposition to the Summons by 9 November 2017, the Claimant was to file its evidence in reply by 23 November 2017, and the Summons was adjourned for argument (with a date later fixed for hearing on 3 January 2018).  The Order contained the express direction that no further affirmation should be filed without the leave of the Court.

32.The Respondent served its expert evidence on PRC law on about 13 November 2017, and the Claimant served its expert evidence in response, on 24 November 2017.  It was only on 21 December 2017, that the Respondent applied for leave to produce and rely on its further expert evidence, said to be in answer to the expert evidence of the Claimant.  The application for leave was fixed for hearing on the day of the substantive hearing, on 3 January 2018.

33.I reject the Respondent’s claim, that it has the right to reply to the expert evidence served by the Claimant in answer to the Respondent’s expert evidence.  The Order made no distinction between the service of factual, and expert, evidence, providing only that no further evidence should be filed without the leave of the Court.  At the time when the Order and the directions were made, the Respondent must have anticipated that it would be serving expert evidence on PRC law, in opposition to the Claimant’s application for stay of the 2017 Proceedings, and that if it did, it was highly likely that the Claimant would be serving its own evidence on PRC law.  The Respondent did not ask for time to put in expert evidence, in reply, if it considered that it had the right to do so.  It waited until 5 clear days before the hearing on 3 January 2018 to apply for leave to put in further expert evidence.  The application was made too late in time, and it affected the Claimant’s preparation for the hearing scheduled to take place on 3 January 2018.  Delay is a ground for refusing a late application such as this.

34.If, as the Respondent submitted, there is any right on its part to serve expert evidence in reply, I consider that it is also incumbent on the Respondent, at the time when it sought directions for filing evidence for the Summons, not only to highlight to the Court and to the Claimant that it would be serving expert evidence, but also to confer with the Claimant and to agree on a timetable for the experts to discuss the expert evidence to be addressed, and to identify areas of agreement and disagreement in good time before the scheduled hearing of the Summons, to be of assistance to the Court.  Having failed so to do, it lies ill in its mouth to complain of not being given the opportunity to adduce further expert evidence.

35.In any event, and as a matter of caution, I have considered the further expert evidence sought to be produced and relied upon by the Respondent.  Suffices it to say that it serves little purpose other than to confirm that the experts do not agree on the nature of and procedures for derivative actions under PRC law.  As indicated in the earlier part of this Decision, the different views of the experts on the issues they address under the relevant provisions of the PRC law have little impact on the outcome of the application for the injunction, which I have granted.

36.Since the application for leave to adduce expert evidence is too late in time, it is dismissed, with costs to the Claimant.

Mr Laurence Li and Mr Ho Kiu Chow, instructed by CL Chow & Macksion Chan, for the applicant

Mr Johnny Mok SC and Mr Alexander Tang, instructed by King & Wood Mallesons, for the respondent