Baosteel Engineering & Technology Group Co Ltd v. China Zenith Chemical Group Ltd

HCCT 7/2018

[2022] HKCFI 2343

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 7 OF 2018

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REASONS FOR DECISION

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Background

1.On 16 April 2017, the Plaintiff (a Mainland company) obtained an arbitral award on the Mainland (“Award”) against the Defendant, which is a Hong Kong listed company, and against the Defendant’s 90% indirectly owned subsidiary on the Mainland (“HH”). The Award is for payment by the Defendant and HH, jointly and severally, to the Plaintiff of a sum of RMB 19.44 million and interest, as the outstanding balance payable under a Debt Agreement made between the Plaintiff, the Defendant and HH. On 7 February 2018, the Plaintiff obtained leave from the Hong Kong Court to enforce the Award against the Defendant only as a judgment in Hong Kong (“Enforcement Order”). The Defendant applied by summons on 6 April 2018 to set aside the Enforcement Order (“Setting Aside Application”), and alternatively to adjourn the Setting Aside Application.  On 23 May 2018, an order was made for the adjournment but conditional upon the Defendant’s provision of security in the total sum of RMB 31.44 million, in default of which the Setting Aside Application shall be dismissed. Security was not provided by the Defendant as ordered, the Setting Aside Application was accordingly dismissed, and hence, the Enforcement Order remains valid and binding.

2.On 21 June 2018, the Defendant then applied to stay execution of the Enforcement Order. On 11 July 2018, this Court granted an order by which execution of the Enforcement Order was stayed for 6 months (until 10 January 2019), on the condition that the Defendant should provide security in the sum of RMB 19,818,046 (“Conditional Stay Order”). Pursuant to the Conditional Stay Order, the Defendant made payment into court of the sum ordered (“Initial Payment”), but applied on 24 December 2018 for a further stay of 3 months, which was refused by the Court on 7 January 2019.  The Defendant’s application to the Court of Appeal was likewise dismissed on 9 April 2019.

3.The Plaintiff proceeded with enforcement of the Award, by having its costs taxed under various Court orders, and obtaining a garnishee order against the Defendant’s bank account for recovery of its taxed costs.  The Plaintiff’s taxed costs were certified at HK $1,019,080.23 in the Allocatur dated 10 January 2022 (“Allocatur”). In the interim, the Defendant had made a further payment of HK $5,625,672.67, comprising the agreed interest on the Initial Payment and costs.

4.On 4 March 2022, the Defendant issued its summons for a stay of execution on the Allocatur (“Stay Summons”). The Stay Summons was stated to have been issued under Order 45 rule 11 RHC and the inherent jurisdiction of the Court, was initially fixed for hearing on 3 May 2022 and was adjourned for an hour’s hearing on 28 July 2022.

5.Shortly before 28 July 2022, the Defendant attempted on about 18 July 2022 to issue two further summonses, to seek leave to amend the Stay Summons (to refer to a stay of execution of the various costs orders made by the Court as well as the Allocator), and to adduce new evidence in the form of expert evidence on PRC law. The Plaintiff also sought to issue its summons dated 23 July 2022 for leave to file further evidence in response. The Court did not permit these summonses to be set down for hearing on 28 July 2022, when such hearing had been set as early as May 2022, and for one hour on the parties’ own choice. Nor was it possible, by virtue of the parties’ own delay, to obtain a hearing date for the further summonses in reasonable time before the substantive hearing of the Stay Summons on 28 July 2022. As directed by the Court, the hearing on 28 July 2022 proceeded as the hearing for the only application set before the Court, namely the Stay Summons, and on the evidence as filed within the timetable set for the Stay Summons. Ex abundanti cautela, the proposed amended Summons and the Defendant’s new evidence had been considered by the Court prior to the hearing on 28 July 2022.

6.At the conclusion of the hearing on 28 July 2022, the Defendant’s application for stay of execution was dismissed, with costs on indemnity basis. These are the reasons for my decision.

The Stay Summons

7.Counsel for the Defendant argued that the stay application can be made under Order 47 rule 1 RHC. As Counsel for the Plaintiff correctly pointed out, Order 47 rule 1 is stated to apply to an order to stay the execution of a judgment or order by writ of fi fa, which is not at all applicable to the present case. The judgment of the Court of Appeal in Credit Lyonnais v SK Global Hong Kong Ltd CACV 167/2003 15 July 2003 confirmed the position.

8.As for a stay sought under Order 45 rule 11, the Defendant does not dispute that stay of execution is only granted in “exceptional circumstances” (as stated by the Court of Appeal in S v G [2022] HKCA 383). Rule 11 itself states that a party may apply for a stay of execution of a judgment or order or other relief “on the ground of matters which have occurred since the date of the judgment or order”. On behalf of the Plaintiff, it was pointed out that the Defendant seeks a stay of execution of the Allocator dated 10 January 2022, in respect of costs allowed by the Court on 23 May 2018, and from July 2018 to January 2019, all made prior to the Allocatur. In Credit Lyonnais v SK Global Hong Kong Ltd CACV 167/2003, the Court of Appeal reiterated that a stay under Order 45 rule 11 may be ordered by reason only of matters which have occurred since the date of the judgment or order, and further, that these must be “matters which went to the validity of the judgment and which, if established before the court, might justify the court in saying that this was not a judgment which on the material placed before it, it would allow to be exercised”, as interpreted in the case of Tam Ho Man v Wong Kwok Fai [1986] HKLY 705.

The Mainland Proceedings

9.The matters relied upon by the Defendant to support the Stay Summons are that firstly, there have been proceedings on the Mainland, commenced by HH against the Plaintiff on 19 March 2018, for damages claimed in the sum of RMB 52.3 million in respect of the Plaintiff’s breach of the underlying contract made between the Plaintiff and HH, for the Plaintiff’s design and construction of an industrial plant (referred to by the Defendant as the EPC Contract, as revised by an Amended Agreement of 4 July 2009).  The Defendant described its claim as one in respect of the Plaintiff’s poor and inadequate design of the plant, faulty construction and installation work carried out by the Plaintiff, and the Plaintiff’s failure to provide training. In respect of such proceedings, the Heilongjiang Intermediate Court gave judgment in favour of HH in April 2019, of RMB 5,622,647.84 (“Intermediate Court Decision”). The Defendant claims that on appeal to the Heilongjiang Higher People’s Court, the Higher Court quashed the Intermediate Court Decision by its judgment of 29 December 2020, and awarded a reduced sum of RMB 963,000 to the Defendant instead (“Higher Court Decision”). HH further appealed to the Supreme People’s Court, and on 29 October 2021, the Supreme Court ordered a retrial (on the ground that the lower court had erred in law), which was to be heard by the Supreme Court, and initially scheduled for March 2022, but subsequently adjourned due to COVID. According to the Defendant, HH’s claims in the Mainland proceedings are meritorious and it is likely to be successful upon retrial of its claim for compensation - which claim would exceed the costs allowed in the Allocatur.

10.In its later affirmation, the Defendant acknowledged that the Plaintiff’s evidence on the Higher Court Decision is correct, and that the Defendant had made an error in its own evidence. It admits that all the  claims made by HH in the Mainland proceedings before the Intermediate Court were in fact quashed on appeal, including the claim for RMB 963,000.

11.There is dispute as to whether the hearing before the Supreme Court on 23 March 2022 was a pre-trial review or the commencement of the retrial.  However, it is not disputed that the hearing was further adjourned in March 2022.

12.At the hearing on 28 July 2022, Counsel for the Defendant informed the Court that the retrial had taken place before the Supreme Court on 27 July 2022, and that judgment was expected to be handed down within 2 weeks.

13.I agree with the Plaintiff, that it is not open to the Defendant to rely on the Mainland proceedings as matters arising after the judgment or order sought to be stayed under Order 45 rule 11. All the material decisions in the Mainland Proceedings (namely the Intermediate Court Decision and the Higher Court Decision) were made before the Allocator of 10 January 2022, apart from the hearing scheduled for 23 March 2022 and which was adjourned. The Intermediate Court Decision was dated 1 April 2019.  The Higher Court Decision was stated 29 December 2020. The Defendant had known of the outcome of the Decisions since then.

14.As for the retrial before the Supreme Court, the outcome is yet unknown but at the hearing on 28 July 2022, the Defendant placed reliance on the fact of the retrial as the impetus, and the key development after the Allocator, which should be considered by the Court for the stay application.

15.The material point is that even if relevant, the Mainland proceedings including the retrial relate to claims made by HH (and not the Defendant) against the Plaintiff, under the EPC Contract, which is separate to the Debt Agreement under which the arbitration was commenced and in which arbitration the Award was made.  The Defendant had separately and severally from HH assumed primary obligations under the Debt Agreement in respect of the payment of the amounts then outstanding under the EPC Contract and the Amendment Agreement from HH to the Plaintiff. The payment obligations of the Defendant were said in the Debt Agreement to arise in the event of any default of payment by HH, with no reference to any condition as to the due performance of the obligations of the Plaintiff under the EPC Contract, or any performance by the Plaintiff.

16.In short, the Mainland proceedings do not serve or have the effect of setting aside the Award made in favour of the Plaintiff and in respect of the Defendant’s liability under the Debt Agreement, which remains a valid award unless and until it is set aside.

17.Even if, as argued for the Defendant, there should be any set‑off that may be available to the Defendant by virtue of the claims made in the Mainland Proceedings which are said to be the subject of the retrial by the Mainland Supreme Court, the claims are those asserted by HH, and not by the Defendant in these proceedings, in relation to the Plaintiff’s alleged breach of the EPC Contract and its obligations allegedly owed to HH.  As this Court had highlighted in its earlier decision, HH is a separate legal entity from the Defendant in these proceedings, the Defendant’s case being that it owns 90% of the shares of HH through 2 intermediate companies.

18.Counsel for the Defendant relies upon Burnet v Francis Industries PLC [1987] 1 WLR 802 for the proposition that a cross-claim exists by virtue of the retrial in the Mainland proceedings. Even in that case, the English Court referred to Canada Enterprises Corporation Ltd v MacNab Distilleries Ltd (Note) [1987] 1 WLR 813 CA, and to the observations made by Mustill J in Orri v Moundreas, unreported, 4 March 1981:

“The mere existence of a cross action by the debtor against the judgment creditor will not ordinarily be sufficient to justify a stay: and a fortiori where, as here, the parties to the cross actions are not the same. That there can, however, be cases where the court will look behind the corporate structure at one or both parties to find the persons truly at interest, and then exercise its power to grant a stay, as the justice of their mutual relations may demand, is strikingly demonstrated by Canada Enterprises Corporation Ltd v MacNab Distilleries Ltd…” (Emphasis added)

19.The principles set out in Burnet v Francis Industries PLC were applied in Re LehmanBrown Ltd (No 2) [2015] 5 HKLRD 1.  In summary, it requires special circumstances before the Court will stay enforcement of a judgment for a liquidated sum.  When deciding in any case whether such special circumstances exist to stay execution and enforcement of a judgment in favour of a judgment creditor pending or on the basis of an alleged cross-claim which may be asserted not by the judgment debtor but by a 3^rd party against the judgment creditor, the matters which will be considered by the Court include (see paragraph 9 of the judgment in Re LehmanBrown Ltd (No 2)): the nature of the claim of the judgment creditor; the extent of the identity between the 3^rd party and the judgment debtor; the inter-relationship of the respective claims by the judgment creditor against the judgment debtor and by the 3^rd party against the judgment creditor; the strength of the 3^rd party’s claim; the size of the 3^rd party’s claim relative to the claim of the judgment creditor; the likely delay before the merits of the 3^rd party’s claim against the judgment creditor will be the subject of adjudication; the extent of the prejudice to the judgment creditor if he is denied the rightful fruits of his judgment until the determination of the claim of the 3^rd party; and the risk of prejudice to the 3^rd party if the judgment debtor makes payment to the judgment creditor under the judgment, including the risk of dissipation or the fruits of the judgment being removed from the jurisdiction.

20.Of material relevance in this case is that the nature of the Plaintiff’s claim against the Defendant is for enforcement of an Award, in an arbitration on the Debt Agreement which is by its language in the nature of an indemnity or unconditional guarantee with primary liability on the Defendant’s part to pay the Plaintiff. On the other hand, HH’s claim against the Plaintiff is for unliquidated damages, on the basis of alleged breach of obligations of design and construction under the EPC Contract.

21.It is also significant in this case that on the one hand, the Defendant seeks to rely on “an element of common ownership” between the Defendant and HH, and claims that their interests are closely and “economically aligned” in that the Defendant is the ultimate beneficiary of the proceeds resulting from a favorable judgment in the Mainland proceedings commenced by HH, and that HH had undertaken to use the proceeds of those proceedings to set-off the Defendant’s liability to the Plaintiff for the costs allowed in these proceedings. On the other hand, however, the Defendant claims that it will suffer significant prejudice because even if it/HH can recover payment from the Plaintiff under a judgment in  favour of HH upon the retrial in the Mainland proceedings, the Defendant cannot be compensated properly in Hong Kong by HH because of the existence of foreign exchange controls (notwithstanding their close relationship).  These assertions of the Defendant are self-contradictory and entirely self-serving, blowing hot and cold in the same breath.

22.Although the Award is at an advanced enforcement stage in Hong Kong, it is uncertain when judgment on the retrial by the Supreme Court can be expected. The Award had been made as a final award in April 2017, and leave to enforce the Award against the Defendant had been granted since February 2018. Judgment in terms of the Award was entered in Hong Kong on 10 January 2019. The Plaintiff is entitled to take all steps to enforce the Judgment and to reap the fruits of the judgment without any further delay.

23.There is no evidence of any likelihood of the Plaintiff’s dissipation of the fruits of its recovery under the Allocatur sought to be stayed, and neither assertion nor evidence that the Plaintiff would not be financially able to repay the amount recovered, or otherwise make payment to HH if and when there should be a judgment favorable to HH as a result of the retrial on the Mainland.

24.I am not convinced that the Defendant cannot look to HH for indemnity or contribution by way of recovery for the amount the Defendant had paid to the Plaintiff under the Award or the Allocatur, if HH should succeed in recovering damages from the Plaintiff on the Mainland. This is particularly so if the Defendant’s assertion of its close relationship and economic alignment with HH is true.

25.The amount payable under the Allocatur is not substantial. There is no assertion that payment will create any hardship on the Defendant’s finances to cause injustice.

The VAT claim

26.Apart from the retrial in the Mainland proceedings, the Defendant further sought to assert that it/HH has a claim against the Plaintiff in respect of the Plaintiff’s failure to issue a VAT invoice to HH as a result of the Initial Payment made by the Defendant, pursuant to the Conditional Stay Order of 11 July 2018.  The Defendant claims that HH has suffered a loss of a tax credit representing 13% of the Initial Payment, calculated to be RMB 2,576,345.98 (equivalent to HK $3,187,363.58), and a tax credit in respect of the Defendant’s further payment of outstanding interest on the Initial Payment, and the costs of garnishee proceedings (in an additional sum of RMB 265,559.17). The alleged tax credit loss said to have been sustained by HH is RMB 2,841,905.15 in total.

27.The claims are asserted on the basis that the Initial Payment was made as payment of part of the contract sum HH was required to pay to the Plaintiff under the EPC Contract. The Defendant claims that under PRC law, the Plaintiff should have issued a VAT invoice to HH for its payment of purchase price, and that the Plaintiff’s failure so to do has resulted in HH suffering the tax credit it would otherwise have been entitled to claim, and for which the Plaintiff is liable to compensate HH.

28.I reject the claim that execution of the Allocatour and the costs orders should be stayed pending or by reason of HH’s VAT Claim, and any  cross claim that may be available to the Defendant in reliance thereon.

29.First, I am not satisfied that the Initial Payment should be treated as HH’s payment of the contract sum or purchase price under the EPC Contract. The payment was made by the Defendant, pursuant to an order of the Hong Kong Court, as a condition for the Court’s stay for an initial period of 6 months of the execution on the Award made in the arbitration under the Debt Agreement. These proceedings relate to enforcement of the Award in Hong Kong against the Defendant. The Conditional Stay Order was made in the enforcement proceedings, and should be distinct from the dispute in the underlying arbitration which relates not to the EPC Contract and the obligations of HH thereunder, but to the Debt Agreement and the separate obligations assumed by the Defendant thereunder for payment of sums specified in the Debt Agreement.  The expert evidence on PRC law sought to be relied upon by the Defendant has not adequately analyzed the question, nor cited any authority to support the opinion asserted. Nor has the Plaintiff been given the reasonable opportunity to reply to the expert evidence.

30.Again, these alleged tax credit losses are the losses of HH, and not of the Defendant. The Plaintiff on its part claimed that the relevant VAT invoice had already been issued, and denies that either HH or the Defendant has suffered the loss alleged. If there is any valid claim at all to be made against the Plaintiff, it has yet to be made by HH, in the unforeseeable future, by separate legal proceedings which have not been commenced. I do not accept that it would be just to further delay enforcement of the Award on the basis of a dubious claim yet to be made by HH against the Plaintiff.

Disposition

31.By reason of all the foregoing matters, I was not satisfied that there are any special circumstances for the Court to exercise its discretion to stay execution of the Allocator or of any orders of costs made in these proceedings in 2018 and 2019. On the facts of this case including the matters summarized in paragraphs 20 to 25 above, I do not consider that it would be just to stay enforcement of the Allocatur, nor that it would be inexpedient to enforce the Allocatur (the test in BIS Consultants Ltd v Dao Heng Bank Ltd [1989] 2 HKLR 172 relied upon by Counsel for the Defendant).

32.The Stay Summons was accordingly dismissed, with costs on indemnity basis (Chimbusco International Petroleum (Singapore) Pte Ltd v Fully Best Trading Ltd [2016] 1 HKLRD 582; A v R (Arbitration: Enforcement) [2009] 3 HKLRD 389), to be summarily assessed, with certificate for Counsel. The costs are to include the costs incurred and occasioned by the Defendant’s summonses of 18 July 2022 for leave to adduce expert evidence and to amend the Stay Summons.

33.The Plaintiff should serve its statement of costs on the Defendant, which has liberty to file and serve its statement of objection within 7 days of service.

Mr Edward Ng, instructed by Oldham, Li & Nie, for the plaintiff

Mr Adrian TY Wong, instructed by Wellington Legal, for the defendant