G v. N

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

____________________

____________________

____________________

AND

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 28 OF 2023

____________________

____________________

____________________

AND

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 52 OF 2023

____________________

____________________

____________________

_____________

D E C I S I O N

_____________

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.

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