Bb v. Ko
Read the full judgment text of HCCT 7/2020 on BabelCite. This 高等法院原訟法庭 judgment was delivered on 20 October 2023 before Hon Mimmie Chan J.
Construction and arbitration — Enforcement of arbitration award — Judgment creditor applying for appointment of receivers under section 21L of High Court Ordinance over shares held by judgment debtor in asset-holding company — Judgment debtor’s failure to comply with disclosure orders and non-cooperation causing practical difficulties in enforcement — Court applying principles in Cruz City v Unitech and local authorities — Holding that appointment of receivers just and convenient to assist enforcement — Receivers empowered to take possession and value assets, including valuable artwork — Dismissal of late application to set aside judgment — Refusal of interim injunction restraining dealing with artwork due to absence of necessity or urgency — Costs awarded to judgment creditor. Judgment creditor had obtained arbitral award for substantial sum and subsequent judgment against KO who owned shares in OFA holding HK$2.7 billion artwork, but KO obstructed enforcement by failing to disclose financial documents and other assets. The Court found that the usual execution methods were hindered; receivership would facilitate realization of assets and discharge judgment debt. The Court also rejected KO’s claim of not having possession of documents, affirming constructive possession principles. Additional injunctions sought were refused for procedural and substantive reasons.
Legal issues: Appointment of receivers under section 21L · Right to possession and disclosure of company documents · Whether to grant interim injunction restraining dealing with Artwork
Outcome: Application for appointment of receivers over the OFA Shares granted; interim injunction refused; costs awarded to BB
Cited by 2 cases · Cites 8 cases
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Redacted and amended version for publication HCCT 7/2020 [2023] HKCFI 2722 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE CONSTRUCTION AND ARBITRATION PROCEEDINGS NO 7 OF 2020 ____________________
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_____________ D E C I S I O N _____________ Background 1.The Defendant (“KO”) is a successful XXXXXXX businessman, having founded XXXXXXXXXXXXXXXXXX (“UEC”) which is a multi-billion-dollar XXXXXXXXXXX company, and one of the world’s largest manufacturers of XXXXXX products. KO was (until May 2017) Chairman and a director of UEC, and President and Director of XXXXXXX (“AU”). He is and was at all material times also the sole shareholder and director of XXXXXXXXXXXXX (“OFA”), and the owner of a substantial number of shares in XXXXXXXXXXXX (“OHL”) and one share in XXXXXXXXXXXXXXXX (“AHK”). OFA is a company incorporated in Hong Kong, which is the owner of valuable pieces of artwork (“Artwork”) currently situated at the XXXX Museum of Art in XXXXX, Japan (“Museum”). The Artwork was valued at almost HK$2.7 million in 2014, and it is estimated that the OFA shares owned by KO were worth over US$500 million as of August 2021. 2.As reflected in the Decision of this Court handed down on 17 October 2023, the Plaintiff in these proceedings (“BB”) commenced arbitration against KO under an engagement agreement for legal fees due from KO which were unpaid. An arbitral award was issued in favor of BB on 20 December 2019 (“Award”), for KO’s payment to BB of a sum of US$49,651,513, with interest and costs. On 16 March 2020, BB obtained leave of the Hong Kong Court to enforce the Award (“Enforcement Order”), and judgment was entered against KO in terms of the Award on 29 December 2020 (“Judgment”). 3.By way of enforcement, BB obtained various orders against KO’s assets in Hong Kong. On 4 May 2021, a Charging Order Absolute was made over KO’s shareholding in his 3 Hong Kong companies, namely, OFA, OHL and AHK. On 9 June 2022, BB further obtained a Garnishee Order over dividends declared by OHL in respect of KO’s shareholding, of a total sum of HK$57 million. 4.On 4 January 2023, BB made the present application for receivers to be appointed under section 21L of the High Court Ordinance (“section 21L”) and Order 51 rule 1 RHC, over the approximately 2.69 million shares KO held and owned in OFA (“OFA Shares”). The application for appointment of receivers sought powers to be given to the receivers to (inter alia) secure, take possession of and receive all the assets and properties of OFA including the Artwork, with power to sell the assets, take control of and exercise all rights which OFA may have in relation to its shares and assets, and the power to exercise voting or other rights in the shares KO has as a registered or beneficial owner. 5.The application was heard on 15 September 2023, and at the conclusion of the hearing, judgment was reserved. 6.To complete the picture, KO had on 19 September 2022 applied to this Court to set aside, out of time, the Judgment on the Award, and the Enforcement Order. That application was heard on 6 October 2023. 7.On 17 October 2023, this Court handed down judgment on KO’s setting aside application, dismissing such application on the ground, firstly, that there was no good or satisfactory reason shown to extend time to KO to set aside the Judgment, when there was delay of over 2 years from the time granted by the Court to KO to make the setting aside application; and further, on the ground that there were no merits shown for this Court to refuse enforcement of the Award in Hong Kong under section 87 of the Arbitration Ordinance. Applicable legal principles 8.The Court has power under section 21L to appoint a receiver in all cases in which it appears to the Court to be just or convenient to do so. Where an application is made for the appointment of a receiver by way of equitable execution, the Court must have regard to the amount claimed by the judgment creditor, the amount likely to be obtained by the receiver, and the probable costs of the appointment of the receiver (Order 51 rule 1(1) RHC). The relevant principles were summarized by Males J (as his Lordship then was) in Cruz City v Unitech [2015] 1 All ER (Comm) 336, at para 47:
9.The above principles are applied in Hong Kong in cases such as Leader Screws Manufacturing Company Limited v Huang Shunkui [2021] HKCFI 2828, and Paloma Company Limited v Capxon Electronic Industrial Company Limited & Others [2020] HKCFI 3050. 10.In gist, BB’s case as judgment creditor is as follows. Almost 4 years have elapsed from the Award. Despite their having obtained Judgment in Hong Kong in terms of the Award, BB’s attempts to enforce the Judgment have all been in vain and have been obstructed by KO, who has persistently refused or failed to comply with orders made by the Court against him for disclosure, for discovery and for the delivery up of documents such as bank statements, company records and financial records of himself, of OHL or of OFA which may shed light on the value of the assets of OFA, to enable any recovery or sale of assets to take place. Recovery outside Hong Kong has limited success, and 98% of the Judgment debt remains unsatisfied. According to BB, the demands of justice now warrant the appointment of receivers to take over the OFA Shares and to realize its assets in order to discharge the judgment debt due to BB. 11.BB relies on the fact that there have been repeated breaches by KO of orders of the Court, and that he has failed to cooperate in any way in the attempts made by BB to obtain information on the Artwork and the assets of OFA or on the financial status of OFA for purposes of enforcement of the Charging Order on the OFA Shares, short of any appointment of receivers. OFA 12.On BB’s case, in order for them to enforce the Charging Order by sale of the OFA Shares, they are required to give to the Court estimates of the gross price which can be obtained and to provide the bases of such estimates (referring to Order 88 rule 5A(2)(e) RHC). They would in any event have to give to any potential purchaser some estimate of the value of the OFA Shares to be sold. On 15 July 2021, BB’s solicitors had served the Charging Order on the Museum and requested the Museum to provide a list of the Artwork in its custody, together with valuation reports of the Artwork, in order to obtain updated information on their value. In response, UEC had instructed its solicitors to seek from BB’s solicitors the legal basis of their request, and on receipt of their reply, has failed to provide the information sought. 13.When BB’s lawyers asked in July 2021 for inspection of the company records of OFA pursuant to the Companies Ordinance, the company secretary of OFA had initially scheduled a meeting for the inspection sought, but this and other meetings were subsequently cancelled by the secretary. The company secretary explained to BB that they had been instructed by OFA and been prohibited from disclosing any information or documents to BB. OHL 14.BB had served the Charging Order on OHL, and had on 4 August 2021 obtained from the Court an order for OHL to disclose information, including information of all its accounts receivables of an individual value of HK $100,000 or more for the past 5 years (“OHL Disclosure Order”). OHL’s solicitors had informed BB that KO had been removed as a director of OHL in mid-2017, and that since his departure, the current directors of OHL had been denied access to the financial information of the company, in particular for the period from 2015 to 2017. According to the solicitors, no audited financial statements could be prepared for OHL since the year ended 31 December 2015, for lack of the necessary financial information. OHL’s lawyers further informed BB that if BB should decide to proceed with any sale of the charged shares of OHL, a debt of HK$284,274,000 due from KO to OHL had to be fully repaid before any transfer of the charged shares to any purchaser can be registered. KO’s breaches 15.Apart from the above, BB relies on the fact that KO had been in repeated breach of orders made by the Court against him for disclosure of the financial information of OFA, OHL and AHK. First, an order for post‑judgment discovery had been made against KO on 30 August 2021, for production of the financial information of OFA, OHL and AHK. Next, there was an order made on 29 November 2021 for examination of KO, with an ancillary disclosure order compelling him to produce the accounts, passbooks, and bank statements of his businesses in Hong Kong which include those of OFA, OHL and AHK. Apart from KO’s disclosure of a copy of the unaudited management accounts of OHL for the year ended 31 December 2021 (made only when he filed evidence to set aside the Enforcement Order), BB has highlighted the fact that KO has failed to comply with any of the aforementioned disclosure and production orders, and has been in contumelious breach thereof. 16.I agree with Counsel for BB, that KO’s purported compliance with the orders, by producing printouts from the Museum’s website and referring to the publicly available information on UEC’s revenue from the Museum – is simply insufficient. There is nothing in such information as to which of the art pieces shown or featured in the website of the Museum form part of the Artwork, and are the property of KO, or what they are worth. The printout of the website only introduced some of the artwork on display at the particular time. Nor does the revenue of the Museum show the value of the Artwork belonging to KO. Without further details of the Artwork which are in the possession of the Museum, such as information on the condition, authenticity and provenance of the Artwork, a proper and professional valuation of the Artwork for the purposes of sale is not possible, and any valuation made without the aforesaid information cannot be reliable. 17.I am not satisfied by the excuse given by KO, that he did not personally keep or have access to the financial documents of OFA, and that they were in the possession of one Mr N (“N”), the Executive Manager of UEC and KO’s trusted assistant at the time. OFA is a company which is wholly owned and controlled by KO. The documents of OFA are therefore within KO’s possession, or custody, or power (Bruno Arboit v Koo Siu Ying, HCMP 2749/2012, 8 March 2016). In her judgment in Bruno Arboit, Au Yeung J explained:
18.On the above principles, KO certainly has had the presently and enforceable right to inspect and make copies of OFA’s financial and other documents. Even if it is true that N was the person who was in actual physical possession of the relevant financial documents, he would be holding such documents as agent of OFA, as such documents were the property of OFA. As the controller of OFA, KO had the power to procure OFA to demand the delivery up of the documents from N. 19.Although the production and disclosure orders were made in 2021, it was only in KO’s 6th affirmation made on 1 June 2023, that he claimed for the first time that the relevant documents were in the possession of N, and that he had been unable to establish contact with the latter, after having been ousted from the management of UEC in May 2017. KO did not state in his evidence that he had ever attempted to ask N for the documents sought by BB, but that the latter had refused to produce them. As rightly pointed out by Counsel for BB, it was incumbent on KO himself to make demands on N for delivery up of the documents, for him to comply with the disclosure and production orders made against him, rather than to suggest that BB should themselves locate N and obtain the relevant documents from him. BB only knew of N’s alleged possession when KO served his 6th affirmation in June 2023. Enforcement of other orders 20.As for the Garnishee Order over the dividends payable by OHL to KO, OHL has opposed the application on the basis that it is entitled to set‑off the entirety of the dividends against loans which had been made by OHL to KO. 21.In respect of AHK, the company is insolvent with net liabilities of HK $217,742,559, according to its financial statements for the year ended 31 December 2020. Whether just and convenient to make the receivership order 22.On the above bases, it is BB’s case that there are hindrances as well as difficulties in the normal process of execution of the Judgment, and the appointment of receivers is the only realistic prospect of enforcement. 23.Although it has not been possible to give an updated and accurate estimate of the value of the Artwork, it was valued at approximately HK$2.7 billion in 2014 and the value of the OFA Shares were worth over US$500 million in August 2021. As such, there is reasonable prospect that the appointment of receivers would assist in the enforcement of the Judgment. 24.The submissions made by Counsel for KO are that the appointment of receivers is unnecessary, and that there are no difficulties in the normal means of legal execution which cannot be overcome and which justify the appointment of receivers. 25.Having considered the evidence and the submissions made for BB, I accept that it has been shown that there have been practical difficulties and hindrances in the execution and enforcement of the Judgment in the usual course by the Charging Order, or the Garnishee Order. As Counsel for BB submitted, an applicant for the appointment of receivers does not have to establish the “necessity” of such an order, if the demands of justice make it convenient and appropriate for the Court to make the appointment, taking into consideration the hindrances and legal or practical difficulties faced by the judgment creditor in all the circumstances. In Cruz City v Unitech itself, the Court rejected the submission that an order for appointment of receivers can only be made if legal, as opposed to equitable, enforcement is “impossible”, or there exist some special circumstances which practically render it very difficult, if not impossible, for the judgment creditor to obtain the fruits of his judgment by other means. The Court pointed out that the jurisdiction is unconstrained by rigid expressions of principle and should be responsive to the demands of justice in the contemporary context. 26.In this case, OHL has disputed the dividends payable to KO and has asserted a substantial debt which has to be repaid first. The other shareholders of OHL are KO’s former wife, his son and his daughter, and there was litigation amongst the family members and KO in respect of the shareholding in OHL. On KO’s own case, he has been ousted from and lost control of OHL. It is practically unlikely and uncertain that a purchaser can be readily found, who would be prepared to buy the OHL shares in the light of the dispute over share ownership and the board’s refusal to register any transfer before the debt is discharged in full. 27.Although it is claimed that due to OHL’s 70% shareholding in UEC, a listed company, the value of the OHL shares is substantial and worth HK$6,668,199,074.22, it is nevertheless unrealistic to assume that any sale can be successfully concluded in the near future when no audited financial statements of OHL are available since the year ended 31 December 2015, and no information is known as to its liabilities. If a sale is to proceed on the basis of OHL’s unaudited management accounts, it is also probable that a large discount may have to be made in the price for the shares – and that would not be in the interests of either BB or KO himself. 28.This consideration applies with equal force to OFA: a sale of the OFA Shares or of OFA’s assets without full and up-to-date information as to the Artwork and its value, or as to OFA’s liabilities (if any), would not be in the best interests of KO. As Counsel for BB pointed out, if the value of the OFA Shares is indeed as substantial as HK$2.7 billion, there will be conceivable and practical difficulties in locating a willing purchaser with available funds to purchase the OFA Shares. With receivers appointed, they would be able to obtain the necessary financial information on the Artwork, take possession thereof, procure proper valuations, and engage auction houses to carry out the sales. The receivers would have the flexibility of selling the Artwork separately, or in bulk, and maximize the chances of successful realization of the assets of OFA. 29.Realistically, however valuable the OHL and OFA shares are, if in practice a purchaser cannot be found, because of the lack of relevant and necessary information or any other reason, that can be of no use or value to BB at all, in terms of the realization of the shares. 30.In considering whether it is just and convenient to grant the receivership order sought in this case, I have taken into account the nature of such an order. The position of a receiver has been explained in the authorities to which I have referred in my judgment in Chen Hongqing v Ma Jingtian and ors HCMP 962/2017, 27 June 2017, at paragraphs 42 to 44. These include the reference made in Mandarin Resources Corp Ltd v David Cheng Heng Soon CACV 146/1987, 28 April 1988 to Kerr on Receivers, where it was highlighted that the appointment of a receiver does not affect the right to the property over which he is appointed, and that the court takes possession of the property by its receiver, and the receiver’s position is that of all parties to the action according to their titles. The role of the receiver is to preserve the overall value of the shares until such time as the dispute has been resolved, and it is the duty of the receiver to exercise one or other of the particular rights which he has, in order to preserve the value of such shares. 31.In the decision of G Lam, J (as His Lordship then was) in Chen Hongqing v Zhang Caikui HCA 1661/2014, 20 May 2015, it was further highlighted that the risk of stigma is reduced in a case where receivers are appointed for a block of shares in an investment-holding company which has no business of its own. In his judgment, His Lordship noted:
32.At paragraph 33 of his judgment, His Lordship further highlighted the fact that receivers act independently of the parties and under the supervision of the court, and that they could see how best to exercise their rights, including voting rights in the shares, in a manner which is necessary to safeguard the investment and preserve the value of the shares and the interests of the beneficial owner of the shares. Directions may be sought from the Court, if and whenever necessary. 33.I bear in mind the fact that Chen Hongqing concerned the appointment of receivers in the interim of the determination of the proceedings, whereas in the present case, the appointment is sought after judgment has been entered against KO. 34.As summarized at paragraph 77 of this Court’s decision in Chen Hongqing v Ma Jingtian HCMP 962/2017, 27 June 2017, receivers appointed by the Court are not agents of the parties. As owners of the shares, the parties for whose benefit the receivership is to be appointed do not owe any fiduciary duty to the company. The parties, as shareholders, and the receivers in exercise of their rights as shareholders, are generally entitled to vote their shares in their own interests as they see appropriate (Éclairs Group Ltd v JKX Oil & Gas plc [2015] UKSC 71). This goes to address the submissions made by Counsel for KO as to the receivers being put in a position of conflict of interests. The receivers are empowered to vote the OFA Shares to appoint themselves, or their nominees, as directors for the purpose of obtaining financial information of OFA and for selling the Artwork in discharge of the Judgment debt. It cannot be in the interest of OFA in any event to assist KO to evade his liability under the Judgment, and to implicate OFA in litigation. Further, as Counsel for BB pointed out, the receivers can in any event be protected from any allegation of conflict of interests in their capacity as directors, if they disclose any conflicting interest to the company in general meeting and obtain the approval of the shareholders. Disposition 35.Having considered all the circumstances of this case, I accede to BB’s application for appointment of receivers by way of equitable execution over the OFA Shares. There will be an order in terms of the Summons of 4 January 2023, subject to the usual undertaking as to damages from BB. There is no reason to doubt the fitness and propriety of receivers to act as such. 36.The costs of the application are to be paid by KO to BB, with certificate for Counsel. Interim relief 37.In the skeleton submissions of Counsel for BB, an additional interim injunction was sought to restrain KO and OFA from dealing with the assets of OFA and from extending or renewing the term of the Bailment Agreement for the Artwork. At the conclusion of the hearing, I declined to grant any such interim relief, since they were not included in the application made by BB’s summons, and KO has not been given any reasonable opportunity to respond and to file evidence in opposition. Further, I was not persuaded that there was any urgency or necessity to grant the injunction to restrain the renewal or extension of the term of the Bailment Agreement. As pointed out by Counsel for KO, BB had known since 2020 at least that the Bailment Agreement would expire on 2 October 2023 but they had not considered it necessary to apply for any injunction. The Artwork has been safely in the custody of the Museum under the terms of the Bailment Agreement between OFA and UEC for 10 years, and there is no evidence that UEC or OFA would dissipate or sell the Artwork. Further, as pointed out by Counsel for KO, the term of the Bailment Agreement would have been automatically renewed in the absence of any prior notice or request for termination.
Mr Ambrose Ho SC and Mr Michael Ng, instructed by Kobre & Kim, Mr Law Man Chung SC and Mr Keith Chan, instructed by Ince & Co, | ||||||||||||||||||||||||||||||||
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