Y and Another v. Gi and Another

HCCT 117/2024

[2025] HKCFI 1317

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 117 OF 2024

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BETWEEN

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REASONS FOR DECISION

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Background

1.By an originating summons dated 4 October 2024, the Plaintiffs applied under section 81(1)  of the Arbitration Ordinance, to set aside the Final Award dated 15 May 2024 and the Corrigendum to the Final Award dated 24 September 2024  (“Award”)  made by an arbitral tribunal (“Tribunal”)  in the consolidated arbitration proceedings administered by the Hong Kong International Arbitration Centre (“Arbitration”), on the ground that the Award is in conflict with the public policy in Hong Kong.

2.On 13 December 2024, the 1^st Defendant applied under Order 23 rule 1 RHC and section 905 of the Companies Ordinance for security to be furnished by the Plaintiffs in respect of the 1^st Defendant’s costs in the action, in the sum of HK$3,664,770, which was revised later to HK$3,560,500.

3.The application for security was made on the basis that the Plaintiffs are both ordinarily resident in the Mainland, with their central management and control outside Hong Kong; that there is evidence to show that the XXXXXXXXX GroupX of which the Plaintiffs both form part is in serious financial difficulties, and that substantial difficulties would be encountered if and when the 1^st Defendant has cause to enforce any costs orders which may be made against the Plaintiffs in these proceedings. As such, the 1^st Defendant claims that this is a case where it would be just for the Court to exercise its discretion to order security to be furnished by the Plaintiffs.

4.At the conclusion of the hearing on 11 March 2025, I ordered security for costs to be provided by the Plaintiffs, in the sum of HK$2 million. I now give the reasons for my decision.

5.The 1^st Plaintiff, 2^nd Plaintiff and 2^nd Defendant are all companies within the XXXX Group, which carries on retailing business on the Mainland. The 1^st Plaintiff is a subsidiary of XXXXXXXXXXXXXXXX Listco X which is listed on the Shenzhen Stock Exchange.

6.The parties entered into a series of agreements, being: (1)  a Bond Instrument dated 30 December 2020, signed by the 2^nd Defendant, the 1^st Plaintiff and the 1^st Defendant (“Bond Instrument”); (2)  a Promissory Note dated 30 December 2020 issued by the 2^nd Defendant to the 1^st Defendant (“Promissory Note”); and (3)  a Call Option Agreement dated 29 December 2020 made between the 1^st Defendant, the 1^st Plaintiff and the 2^nd Plaintiff (“COA”).

7.As narrated by the 1^st Defendant, it had agreed to invest into the Group, by way of US$100,000,000 8% secured guaranteed exchangeable bonds issued by the 2^nd Defendant (“Bonds”), with an option granted under the COA for the 1^st Defendant to exchange the Bonds for shares in the 2^nd Plaintiff held by the 1^st Plaintiff (“Exchange Right”). The 1^st Defendant was entitled to exercise the Exchange Right so long as the Bonds remain outstanding. Upon the 1^st Defendant’s exercise of the Exchange Right, the 2^nd Defendant would be obligated to pay to the 1^st Defendant the corresponding amount of principal and interest outstanding under the Bonds, pursuant to the Promissory Note issued by the 2^nd Defendant. At the same time, the 1^st and 2^nd Plaintiffs would be obligated to take steps to transfer to the 1^st Defendant a corresponding amount of shares in the 2^nd Plaintiff (“Shares”).

8.The consideration for the Shares to be transferred was to be paid by the 1^st Defendant to the 1^st Plaintiff in cash but in the event that the 2^nd Defendant should fail to pay to the 1^st Defendant any amount due under the Promissory Note, the COA provides that the 1^st Defendant would have the right to issue a “Set-off Notice”, upon which the 1^st Plaintiff was obliged to waive the purchase price in the amount outstanding to the 1^st Defendant under the Promissory Note, and the 1^st Defendant shall be deemed to have paid the full purchase price for the Shares (the so-called “Set-off Mechanism”).

9.The terms of the relevant agreements as summarized above by the 1^st Defendant are not disputed in these proceedings.

10.Disputes arose when the 2^nd Defendant began defaulting on its obligation to pay interest on the Bonds, as a result of which the 1^st Defendant issued exchange notices to convert the Bonds into Shares of the 2^nd Plaintiff. The 1^st Defendant commenced the Arbitration against the XXXXXXX (the Plaintiffs herein and the 2^nd Defendant), claiming that the Plaintiffs were in breach of the Bond Instrument, the COA and the Promissory Note, in that the 1^st Plaintiff and the 2^nd Plaintiff had failed to effect the transfer of Shares to the 1^st Defendant, the 2^nd Defendant had failed to pay the amount due and payable by it under the Promissory Note to the 1^st Defendant, and the 1^st Plaintiff had failed to procure the 2^nd Defendant to make such payment to the 1^st Defendant.

11.By way of defence, the Plaintiffs as respondents claimed in the Arbitration that the Set-off Mechanism is unenforceable under PRC law. According to the Plaintiffs, the Set-off Mechanism was an impermissible “joinder of debt” under PRC law which is the governing law of the relevant agreements, and an appropriation of the assets of Listco or its subsidiaries (summarized by the 1^st Defendant as the “PRC Illegality Defence”).

12.The Tribunal dismissed all the defences raised by the respondents in the Arbitration, and by the Award, the 2^nd Defendant was ordered to pay to the 1^st Defendant a total sum of US$111,475,737 due under the Bond Instrument and the Promissory Note, with interest, and the Plaintiffs were ordered to effect the transfer of the Shares to the 1^st Defendant.

13.The Award included an order that upon performance of the orders for the Plaintiffs to effect transfer of the Shares to the 1^st Defendant, the 1^st Defendant should make payment of the purchase price for the Shares, in respect of the 1^st exchange, in the sum of US$30 million and in respect of the 2^nd exchange, the sum of US$70 million. Pertinently, the Award included a declaration that the amount of any Set-off Notice which the 1^st Defendant is entitled to exercise under the COA is US$30 million in respect of the 1^st exchange, and US$70 million in respect of the 2^nd exchange. Such orders were made pursuant to the express provisions of the COA and the 1^st Defendant’s rights and entitlement thereunder.

14.In their opposition to this application for security for costs, the only submissions made for the Plaintiffs are that the 1^st Defendant is liable under the Award to pay the purchase price for the Shares, of US$100 million, which sum exceeds the revised amount of security sought by the 1^st Defendant in these proceedings, of HK$3,560,500. It was argued that in view of the Plaintiffs’ entitlement to the purchase price under the Award, it is not just or fair to order any further security to the 1^st Defendant. The submissions made for the Plaintiffs set out and analyzed authorities which support their claim to a legal and/or equitable set-off, on the basis of their right to the purchase price, in answer to any liability which the Plaintiffs may have against the 1^st Defendant in respect of security for costs.

Applicable legal principles

15.So far as the legal principles applicable to the determination of the present application are concerned, there is no dispute raised.

16.As held in P1 v D (Arbitration: Security for Costs) [2024] 5 HKLRD 699, Order 23 rule 1 RHC applies to an application made to the Court under section 81 of the Arbitration Ordinance to set aside an arbitral award. In his reasoned and carefully analyzed decision, which I fully endorse, Deputy High Court Judge Jonathan Wong explained that it would be against the policy of Hong Kong which is to support both the arbitral process and arbitral awards, to create an environment whereby challenge of an arbitral award would be made easier or more accessible, by disapplying ordinary security for costs principles.

17.The circumstances under which the Court may order the plaintiff in an action to give security for the defendant’s costs of the action is set out under Order 23, rule 1(1), which provides that:

“Where, on the application of a defendant to an action or other proceeding in the Court of First Instance, it appears to the Court —

(a)  that the plaintiff is ordinarily resident out of the jurisdiction,

…

then if, having regard to all the circumstances of the case, the Court thinks it just to do so, it may order the plaintiff to give such security for the defendant’s costs of the action or other proceeding as it thinks just.”

18.The general and applicable principles for the grant of security for costs under Order 23 rule 1 have been summarized in Crane World Asia Pte Ltd v Hontrade Engineering Ltd, HCA 109/2014, 5 May 2016 at paras 7 and 8:

(1)  Generally security will be ordered where a foreign plaintiff is involved. However, there is no inflexible rule and the court has a real discretion under Order 23.

(2)  The court has to consider a host of factors in the exercise of its discretion and will order security only if it is just to do so.

(3)  Parties should not attempt to go into the merits of the case unless it can be clearly demonstrated that there is a high degree of probability of success or failure.

(4)  Though there is no inflexible rule, as a matter of discretion, it is the usual practice of the court to require the foreign plaintiff to give security for costs, because it is ordinarily just to do so. After all, if the defendant succeeds and gets an order for his costs, it is not right that he should have to go to a foreign country to enforce the order.  Hong Kong Civil Procedure 2016, Vol 1, §23/3/4, p 553; Montgomery Ward & Co Inc v Evergo Trading Co Ltd & anor [1996] HKEC 305, Nazareth VP.

19.In Edward Walecki v The General Fiduciary Company Ltd [2020] HKCFI 2921, Queeny Au-Yeung J summarized at para 17 and 18 the Court’s approach when ordering a plaintiff to provide security for costs:

“17. The legal principles are not in dispute. The Court has complete discretion whether to order security or not. It must carry out a balancing exercise, weighing the injustice to the plaintiff for being prevented from pursing a proper claim by an order for security, against the injustice to the defendant if the defendant finds itself unable to recover costs from the foreign plaintiff in due course. Wing Hing Provision, Wine and Spirits Trading Co Ltd v Hanjin Shipping Co Ltd [1998] 4 HKC 461.

18. In general,

(1)  Where a plaintiff is ordinarily resident out of jurisdiction and has no fixed assets in Hong Kong, the court would be inclined towards making an order for security for costs.

(2)  Unless it can be clearly demonstrated that the plaintiff has a high degree of probability of success, the practice of going into the merits of the case in a security application is to be deplored.

(3)  Where the plaintiff asserts that an order for security would stifle his claim, the burden is on him to demonstrate that it is more likely than not that funds are not available from any source (whether from him, through commercial borrowing or from other backers)  to provide security.

(4)  The court has unfettered discretion to order such amount of security as it thinks just taking into account all the circumstances of the case and adopting a “broad-brush” approach instead of a line by line evaluation of the bill of costs.

See Hannelore De Lasala-Debring v Ernest Ferdinand Perez De La Sala (HCMP 1029/2013, 8 July 2015)  §§5-13, B Chu J; Bart Willem Jozef Bost v Jerry Teng Mei Sheng, HCCW 141/2007, 20 June 2011, §33, Barma J (as he then was). Po Hio Chua v Hang Seng Bank Ltd, CACV 146/2008, 23 September 2008, CA.”

20.Under section 905 of the Companies Ordinance, which is also relied upon in the 1^st Defendant’s application for security, the Court can order security if a company is a plaintiff in an action and it appears to the court, on credible testimony, that there is reason to believe that the company will be unable to pay the defendant’s costs if the defendant succeeds in its defence. “Company” includes one which is incorporated outside Hong Kong (section 905(3)(b)).

21.The 1^st Defendant referred to T&T Global Trading Ltd v BOE (HK)  Group Co Ltd [2022] 4 HKLRD 234, and the following observation made by the Court of Appeal (at para 12 (5)):

“…. by the very nature of the application and the relationship between the parties, the defendant cannot be expected to produce conclusive evidence of the plaintiff's lack of means. It has no access to the plaintiff's books of account or other evidence. Nor is it desirable to mount a comprehensive discovery process for the purpose of making such an application. It is therefore sufficient for the defendant to point to the surrounding circumstances or adduce some credible evidence in support of his belief that the plaintiff will be unable to pay the defendant's costs. It is then up to the plaintiff to adduce such evidence as he thinks fit to demonstrate his means or to contradict the defendant's evidence. The Court shall decide whether a reasonable person with ordinary experience of daily life would consider the plaintiff unable to pay such costs. The threshold is just one of adducing credible evidence for the belief and falls short of proof of lack of means to pay.” (emphasis added)

22.The Plaintiffs’ case in opposition to security is that if the Plaintiffs fail in the setting aside application, they will comply with the Award, under which the 1^st Defendant will be required to pay the 1^st Plaintiff the purchase price of US$100,000,000, which clearly exceeds the quantum of security for costs sought.

23.If a plaintiff in an action has sufficient and available assets to meet any order for costs, then the Court would usually not order security for costs. The Plaintiffs rely on Azov Shipping Co v Baltic Shipping Co (No 2) [1999] 1 All ER (Comm)  716, where Longmore J (as His Lordship then was)  observed at 718j-719c:

“… I am however guided in particular by the provisions of s 1(a)  of the 1996 Act, which provides: ‘The object of arbitration is to obtain the fair resolution of disputes by an impartial tribunal without unnecessary delay or expense.’ It seems to me to follow from this that cases will be rare in which a court or indeed an arbitrator would think it right to order security for costs if an applicant for relief has sufficient assets to meet any order for costs and if those assets are available for satisfaction of any such order for costs. In this case it is therefore relevant for me to enquire whetherAzov have assets which are available for the satisfaction of anyjudgment as to costs. If Azov does have such assets, then I would notbe inclined to make any order for security; whereas, if it does not havesuch assets or if such assets are not readily available to satisfy anycourt order, I would be inclined to make an order for security.” (emphasis added)

On behalf of the 1^st Defendant, Counsel pointed out that the above observations were made in the context of the Arbitration Act, section 70 of which makes provision for security which are totally different to those relevant to Hong Kong.

24.The Plaintiffs further rely on HWH Holdings Limited v Stephenson Harwood (A Firm) [2025] HKCA 193, in which Godfrey Lam JA observed at para 14, in the context of whether to grant security for costs in an appeal to the Court of Appeal, that:

“It is not in dispute that where an appellant has substantial assets in Hong Kong in excess of the potential liability for costs, an order for security for costs will ordinarily not be made.”

25.It is with the above legal principles in mind that the 1^st Defendant’s application for security is considered.

Whether security should be ordered

Residence outside Hong Kong

26.There is no doubt that the Plaintiffs in this case are resident outside Hong Kong. The registered office address of the 1^st Plaintiff is in Shenzhen, and it is registered under the Shenzhen Administration for Market Regulation. There is evidence that its central management and control is located on the Mainland. It is a subsidiary of Listco on the Mainland. The executive director/general manager and legal representative of the 1^st Plaintiff is resident in Nanjing. The 1^st Plaintiff’s principal place of business (according to Listco’s Annual Report for 2023)  is in Shenzhen. Its business is developing e-commerce technology and IT related services, with all its subsidiaries operating in the Mainland. The 1^st Plaintiff is not registered under Part 16 of the Companies Ordinance.

27.The 2^nd Plaintiff, a subsidiary of the 1^st Plaintiff, has its headquarters in Nanjing. It is registered under the Nanjing Administration for Market Regulation and, like the 1^st Plaintiff, is not registered under Part 16 of the Companies Ordinance. Its majority shareholder is the 1^st Plaintiff which has the effective control over the 2^nd Plaintiff. Its primary operation is in the Mainland.

Whether set-off/assets available in Hong Kong

28.Apart from the claim made of their entitlement to the purchase price for the Shares, there is no other suggestion that either Plaintiffs have any assets in Hong Kong.

29.As to the claim that the Plaintiffs are entitled to the purchase price which is payable upon the transfer of the Shares to the 1^st Defendant, the immediate answer is that the Award expressly provides for the 1^st Defendant’s entitlement to the contractual Set-off Mechanism provided for in the COA. This enables the 1^st Defendant to set-off the amounts due under the Promissory Note against the purchase price payable for the Shares to be transferred. In such event, the COA provides that the 1^st Plaintiff would waive the purchase price and the 1^st Defendant “shall be deemed to have paid the purchase price in full”. Under the Set-off Mechanism which is permitted and acknowledged in the Award, the Plaintiffs will not be receiving the purchase price when the 1^st Defendant exercises its contractual set-off.

30.On the face of the Award and the declaration made in paragraph 550(j), no sum at all will be due from the 1^st Defendant to the Plaintiffs for the transfer of the Shares, when the 1^st Defendant exercises the Set-off Mechanism. The Award expressly acknowledges this and quantifies the amount which the 1^st Defendant is entitled to set-off, in the total sum of US$100 million. The Plaintiffs’ argument, that even if they are or remain liable to the 1^st Defendant under the Award, they are entitled to claim a set-off for the purchase price payable, cannot assist them on the evidence in this case.

31.The 1^st Defendant has highlighted that under the Award, the 2^nd Defendant and the 1^st Plaintiff are held liable to the 1^st Defendant for payment of the total sum of US$111,475,737 with interest, being the total amount held to be due under the Bond and the Promissory Note. According to the 1^st Defendant, interest accrued on US$111,475,737 is in the region of US$20.6 million.

32.The amount which the 1^st Defendant is ordered to pay to the 1^st Plaintiff for the Shares is US$100 million, which is stated to be payable upon the Plaintiffs’ performance of the orders for their transfer of the Shares to the 1^st Defendant - and not before any such transfer, as emphasized by Mr Manzoni. There is no amount due and payable for the Plaintiffs’ alleged set-off, or asset, without the transfer.

33.In any event, the figures in the Award show that even if the 1^st Defendant does not exercise the Set-off Mechanism, the amount of US$120 million/US$130 million (inclusive of interest)  due to the 1^st Defendant exceeds the amount of US$100 million payable by the 1^st Defendant to the 1^st Plaintiff, and the costs incurred by the 1^st Defendant are not capable of being set-off.

34.According to Mr Manzoni, if there was any asset of the 1^st Plaintiff arising from any debt due to it, it can at most be a receivable due to the 1^st Plaintiff on the Mainland from the 2^nd Defendant. On the whole, the facts of this case do not show that any debt due from the 1^st Defendant, a Singapore company, can constitute assets of the 1^st Plaintiff in Hong Kong.

Risks, inability to pay and difficulties of enforcement 

35.The 1^st Defendant claims that the Plaintiffs have a history of non-compliance with their contractual obligations, including their obligation to pay fees and deposits relating to the Arbitration and the costs awarded. The 1^st Defendant emphasized the fact that the Tribunal expressly referred in the Award to the Plaintiffs’ “unreasonable conduct” in the Arbitration, and that the Plaintiffs’ case had “meandered widely as they have sought to muddy the waters, injecting complication and delay into (the Arbitration)”.

36.As part of the evidence that enforcement of orders and awards against the Plaintiffs would have to take place out of the jurisdiction and would be subject to delay, difficulties and additional costs, the 1^st Defendant claims that in July 2021, the Supreme People’s Court on the Mainland had issued a Consolidation Notice in respect of the Group. The effect of the Consolidation Notice is to centralize all proceedings and enforcement actions against the entities in the Group which might be faced with a large number of debt claims, and to protect the struggling business of the Group. The designated Court on the Mainland can consolidate all cases relating to the Group, align the creditors involved, and assist the Group to reach a settlement with its creditors. On the 1^st Defendant’s case, significant delays are accordingly probable in any legal including enforcement proceedings on the Mainland against entities in the Group.

37.The Plaintiffs have not adduced any evidence to explain why the Consolidation Notice was issued, if Listco is truly financially sound, as it suggests. The Consolidation Notice would appear to support the 1^st Defendant’s claim, that the Group is facing a large number of claims on the Mainland, and that enforcement against the Plaintiffs would be subject to delay and difficulties on the Mainland.

Merits of the setting aside application

38.Finally, on the question of the merits of the setting aside application before this Court, it seems clear without going into detailed arguments that the application has little prospect of success. The only ground relied upon is that the Set-off Mechanism in effect allows a connected person of Listco, the 2^nd Defendant, to appropriate the Shares which are assets of Listco or its subsidiaries, to discharge the liabilities of the 2^nd Defendant and without the 1^st Plaintiff receiving any payment. According to the Plaintiffs, that is contrary to the public policy of Hong Kong, as being “in breach of the spirit of the Hong Kong Listing Rules” which require disclosures to be made of dealings with connected persons of a company listed in Hong Kong, and approval of shareholders to be obtained. The Plaintiffs contend that to recognize and enforce the Award in such circumstances would be unjust and shocking.

39.The Hong Kong Listing Rules do not apply to, or have effect on Listco (allegedly connected with the 2^nd Defendant), which is listed in Shenzhen, and not Hong Kong. Moreover, the aspects of the Set-off Mechanism which are said to be unjust to the 1^st Plaintiff in depriving it of payment of the purchase price for the Shares were all agreed to and accepted by all the parties to the COA. The Tribunal rejected all claims made that there is any illegality under the applicable PRC law.

40.I agree with Mr Manzoni, that it is difficult to see how there can be a breach of Hong Kong public policy on the facts of this case, bearing in mind the fact that both Plaintiffs and the 2^nd Defendant had, by choice, voluntarily agreed to the contractual provisions of the COA and the Promissory Note and the Set-off Mechanism provided thereunder in their agreement with the 1^st Defendant. It has to be borne in mind that it is also an important public policy of Hong Kong to recognize and enforce contracts, arbitration agreements and arbitral awards.

Disposition

41.Having considered all the relevant circumstances of this case, I allowed the 1^st Defendant’s application for security for costs and made order to such effect at the conclusion of the hearing. On broad brush approach, the amount ordered as security for the reasonable costs of the 1^st Defendant was assessed at $2 million. The application was allowed with costs, to be summarily assessed. There will be certificate for one Counsel.

Mr Frederick HF Chan, instructed by Nixon Peabody CWL, for the 1^st & 2^nd plaintiffs

Mr Charles Manzoni SC and Mr Martin Ho, instructed by Clifford Chance, for the 1^st defendant