Borrower v. Lender

HCCT 146/2024

[2025] HKCFI 3197

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 146 OF 2024

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D E C I S I O N

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Background

1.On 22 November 2024, the Applicant issued the Originating Summons in these proceedings under section 81 of the Arbitration Ordinance (“Ordinance”) to set aside an award made in an arbitration in Hong Kong (“Arbitration”) issued on 22 August 2024 (“Award”). The grounds relied upon are that the Applicant was unable to present its case in the Arbitration, and/or the Award is contrary to public policy.

2.The Arbitration was commenced by the Respondent against the Applicant under a loan agreement dated 11 August 2021 (“Loan Agreement”) which was made between the parties, for a loan of HK$40 million to be extended by the Respondent to the Applicant for the purpose of a specified investment. The claims made against the Applicant in the Arbitration were for repayment of debt, breach of contract, fraudulent misrepresentation, breach of trust and unjust enrichment. The Applicant counterclaimed for breach of confidence.

3.After a contested hearing, the tribunal issued the Award, which allowed all the Respondent’s claims other than the one for unjust enrichment. The tribunal also allowed the counterclaim with an award of nominal damages.

4.On 12 December 2024, after the Applicant applied to set aside the Award, the Respondent issued its summons for security to be furnished, under Order 23 rule 1, Order 73 rule 10A RHC, section 905 of the Companies Ordinance (“section 905”) and the inherent jurisdiction of the Court, and for the proceedings to be stayed until security is furnished (“Security Summons”).

5.The Security Summons is resisted by the Applicant, on the basis that the Court has no jurisdiction as neither Order 23 nor section 905 is triggered, and that in any event, the Court should not exercise its discretion to order security against the Applicant.

Whether Order 23 RHC applies

6.Order 23 rule 1 RHC provides as follows:

“Where, on the application of a defendant to an action or other proceedings 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 proceedings as it thinks just.”

7.On the question of the jurisdiction of the Court to order security under Order 23 in proceedings relating to arbitrations, the matter has been considered and analyzed in detail by the Court in P1 v D [2024] HKCFI 3052, and followed by this Court in Y v G1 [2025] HKCFI 1317. As emphasized in P1 v D, there is the important distinction between the determination phase of the arbitral process and the challenge phase (see paragraph 3.2 of the judgment, with reference to the Court of Final Appeal decision in Xiamen Xinjingdi Group Co Ltd v Eton Properties Ltd (2020) 23 HKCFAR 348 at [118]-[119]).

8.Section 56 of the Ordinance, the restrictions contained in section 56(2)(a), and any discussions on the legislative intent of section 56, relate only to the powers exercisable by the tribunal in the determination stage, and does not affect the powers of the Court. The Departmental Advisory Committee on Arbitration Law (“DAC Report”) dated February 1996 and Hansard which discussed the English Arbitration Act 1996, and which are relied upon by Counsel for the Applicant, if at all relevant, referred to the powers of arbitral tribunals, and whether tribunals should be given the power to order security for costs in arbitral proceedings.

9.I have therefore not been persuaded by the “new materials” and the submissions made by Counsel for the Applicant in this case, to alter or depart from the views (as to the application of Order 23 rule 1 to proceedings made under the Ordinance) expressed in my earlier judgment of SA v BH (Arbitration: Security for Costs) [2024] HKCFI 1357, and Y v G1 following P1 v D.

10.In gist, the power of the Court to order security against a party seeking to oppose enforcement of an arbitral award serves the very purpose and is in line with the policy of assisting, recognizing and giving effect to the arbitral process and awards made under the consensual arbitral regime. It can only enhance Hong Kong as an arbitral centre and as a venue with a judiciary which supports arbitration and arbitral awards, rather than to weaken it, as Counsel for the Applicant claims, if the court should order security against an applicant who is resident outside Hong Kong and who seeks to challenge an arbitral award which it had agreed, by a consensual arbitration agreement, to be final and binding upon it.

11.As DHCJ Jonathan Wong explained in P1 v D (at para 3.32 of his judgment), there is no justification for creating a situation to make it easier for a party to challenge an award and, as a corollary, more onerous for a party to resist such a challenge.

12.Further, it is important to highlight that Order 23 rule 1 makes it clear that on an application made by a defendant for security for its costs of the proceedings, the fact that the plaintiff is “ordinarily resident out of the jurisdiction” is not by itself sufficient. Under the express provisions of Order 23 rule 1, it has to be established that the order for security is “just”, “having regard to all the circumstances of the case”. Accordingly, an order for security under Order 23 rule 1 is not made by the Court by virtue only of the fact that the plaintiff is ordinarily resident out of the jurisdiction. This is not inconsistent with the other provisions in the Ordinance on which emphasis was placed by Counsel for the Applicant, to highlight that any provision on security for costs in arbitration related proceedings as is contained in the Ordinance, namely section 7(5) of Schedule 2 (which only applies if parties opt for the Schedule), and section 56 (which governs the arbitral tribunal only) comprises a prohibition on the reliance on the fact only that the plaintiff is resident or incorporated outside Hong Kong.

13.Nor do I see the validity of the distinction made by Counsel for the Applicant, between security being ordered under section 86(4)(b) (or section 89(5)(b)) of the Ordinance, when enforcement of an award is opposed in Hong Kong on the basis of a setting aside application made to the supervisory court outside Hong Kong, and security being ordered for an application made to the Hong Kong Court under section 81 of the Ordinance to set aside an award made in Hong Kong. Counsel sought to justify security being ordered in the former case, for the purpose of avoiding delay in the enforcement proceedings, particular when leave for enforcement has already been granted by the Hong Kong Court. An application to set aside an award made in Hong Kong likewise delays the enforcement of an award which is supposed to be final and binding when made. An application to set aside is often followed by a cross-application from the other side to enforce the award. An order for security in the setting aside proceedings acts as a useful deterrence against unmeritorious applications to challenge an award on dubious grounds. Awards which are shown to be manifestly valid can be immediately enforced, without delay.

14.To conclude, the Court has the discretion and power under Order 23 RHC to order security in arbitration related proceedings, when it is just to do so.

Whether the discretionary power should be exercised

15.On the express provisions of Order 23 rule 1, and as established by the authorities, in deciding whether to order security for costs against a party, the Court takes into consideration all the circumstances of the case. These include: (1) the fact that the plaintiff against which security is sought is ordinarily resident out of the jurisdiction; (2) whether the plaintiff has assets within the jurisdiction against which any order for costs may be enforced; (3) the merits of the plaintiff’s case; and (4) any other factor which may make it unjust to order security (SA v BH [2024] 3 HKLRD 204, para 29).

16.Under section 905 of the Companies Ordinance, the court may require sufficient security to be given in an action or other legal proceedings and stay the proceedings in the interim, where a company is a plaintiff in the or proceedings, and:

“it appears, by credible testimony, to the court having jurisdiction in the matter that there is reason to believe the company will be unable to pay the defendant’s costs if the defendant succeeds in the defence.”

17.In this case, the Applicant seeking to set aside the Award disputes that it is ordinarily resident outside Hong Kong. It also claims that there is no factual basis for the Respondent to argue that the Applicant has no assets within the jurisdiction, or that there is any reason to believe that the Applicant would be unable to pay any adverse costs orders, whether to justify an order for security under Order 23 RHC, or section 905.

18.The Applicant claims, through the affirmations filed in these proceedings, that it is an ongoing company with assets in Hong Kong. Its assertions are that:

(1)  the Applicant’s place of business was in Hong Kong;

(2)  its correspondence address was an address in Hong Kong;

(3)  the Applicant’s “counterparties” were from Hong Kong;

(4)  its source of funds was from Hong Kong;

(5)  it had a bank account in Hong Kong;

(6)  the reason for establishing its bank account in Hong Kong was for investment here;

(7)  the “ultimate controller” of the Applicant was from Hong Kong;

(8)  the Hong Kong account opening documentation of the Applicant shows that there was a Hong Kong mobile telephone number for contact; the Applicant’s majority shareholder, ultimate owner, ultimate controller, director, authorized signatory and e-banking primary user was XXXXXX (“XX”) who had a Hong Kong permanent identity card, a Hong Kong residential address, and a fixed/long-term residence address in Hong Kong, with Hong Kong nationality.

19.On its part, the Respondent claims in its evidence that the Applicant is a company incorporated in the Cayman Islands, with a last known address there. The Loan Agreement dated 11 August 2021 which was the subject matter of dispute in the Arbitration, and under which the Arbitration was brought, stated that the Applicant’s address was in the Cayman Islands. The Amended Answer to the Notice of Arbitration (“NOA”) also stated, for the Applicant, that its contact address was in the Cayman Islands. The Respondent further relies on the fact that according to the ledger of the Applicant’s bank account produced as evidence in the Arbitration, its bank balance as at 25 August 2021 was 0, which is evidence that it has no funds or assets in Hong Kong.

The evidence of the Applicant

20.Counsel for the Respondent argued that the Applicant has not filed any satisfactory or admissible evidence to establish its case in opposition to the application for security. Although the Applicant sought at the hearing to rely upon two affirmations of XX, neither of them was ever signed, dated or notarized at all, despite the lapse of time from 22 November 2024, when XX’s first unsigned affirmation was exhibited to the affirmation filed by her solicitor, Y. In Y’s said affirmation, it was claimed that XX was then out of Hong Kong, and it had not been possible to procure her properly executed affirmation within the available time. Y stated in his affirmation that XX had confirmed to him that the contents of her affirmation were true and correct.

21.In a further affirmation made and filed on 14 February 2025, Y again exhibited an unsigned, undated and of course unnotarized affirmation of XX. It was still asserted that as XX was not in Hong Kong, it had not been possible to procure her properly executed affirmation within the time available.

22.In both Y’s affirmations, it was stated that the Applicant undertook to file and serve “properly executed and notarized versions” of XX’s affirmations “as soon as reasonably practicable in the same form as exhibited”.

23.Up to the time of the hearing on 30 May 2025, and to date, no signed affirmations of XX have been filed, despite the Applicant’s undertaking. The versions of XX’s affirmations, exhibited to Y’s two affirmations filed in November 2024 and February 2025, can only be described as draft affirmations, which have never been sworn or confirmed to be true. They have no value so far as reliability or credibility is concerned. This is particularly so bearing in mind that more than 5 months have expired from the time XX’s draft affirmation was exhibited to Y’s 1^st affirmation filed on 22 November 2024. No explanation whatsoever was given as to why it had not been possible for XX to properly execute her affirmations between November 2024 and May 2025. The only inference must be that she has refused to sign and affirm the contents of the draft prepared for her.

24.According to Y, the Applicant had undertaken to file and serve properly executed and notarized affirmations of XX. The fact that XX has not executed her affirmations for them to be filed demonstrates that what the Applicant claims cannot be believed, and that the Applicant’s assertions to her solicitors and to the Court are totally unreliable.

25.In the absence of any satisfactory explanation, and as Counsel for the Respondent highlighted, in the absence of any application made by the Applicant under Order 41 rule 4 RHC to admit the defective affirmations of XX, I see no reason why the Court should consider the contents of XX’s purported affirmations at all. They are not only of negligible weight, but are inadmissible (Top Flying Investment Ltd v Open Mission Assets Ltd [2006] 4 HKLRD 83 paras 30-32, Re張承勷HCB 6679/2015, 16 May 2017, paras 31-36).

The Respondent’s case for security

26.For the reasons set out below, I am satisfied that the Respondent has established a case for security for costs to be furnished by the Applicant.

Ordinary residence

27.As Counsel for the Respondent submitted, the test to be applied for deciding whether a company is ordinarily resident outside the jurisdiction, for the purposes of Order 23 rule 1 RHC, is by reference to the location of its central management and control. All the circumstances relating to the manner in which the company carries on its business should be taken into account (Hong Kong Civil Procedure 2025 para 23/3/4).

28.The Applicant is incorporated under the laws of the Cayman Islands. Its last known address is in the Cayman Islands, according to the Loan Agreement, and pertinently, according to the Applicant’s own statement as to its contact address in the Amended Answer to the NOA.

29.In deciding where the Applicant is located and operated, it is relevant to consider the nature of its business. According to the Statement of Defence and Counterclaim filed in the Arbitration on 21 April 2023, and also according to the Applicant’s Opening Statement filed in the Arbitration on 9 February 2024, the Applicant was described as being the General Manager of XXX, a Cayman Islands exempted limited partnership and whose registered office is in the Cayman Islands.

30.The sole shareholder, sole director, sole controller and ultimate beneficial owner of the Applicant is said to be XX. She was described in Y’s two affirmations to be not in Hong Kong - neither in November 2024, nor in February 2025. According to the draft affirmations Y exhibited, the address given for XX was in Beijing, on the Mainland. Any business or activity of the Applicant would be managed and conducted by XX outside Hong Kong.

Available assets/financial means

31.There is no evidence of the Applicant having any funds or assets in Hong Kong. The ledger of the bank account maintained by the Applicant in Hong Kong showed a transfer of HK$39,999,970 from its account to XX on 25 August 2021 (shortly after the date of the Loan Agreement for HK$40 million), and thereafter, a nil balance. Counsel for the Applicant alluded to the fact that there were other (redacted) transactions before and after 25 August 2021, but if they are relevant or helpful to the Applicant’s case, the Applicant did not choose to produce the unredacted versions. Nor has the Applicant chosen to adduce any other of its recent bank records to support any assertion that it has funds in its bank account, or any other account, or any other assets in Hong Kong. As Ms Lau SC for the Respondent pointed out, a defendant is not expected to produce conclusive evidence to establish the plaintiff’s lack of means for the purpose of an application for security for costs. It is sufficient if the defendant can point to credible evidence about the surrounding circumstances, and it is then for the plaintiff to adduce evidence to the contrary (Sun Hing Ginza Ltd v Chan Kai Yan [2022] 4 HKLRD 890). There is nothing in the present case from the Applicant.

32.Nor has the Applicant provided any evidence of its financial means.

33.Even if I should be wrong in rejecting XX’s evidence, and the contents of her draft, unsigned and unnotarized affirmations should be included in the Court’s assessment of the evidence in this case, I would add that her said affirmations have added nothing to support the assertions that the Applicant has assets, or the means, to pay the Respondent’s costs. There is nothing but a bare assertion in the draft affirmations of XX that the Applicant is an ongoing company, with assets in Hong Kong and on the Mainland. XX provided no particulars of the Applicant’s alleged assets, with no information as to their nature, or liquidity or precise value. No financial statements of the Applicant have been produced, and there was no explanation as to why the Applicant should be reticent in disclosing the financial and/or other relevant documents which can support the assertions made in the draft affirmations and summarized at paragraph 18 above (eg as to the Applicant’s source of funds, and its alleged investments and assets here).

34.If it is true that XX (as the controller and director or “central management” of the Applicant) is ordinarily resident in Hong Kong, it is also inexplicable why she could not have signed and duly made her affirmations here in the period of over 5 months which have elapsed from November 2024 to the date of the hearing in May 2025. She did not proffer any satisfactory explanation in the draft affirmations. XX did allude to her alleged concerns for her own personal safety as a reason for not attending the Arbitration in February 2024. Nevertheless, she had indicated a preference for physical attendance in Hong Kong in April and May 2024, despite, or to address the alleged risks (as she claimed that there was more security in Hong Kong than where she was allegedly located at the time to give evidence remotely). Her prolonged absence from Hong Kong is not consistent with her claim of being ordinarily resident here.

Conduct/difficulty in enforcement of costs order

35.On the Respondent’s case, it would be difficult to enforce any adverse costs orders against the Applicant, when the history of the Applicant’s conduct of the Arbitration and the unreasonable and uncooperative attitude and conduct of XX is considered.

36.The dates of the substantive hearing of the Arbitration had been fixed as early as in September 2023, to take place on 20, 22 and 23 February 2024, with closing submissions on 10 April 2024. There was then a chain of correspondence between the Applicant’s solicitors and the tribunal from January 2024, whereby the Applicant informed the tribunal and the Respondent that XX would not be able to attend the hearing on 23 February 2024 and 10 April 2024. The reasons given and the stance adopted by XX in the correspondence which followed were evolving. She claimed that she had been threatened by the Respondent or by triads, and there were safety concerns if she should give evidence remotely without safeguards such as covering her entire face and preventing her location to be identified on the camera. She preferred to physically attend the hearing in Hong Kong, but only in April and May 2024.

37.As Counsel for the Respondent pointed out, the safety concerns and religious reasons given by XX to justify her insistence on covering her face throughout her attendance at the hearing by video link was raised only for the first time on 15 February 2024. She was not able to satisfy the tribunal’s questions as to these unparticularized and unsubstantiated claims for the imposition of conditions on her remote attendance, and this ultimately led to the tribunal’s rejection of the Applicant’s request for adjournment of the hearing, and of the application made by the Applicant’s lawyers to adjourn the hearing of the Arbitration, on the basis that they were unable to obtain instructions from the Applicant. The Applicant’s legal representatives and XX failed to attend the hearings fixed on 20 and 22 February 2024, when the factual witness of the Respondent was scheduled to be called to give evidence and to be cross-examined.

38.The Applicant challenged the tribunal’s decision on the conduct of the hearing under sections 25 and 26 of the Ordinance, on the ground that its conduct gave rise to doubts as to its independence and/or impartiality, which challenge was rejected by the tribunal. The Applicant nevertheless refused to take further part in the Arbitration, and did not file any post-hearing submissions.

39.On behalf of the Respondent, it was argued that the Applicant/XX’s unreasonable conduct of the Arbitration, including its failure to meet a whole series of deadlines ordered by the tribunal in the course of the Arbitration, and the unreasonable conditions imposed by XX on her attendance for examination, all go to show that there is a serious risk that the Applicant and its controller would take all steps to defeat and unreasonably obstruct any enforcement action taken by the Respondent. The Respondent referred to the fact that the findings made against XX in the Award on the claims of fraudulent misrepresentation support the fact that XX is a person lacking in commercial morality, and add to the risk that the Applicant under its control would not abide by any costs orders adverse to the Applicant.

40.On the Applicant’s part, Counsel contended that the findings of fraudulent misrepresentation are the very ones which are sought to be challenged in the setting aside application, such that the Court should not give consideration thereto. In relation to the Respondent’s reliance on the Applicant’s failure to make payment of the deposit for the costs of the Arbitration, the Applicant claims that there are costs orders made in favour of XX and against the Respondent in related arbitration proceedings, which the Applicant is entitled to set off against its liability, and that the Applicant should not be considered to be obstructive or to have disregarded orders made against it. I have taken this submission of the Applicant into consideration in the balance.

The merits of the setting aside application

41.The merits of the case against the Applicant are, in my judgment, very relevant to the consideration of whether security should be ordered, but they should only be considered on a preliminary review. Borrowing the principles set out in Soleh Boneh International Ltd v Government of the Republic of Uganda [1993] 2 Lloyd’s Rep 208, referred to in X v Jemmy Chien [2019] HKCFI 2172 , the Court considers the strength of the argument that the Award is invalid, as perceived on a brief consideration by the court. Having thus considered the arguments and the evidence available, I certainly cannot conclude that the Award in this case is manifestly invalid.

42.Even if I should consider the facts in XX’s unsigned affirmations, the claims that the Applicant had been unable to present its case in the Arbitration are without merits.

43.As this Court already stated in CNG v G and G [2024] HKCFI 575 at para 67, the tribunal is the master of its procedures and has the full discretion to decide on the timetable for and on management of the arbitration. It is within the case management powers of the tribunal to decide, after hearing each party’s submissions, (1) the dates of the hearing, after having heard the parties as to their availability/unavailability and the reasons the parties, their witnesses and representatives cannot attend either physically, or remotely; (2) the manner of hearing the witnesses and the parties’ submissions; and (3) the venue for the hearing. A case management decision of the tribunal is not one which the Court should lightly interfere with, in the absence of what the Court can find to be a serious denial of justice (COG v ES [2023] HKCFI 294, para 17). It is not the function of the Court on an application to set aside the award to descend to a level of reviewing the minutiae of the procedure, in order to examine the correctness or otherwise of case management decisions and orders made by the tribunal, as it is obviously the tribunal which is in the best position to decide on the most appropriate and fair manner of proceeding with the arbitration in accordance with the principles of the Ordinance, and the time available to the parties, the legal representatives and members of the tribunal.

44.There is accordingly no basis for the Applicant to contend that it had been denied justice as a result of the tribunal’s refusal to accede to the Applicant’s request to adjourn or alter the dates previously fixed for hearing the witnesses in February 2024, or to agree to the manner sought to be imposed by XX for her attendance online for cross-examination (her insistence on covering her face throughout, allegedly for religious reasons, but refusing to disclose her religion, and her refusal to agree to a preliminary 360° viewing by camera of the room in which she was to give evidence). The tribunal was in the best position to consider and decide on the veracity of XX’s assertions as to her claims of security and religious reasons for covering her face, her excuses for not attending the hearing on the dates fixed to be cross-examined, and on her mental/health condition as alleged. There is no ground for the Court to intervene or interfere.

45.The refusal by the Applicant, XX and the Applicant’s legal representatives to attend the hearing in February 2024, and to make submissions in response to the Respondent’s submission that the Applicant had waived the right to cross-examine the Respondent’s witness on 22 February 2024, was a deliberate and conscious decision made by the Applicant and its representatives. Having decided not to attend the hearing of the Arbitration, to examine the Respondent’s witness, to respond to the Respondent’s submission that the Applicant had waived the right to cross-examine the Respondent’s witness, or to make submissions to the tribunal on the merits of the claims made in the Arbitration, it lies ill in their mouth for the Applicant, XX or its legal representatives now to argue and assert that they had been unable to present their case. On the evidence, they had given up the right and reasonable opportunity afforded to them to present their case to the tribunal.

46.The application to set aside the Award on the ground of public policy is on the basis that the Applicant had been deprived of a fair trial, and that the tribunal had discriminated against XX on religious grounds by not allowing her to cover her face during the hearing. On the available evidence as to the Applicant’s decision not to attend the hearing, there is no basis to allege that it would be contrary to public policy to allow enforcement of the Award. The Applicant and XX failed to give particulars to the tribunal on XX’s religion, leading the tribunal to reject her request as unparticularized and no doubt ingenuous. Again, I fail to see how it can be said to be shocking to this Court’s conscience to enforce the Award.

Conclusion

47.To conclude, I am satisfied on the evidence before the Court, and in the light of all the circumstances of the case, that it would be just to order security to be furnished by the Applicant for the Respondent’s costs, as I am satisfied that there is reason to believe that the Applicant will be unable to pay the Respondent’s costs, and that there is a serious risk that the Respondent will not be able to enforce any costs order which may be made against the Applicant in this case.

48.Adopting a broad-brush approach, I order security to be provided in the sum of HK$1.5 million, in terms of paragraphs 1 to 4 of the Security Summons with paragraph 3 amended to provide for the dismissal of the Originating Summons without further notice, if security is not provided in accordance with the order. On the face of the Respondent’s costs breakdown, there is a great deal of duplication in the work already done, and the work envisaged to be further required on the Originating Summons. I do not accept that much further evidence is required, and the anticipated hours to be spent are exaggerated.

49.The costs order on the Security Summons is for such costs to be paid by the Applicant to the Respondent, to be summarily assessed, with certificate for two Counsel. The Applicant is given leave to file and serve within 7 days its statement of objections to the statement of costs filed by the Respondent.