Gdh Ltd v. Creditor Co Ltd and Others

HCA 1462/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1462 OF 2006

_____________

BETWEEN 

____________

Before: Deputy High Court Judge To in Chambers (Open to Public)

Dates of Hearing: 26 and 27 August 2008

Date of Decision: 24 October 2008

_______________

D E C I S I O N

_______________

INTRODUCTION

1.This is the hearing of an application by the 2^nd and 4^th Defendants by counterclaim and a similar application by the 3^rd Defendant by counterclaim to set aside the service of the counterclaim on them out of the jurisdiction.  The 2^nd to 4^th Defendants are collectively referred to as the “French Banks”.  The Plaintiff by counterclaim, Creditor Co Limited (“CreditorCo”), is the Defendant by original action.  The Plaintiff by original action and the 1^st Defendant by counterclaim is GDH Limited (“GDH”).  In addition, there is an application by GDH to restore an Order 14A summons for direction issued against CreditorCo.  That application has been adjourned sine die for the parties to agree to the directions to be sought after the determination of the French Banks’ applications.

The background to the Debt Restructuring Agreement

2.Guangdong Enterprises (Holdings) Limited (“GDE”) is a large investment company of the Guangdong Provincial Government (“GPG”) with about 250 subsidiary companies (“GDE Group”).  One of its subsidiaries is a private company incorporated in France called GD Invest SARL (“GDI”).  In 1992, GDI entered into an agreement, called “Credit Bail Immobilier”, with the French Banks for financing the acquisition of a hotel in Paris.  That agreement was effectively a lease and purchase agreement under which the French Banks acquired the hotel and leased it to GDI, with an option for GDI to purchase the hotel after a fixed period of time.  During the currency of the lease, GDI would make rental payment to the French Banks.  GDI would be liable in penalty if the lease was terminated prematurely.  Credit Bail Immobilier was governed by French law.  It was an entirely French transaction entered into in France among French parties.  GDI’s liability under the Credit Bail Immobilier was guaranteed by GDE under a First Demand Guarantee dated 21 July 1992 (“GDI Guarantee”).

3.In late 1998, the GDE Group defaulted on payment of their debts which totalled approximately US$4.9 billion.  The debt included contingent liabilities guaranteed by members of the GDE Group, which included GDE’s contingent liability to the French Banks under the GDI Guarantee.  The GDE Group’s creditors included approximately 170 banks and bondholders, along with trade and other debtors.  The borrowings of the GDE Group had been used to fund investments, mainly in Hong Kong, the People’s Republic of China (“the PRC”) and Macau, which were of doubtful value and would be difficult to recover.  It is common ground that there was considerable impropriety which led to the financial collapse of the GDE Group.  The PRC authorities feared that a failure to restructure the GDE Group would have adverse impact on foreign lending into China and on the Hong Kong banking sector.  The GPG was also keen to avoid any investigation into the circumstances leading to the collapse of the GDE Group which such formal liquidation procedures of the GDE Group or any of its subsidiaries would bring. 

4.Against that background, the GPG, the GDE Group and their creditors entered into negotiation for a restructuring arrangement.  Under the arrangement, the GPG and its wholly owned company, GDH agreed to contribute to the pool of assets to be made available for distribution to the creditors of those members of the GDE Group which were being restructured.  Those assets included US$2 billion of debt arising from the privatisation of the Dongshen Water Project which supplied water to Hong Kong, shares in the equity of the privatised company and US$80 million cash (“Restructuring Consideration”).  During the negotiation, it was envisaged that the creditors would be entitled to share in the Restructuring Consideration pari passu.  Failure by a creditor to agree to the restructuring arrangement and the ensuing claim procedure would mean that it would be unable to benefit from the additional assets made available by the GPG.

5.In October 2000, after two years of negotiation, the GPG exerted pressure on all the parties to finalise the restructuring arrangement by the end of the year on the basis that no financial provision would be available for the restructuring in the following year.  It was only then that the procedure for dealing with contingent and unascertained creditors’ claims was worked out, which included GDE’s contingent liability under the GDI Guarantee.  As a result, the Debt Restructuring Agreement (“DRA”) was finalised at breakneck pace.  It was signed on 22 December 2000 among, inter alia, CreditorCo, GDH, the French Banks and other named parties.  However, not all the related companies of GDE were restructured under the DRA.  In particular, GDI was not one of the restructuring companies. 

The Debt Restructuring Agreement and Claims Procedure

6.The DRA runs to 84 pages and 27 schedules with 41 pages of signatories.  Under the DRA, the Restructuring Consideration contributed by GPGwas transferred to and held by CreditorCo.  All claims would be assessed by the claims assessor, Messrs PricewaterhouseCoopers (“PwC”).  To the extent relevant to these proceedings, part of the Restructuring Consideration was to be held as “General Reserve D” specifically designated for unadmitted unsecured restructuring claims.  Within the constraint of time, it was not possible to assess the amount of unadmitted unsecured restructuring claims which were either contingent or unascertained liabilities at the time of signing of the DRA.  The assessment of the size of those liabilities was made by GDH and PwC.  Due to pressure of time, the liability to the French Banks was assessed on the basis of a worst case scenario, including default penalty for early determination of the Credit Bail Immobilier which would not normally be included in a liquidation claim.  US$15.5 million was set aside from the Restructuring Consideration for the purpose of meeting the French Banks’ claim of approximately US$23 million.  In fact, the maximum amount outstanding on the loan at that time, excluding the default penalties, was only about US$13 million.

7.The claims procedure is set out in clause 10.1 of and Schedule 14 to the DRA. Under the Claims Procedure, a creditor, described as an “Accepting Creditor” in the DRA, would file a proof of claim.  Such proofs had to be filed on or prior to 31 March 2002.  The creditor would try to agree the amount of claim with PwC and the agreed amount would be distributed to the creditor.  If there was a difference between the amount originally reserved and the amount actually distributed to that creditor, that difference would be transferred to General Reserve D for the benefit of all creditors.  If the holder of an unadmitted unsecured restructuring claim did not submit a proof of claim on or prior to 31 March 2002, the Restructuring Consideration reserved for such a claim would be transferred to GDH and might be distributed at the discretion of GDH to the creditor with the unadmitted unsecured restructuring claim or otherwise applied by GDH for its own use and benefit, pursuant to clause 10.1(c) of the DRA. 

8.Where the guarantor was a restructuring company but the primary obligor was not (“Unrelated Guarantee Claim”), the creditor had the further choice of assigning its claim against the primary obligor to CreditorCo and proving for the entire amount in its proof of claim.

9.There is no dispute that the French Banks acceded to the DRA because of GDE’s liability under the GDI Guarantee but that liability was a contingent one and the amount was not admitted.  The French Banks were therefore treated as unsecured contingent creditors for the purpose of the restructuring, a list of which had been provided by Goldman Sachs, who represented the GPG in the restructuring arrangement.  Their claims were classified under the DRA as Unrelated Guarantee Claims because the claims were based on a guarantee where the guarantor is a company involved in the restructuring, i.e. GDE, but the primary obligor, i.e. GDI, is not. 

The French Banks Agreement

10.The 2^nd Defendant played a leading role among the French Banks in relation to the DRA.  On 5 March 2002, GDH approached the 2^nd Defendant by a strictly private and confidential letter and sought to discuss with them about a possible immediate settlement of the obligations of GDI.  GDH insisted that the French Banks should not submit a proof of claim as required by the Claims Procedure.  On 8 March 2002, GDH’s solicitors, Messrs Richards Butler, wrote to the French Banks threatening that if a proof of claim was presented, GDH would reconsider whether or not to make payments under the hotel lease agreement.  There were further discussions between GDH and the French Banks.  On 14 March 2002, Messrs Richards Butler stipulated that the French Banks should not, inter alia, engage in any discussion with any one of the other creditors, CreditorCo, Creditor Management Co, PwC, the claims controller or with any other person who would be likely to prevent GDH from receiving the sums for Restructuring Consideration. 

11.On 22 March 2002, James Law of PwC met with the French Banks and their legal advisers, during which James Law gave a presentation of the Claims Procedure under the DRA.  PwC’s purpose of the meeting was to ensure the French Banks abided by the Claims Procedure by submitting a proof of claim or to submit a nil proof of claim so that the provisions for the liabilities to the French Banks in the Restructuring Consideration could be made available to other creditors.

12.After further discussions among the parties, the French Banks reached agreement with GDI and GDH on 27 March 2002 (“French Banks Agreement”).  Under that agreement, GDI was to bring forward its purchase of the hotel from the French Banks under the Credit Bail Immobilier and GDH would pay the purchase price on behalf of GDI in an amount calculated as representing the indexation applicable to the building and the increase on the residual value of the hotel.  As security for the premature termination of the hotel lease and the purchase price, GDH would make an immediate payment of Euro 3.5 million to the French Banks.  In return, the French Banks agreed that they would not submit any proof of claim under the DRA.  In so agreeing, the French Banks disentitled themselves from receiving Restructuring Consideration under the DRA in respect of their entitlements arising under the GDI Guarantee.  Effectively, the French Banks reached a compromise with their primary obligor, GDI, which was not being restructured, that GDI would arrange for the early discharge of its obligations via GDH.  Having so compromised their claim with GDI, the French Banks had no reason to claim under the DRA and did not file any proof of claim.  By this arrangement, GPG was able to claw back US$15.5 million from the Restructuring Consideration set aside for the French Banks’ claims and make a saving of about US$10 million.

The original action and counterclaim

13.CreditorCo took the view that the French Banks had entered into a side deal with GDH and refused to return to GDH the US$15.5 million from the Restructuring Consideration set aside for the French Banks.  Then GDH commenced the original action against CreditorCo for breach of the DRA.  CreditorCo denied it was in breach of the DRA and commenced action by counterclaim against GDH and the French Banks.  CreditorCo relies on a cause of action in contract and another cause of action in tort against the French Banks.  The cause of action in contract is premised on the fact that the French Banks were parties to the DRA and that having settled their claims with GDH were in breach of expressed or implied terms of the DRA by failing to submit a nil proof of claim to PwC under the Claims Procedure.  Had the French Banks submitted a nil proof of claim, it would enable the US$15.5 million in General Reserve D set aside for the French Banks’ claim to be distributed to the other creditors on pari passu basis.  Thus, the French Banks subjected CreditorCo to GDH’s claim for return of US$15.5 million of its Restructuring Consideration.  Secondly, CreditorCo alleges that by entering into the French Banks Agreement and by not submitting any proof of claim under the DRA, the French Banks conspired with GDH to use unlawful means to injure CreditorCo, the unlawful means being the breach of the DRA.  In addition, CreditorCo also seeks rectification of the Creditor Accession Agreement dated 20 December 2000 based on mistake in the amount of the 3^rd Defendant’s loan.  But this remedy is not relevant for the purpose of the 3^rd Defendant’s application.

14.On 11 June 2007, Master J Wong granted leave to CreditorCo under Order 11 rule 1(1)(c), 1(1)(d)(i) and 1(1)(f) of the Rules of the High Court (“RHC”) to file and serve the counterclaim on the French Banks out of the jurisdiction.  The French Banks now seek, among other things, to set aside the above order of Master J Wong.

15.The French Banks’ central argument is that the restructuring arrangement was entirely contractual and the liquidation principles and pari passu distribution have no application to the DRA.  They claim that they have an option under the DRA to submit a nil proof of claim on or prior to 31 March 2002 with the result that the surplus of the Restructuring Consideration set aside for the French Banks over the assessed amount of the claims would be released for distribution among other creditors or not to submit any proof of claim with the result that the entire amount of the Restructuring Consideration set aside for the French Banks would be returned to GDH in accordance with clause 10.1(c) of the DRA.  Hence, the French Banks were not in breach of the DRA and were not liable in conspiracy.  They also rely on other technical defences.

The legal principles applicable to an application for setting aside the service out of the jurisdiction under Order 12 rule 8 of the Rules of the High Court

16.The principles and procedures governing the grant of leave for service of a writ out of the jurisdiction and of setting aside such service are prescribed in Orders 11 and 12 of the RHC and are very well settled.  A plaintiff seeking to serve a writ out of the jurisdiction has to apply for leave by way of an ex parte application.  He has to show firstly that he has a good arguable case that his case falls within one of the subparagraphs of Order 11 rule 1(1) so as to give the court jurisdiction to consider the application.  An arguable case is not sufficient: see Hong Kong Civil Procedure 2008, para 11/1/8 and A J Lucas (Hong Kong) Limited and Drilltec Gut GmbH Grossbohrund Umwelttechnik, HCCT No 36 of 2005, per Burrell J.  Though the court will not require proof to its satisfaction, it will require something better than a mere prima facie case.  This is a high threshold.  The court has no discretion to exercise any jurisdiction if this threshold is not achieved: see The Brabo [1949] AC 326.  Where questions of facts are concerned, the court looks primarily at the plaintiff’s case and relies on the plaintiff’s duty of full and complete disclosure at the ex parte stage. 

17.Once the court is satisfied that it has jurisdiction under one of the subparagraphs of Order 11 rule 1(1), it shall conduct an examination of the merits.  It has to be satisfied that there is a serious issue to be tried both as to merits (if not already decided under the first stage) and as to forum conveniens before exercising its discretion to grant leave to serve the writ out of the jurisdiction.  This is the lower degree of proof required to enable it to exercise its discretion to grant leave: see Seaconsar Far East Ltd and Bank Markazi Jomhouri Islami Iran [1993] 3 WLR 756.

18.A defendant served with a writ out of the jurisdiction who disputes the court’s jurisdiction may apply by way of an inter parte application to set aside the service under Order 12 rule 8.  The parties may file affidavits in support of or in opposition to the application to set aside the service.  To resist an application to set aside the service out of the jurisdiction, the plaintiff has to show a good arguable case that his case falls within one of the subparagraphs of Order 11 rule 1(1) and that there is a serious issue to be tried.  But he is not required to discharge the same high standard of proof as applicable at trial or at the ex parte stage.  The court will not resolve disputes of facts on affidavit.  The question whether the plaintiff has shown a good arguable case is to be decided primarily by reference to the plaintiff’s evidence: Tay Chao Wah & Another v Singapore-Johore Express (Pte) Ltd [1992] 1 HKLR 19.  The court will weigh the arguments on both sides.  A “good arguable case” reflects that one side has a much better argument on the material available.  It is the concept of the court being satisfied, or as satisfied as it can be having regard to the limitations which an interlocutory process imposes, that factors exist which allow it to take jurisdiction: Hong Kong Civil Procedure, para 11/4/9. 

19.If the plaintiff succeeds in proving a serious issue to be tried, the defendant who seeks to set aside the service has to assume the more onerous burden of showing that the plaintiff’s claim is liable to be struck out.  A similar approach was adopted by Recorder Yu in Ren Yun Liang & Others and China Merchants Bank Company Limited, HCA 1456/2005, unreported.  The court at interlocutory hearing will not enter summary judgment nor dismiss or strike out a claim if there is an arguable case on the facts or in law.  The court will not resolve disputed questions of fact on affidavit.  Thus, the court will be extremely cautious before striking out a claim if it does not have all the relevant facts or if the issues of fact may be interwoven with legal issues, or is in any way fact sensitive, or if the case raises an arguable point of law or if the principles of law are not fully settled: see Allen and Gulf Oil Refining Ltd [1981] AC 1001.  In this sense, a serious issue to be tried imposes a higher threshold on the defendant to prove the lack of one than on the plaintiff to prove there is one.

20.If, on balance, the court is not satisfied that the plaintiff has shown a good arguable case that his case falls within one of the subparagraphs of Order 11 rule 1(1) and a serious issue to be tried or if the court is satisfied that the plaintiff’s case is bound to fail on the merits, the leave granted at the ex parte stage will be set aside.  In the instant case, there are no significant material factual disputes between the parties.  The factual allegations of the parties are consistent with one another.  For reasons as I shall explain below, there cannot be any doubt that CreditorCo’s counterclaim falls within subparagraphs (1)(c), (1)(d)(i) and (1)(f) of Order 11 rule 1.  Furthermore, it is not the French Banks’ contention that CreditorCo failed to discharge the burden of showing a serious issue to be tried.  The question is whether the French Banks have discharged the burden of showing CreditorCo’s counterclaim is so devoid of merit to the extent that the counterclaim should be struck out and hence the service of the writ ought to be set aside.

Legal principles applicable to an application for stay of proceedings on jurisdictional ground

21.Apart from challenging the service of the writ as aforesaid, a defendant, who does not wish to dispute jurisdiction or who has failed to have the service set aside, may apply for stay of the proceedings under the court’s inherent jurisdiction.  The principles applicable to an application for stay of proceedings has been clearly set out by the House of Lords in Spiliada Maritime Corporation and Cansulex Ltd [1986] 3 WLR 972.  Spiliada was applied by the Court of Appeal in Hong Kong in The Adhiguna Meranti And Adhiguna Harapan and others [1987] HKLR 904 in which Hunter JA set out a three stage approach at 907F-908B, summarising the effect of Spiliada:

(1)         Is it shown that Hong Kong is not only not the natural or appropriate forum for the trial, but that there is another available forum which is clearly or distinctly more appropriate than Hong Kong.  The evidential burden here lies upon the applicant, i.e. the defendant. 

(2)         If the answer to (1) is yes, will a trial at this other forum deprive the plaintiff of any ‘legitimate personal or juridical advantages’?  The evidential burden here lies upon the plaintiff.

(3)         If the answer to (2) is yes, the court has to balance the advantages of (1) against the disadvantages of (2): see Abidin Daver per Lord Brandon at p. 419.  The burden is on the defendant to establish that on balance the other forum is more suitable ‘for the interests of all the parties and the ends of justice’.”

22.Though the French Banks have applied for a stay of proceedings in the event that they fail to have the service set aside, no argument has been advanced by Mr Manzoni, counsel for the 2^nd and 4^th Defendants by counterclaim, or Mr Chan, counsel for the 3^rd Defendant by counterclaim, that Hong Kong is not only not the natural or appropriate forum for the trial, but that there is another available forum which is clearly or distinctly more appropriate than Hong Kong.  I consider that application has effectively been abandoned.  

23.The bone of contention between CreditorCo and the French Banks is whether the French Banks have shown that there is no serious issue to be tried in respect of CreditorCo’s counterclaim.

Order 11 rule 1(1)(c) - necessary or proper party ground

24.Rule 1(1)(c) permits service out of the jurisdiction if the claim, or in this case the counterclaim, is brought against a person duly served within or out of the jurisdiction and a person out of the jurisdiction is a necessary or proper party.  In the original action, GDH sued CreditorCo for breach of the DRA by failing to transfer the Restructuring Consideration set aside for the French Banks to GDH.  CreditorCo denied it was in breach and averred that on the true and proper construction of the DRA the French Banks and GDH had breached the DRA and counterclaimed against GDH and the French Banks for breach of the DRA and for conspiracy.  Without going into the merit as to the proper construction of the DRA, it is plainly obvious that common questions of fact and law arise in the claim and counterclaim.  CreditorCo’s case by counterclaim against GDH as well as that against the French Banks is founded on the same set of facts, namely the parties’ obligation under the DRA, the making of the French Banks Agreement between GDI, GDH and the French Banks and all surrounding circumstances.  The central issue as between all the parties is what is the true and proper construction of the DRA. 

25.CreditorCo is entitled to bring a counterclaim against GDH under Order 15 rule 2 without the need to bring a cross action.  Likewise, it must also be entitled to bring a counterclaim against the French Banks, if they were within the jurisdiction, under Order 15 rule 3 as any other person who is liable to CreditorCo along with the GDH in respect of the subject matter of the counterclaim on the basis that they are the other parties to the French Banks Agreement which is relied on by CreditorCo as breach of the DRA and conspiracy.

26.The court has a duty under section 16(2) of the High Court Ordinance to exercise its jurisdiction in every cause or matter before it so as to secure, as far as possible, that all matters in dispute between the parties are completely and finally determined and all multiplicity of legal proceedings with respect to any of those matters is avoided.  The legislative intent behind the section is the avoidance of all multiplicity of legal proceedings: see McGowan v Middleton (1883) 11 QBD 464. 

27.Not only that the French Banks have not given any good reasons why the issues between the French Banks and CreditorCo could not be conveniently disposed of together, it is only too obvious that serious disadvantages may arise if the action against the French Banks and the action against GDH are allowed to proceed concurrently in two different jurisdictions.  There will be the risk of inconsistent judgments; the risk of injustice to the parties since neither court would have the full picture nor all the evidence; and unnecessary duplication in time, costs and evidence: see The Abidin Daver [1984] 1 AC 398.  In addition, as there is an allegation of conspiracy or secret agreement, separate trials are particularly inappropriate: see Donohue v Armco Inc and others [2002] 1 All ER 749.  Separate trials will be a potential disaster from a legal point of view.

28.The description “necessary or proper party” encompasses a wide and elastic class of person: see The Eras Eil Actions [1992] 1 LL 570.   It includes persons who can be described in general terms by looking at Order 15 rule 6(2)(b).  It includes persons who ought to have been joined by the plaintiff as co-defendant or co-plaintiff or whose presence before the court is otherwise necessary.  It includes even persons against whom the plaintiff may wish to claim no relief so long as he is a person between whom and any party to the cause or matter there may exist a question or issue arising out of or relating to or connected with any relief or remedy claimed in the cause or matter which in the opinion of the court it would be just and convenient to determine as between him and that party as well as between the parties to the cause of matter.  When common questions of law or fact arise and a person could have been joined under Order 15 rule 4, that person is a proper party: see United Film Distribution v Chhabria [2001] 2 All Ern Comm 865.

29.Not only that there are common questions of fact and law involved in the claim and counterclaim, the counterclaim is clearly an integral part of the defence.  It is just and convenient that CreditorCo’s counterclaim against the French Banks and GDH should be determined once and for all in the same proceedings.  The French Banks are clearly necessary and proper parties to the action.  I am well satisfied that CreditorCo has shown a good arguable case that its case falls within Order 11 rule 1(1)(c).

Order 11 rule 1(1)(d)(i) - contract made within the jurisdiction

30.CreditorCo also seeks to rely on Order 11 rule 1(d)(i) as one of the grounds for service out of the jurisdiction.  Its contention is that the DRA was a contract made in Hong Kong and the counterclaims against the French Banks are claims brought to enforce or otherwise affect a contract or to recover damages for breach of contract made in Hong Kong.

31.Mr Manzoni’s argument, which Mr Chan also adopts, is that there were 41 pages of signatories to the DRA including numerous overseas parties and it is impossible to show that the DRA was made in Hong Kong.  Since the DRA was entered into by numerous parties all over the world, the fact that some of the parties might have signed the DRA elsewhere other than in Hong Kong is of little significance.  There is no dispute that the DRA was negotiated between parties, most of whom were located in Hong Kong.  Hong Kong was the geographical centre of the restructuring negotiations.  The French Banks signed the DRA by their agents in Hong Kong under powers of attorney executed in France.  By all indications, the DRA was concluded in Hong Kong. 

32.Mr Chan advanced the further argument that the 3^rd Defendant was not involved in the negotiation of the terms of the DRA at all; that it was only brought in at a very late stage to sign the DRA and that the DRA was not signed by the 3^rd Defendant but by its agent in Hong Kong under a power of attorney executed in France.  But, there is no dispute that the DRA was signed by a duly authorised agent of the 3^rd Defendant in Hong Kong.  The fact that the 3^rd Defendant did not take part in the negotiation and that the power of attorney giving authority to its agent to sign the DRA was executed in France are totally irrelevant.  I dismiss such argument as nebulous.  I am satisfied that the Court has jurisdiction to grant leave to serve the counterclaim out of the jurisdiction under Order 11 rule 1(1)(d).

Order 11 rule 1(1)(f) - tort causing damage within the jurisdiction

33.Order 11 rule 1(1)(f) permits service out of the jurisdiction in respect of a claim founded on a tort and the damage was sustained, or resulted from an act committed, within the jurisdiction.  Two conditions must be satisfied: a tort was committed and the damage was sustained in Hong Kong or resulted from an act committed here.  Where the tort involved international elements, the double actionability rule applies: see Kuwait Oil Tanker Co SAK and another v Al Bader and others [2000] 2 All ER (Comm) 271.  To obtain leave for service out of the jurisdiction under this subparagraph, the plaintiff must show that the tort complained of was of such a character that it would have been actionable if committed within the jurisdiction and the act must not have been justifiable by the law of the place where it was done.

34.CreditorCo’s case on the conspiracy claim is based on the entry into the French Banks Agreement which was executed in France and governed by French law.  The French Banks contend that it is incumbent on CreditorCo to show that such acts would be actionable under the law of France and that CreditorCo has failed to show a good arguable case that the tort of conspiracy as alleged falls within rule 1(1)(f).  In addition, Mr Manzoni further submits that an applicant seeking leave to serve a writ out of the jurisdiction under this rule bears the burden of adducing evidence on foreign law and may not rely on the presumption that foreign law is the same as local law. 

35.With respect, that proposition is neither founded upon authority nor hallowed by practice.  In fact, I find it absurd that a party can rely on the presumption at trial but not at pre-trial or interlocutory proceedings.  In Kuwait Oil Tanker Co SAK and another v Al Bader and others [2000] 2 All ER (Comm) 271 at 336, Nourse LJ said at paragraph 184:

“Since English courts proceed on the basis of a presumption that foreign law is the same as English law unless the contrary is proved as a fact, it seems clear that, whether or not the claimant incorporates in his pleading an averment that the matters relied on are civilly actionable under the lex loci delicti, the burden in practice lies upon the defendant to plead and prove that his conduct was not actionable under the lex loci delicti.  That being so, the debate appears to be a somewhat arid one.”

Thus, in practice, the burden is upon a defendant to plead and prove that its conduct is not actionable under the lex loci delicti.  Otherwise, the court applies the well-known presumption that foreign law is the same as local law unless the contrary is proved as a fact.  This rule and practice of pleading must apply equally in an application for leave under Order 11.  To hold otherwise would render the presumption, which undoubtedly applies in substantive trial, inapplicable during pre-trial proceedings.  That would render the presumption nugatory and cannot be right.  Hence, in my view, the burden is on the French Banks to prove by expert evidence that the conspiracy counterclaim is not actionable under the lex loci delicti or how French law differs, if at all, from Hong Kong law.  The French Banks have utterly failed in discharging the burden of proof.  The presumption therefore applies.

36.Furthermore, under Hong Kong law, damage is an essential ingredient of the tort of conspiracy: see Clerk and Lindsell on Torts (19^th Ed 2006) para 25-137.  Thus, on CreditorCo’s case, Hong Kong law is the lex loci delicti and the tort was completed and damage suffered in Hong Kong where CreditorCo is based.  Arguably, the principle of double actionability has no application and does not undermine CreditorCo’s case for leave to serve the counterclaim out of the jurisdiction under Order 11 rule 1(1)(f).

37.Thus, howsoever, CreditorCo’s case is considered, it has at least shown a good arguable case that the conspiracy claim falls within rule 1(1)(f) for grant of leave for service out of the jurisdiction. 

The issue

38.The primary dispute between the parties is whether the Restructuring Consideration set aside to meet the French Banks’ contingent claim should be transferred to GDH or be retained by CreditorCo for distribution on a pari passu basis to all GDE creditors, other than the French Banks who did not submit any proof of claim. 

39.CreditorCo’s contractual counterclaim is based on breach of express or implied terms of the DRA.  In particular, it relies on paragraph (I) of the preamble, clause 10.1(a), paragraphs 1, 2 and 59 of Schedule 14 as containing the express terms which were breached by the French Banks.  It is CreditorCo’s contention that on a true and proper construction of the DRA, clause 10.1(a) and paragraphs 1 and 2 of Schedule 14 impose an obligation on the French Banks to submit their claims to PwC and be bound by the Claims Procedure set out in Schedule 14.  Furthermore, Mr Chua SC, counsel for CreditorCo, submits that if there is arguable ambiguity on the true and proper construction of the DRA it is not appropriate for summary determination.

40.On the other hand, Mr Manzoni relies on clause 10.1(c) which provides for the event of a creditor not submitting a proof of claim on or prior to 31 March 2002.  He argues that clause 10.1(a) is to be construed as giving the French Banks an option or a right to submit a proof of claim and to share in the Restructuring Consideration.  Hence, he submits that only if the French Banks submit a proof of claim would they be bound by the Claims Procedure in Schedule 14, but they were free not to submit any proof of claim or a nil proof of claim.  The effect, according to Mr Manzoni, is that if the French Banks submitted a proof of claim, albeit a nil one, the part of the Restructuring Consideration set aside for the French Banks would fall into the pool for distribution by creditors, but if the French Banks did not submit a proof of claim, that part of the Restructuring Consideration would have to be returned to GPG or GDH.

41.Thus, the issue is what is the true and proper construction of the DRA, in particular clause 10.1(c), or more precisely, whether the French Banks have shown that the construction as contended by CreditorCo is so unarguable that its counterclaim ought to be struck out. 

The relevant provisions of the Debt Restructuring Agreement

42.The parties’ argument revolved around the following provisions of the DRA: paragraph (I) of the preamble; clause 1which provides for the definitions of the various terms used in the DRA; clause 10.1 which provides for the Claims Procedure and paragraphs 1, 2 and 59 of Schedule 14 which are the Rules of the Claims Procedure.  These provisions are set out below.  The critical terms relied on by counsel are set out in italic and bold prints.

43.Paragraph (I) of the preamble reads:

“(I) Accepting Creditors agree to accept Restructuring Consideration in exchange for their Unsecured Restructuring Claims and Secured Restructuring Claims on the terms and conditions set out in this Agreement and the Exchange Offer Memorandum.”

Clause 1 of the DRA provides:

“1.1     Definitions

In this Agreement:

…

“Claimant”

means any Person making a claim pursuant to Clause      10.1 (Claims Procedure) and Schedule 14.”

Clause 10.1 of the DRA provides:

“10.1   Claims Procedure

(a)          Subject to paragraph (e), Accepting Bank Creditors and Other Creditors and any other Person who accedes to this Agreement agree to the submission to the Claims Procedure of their Secured Restructuring Claims and Unadmitted Unsecured Restructuring Claims and the Secured Restructuring Claims and Unadmitted Unsecured Restructuring Claims of all other Accepting Creditors and Additional Creditor Claims.

(b)               …

(c)               If a holder of an Unadmitted Unsecured Restructuring Claim has not submitted a Proof of Claim (as defined in the Claims Procedure) in respect of such claim in accordance with the Claims Procedure on or prior to 31^st March, 2002 the Restructuring Consideration transferred to CreditorCo in respect of such Unadmitted Unsecured Restructuring Claim and all accretions thereon shall be transferred to GDH and, save as otherwise agreed between GDE and GDH, may be distributed at the discretion of GDH to the Accepting Creditor with the Unadmitted Unsecured Restructuring Claim or otherwise applied by GDH for its own use and benefit. 

(d)                 …

(e)               An Accepting Creditor may institute or continue judicial or arbitration proceedings solely for the purpose of establishing the validity or amount of an Unadmitted Unsecured Restructuring Claim except that no such proceedings may be instituted or continued against a Restructuring Company in respect of an Unrelated Guarantee Claim.  Nothing in this paragraph (e) shall prejudice or affect the right of an Accepting Creditor to enforce its rights against a primary obligor that is not a Restructuring Company if such Accepting Creditor has the benefit of an Unrelated Guarantee Claim.”

Paragraphs 1, 2 and 3 of Schedule 14 provide:

1.  Without prejudice to any other rights under Clause 10.1 (Claims Procedure) of this Agreement, Accepting Creditors (other than Exchanging Noteholders) and any other Person who accedes to this Agreement agree to submit to, and be bound by, the Claims Procedure set out in this Schedule 14 in respect of their claims.

2.   Claimants shall submit a proof of claim (a “Proof of Claim”) in the form of, or substantially in the form of the Proof of Claim form attached …  Claimants with an Unrelated Guarantee Claim shall submit a Proof of Claim in the form of, or substantially in the form of, the Proof of Claim form attached as Exhibit B …  The Proof of Claim shall be sent to: …

3.   (i)    A claim must be in writing, substantiated if need be by written evidence supporting the claim which, on a balance of probabilities test, would be accepted as proof of a claim in a winding up of a Hong Kong company by the court in Hong Kong.  …

(ii) … but if a holder of an Unadmitted Unsecured Restructuring Claim has not submitted a Proof of Claim (as defined in the Claims Procedure) in respect of such claim in accordance with the Claims Procedure on or prior to 31^st March, 2002 the Restructuring Consideration transferred to CreditorCo in respect of such Unadmitted Unsecured Restructuring Claim shall be transferred to GDH and, save as otherwise agreed between GDE and GDH, may be distributed at the discretion of GDH to the Accepting Creditor with the Unadmitted Unsecured Restructuring Claim or otherwise applied by GDH for its own use and benefit.”

Paragraph 59 of Schedule 14 provides:

“59.     Interpretation

In any case of doubt as to the meaning or effect of these Rules they shall be interpreted as if:

(a) the relevant GDE Group Company or Nam Yue Group Company against which the claim is made was being wound up by the court in Hong Kong commencing on the GDE Standstill Date or the Nam Yue Standstill Date, as the case may be);

(b) the claims were proofs of debt; and

(c) the Independent Assessor was a liquidator of a company being wound up by the court.”

The true and proper construction of the Debt Restructuring Agreement

44.The principles applicable to construction of document or contract are very well settled.  The leading case is Investor’s Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 897 at 912 to 913.  Interpretation of a contract is the ascertainment of the meaning which the contract would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.  It is not the same as interpretation of the meaning of the words used in the contract. 

45.Mr Chua SC emphasises the importance of construing a contract against its factual matrix rather than purely on internal linguistic consideration.  The factual matrix includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.  It does not usually include evidence of negotiations and mere subjective intent since the proposed terms may have changed in the course of the negotiation.  It includes the factual background known to the parties, the genesis of the transaction, its aim or commercial purpose and the market at the time of the contract. 

46.Mr Chua SC also refers to the legal background that the restructuring arrangement under the DRA is essentially a notional liquidation.  It is a fundamental principle of insolvency law that an insolvent company’s assets should be distributed pari passu among creditors of the same class.  Any payment or distribution to creditors of the same class which is not pari passu is contrary to public policy.  He refers to Lord Cross’ dicta in British EagleInternational Air Lines Ltd and Compagnie Nationale Air France [1975] 1 WLR 758 at 780H:

“In such a context it is to my mind irrelevant that the parties to the “clearing house” arrangements had good business reasons for entering into them and did not direct their minds to the question how the arrangements might be affected by the insolvency of one or more of the parties.  Such a “contracting out” must, to my mind, be contrary to public policy.”

47.Mr Chua SC also relies on the following dicta In re Bank of Credit And Commerce International SA (No. 8) [1998] AC 214 at 223D-F:

“There can be no set-off of claims by third parties, even with their consent.  To do so would be to allow parties by agreement to subvert the fundamental principle of pari passu distribution of the insolvent company’s assets: See British Eagle International Airlines Ltd v Compagnie Nationale Air France.” 

48.Mr Chua SC also emphasises the importance of giving the DRA a purposive construction.  A contract must be construed as a whole and with common sense.  The court is unlikely to hold that an interpretation accords with the parties’ intention if a construction is contrary to common sense.  In that regard, in construing a commercial contract, the court will favour a commercially sensible construction for such an approach is more likely to give effect to the intention of reasonable commercial men: see Mannai Investment Co Ltd And Eagle Star Life Assurance Co Ltd [1997] AC 749 at 771B.  Counsel have no dispute about these principles.  Their difference lies in the conclusion to be drawn from the application of these principles to the facts of the present case. 

49.Adopting these principles, CreditorCo argues that the restructuring arrangement as equivalent to a liquidation or a notional liquidation.  Hence, it takes the view that the normal liquidation principles of pari passu distribution of assets should be the basis and understanding of how the Restructuring Consideration ought to be distributed and seeks, in the alternative, to imply terms to give effect to that proposition.  The French Banks do not accept that contention.  They take the position that the restructuring arrangement was entirely contractual in nature and the pari passu principle of distribution of assets on liquidation has no place in construing the DRA.  They argue that clause 10(1)(c) of the DRA has express terms which deal with the circumstances which have occurred and that those terms should be applied and there is no room for implying any other terms which would alter the effect of the express terms.  With these principles and the parties’ respective positions in mind, I turn to consider the true construction of the DRA.

50.Mr Chua SC refers me to the preamble and clause 10.1(a) of the DRA which respectively state that the Accepting Creditors “agree to accept the Restructuring Consideration” and “agree to the submission to the Claims Procedure.”  He also refers to paragraphs 1 and 2 of Schedule 14 which respectively provides that the Accepting Creditors “agree to submit to, and be bound by, the Claims Procedure” and “shall submit a Proof of Claim”.  He emphasises on the use of the mandatory term “shall submit a Proof of Claim” in paragraph 2 of Schedule 14.  He submits that this is strong and clear language that the French Banks were obliged to submit a proof of claim.  He also submits that all provisions including Schedule 14 are integral part of the DRA and no particular provision is to take priority. 

51.On the other hand, Mr Manzoni submits that Clause 10.1(c) unequivocally prescribes for the transfer of the Restructuring Consideration to GDH in the event of a creditor not submitting a proof of claim.  This provision is reproduced in identical terms in paragraph 3 of Schedule 14.  In introducing these provisions, the parties must recognise an Accepting Creditor’s liberty not to submit a proof of claim.  Hence, he submits that what is mandatory under paragraph 2 of Schedule 14 relates to the form to be used in submitting the proof of claim, i.e. Exhibit A or Exhibit B as appropriate.

52.On the factual background, there is no dispute that the GDE Group suffered a financial collapse involving considerable amount of impropriety and the GPG was keen to restructure the GDE Group so as to avoid formal investigation into the circumstances leading to the collapse of the GDE Group.  The basic theme of the restructuring was that the remaining businesses of the GDE Group would be reorganised with the GPG making available additional assets by way of the Restructuring Consideration for rateable distribution to creditors of the GDE Group.  After two years of negotiation and towards the end of October 2000, the GPG required that the entire restructuring be completed in the calendar year 2000 on the basis that the provision was in the GPG’s budget for 2000 but not for the following year.  Hence, the DRA was concluded at a breakneck pace.

53.Even against that background, I am quite unable to agree that the purpose of the DRA was a notional liquidation so that the pari passu principles applies regardless of the express provisions of the DRA.  Firstly, there is the very important distinction between the present case and an ordinary liquidation in that the shareholder of the GDE Group contributed additional and very substantial assets in the form of Restructuring Consideration to bring about the restructuring.  The Restructuring Consideration is an additional asset outside the pool of assets belonging to the members of the GDE Group to be restructured.  Secondly, the liabilities which the present action relates were unascertained and unadmitted contingent liability under the GDI Guarantee in respect of the liability of a primary obligor, which is a non-restructuring company, i.e. GDI.  Even according to the affidavit filed on behalf of CreditorCo made by Mr Sterling of Allen & Overy in the United Kingdom, who presumably had significant input in the drafting of the DRA, there is a difference between the restructuring arrangement under the DRA and an ordinary liquidation.  Mr Sterling accepted that the restructuring arrangement under the DRA is a negotiated arrangement, which is different in effect from an ordinary liquidation.  He also recognised the significance that under the negotiated arrangement, the shareholder, i.e. GPG, contributed additional assets to the pool of assets to be made available for distribution to creditors.  Hence, he said that explained the difference in approach between an ordinary liquidation and the negotiated arrangement when a creditor failed to file a proof of claim.  Mr Sterling said in paragraph 28 of his affidavit:

“28.   Clause 10(1)(c) of the DRA was a negotiated provision.  Its intention and effect is to provide the finality which would otherwise be lacking because of the absence of formal liquidation proceedings.  Its commercial effect is, however, different from the finality which would be achieved through a final dividend notice or a bar date because in the latter situation, if a creditor does not prove its claim, all other creditors benefit rateably from the failure to prove by that particular creditor, whereas under the finality mechanism under Clause 10(1)(c) it is the shareholder which benefits from the failure to prove.  GDH was a new company established by GPG for the purposes of the restructuring.”

54.Thus, in effect Mr Sterling agreed with Mr Manzoni that the restructuring arrangement under the DRA is a contractual liquidation rather than a notional liquidation in that it was a negotiated arrangement in which the shareholder, who effectively is a third party, contributed additional and significant assets to the pool of assets to be made available for distribution to creditors.  Mr Sterling also agreed that under the restructuring arrangement, unlike an ordinary liquidation, where a creditor did not prove its claim, the asset was to be returned to the shareholder, i.e. GPG or GDH, and not for pari passu distribution among the other creditors.  In my view, the factual background does not support any intention that the pari passu principle is to apply under all circumstances.  In fact that had all along been the position of PwC.  On 7 March 2002, PwC wrote to the French Banks as follows:

“If you believe that you will receive full repayment from the primary obligor and will therefore not need to claim under the guarantee we would still ask you to complete a form with “Nil” shown as a claim amount.  Once a nil form is received by us the restructuring consideration previously set aside in Reserved D for your bank can be released to all financial creditors (to be distributed at a later date to all HKPropertyCo shareholders).  Should you not complete any form by 31 March 2002 the restructuring consideration previously reserved for you will be paid to the Guangdong Government.  It is critical therefore that you complete this form, in order that the restructuring consideration can be released to the financial creditors.”

55.However, Mr Sterling then made a twist in his argument and went on to draw a distinction between failing to prove a claim through inadvertence and deliberate failure.  He said in paragraphs 29 and 30 of his affidavit:

“29.   If a creditor fails to prove its claim through inadvertence then Clause 10(1)(c) applies and the Restructuring Consideration in respect of the claim of that creditor must be transferred to GDH.  Although it is unusual that the shareholder should receive a benefit from the “estate” when creditors remain unpaid, it is understandable in this situation in which GPG as the shareholder was contributing a significant part of the value …

30.  However, the language used in relation to the Claims Procedure is mandatory and it was not open to an Accepting Creditor deliberately to choose not to prove its claim because it had an undisclosed side deal with the shareholder, the effect of which is both to breach the pari passu principle and to produce an unagreed benefit for the shareholder when creditors remain unpaid in full.” 

His argument is not that because of the factual matrix, the pari passu principle applies in all cases of a creditor failing to submit a proof of claim.  His argument is that on the true construction of clause 10.1(c), the pari passu principle applies only in case of inadvertent failure to submit a proof of claim but does not apply if the failure is deliberate because the creditor was engaged in a side deal with the shareholder.  He relied on what he called the mandatory language of clause 10.1(c) in support of his argument.

56.Firstly, as for the side deal and breach of the pari passu principle as alleged by Mr Sterling, the pari passu principle only applies to distribution by creditors of the assets in the pool of assets belong to the companies to be restructured.  The Restructuring Consideration is not asset originally belonging to the GDE Group.  It is additional asset contributed by the GPG for the purpose of the restructuring.  Thus, the pari passu principle cannot apply to such part of the Restructuring Consideration which by the express term of clause 10.1(c) ought not to be in the pool and ought to be returned to the shareholder, if no claim was submitted in respect of that contingent liability.  This is accepted by Mr Sterling.  Furthermore, in this case, the primary obligor of that contingent liability was not one of the members of the GDE Group to be restructured.  There is nothing to prevent the French Banks from settling that liability with the primary obligor which was not one of the companies to be restructured.  A settlement with the primary obligor which is a non-restructuring company could not be regarded as a settlement with the shareholder of the restructuring companies.  Such a settlement cannot be described as a side deal.  If, as a result of that settlement, the contingent liability is extinguished, it is up to the French Banks to submit a nil proof of claim or not to submit any proof of claim at all.  I think PwC’s letter of 7 March 2002 precisely described the common intention of the parties under clause 10.1(c) of the DRA.  With respect to Mr Sterling, I am quite unable to make any sense out of his distinction of inadvertent or deliberate failure to submit a proof of claim.

57.In PwC’s letter to the French Banks dated 29 March 2002, PwC changed its position and said that it would recommend to CreditorCo not to release the part of the Restructuring Consideration to GDH.  This is a clear change from a neutral position to one bending in favour of the creditors.  PwC was seeking to persuade the French Banks to file a nil proof of claim so as to engineer a situation desired by the creditors, i.e. the part of the Restructuring Consideration reserved for the French Banks would fall into the pool for distribution among the creditors.  In effect, the twist in Mr Sterling’s argument is to impose an obligation on the French Banks to act to the best interest of and in good faith to the other creditors.  That is not an obligation recognised by Hong Kong law.  In keeping with the principles of freedom of contract and the binding force of contract, in English contract law there is no principle of good faith of general application: see Atiyah, Introduction to the Law of Contract (5^th ed, 1995) p 212.  In Interfoto Picture Library Ltd v Stilletto Visual Programmes Ltd [1989] 1 QB 433, Bingham LJ said at 439:

“[I]n many civil law systems, and perhaps in most legal systems outside the common law world, the law of obligations recognises and enforces an overriding principle that in making and carrying out contracts parties should act in good faith.  This does not simply mean that they should not deceive each other, a principle which any legal system must recognise; its effect is perhaps most aptly conveyed by such metaphorical colloquialisms as ‘playing fair’, ‘coming clean’ or ‘putting one’s cards face upwards on the table.’  It is in essence a principle of fair open dealing … English law has, characteristically, committed itself to no such overriding principle but has developed piecemeal solutions in response to demonstrated problems of unfairness.”

I think the above dicta precisely summarises the current position under Hong Kong law.  The obligation of good faith only exists where the parties are in some kind of a fiduciary relationship such as parties to an insurance contract, partnership contract and employment contract.  In the present case, I do not think the French Banks owe any obligation to act to the best interest of or in good faith to the creditors.  They were free under clause 10.1(c) not to submit a proof of claim.  They were free to make their choice according to their best interest or discretion and were therefore not bound to make a nil proof of claim as urged on them by PwC or as now argued by CreditorCo.

58.Turning back to the language used in the relevant provisions of the DRA, I do not think the language supports Mr Sterling’s contention either.  It can hardly be argued otherwise that the various clauses in the DRA govern the parties’ rights and liabilities whereas Schedule 14 only provides for the rules and procedures in respect of claims made under the relevant provisions of the DRA.  Paragraph 2 of Schedule 14 is perhaps the only provision where the word “shall” is used in connection with submission of a proof of claim.  The word “shall” is not used in paragraph (I) of the preamble or clause 10.1.  Under clause 1.1, “claimant” as distinguished from “Accepting Bank Creditor and Other Creditors and any other Person who accedes to the DRA” is defined to mean a person making a claim pursuant to clause 10.1 and Schedule 14.  This suggests that not until a creditor submits a proof of claim in accordance with clause 10.1 and Schedule 14 and becomes a claimant would he submit to the claim procedures but he was free whether to submit a proof of claim.  In his choice to submit a proof of claim, he is entitled to act unfettered in his own interest and according to his own discretion.  It is impossible to read into clause 10.1(c) words importing the very fine distinction urged by Mr Sterling.

59.Mr Chua SC emphasises the importance of the factual background.  The background may assist the reasonable man to choose between the possible meanings of words which are ambiguous and in extreme occasions even to conclude that the parties must for whatever reason, have used the wrong words or syntax: see Mannai Investments Co Ltd And Eagle Star Life Assurance Co Ltd [1997] AC 749.  The language used in the DRA is unequivocal and unambiguous.  Clause 10.1(c) clearly provided for what would happen if a creditor did not submit a proof of claim on or prior to 31 March 2002.  Nothing could be clearer.  It is argued that because of the pressure exerted by the GPG, the parties had to conclude the DRA at breakneck pace.  Despite the extremely short time allowed for the parties to reach agreement on this very complex DRA, it is, nevertheless, a very detailed document running up to 84 pages with 27 schedules.  It was prepared by a very reputable legal firm specialised in corporate liquidation and restructuring.  It is a legal document.  It must have been carefully reviewed, apart by the draftsman, by numerous legal experts of the parties, who must be supposed to have chosen their words with care.  There is nothing to suggest that the parties have used wrong words or syntax.

60.The clear intention of the parties as revealed by the language of clause 10.1 is that while a party to the DRA agreed to the submission to the Claims Procedure, he is not under a contractual obligation to submit a proof of claim, but if he did submit a proof of claim, he would be bound by the Claims Procedure set out in Schedule 14.  Accordingly, I have to agree with Mr Manzoni’s submission that the word “agree” used in paragraph (I) of the preamble and clause 10.1 could not have been intended to be mandatory.  It merely conveys the agreement to submit to, in the sense of being bound by, the Claims Procedure in Schedule 14, if indeed the French Banks submitted a proof of claim in accordance with the Claims Procedure and became claimants.  But the French Banks were free not to submit any proof of claim.

The implied terms

61.CreditorCo’s alternative case is based on implied term.  In paragraph 6 of its Re-Amended Defence and Counterclaim, CreditorCo seeks to imply the following terms into the DRA:

“6.1.  That each party shall do all such things as are necessary on its part to enable the other parties to have the benefit of rights under the DRA.

6.2.   That each party shall refrain from conduct prejudicing the other parties’ benefit to rights under the DRA.

6.3.  That each Accepting Creditor who holds an Unadmitted Unsecured Restructuring Claim agrees to: (a) use all reasonable endeavours to file a Proof of Claim on or prior to 31^st March 2002, and/or (b) act in good faith at all times in respect of such Unadmitted Unsecured Restructuring Claim.” 

The essence of the implied terms is an obligation to act in good faith to the other parties and to use all reasonable endeavours to file a proof of claim.

62.It is trite law that there are only three ways that a term can be implied into a contract: implication as a matter of law; implication to give the contract business efficacy; and implication to reflect the common unexpressed intention of the parties.  There is no argument that these terms are implied as a matter of law.

63.On business efficacy, the DRA is primarily concerned with the consequences of submission or non submission of a proof of claim.  If a submission was made in respect of a claim, the relevant part of the Restructuring Consideration would fall into the pool for pari passu distribution among all creditors; if no submission was made, it would be returned to the GPG or GDH.  The DRA works just as well with or without the proposed implied terms.  The implied terms do not improve the efficacy of the DRA as a whole.  It makes no difference to the operation of the DRA whether an Accepting Creditor uses all reasonable endeavours to submit a proof of claim or not.  If he submits one, certain consequences will follow.  If he does not submit any, another set of consequences will follow.  Reasonable endeavours to submit a proof of claim cannot improve the efficacy of the DRA.  I agree with Mr Manzoni that the terms proposed by CreditorCo could not be implied as a matter of business efficacy.

64.The operation of good faith is not a necessary element of the DRA for the purpose of giving it business efficacy.  As I have already mentioned, there is no principle of good faith of general application under our contract law and a party is free to act to the best of its interest.  In the circumstances, it is difficult to imply an obligation to act to the best interest of the other parties or not to do anything which may prejudice their interest to give business efficacy to the DRA.

65.CreditorCo’s case could only be built on the basis of a common unexpressed intention of the parties.  By way of general observation, the DRA took two years to negotiate.  The parties were all represented by international financial and legal advisers.  The terms of the DRA were all negotiated.  The parties’ financial and legal advisers must have knowledge that the obligation of good faith is not a principle recognised by English law.  As submitted by Mr Manzoni, no English lawyer would simply assume a common unexpressed intention to use good faith in a contract as detailed as this.  If such an obligation was intended, the parties would have set it out in detail.

66.As for the implied obligation to using reasonable endeavours to file a proof of claim, the principal difficulty of CreditorCo’s argument is that no term could be implied if it is contrary to any express term.  There is no express obligation to file a proof of claim under the DRA on which the implied obligation of reasonable endeavour to file a proof of claim and good faith could be tagged.  On the contrary, the parties have by careful deliberation decided what would happen in the event that no claim was submitted on or prior to 31 March 2002.  That was clearly provided for in clause 10.1(c) and reproduced in paragraph 3 of Schedule 14.  Having reached agreement as to what would happen to the Reconstruction Consideration in that eventuality and having documented it, it could not have been the parties’ common intention to be concerned with reasonable endeavour to file a proof of claim or good faith.

67.As submitted by Mr Manzoni, what CreditiorCo seeks to imply is to re-write the DRA in an impermissible way.  Mr Sterling seeks to limit the operation of clause 10.1(c) to circumstances when non-submission of a proof of claim was inadvertent but not if it was deliberate.  There is nothing in the DRA or in the surrounding circumstances to suggest such a fine distinction.  It is inconceivable that such a fine distinction could have been recognised by the large number of parties to the DRA and that those parties could have held any common unexpressed intention in the terms as suggested by CreditorCo.  Indeed as the parties had reached agreement that if they did not file a proof of claim, the Restructuring Consideration would revert to GDH, it is difficult to see how they could also have a common unexpressed intention that they would use reasonable endeavour to file a proof of claim or a nil proof of claim.

68.I think the implied terms contended by CreditorCo is wholly unarguable.

Serious issue to be tried - contractual counterclaim

69.The construction of the DRA and the implied terms contended by CreditorCo is wholly unarguable.  On the true construction of clause 10.1(c), the French Banks had the choice to submit or not to submit a proof of claim.  They were under no obligation under the DRA to act in the best interest of the creditors by submitting a nil proof of claim.  They were not in breach of any express or implied terms of the DRA by entering into the French Banks Agreement and not to submit any proof of claim. 

70.There are other arguments advanced by Mr Manzoni such as that CreditorCo is not an agent of the other creditors and has no right to bring the claim on behalf of the other creditors, or that it suffered no damage because in whatever event it has to release the Restructuring Consideration.  I agree with Mr Chua SC that those issues are arguable.  I do not find it necessary to deal with them here as I have reached the conclusion that the construction of the DRA and the terms sought to be implied by CreditorCo is simply unarguable.  I am satisfied that the French Banks have shown that there is no serious issue to be tried under the contractual counterclaim.

Serious issue to be tried - conspiracy counterclaim

71.CreditorCo’s case under the conspiracy counterclaim is that the French Banks conspired with GDH to use unlawful means to injure CreditorCo.  The unlawful means alleged by CreditorCo was the breach of express or implied terms of the DRA.  Mr Manzoni accepts that it is arguable that a breach of contract can constitute an unlawful means for the purpose of this tort.  However, in view of my conclusion that CreditorCo’s contractual counterclaim is unarguable, it must necessarily follow that the French Banks were not guilty of having engaged in any unlawful means against CreditorCo.  CreditorCo’s counterclaim in conspiracy must also fall with its counterclaim for breach of contract.  It is likewise unarguable. 

72.Counsel are in disagreement as to whether in proving such a conspiracy, a plaintiff must establish that the defendant intended to cause him economic loss, either as an end in itself or as the necessary consequence of achieving some ulterior motive, and whether the defendant’s belief as to the effect of its action could constitute a defence.  I accept these are arguable issues which are not finally settled.  But, these arguable issues can add nothing to undermine the French Banks’ argument that CreditorCo’s conspiracy counterclaim is unarguable.

Conclusion

73.For the above reasons, I find CreditorCo’s counterclaim against the French Banks is wholly unarguable.  Accordingly, I allow the 2^nd to 4^th Defendants’ appeal and set aside the service of the concurrent writ out of the jurisdiction on them.  I also make an order nisi that the Plaintiff by counterclaim shall pay the costs of the 2^nd to 4^th Defendants by counterclaim, such costs are to be taxed, if not agreed.

74.Though GDH, the 1^st Defendant by counterclaim, is not a party to these applications, it was brought into the hearing by the 3^rd Defendant by counterclaim.  Theattendance of the 1^st Defendant by counterclaim is unnecessary and it ought to realise that.  Thus, the 1^st Defendant by counterclaim is partly responsible for the costs wasted and should not be entitled to the full costs of its attendance.  Accordingly, I make an order nisi that the 3^rd Defendant by counterclaim shall only pay 50% of the costs of the 1^st Defendant by counterclaim.

Mr. Joseph Chu, of Messrs Linklaters, for the Plaintiff by original action and the 1^st Defendant by counterclaim

Mr. Chua Guan Hock, SC and Mr. Hew Yang Wahn, instructed by Messrs Allen & Overy, for the Defendant by original action and the Plaintiff by counterclaim

Mr. Charles Manzoni, instructed by Messrs Deacons, for the 2^nd Defendant and 4^th Defendant by counterclaim

Mr. Alfred H.H. Chan, instructed by Messrs JSM, for the 3^rd Defendant by counterclaim