Eastman Chemical Ltd v. Heyro Chemical Co Ltd

HCMP 1859/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1859 OF 2011

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D E C I S I O N

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1.Before me is an application to discharge an exparte Mareva injunction and ancillary disclosure orders together with an enquiry of damages pursuant to the undertaking in damages given to the Court. On the other hand Eastman by summons dated 26 September 2011 seeks the continuation of the Mareva injunction as varied until the determination of the underlying arbitration proceedings.

Background

2.The applicant (“Eastman”) under the Originating Summons herein is a substantial chemical manufacturing company listed on the New York Stock Exchange. The respondent (“Heyro”) has for upwards of 15 years prior to the issue of the proceedings herein been carrying on business solely as a non-exclusive distributor of Eastman’s Tenite products for Hong Kong and China.  The present dispute arose out of the rather abrupt termination of the distributorship arrangement, with Eastman claiming for an outstanding sum of over US$1.5 million for goods sold and delivered.

3.On 23 September 2011 Eastman obtained an ex parte Mareva injunction before Yam J.  On 30September 2011, the return date of the inter partes summons, Heyro sought to discharge the exparte Order together with an enquiry of damages under Eastman’s undertaking of damages given to the Court.  The order was continued by Sakhrani J on the return date of the plaintiff’s inter partes summons dated 26 September 2011, subject to some variations, and pending the determination of Heyro’s application to discharge.

4.By way of procedural background, it should be pointed out that the ex parte order was obtained by Eastman before Yam J in reliance of section 45(2) of the Arbitrations Ordinance, Cap 609, on the basis that Eastman intended shortly to commence arbitral proceedings.  At the hearing of the application before Yam J, Eastman through its Counsel Mr Zimmern gave an express undertaking to the Court to that effect.

5.After commencement of the arbitral proceedings Eastman filed a winding-up petition against Heyro on 27 October 2011 upon the expiry of the one-month period following the service of a statutory demand.  Thereafter Eastman applied for a stay of these proceedings as well as the underlying arbitration proceedings pending the determination of the winding-up petition, on the ground of prudent case management and saving of costs.  Heyro resisted the application.

6.The stay, if granted, would have had the effect of sabotaging Heyro’s application for discharge of the Mareva injunction order while it continued in effect.  The application for stay was dismissed by Deputy High Court Judge L Wong on 23 February 2012.

7.It is not disputed that the arbitral award to be obtained in the underlying arbitral proceedings will be enforceable outside Hong Kong.

Summary of Facts

8.There is no dispute that Eastman has a good arguable case in breach of contract for Heyro’s failure to pay for goods sold and delivered.

9.It is Eastman’s own case that for over 15 years Heyro’s sole business was in distributing Eastman’s products, during which time Heyro had made timely payments for the goods sold and delivered.  Heyro’s evidence is that it has been trading in Eastman’s products for over 20 years, and had built up its own market and goodwill as a distributor of such products in Hong Kong and China.

10.There are some disputes as to whether the intended termination of the distributorship arrangement was properly notified, given the long-standing relationship.  On the part of Eastman, it was said that giving notice of the following towards the end of 2010 sufficiently put Heyro on advance notice of the termination of the distributorship relationship:

(1)  the fact that a Joint Venture was established between Eastman and Mazzuchelli that would put Eastman in charge of direct sales and marketing of the products.

(2)  the fact that the distributorship contract was only renewed for 7 months from the end of 2010 instead of the typical 2 years.

11.However, while Eastman’s evidence was that it made the decision to only continue the distributorship for the limited period of 7 months at the expiry of the last agreement at the end of 2010, there was no evidence that the intention to limit the extension to a period of 7 months was communicated to Heyro at the time of the expiry of the 2010 agreement whether properly or at all.  Indeed, the evidence is to the effect that non-renewal of distributorship was at best referred to as a possibility, and termination was not discussed at all, presumably while Heyro was still needed as a distributorship before the joint venture was to become fully operative.

12.It is common ground that business between Eastman and Heyro continued as usual on previous terms beyond 2010, but without any formal agreement.  Heyro continued to place orders for goods, and goods continued to be delivered to Heyro.

13.On the part of Heyro, it was said that before the end of 2010, Eastman advised by a series of emails dated between 10 to 18 November 2010, that Eastman would be responsible for sales and marketing, and that clarifications on details of future sales channel would be forthcoming, with Eastman expressing appreciation of what Heyro would “continue to do to help support our business in China”.

14.On 12 November 2010, upon the request of Eastman, Heyro even provided a spreadsheet identifying all of its Cellulose Acetate customers “for evaluation purpose”.  Eastman’s case is that the request was but a routine distributor management and performance review process, and that they already knew the identity of all of Heyro’s major customers.  Heyro provided the list out of goodwill believing that the distributorship arrangement would continue in some form.

15.On the evidence of Heyro, no clarification from Eastman was forthcoming regarding future sales channel up to the end of 2010, while business carried on as usual between the parties without any apparent agreement or understanding on when the distributorship agreement extended from the end of 2010 might come to an end.  Heyro’s case is that all along they had been misled into believing that that the distributorship would not be affected by the joint venture.

16.It is common ground that it was on 30 May 2011 that Eastman by its Blake You telephoned Heyro’s Anthony Khong informing the latter of the termination of the distributor relationship with effect from 1 August 2011.  This was the first time when Heyro was notified of the decision that would effectively put an end to the long-standing distributorship.  Not surprisingly, Heyro was considerably shocked by what it perceived as a sudden turn of events.  A formal letter dated 1 June 2011 followed stating that the distributorship agreement was extended for a period of 7 months, and would expire by the end of July 2010 without renewal.  It is not disputed that the 1 June 2011 letter was in fact not sent out until at least 2 weeks after the date it bore.  Heyro claimed not to have received it until 24 June 2012.

17.Thereafter, payment for delivered goods fell behind.  A number of invoices that fell due remained unpaid by Heyro.  When confronted, Heyro initially explained that annual financial audit and bank credit review had caused the delay, and later cited Eastman’s publicising of the termination of Heyro’s distributorship among their customers as a reason.  According to Heyro, customers had become slow in paying for their goods once they learned that Heyro would no longer have distribution rights from Eastman.

18.On the other hand, Heyro asserted that it did not use the list for the purpose of contacting Heyro’s customers, but accepted that since March 2011, Eastman “has been prepared to market and sell the Products directly to customers in Hong Kong and the PRC instead of through its prior non-exclusive distributing channels” including Eastman.

19.By mid August 2011, the outstanding debt owed to Eastman had mounted to over US$1,000,000.  Heyro was unable to promise payment within any specified period, and Eastman started withholding delivery of Heyro’s orders.  Heyro requested them to stop contacting and soliciting its customers as it considered the list of customers provided to Eastman to be confidential, and it would make it all the more difficult to obtain payment from customers.  Eastman was also urged to continue with delivery of the ordered goods.

20.In the latter part of August, the level of outstanding debt continued to escalate, as did the tension between the parties, with the above complaints and allegations further repeated between them, but only in greater intensity.  Eastman kept pressing for a payment schedule while Heyro continued to ask for time without committing to any schedule, citing slow payment from customers and bad debts as the cause for cash flow problems, while trying to persuade Eastman to extend the distributorship arrangement for a much longer period.  Eastman became highly sceptical about Heyro’s alleged financial position and the alleged cause, and read it as a pretext to pressurise Eastman into extending the distribution contract.

21.In the meetings that ensued, various proposals put forward by Eastman with a view to enabling Heyro to discharge the debt were rejected.  These include:

(1)  assigning the debt outstanding from Heyro’s customers to Eastman to offset Heyro’s debt;

(2)  having stock holders of Heyro give personal guarantees for payment of the debt;

(3)  having the parent company of Heyro acting as a guarantor to Heyro’s debt;

(4)  buying back Heyro’s inventory; and

(5)  allowing Heyro to distribute Eastman’s products to smaller customers.

22.The various proposals including the above and the responses of Heyro are set out in an internal email of Blake You dated 22 August 2011.  Eastman read the lack of any commitment to pay within a specified time and the rejections to these proposed solutions as clear indications that the withholding of payment was used as a means of extorting a renewal of the distributorship for a substantial period, and failing that Heyro intended to buy time to gather payments from their customers “and to then transfer them out of Eastman’s reach”.

23.From the internal emails of Blake You between the end of August and the first week of September 2011, it is clear that Eastman had by then already communicated its clear intention to commence legal proceedings to recover the debt.

24.In mid-September 2011, Eastman instructed investigators to carry out investigations at the office and warehouse of Heyro.  Pellets of the products believed to have been sourced from Eastman and stored at Heyro’s warehouse were seen loaded onto a truck which headed for Kwai Chung.  Heyro’s warehouse was estimated to hold 248,000 kg of products that had “probably not yet been sold”, with an estimated worth of US$1,488,000 in terms of trade receivables upon their sale.

25.In support of the application for ex parte Mareva injunction made on 23 September 2011, Eastman asserted that the products held in the warehouse of Heyro were expected to be shipped out of Hong Kong to be delivered to China, where Heyro’s customers were located.  Eastman relied on the perceived risk that payment for these goods would not be reserved to discharge the debt, but would be made to Heyro in China as per Heyro’s direction thus beyond Eastman’s reach.  This fear and the matters set out in paragraph 21 above formed the basis of the submission that there existed a real risk of dissipation of Heyro’s assets as would frustrate judgment, hence a Mareva injunction was necessary and appropriate.

Principles Governing Grant of Mareva Injunction

26.The legal principles governing the grant of a Mareva injunction are not in dispute.  Of particular pertinence are the following propositions derived from the authorities cited:

(1)  Mareva injunctions put the recipient party in a seriously disadvantaged position right from the start, from which it may never recover.  It is therefore essential for the court to carefully and critically scrutinize the materials placed before it before making such an order.  Stone J in Dieulemar Shipping SpA v Transfield ER Futures Ltd (CA) [2011]1HKLRD 75 §§54-55;

(2)  when considering whether there was unacceptably low commercial morality to infer a risk of dissipation of assets, the court should scrutinize the evidence with care and should not too readily infer a real risk of dissipation from the defendant’s conduct or commercial morality.  Honor Resources (International) Co Ltd v Savvy Resources Ltd [2010] 4 HKC 50 @ 57;

(3)  there must be “solid evidence” of the risk of dissipation of assets. The order, being a very serious infringement of rights and liberties of the defendant, can only be justified on appropriately clear and strong facts and risks.  The standard of proof of the risk of dissipation is relatively high.  Colman J in Laemthong International v ARTIS and Ors [2005] Lloyd’s Rep 100 §§59-61, citing Thane Investments Ltd v Tomlinson [2003] EWCA Civ 1272;

(4)  the fact that a defendant may be short of money to pay his debt is not itself a good reason for a Mareva injunction, the purpose of which is not to put the claimant in a better position over other creditors.  Midas Merchant Bank Plc v Bello and Ano (CA) [2002] EWCA Civ 1496 unreported Judgment dated 14 October 2002;

(5)  the plaintiff cannot beforehand prevent the defendant from disposing of his assets merely because he fears that there will be nothing against which to enforce his judgment nor can he be given a secured position against other creditors.  The dissipation of assets must be shown to be with an intention or for the purpose of defeating the plaintiff’s claim, or otherwise “improper”.  Chernov J in Woodside Hospital Consulting Pty Ltd v Stockton Nominees Pty Ltd [1998] VSC 12 (Sup. Ct. of Victoria);

(6)  the plaintiff is required to show that at least objectively, the effect of the defendant’s conduct would be to frustrate the enforcement of any judgment.  The conduct in question must be unjustifiable.  There must be risk that the asset will be used otherwise than for normal and proper commercial purposes.  Mobil Cerro Negro v Petroleos de Venezuela [2008] 1 Lloyd’s Rep 684;

(7)  the fact that the defendant has not been forthcoming with information of its financial position is neither here nor there, even where the claim against the defendant is strong.  LG International Corporation v J&J Chemtrading Company Limited HCA 2557/2008 unreported decision of Sakhrani J dated 30 December 2008;

(8)  the burden is squarely on the claimant to adduce cogent evidence of commercially sharp practice.  The failure of the defendant to give assurances of retention of assets to settle a debt, when the plaintiff is not entitled to such assurance in law, is irrelevant.  Hsin Chong Constructive (Asia) Limited v Henble Limited HCCT 23/2005 Reyes J, unreported decision dated 12 May 2005; and

(9)  equity does not act in vain.  A court does not usually order injunctions where time has elapsed and an injunction would in effect be locking the stable door after the horse has bolted.  Hsin Chong, ibid.

Application to Discharge - The Parties’ Arguments

27.The grounds in support of discharge of the Mareva injunction are focused on Eastman’s failure to show a real risk of dissipation of assets as would justify the grant.  Counsel for Heyro has indicated at the commencement of the hearing that he is not pursuing the ground of “material non-disclosure”.

28.In a nutshell, Counsel for Heyro Mr Maurellet argues that the evidence, taken at its highest, merely showed Heyro might have been difficult or unreasonable in negotiations regarding payment of the debt, but not sneaky or dishonest.  It did not begin to show there was a real risk of dissipation of assets in a way that was improper or unjustifiable.

29.For Heyro it was said that there was in fact no evidence of any deplorable commercial behaviour.  It made no promises as to when it could repay the outstanding debt, but kept driving a hard bargain for the company, leveraging on what little they had in terms of bargaining power as a jilted business partner.  By early September 2011, Eastman well understood the bottom line of Heyro, as set out in an internal memo of Blake You dated 9 September 2011.  It was negotiating on the one hand for time to pay, and on the other hand for a continued distributorship arrangement.  By then Heyro was well aware of the fact that legal proceedings might be commenced, but believed that at the end of the day the matter could be resolved by commercial negotiation.  Mr Maurellet argued that if Heyro had intended to put assets beyond the reach of Eastman, it would have done so by that date, and by the time of the ex parte application, a Mareva injunction would have been futile.  Borrowing from the analogy used by Reyes J in Hsin Chong, the horse would have bolted from the stable before anyone attempted to lock it.

30.Heyro argues that if by 9 September 2011 there was no solid evidence to support a real risk of improper disposal of assets to frustrate enforcement of judgment, the investigation thereafter added nothing to it.  Eastman having accepted that the goods were usually delivered to China where Heyro’s customers were, there was nothing improper about the products in Heyro’s warehouse leaving Hong Kong to fulfil orders.  Eastman was unable to demonstrate with solid evidence that the deliveries were with a view to putting the proceeds or the goods out of the reach of Eastman.

31.In answer, Counsel for Eastman Mr Zimmern argued that the key question was whether there was a risk that judgment will go unsatisfied.  He argued that the very fact that the goods were leaving Hong Kong without an identifiable chose situated in Hong Kong available to Eastman for enforcement of judgment, without more, constituted a risk of dissipation.

32.Eastman further relies on the bank account evidence provided by Heyro to fortify the suspicion harboured by Eastman regarding Heyro’s financial position. It was said that the large number of online transfers only demonstrated how money could have disappeared at the push of a button, and put beyond the reach of Eastman.

33.As for low commercial morality, Eastman relied on the following, but without alleging concealment of assets:

(1)  the reasons for delaying payment were but excuses made to extract an extension of the distribution agreement;

(2)  the fact that Heyro continued to trade in the products knowing the distribution agreement had come to an end; and

(3)  the purposeful disregard of their obligation to pay when they were “in a position to do so”.

Whether Evidence on Risk of Dissipation Justified Grant of Injunction

34.Having considered the evidence carefully against the applicable legal propositions, and taking into account all the circumstances, I am of the view that the evidence put before Yam J fell short of demonstrating a real risk of dissipation of assets in a way that was in the circumstances improper or unjustifiable.

35.Given Eastman also accepts that the abrupt termination of the distributorship relationship after some two decades was shocking to Heyro to say the least, and the fact that the distributorship was its entire business for that lengthy period of time, it is not difficult to understand why Heyro would strive its utmost to try to reverse the decision, while battling what must have been traumatising after-effects of the stripping of its entire business.

36.The evidence shows that throughout the time of the negotiations, Eastman was in a position to negotiate at length with not only the Managing Director Mr Stephen Chan, but also a major shareholder, Mr C M Leung.  Both explained the difficulties faced by Heyro, which did not appear to have been seriously challenged or disbelieved. C M Leung of Heyro dealt with Eastman’s proposals point by point with explanations on why they were unacceptable.  The attitude of Heyro in these meetings as recorded in the several emails or memoranda of Blake You did not show Heyro to be engaging in anything other than earnest negotiations, less still adopting any pattern of evasiveness.  Heyro could be accused of playing hard ball, much to the annoyance of Eastman, but there is no solid evidence pointing to dishonesty or any attempt to conceal their inventory or proceeds.

37.In this regard, the “insights” Blake You gained after meeting with Stephen Chan on 22 August 2010 at least impliedly recognised that there were heavy outstanding payments from Heyro’s major customer Creation.  While Blake You pondered on how Eastman might be affected if Heyro “[worked] with Creation to cause the bad debt”, it was plainly not a serious concern of dissipation of assets.  Otherwise, there would have been no point for another round of negotiation to be conducted some two weeks later with C M Leung.

38.From the available evidence, it is difficult to see how in the circumstances an intention to improperly dissipate assets can be inferred when Heyro made it clear to Eastman that they would not commit to any payment schedule, did not fear legal proceedings but believed commercial negotiation should be proceeded with to reach a mutually acceptable solution.  If there was such an intention, it would have served Heyro’s purpose much better to pretend to agree to some payment schedule in order to avoid any imminent commencement of legal proceedings while Heyro could take steps to dispose of the inventory and hide away any proceeds.

39.On the other hand, Eastman’s evidence in support of the ex parte application deposed to a very substantial quantity of goods believed to be sitting in Heyro’s warehouse awaiting to be delivered out of Hong Kong, as they would usually be in order to fill orders from Heyro’s customers.  Quite apart from the lack of evidence of any impropriety of such disposals, this position is inherently inconsistent with any suggestion that Heyro was ready and intended to hide away or dispose of assets improperly.  If it had intended to do so to put the goods out of Eastman’s reach, it would have had ample time to do so before Eastman finally made the ex parte application before Yam J.

40.I find myself unable to agree with Mr Zimmern that the very fact that the goods were leaving Hong Kong without an identifiable chose (ie payment for the goods) in Hong Kong to replenish the depleting pool of assets here is itself dissipation that would justify an injunction.  The dissipation of assets, ie delivery of goods to China, must be shown to be extraordinary, improper or otherwise unjustifiable. Insecure through Eastman would have felt about these deliveries, there is no evidence put forward to demonstrate their impropriety.

41.If there is any serious reliance on proceeds of sale being capable of easy online transfer as a ground in support of the injunction, it would likewise be defeated by what has been said in the preceding paragraphs.  When the evidence is properly scrutinised, it would be apparent that the injunction sought could not have served any alleged intended purpose, namely, to prevent improper disposal of assets.

42.Further, I do not see how low commercial morality could be demonstrated by Heyro continuing to trade with its customers on the products despite the distributorship having come to an end. On Eastman’s own case, there was a large quantity of products sitting in the warehouse of Heyro, and there was a demand for them from Heyro’s customers.  Heyro had every right to sell them off with a view to making the last batch of profits it could make as distributor of the products.  How it was to secure payment from its customers was a matter for Heyro.  More particularly, it was not obliged to dispose of the goods in a way that conformed with Eastman’s belief of what would best serve their interest, such as by selling the inventory back to them.  In my view, Heyro’s choice of continuing to sell its inventory to its customers did not, whether by itself or with any other act, give rise to an inference of improper disposal of assets.

43.While Eastman had failed to pay its debt, the notes of the various meetings as recorded by Blake You did show Heyro’s explanations and their accusations against Eastman for aggravating the difficulties they faced, which had arisen out of a poorly handled termination of a long-standing business relationship.  I am unable to dismiss the explanations and accusations out of hand as being mere pretexts for avoiding payment, less still is there evidence to show that Heyro was, contrary to what they asserted, in fact “in a position to [pay]”.  Given the accepted traumatic effects the termination had on Heyro’s business, it would be more incredible to suggest that Heyro faced no financial difficulties arising from delayed payment as a result.  I therefore do not accept that the evidence demonstrated a deliberate disregard of payment obligations when Heyro was able to pay, nor that the mere fact of their withholding payment could go to show a low standard of commercial morality as would justify the grant of the injunction.

44.Accordingly, I discharge the Mareva injunction and the ancillary orders granted by Yam J and continued on varied terms by Sakhrani J.

45.I make an order that there be an enquiry as to damages pursuant to Eastman’s undertaking in damages.

Application for Continuation of Injunction

46.Since the grant of the injunction, and in support of the discharge application, Heyro furnished evidence in the form of bank statements.  Mr Zimmern relies on these statements as showing there were sums of money going out of Heyro’s account to unknown recipients, and that the risk of dissipation of assets persists.

47.First and foremost, the burden remains on Eastman to satisfy the same requirements as propounded above.  Despite the ancillary discovery order, the burden is not reversed.  There is no evidence to show that the outgoing sums were for improper purposes with the intent to put assets out of the reach of Eastman.

48.On the other hand, Mr Maurellet argued that the mere fact that various sums of money continued to come into the jurisdiction and were credited into the accounts of Heyro showed that Eastman’s wild speculations of how proceeds of sales of products might be engineered to be received outside Hong Kong cannot be sustained.  This argument is not without force.

49.In view of my decision on the lack of merits of the ex parte application, I do not think that anything that surfaced thereafter turned the case around for Eastman. There remains a lack of solid evidence to demonstrate a real risk of dissipation of assets.  I therefore dismiss Eastman’s application to continue the Mareva injunction and ancillary disclosure order.

Costs

50.I make an order nisi that the respondent do have the costs of the hearing of the discharge application and the costs of the Summons dated 26 September 2011, including the costs of the hearing before Sakhrani J on 30 September 2011, to be taxed if not agreed, save and except the cost of preparing the supplemental bundle filed and served on 12 March 2012 by solicitors for the applicant will be to the applicant, to be taxed if not agreed.  The respondent’s costs of and incidental to the execution of the ex parte Order will be awarded to the respondent, to be taxed if not agreed.

51.It remains for me to thank Counsel for both parties for their able assistance.

Mr Richard Zimmern, instructed by Kennedys, for the applicant

Mr Jose Antonio Maurellet, instructed by Squire Sanders, for the respondent