Hong Kong courts can order interim relief against non-parties—but only sparingly

The decision in Company A and Others v Company B and Others [2018] HKCU 3575 confirms that Hong Kong courts can order interim relief in support of an arbitration, even against a person or entity which is not party to the arbitration. However, that power will be exercised sparingly. Similarly, the court will be slow to grant receivership orders, despite such orders being—in the judge’s words—‘flavour of the season’.

Background

The defendants failed to pay in full for shares in ‘RCo’, which the plaintiffs had sold and transferred to them. Following the sale, the defendants’ only material assets were the RCo shares. RCo held 59% of ThaiCo, a leading Thai energy company. The defendants were SPVs, controlled by Mr X.

The sale agreements provided for International Chamber of Commerce (ICC) arbitration in Singapore, which the plaintiffs duly commenced against the first and second defendants. They then learned that the defendants were seeking to transfer the RCo shares to a third party. This would make the ThaiCo shares unavailable to satisfy any award in the plaintiffs’ favour. The plaintiffs obtained an injunction in the British Virgin Islands (BVI) courts against the first defendant (a BVI company), to prevent it disposing of the RCo shares. They also obtained an order (February 16 Order) from an ICC emergency arbitrator:

• preventing the first and second defendants from disposing of the RCo shares
• preventing the first defendant from taking ‘any other action having an economic effect similar to the disposal and/or transfer and/or encumbrance of’ the RCo shares
• requiring the second defendant to procure the first defendant’s compliance

The plaintiffs asked the emergency arbitrator to grant a receivership order over the shares, but they declined, on grounds that the plaintiffs were sufficiently protected by the other emergency orders and the BVI injunction, and had failed to establish an urgent need for a receiver.

In September 2017, the arbitral tribunal extended the February 16 order, preventing the defendants from disposing of the ThaiCo shares ‘in any manner until the [full price] is paid to the plaintiffs’. In October 2017, the plaintiffs discovered that RCo had sold the ThaiCo shares to Mr X’s father, Mr Y, at a significant undervalue (April 16 Transaction). In July and August 2017, 38% of the ThaiCo shares were transferred to the third defendant. The plaintiffs obtained an injunction in the HK court, restraining the third defendant from dealing with that 38% (May 18 Injunction). The court granted the injunction, despite the fact that the third defendant is not party to the arbitration, as an extension to its usual Mareva jurisdiction (on the so-called ‘Chabra’ basis).

On 25 June 2018, the third defendant transferred the shares from Mr Y to Mrs Z.

On 27 June 2018, the plaintiffs asked the Hong Kong court to reinforce the May 18 Injunction by appointing a receiver to hold the shares until the award was issued. They alleged that the 25 June 2018 transfer was in breach of the injunction, and there was a risk of further disposals.

(Separately, Mr Y had injuncted Mr X and Mrs Z from dealing with the shares in the third defendant, alleging that they had forged the transfer documents.)

The issue for Chan J was whether to appoint a receiver over the ThaiCo shares held by the third defendant, as an interim measure in aid of the arbitration between the plaintiffs and the first and second defendants, to which the third defendant is not party.

The defendants resisted, on the following grounds:

• section 45 of the Arbitration Ordinance, Chapter 609 (AO), which empowers the court to order interim relief in support of an arbitration in or outside Hong Kong, does not confer jurisdiction over third parties to the arbitration—indeed, it expressly disapplies Article 17J UNCITRAL Model Law, which preserves such jurisdiction
• AO, s 3 provides that the court shall interfere in arbitration ‘only as expressly provided for in the Ordinance’
• it would be ‘grossly unjust’ to extend the jurisdiction to third parties, particularly as there is no appeal (AO, s 45(10))
• case law under section 44 of the English Arbitration Act 1996 (AA 1996) confirms that the court’s jurisdiction to order interim relief extends only to parties to the arbitration

Decision

The court held that its AO, s 45 power to order interim relief in support of an arbitration is not limited to parties to the arbitration, but should not be exercised lightly.

AO, s 45 is broader than AA 1996, s 44. It does not oust the court’s general jurisdiction to order interim relief in support of an arbitration. Specifically, the court’s s 45 powers may be exercised ‘irrespective of whether or not similar powers may be exercised by the tribunal’. In addition, the court may grant s 45 relief on the application of ‘any party’. This is ‘more neutral’ than AA 1996, and ‘does not by its mere use indicate that the application for interim measure can only be made by a party to the arbitration or arbitration agreement’. On the contrary, it may extend to ‘any party before the court’. AO, s 21 expressly confirms there is no incompatibility in applying to the court for interim relief during an arbitration. Moreover, it is possible to serve HK court process on a third party outside the jurisdiction. In light of all this, there is ‘no need to…confine the scope of the [s 45] interim measures which may be granted, beyond what is already expressly set out.’ The court’s role is to facilitate the arbitral process, and it has discretion whether to grant any interim relief, whether or not in support of arbitration.

However, Chan J urged caution, noting that there must be ‘clear evidence, and…strong grounds’ that it is necessary to facilitate the arbitral proceedings, before bringing a non-party before the court and subjecting it to an order against which there is no appeal.

The court held that, on the facts, it was not prepared to order receivership against the third defendant.

The plaintiffs were not asserting a proprietary claim over the shares, and had no security interest in them. They merely wanted the shares available should the tribunal find in their favour. In any event, the defendants’ (or Mr X’s) control over the third defendant and the ThaiCo shares was now disputed, and subject to separate legal proceedings. Moreover, it was not clear that the defendants breached the BVI and emergency injunctions by disposing of ThaiCo’s shares; at the time of the transfer, those injunctions prevented only the disposal of shares in RCo. The plaintiffs relied on the February 16 order, which prohibited the first defendant from taking ‘any other action having an economic effect similar to the disposal’, etc. However, it is uncertain whether RCo’s disposal of ThaiCo shares actually breached that order. An injunction, whether made by a court or tribunal, should be ‘precise in its terms’, so the injuncted party knows what would breach it. Any ambiguity will be construed in favour of the party who is alleged to have breached the order.

In addition, each defendant, RCo and ThaiCo are separate legal entities. The judge was not satisfied that the third defendant would be obliged to disgorge its ThaiCo shares to contribute to the first and second defendants’ assets, in order to satisfy an arbitral award. She was therefore not satisfied that the test for ‘Chabra’ Mareva relief against a nonparty was met.

Finally, Chan J felt the plaintiffs were adequately protected against further disposal of the ThaiCo shares by existing injunctions and undertakings, such that she need not grant the receivership order. These ‘less intrusive’ remedies are to be preferred over the ‘draconian’ receivership order.

The judge also rejected arguments and expert evidence that Hong Kong injunctions are not recognised under Thai law, so it would be difficult to ‘police’ the injunctions restraining dealings in the ThaiCo shares. She held that this should have been made clear at the hearing of the May 18 injunction as, if correct, the injunction was futile in any case. The judge also ruled that the expert evidence was inadmissible, because the report contained no expert declaration.

Discussion

In this case, the plaintiffs sought a receivership order over shares that might be used to satisfy any arbitral award in their favour. Chan J noted that such orders are ‘draconian’ and ‘invasive’, and should not be easily granted unless there is ‘solid evidence’ of a risk the assets will be dissipated, or the application is otherwise justified on clear facts. The court will be particularly slow to grant receivership where there is a less intrusive remedy available.

The judge reminds us that injunctions must be clearly worded, so the injuncted party knows what would constitute breach. Any ambiguity will be construed in favour of the party allegedly in breach. Parties who seek injunction orders must take care to draft clearly and comprehensively, without adding unnecessary obligations.

The case also reminds us that it is important to comply with the court’s procedural requirements, however apparently minor. The judge ruled inadmissible the evidence of the Plaintiffs’ foreign law expert, because the report failed to include a declaration by the expert, as required by Order 38 rule 37(C) of the Rules of the High Court.

A version of this article was originally published on Lexis PSL