HONG KONG COURT UPHOLDS FREEZING ORDER GRANTED IN SUPPORT OF ENFORCEMENT OF CIETAC ARBITRAL AWARD

The Hong Kong Court recently considered in G v X, GMCI, GMCC [2022] HKCFI 829 whether a freezing order granted in support of the enforcement of a CIETAC arbitral award ought to have been granted. The freezing order was opposed on the basis that there was material non-disclosure and that there was no good arguable case supporting the freezing order.

However, the Court found that as compared to freezing order applications made during the interlocutory stage, it was generally more prepared to grant freezing orders in aid of enforcement. The good arguable case that has to be demonstrated in such cases is simply that there was an arbitral award which could be enforced by the Hong Kong Court.

Background and decision

In a CIETAC arbitration, the Claimant obtained an award against the Respondent and others on 20 April 2021. The Respondent was ordered to pay the Claimant damages, interest and arbitration fees.

Subsequently, the Respondent applied to the Beijing Intermediate Court on 20 May 2021 to set aside the award, while the Claimant applied to the Beijing Court to enforce the award on 18 June 2021. The latter enforcement proceedings were stayed in favour of the former set aside proceedings.

In parallel to the Beijing proceedings, the Claimant made ex parte applications on 5 July 2021 in Hong Kong for:

1. leave to enforce the award (Enforcement Order);
2. a freezing order to restrain the Respondent from disposing its Hong Kong and worldwide assets up to the amount of the award (Mareva Injunction);
3. a disclosure order to disclose details of the Respondent's assets (Disclosure Order).

The Court did not grant the Enforcement Order immediately, but did grant the Mareva Injunction and Disclosure Order against the (first) Respondent as well as the second and third Respondents (the Respondents) of the proceedings under the Chabra jurisdiction (i.e. a grant of interim injunctive reliefs against third parties, see also our discussion on the application of the Chabra jurisdiction in Hong Kong in our previous post here).

On 20 September 2021, the first Respondent made payment into Court which allowed for the Mareva Injunction to be discharged.

On 15 October 2021, the Respondents applied for payment out of the sum paid in (Payment Out Application). The Respondents alternatively sought for fortification of the Claimant's undertaking as to damages in respect of the Mareva Injunction (Fortification Application).

On 21 December 2021, the Court of First Instance heard the Payment Out Application and Fortification Application, along with a pre-existing application from the Claimant for continuation of the Mareva Injunction and Disclosure Order (the application had been made on 6 July 2021 before the Mareva Injunction was discharged after the Respondents had made payment into Court) (Continuation Application).

By this time, set aside proceedings had been heard before the Beijing Court on 23 July 2021 and 15 September 2021 but judgment was pending at the time of the 21 December 2021 hearing.

The Court dismissed the Payment Out Application and Fortification Application. The Court also found that had it not been for the first Respondent's payment into Court which discharged the Mareva Injunction, it would have allowed the Continuation Application. A discussion of the Court's rationale for the dismissal follows.

Main issues

The overarching grounds relied on by the Respondents in their Payment Out Application were that the Mareva Injunction should never have been granted on an ex parte basis for:

1. lack of a good arguable case; and
2. material non-disclosure.

The alternative Fortification Application was based on the Respondents' claim that the Claimant had a tenuous connection with, and an absence of any assets in Hong Kong, so the Claimant would not be able to make good the Respondents' (potential) loss arising as a result of the Mareva Injunction.

In deciding against the Respondents, the Court considered specifically the following issues based on the grounds raised by the Respondents.

Whether there was material non-disclosure of lack of urgency regarding the first Respondent's disposal of shares

The first Respondent claimed that the Claimant had created "an unwarranted sense of urgency" in relying on an investigation report issued on 29 June 2021 (commissioned by the Claimant) from which the Claimant learned about the first Respondent's disposal of company shares which had been the subject matter of the CIETAC arbitration. The first Respondent's case was that the Claimant ought to have known of the first Respondent's disposal of the shares before June 2021.

The Court found that there was no basis for the assertion that the Claimant must have known or should have known of the disposal before June 2021.

Whether there was material non-disclosure of asset preservation relief

The first Respondent also claimed that the Claimant had misled the Court as to the full extent of and the reason for the Claimant's failure to apply for an asset preservation order in Mainland China (APO).

In the Hong Kong Court's view, the duty to make full and frank disclosure when making an ex parte application (for a freezing order) was as important as the need to state clearly the grounds of material non-disclosure in an application to discharge the order. Applications to discharge for material non-disclosure were not to be abused or to become a "rambling and roving investigation" of what should have been disclosed.

The Court found that the APO was made by the Beijing Court on its own volition and was persuaded that the Claimant did not have knowledge of it at the time. The Court also held that it was not the first Respondent's duty of full and frank disclosure to refer to powers which the Beijing Court might invoke in respect of the first Respondent's assets in Mainland China.

The first Respondent also tried to argue that the Claimant had been afforded "double protection" in both Hong Kong and Mainland China. However, by virtue of the implementation of the Supplemental Arrangement Concerning Mutual Enforcement of Arbitral Awards between the Mainland and the Hong Kong SAR (Supplemental Agreement), the Court held that the previous restriction against simultaneous enforcement of a Mainland award in Hong Kong and in the Mainland had been removed. There was nothing to prevent the relevant court from imposing its own preservation or mandatory measures for the enforcement of arbitral awards. A creditor would only have been prevented from seeking payment of any sum in excess of the full amount due under the award. The Court clarified that the Supplemental Agreement was prohibiting was double recovery, not double protection.

Whether there was material non-disclosure of the Claimant's financial means

The Court was not satisfied that in this case there was material non-disclosure with regard to the Claimant's financial means and status. The Court instead noted that it was highly pertinent that the Mareva Injunction in this case was not made at the interlocutory stage, but rather that it was made post-judgment and in aid of execution. In such circumstances, the Court was in general more prepared to grant a Mareva injunction.

The Court also noted that even if the award was ultimately set aside by the Mainland Court, the first Respondent had no automatic right to resist enforcement of award merely by virtue of that fact. The Hong Kong Court as court of enforcement had residual discretion to permit enforcement based on exercise of its discretion on recognised legal principles.

Whether the Claimant had a good arguable case for the Mareva Injunction and the Chabra Order

On the issue of whether the Claimant had a good arguable case for the Mareva Injunction, the Court referred to the criteria set out in Arrow ECS Norway AS v Xin Cheng Holdings (International) Company Limited HCA 239/2016, unreported, 12 May 2016, i.e.:

1. the plaintiff had to show his case was one that is more than barely capable of serious argument (and not necessarily one which the judge believes to have a better than 50% chance of success);
2. it was not enough to show an arguable case, namely one which a competent advocate could get on its feet, but something "markedly better than that is required, even if it cannot be said with confidence that the plaintiff is more likely to be right than wrong".

With respect to the Mareva Injunction application, the Court in this case was satisfied that there were good merits in the Claimant's application for leave to enforce the award because the good arguable case required of the Claimant here was that there was an award which could be enforced by the Hong Kong Court. The Court also found that it was just and equitable in this case to grant the Chabra order over the general assets of the second and third Respondents (which were controlled by the first Respondent) up to the amount of the Mareva Injunction.

Whether fortification should be ordered

On Fortification Application, the Court was not satisfied it was just or proper in this case to make such order.

The burden of showing the need for fortification lay on the defendant, and the defendant had to show the likelihood of a significant loss arising as a result of the injunction and demonstrate why it was believed that the plaintiff would not be able to make good that loss. While the merits of the parties' case were not usually necessary considerations, if the plaintiff had a strong case, then it may not be just or proper to make the order.

In this case, the first Respondent was unable to discharge the burden to prove that there was a likelihood of a significant loss because of the Mareva Injunction or that the Claimant would be unable to make payment under the undertaking.

Comment

Overall, the Court found that there was no material non-disclosure on the Claimant's part and the Claimant did have a good arguable case which supported its ex parte application for the Mareva Injunction.

The key principle arising from this case is that, with interlocutory relief, the Court will weigh the justice of granting the injunction against the likelihood of the primary cause of action being dismissed (and therefore harming the defendant). By contrast, where relief is sought in aid of execution of a judgment or arbitral award, the Court will generally be more inclined to grant freezing orders / Mareva injunctions or even Chabra orders because cause of action has already been decided.

It is also noteworthy that the Court considered the effect of the Supplemental Agreement and confirmed that relief granted by a Mainland Chinese court could co-exist with relief granted by a Hong Kong court.

For more information, please contact Simon Chapman QC, Partner, Jacob Sin, Associate, or your usual Herbert Smith Freehills contact.

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