This article discusses how Hong Kong courts, as the court of a company’s COMI (centre of main interest) could lend assistance to local liquidators appointed over a foreign company – which goes as far as to compel a Hong Kong ex-director passing resolutions to appoint the liquidator as director of foreign subsidiaries in place of himself.

The subject company (“Company“) in Re China Properties Group Limited (in Liquidation) [2023] HKCFI 2346 has a structure commonly seen in Hong Kong-listed companies (see Re NewOcean Energy where we previously discussed the second requirement to wind up foreign companies). The top-co is a Cayman company which directly holds 4 BVI subsidiaries, which in turn hold various Hong Kong subsidiaries. These Hong Kong subsidiaries then directly hold Mainland subsidiaries which own substantive assets and operations of the Company ([7]) – foreshadowing that the ex-director being Hong Kong-based is a key consideration in this case (more on this later).

At issue is that the ex-directors were being extremely difficult and uncooperative in the liquidation process where no progress has been made for about 3 months. For example, none of the directors filed statement of affairs and the liquidators were prevented from accessing the Company’s books and records ([12]). Worse still, one of the ex-directors commenced proceedings in the BVI seeking declaratory relief that he is the sole director of the BVI subsidiaries when the liquidators took out an inter-partes summons in Hong Kong seeking orders against the directors of the Company so as to give effect to the winding-up order ([14]-[15]). This, culminated into the present urgent summons – if the ex-director was successful in the BVI proceedings, it would give him power to appoint further directors, which would make it difficult for the liquidators to take control of the BVI subsidiaries (and their assets) ([18]).

The General Principles and In Personam Jurisdiction 

Recorder William Wong SC held at [19] that Hong Kong courts “have a duty to assist liquidators appointed [by the same] to effectively and efficiently discharge their professional duties in the best interest of the general body of creditors“. In this regard, an “orderly, speedy and cost effective liquidation for the best interest of all stakeholders” is key for Hong Kong to maintain its status as an international financial centre and insolvency hub ([20]). It was with this in mind, he adopted Re Yung Kee Holdings Limited (2015) 18 HKCFAR 501 to order the ex-director who is indisputably subject to the in personam jurisdiction of the Hong Kong courts to pass the written resolutions so as to facilitate the effective administration of the liquidation. In particular, citing [39] of Re Yung Kee that,

“Every court…has an implied jurisdiction to make whatever orders are necessary to give effect to its own judgments. In the present case all the individual respondents reside in Hong Kong are subject to the in personam jurisdiction of the Hong Kong court. Accordingly were this Court to be of the view…that a winding up order ought to be made…we would propose to give leave to the…liquidator to apply to the Court of First Instance for such orders…as may be necessary to make the underlying assets of the Company available to the liquidator.“

Comity

Insofar one was to doubt whether such order by the Hong Kong courts usurped the jurisdiction of the BVI court, Recorder Wong SC provided a three-fold answer.

First, following the line of authorities Re Lamtex Holdings Ltd [2021] HKCFI 622 and Re Global Brands Group Holdings Ltd (in Liquidation) [2022] HKCFI 1789, Hong Kong laws have past the point where assistance was only to given by courts of the place of incorporation. In the spirit of comity, and more importantly to reflect the commercial reality that these companies often have a top-co in “letterbox” offshore jurisdiction which have no connection other than formality and registration, Hong Kong courts as the court of COMI are prepared to lend assistance to local liquidators appointed over foreign entities.

Secondly, while the ex-director was entitled to take out whatever proceedings he thinks fit (whether in Hong Kong or the BVI), it is paramount that “this Court discharges its own facilitative duties to promote the effectiveness and efficiency of liquidations in this jurisdiction” ([40]). Recorder Wong SC was of the view that it is not right for the Hong Kong courts to stand by and simply pass on the burden to the BVI courts.

Thirdly, judicial comity dictates that within the four corners of local laws, courts should offer mutual assistance to each other so that orders of courts can be given their full effects in the best interest of cross-border liquidations. Bearing in mind the abovementioned General Principles, it will not be cost effective for the liquidators, in every case, to have to apply for a winding up order against the subject company in the place of incorporation and to ask that court to appoint them to be liquidators ([41]-[42]).

Implications

Re China Properties Group Limited is a timely reminder that directors of a company in liquidation are meant to render assistance to liquidators and there is nothing spectacular or oppressive for them to do so. If they are being difficult about it, the courts would be prepared to grant suitable orders to compel their cooperation. Further, we can be sure that COMI, rather than the place of incorporation is the criteria the courts are concerned with in recognising and assisting liquidators of companies wound up in Hong Kong.

See full judgment here: https://legalref.judiciary.hk/lrs/common/search/search_result_detail_frame.jsp?DIS=154981&QS=%28tiffany%2Bwong%29&TP=JU&currpage=T

The Hong Kong Court of First Instance recently handed down its decision, G v P [2023] HKCFI 2173, where it set aside an enforcement order of an arbitral award due to invalid service of a notice of arbitration, which resulted in the Respondent not being given a reasonable opportunity to present his case.

Background

The Applicant, as lender, and the Respondent, as borrower, entered into a loan agreement and a supplemental loan agreement (the “Supplemental Loan Agreement“) with the following dispute resolution clause (the “Arbitration Clause“):

“Any dispute or difference arising out of or in connection with the Loan Agreement and this Supplemental Loan Agreement shall, at the option of the Claimant (or the Plaintiff, as may be applicable), be referred to and finally resolved by arbitration administrated by the Hong Kong Arbitration Society and in accordance with the HKAS Online Arbitration Rules for the time being in force or by court proceedings in Hong Kong courts.”

A dispute arose between the parties under the Supplemental Loan Agreement and was resolved by way of arbitration commenced at the option of the Applicant (the “Arbitration“).  The Respondent did not serve any defence in the Arbitration and the Arbitration proceeded without the Respondent’s participation.  On 28 November 2022, an arbitral award was made by the Hong Kong Arbitration Society in favour of the Applicant (the “Arbitral Award“).

On 2 December 2022, on the application of the Applicant, the Court made an order granting leave to enforce the Arbitral Award against the Respondent (the “Enforcement Order“).

Subsequently, the Respondent applied to set aside the Enforcement Order on two grounds:

• there was no valid arbitration agreement between the Applicant and the Respondent; and
• the Respondent was not given a reasonable opportunity to present arguments in the Arbitration.

Ground 1: Absence of a valid arbitration agreement

The Respondent argued that the Arbitration Clause was not a valid arbitration agreement, as it was an optional arbitration clause which did not compel the parties to arbitrate. An arbitration agreement could not be valid in the absence of the element of compulsion for the parties to arbitrate.

In determining the validity of the Arbitration Clause, the Court stated that the ultimate question was one of construction of the clause in question, to ascertain the objective intention of the parties at the time of contracting.  Each case would turn on the terminology used in the contract, with the contract construed as a whole.

The Court held that the Arbitration Clause was valid and binding. It considered that the option in the Arbitration Clause was only conferred on the lender – the Applicant – and not on the borrower – the Respondent. Therefore, when the Applicant exercised the option to commence arbitration proceedings, the Respondent was compelled to arbitrate. The Respondent did not have an option under the Arbitration Clause as to whether to arbitrate or not.

Ground 2: Inability to present case

The Respondent claimed that he was not given a reasonable opportunity to present his case. The Court stated that the core and determining factor for this was whether the Respondent had been given proper notice of the Arbitration (the “Notice of Arbitration“) .

The Applicant argued that given that the Notice of Arbitration was served on the Respondent at the email address specified in the Supplemental Loan Agreement, and the Arbitration Clause provided that the Arbitration was to be in accordance with the HKAS Online Arbitration Rules (“Online Rules“), the Notice of Arbitration was deemed to be properly received by the Respondent under Article 2.1 of the Online Rules, which provides that a notice of arbitration is deemed to be have been received by a party if it is transmitted to:

• the email address confirmed by the recipient upon participating in the online arbitration proceedings;
• the email address “specified in any applicable arbitration agreement or any agreement”; or
• in the absence of the above, any email address which the recipient holds out to the world at the time of such transmission.

The Respondent only provided the email address of “[email protected]” in the Supplemental Loan Agreement. Further, the only evidence on service of the Notice of Arbitration was in the Arbitral Award itself, which stated that the Notice of Arbitration was transmitted by email to the email address of “[email protected]”, which was different from that specified in the Supplemental Loan Agreement. The Court decided that the Arbitral Award must be taken to be correct and accurate by virtue that there was no amendment thereto.

Accordingly, the Court held that the deeming provisions in Article 2.1 of the Online Rules could not apply and did not even come into operation, when the Notice of Arbitration was not transmitted to the email address “specified in [the] applicable arbitration agreement”.  Further, since the Respondent never participated in the Arbitration, there was no evidence of “[email protected]” having been specified or confirmed by the Respondent upon his participation in the Arbitration. Nor was there any evidence to support any possible claim that “[email protected]” was the Respondent held out to the world as his email, at the time of the transmission of the Notice of Arbitration.

In the circumstances, there was no valid service of the Notice of Arbitration on the Respondent, and consequently, he was not given the opportunity to present his case before the Arbitral Award was made.  As such, the Enforcement Order was set aside.

Key Takeaways

This case provides us with the following key takeaways.

First, the unsuccessful jurisdictional challenge for the optional arbitration clause once again confirms the Court’s pro-arbitration stance and willingness to give effect to parties’ agreement.

Secondly, even with the Court’s pro-arbitration approach, failure to effect proper service of the Notice of Arbitration may lead to an eventual setting aside of the arbitral award and any enforcement order, by reason that the Respondent would not be given a reasonable opportunity to present his or her case.

Thirdly, it serves as a reminder that typographical errors in arbitral awards should be corrected to avoid possible prejudice in subsequent enforcement proceedings.

For details, please refer to the full judgment here.

On 28 November 2022, we published an article discussing the Court of Appeal’s judgment in C v D (Arbitration) [2022] 3 HKLRD 116, which contains a summary of the facts and the rulings by the Court of First Instance and the Court of Appeal. Please refer to the article at https://minterellison.com.hk/latest-news/page/6/.

The CFA’s ruling

Just before the summer holidays, the Court of Final Appeal in Hong Kong (‘CFA’) handed down its judgment, affirming the Court of Appeal’s finding that whether pre-arbitration procedures have been complied with is a question of admissibility to be decided by the arbitral tribunal, not the court.

Before the CFA, the issue was whether an arbitral tribunal’s determination on the compliance of a pre-arbitration condition precedent is subject to recourse to the court under Articles 34(2)(a)(iii) of the UNCITRAL Model Law (as incorporated under s.81(1) of the Arbitration Ordinance (Cap. 609)). Having considered the arguments put forward by both sides, the CFA unanimously dismissed the appeal, ruling that:

(i). the distinction between questions of “jurisdiction” and questions of “admissibility” does provide a helpful aid to construction when deciding whether a particular objection warrants judicial interference. Whether pre-arbitration procedures have been complied with is a question of admissibility and not of jurisdiction, and the court may only review a tribunal’s decision on the latter but not the former,

(ii). where there is an objection in relation to a pre-arbitration condition, it is necessary first to construe the arbitration agreement. The parties are free to agree that compliance with such a condition is amenable to review by the court, but unequivocally clear language in the arbitration agreement would be required, given that it is contrary to all normal expectations to find that such is the intention of the parties who have chosen to submit disputes to an arbitral tribunal rather than a court for resolution,

(iii). it is presumed that pre-arbitration conditions are not jurisdictional. Hence, absent unequivocal language to the contrary, an objection to how the tribunal has resolved an issue concerning a pre-arbitration condition does not challenge the tribunal’s authority to arbitrate what is conferred by the parties, and

(iv). in the present case, nothing in the operative clauses of the parties’ contract suggests an intention to confer jurisdictional status on the pre-arbitration conditions. In contrast, those clauses lend themselves to a construction that the relevant conditions are merely procedural and intended to be exclusively decided by the tribunal.

The full judgment can be found at https://legalref.judiciary.hk/lrs/common/ju/ju_frame.jsp?DIS=153528&currpage=T.

Takeaway

As Hong Kong adopts the UNCITRAL Model Law on arbitration, the clear ruling in this judgment is likely to have an impact in the other 118 jurisdictions having their arbitration legislation also based on the Model Law. The CFA’s ruling is generally welcomed by the arbitration community in Hong Kong and demonstrates the pro-arbitration stance of the Hong Kong courts. In view of this ruling, parties are advised to be cautious not only when drafting multi-tiered dispute resolution clauses in arbitration agreements but also not to easily challenge an arbitral tribunal’s decision when one has queries about compliance with pre-arbitration conditions.

On September 5 2023, the Court of Final Appeal (“CFA“) held by a majority of 3:2 that the Hong Kong Government is in violation of its positive obligation under Article 14 of the Hong Kong Bill of Rights Ordinance (“BORO“) to establish an alternative framework for the legal recognition of same-sex partnerships. This is the first time a court in a common law jurisdiction has decided that Article 17 of the International Covenant on Civil and Political Rights (“ICCPR“) (from which Article 14 of the BORO is derived) imposes a positive obligation on a State to ensure that the rights protected by it are effective.

The appellant Sham Tsz Kit, was married to his same-sex partner in New York in 2013. In the absence of any Hong Kong law providing for such marriage to be recognised, he brought proceedings which culminated in him seeking a determination by the CFA of the following 3 questions:

1. Whether he has a constitutional right to same-sex marriage under Article 25 of the Basic Law (“BL“) and Article 22 of the BORO;
2. Alternatively, whether the absence of any alternative means of legal recognition of same-sex relationships constitutes a violation of Article 14 of the BORO and/or Article 25 of the BL and Article 22 of the BORO; and
3. Whether the non-recognition of foreign same-sex marriage constitutes a violation of Article 25 of the BL and Article 22 of the BORO.

Questions 1 and 3 – Lex Specialis

The CFA unanimously dismissed questions 1 and 3 by operation of the common law principle lex specialis (that a general provision that might apply to any case must give way to a specific provision which applies to the case at hand). Regarding question 1, Article 19(2) of the BORO is the lex specialis in relation to the right to marry and takes precedence over the equality rights under Article 25 of the BL and Article 22 of the BORO. Since Article 19(2) of the BORO is confined to heterosexual marriage, it is not permissible to interpret the equality rights under Article 25 of the BL and Article 22 of the BORO as conferring a constitutional right to same-sex marriage. Similarly regarding question 3, given that the appellant lacked capacity to enter into a same-sex marriage as concluded under question 1, compelling recognition of the appellant’s foreign same-sex marriage would amount to an “incongruent” situation (see paragraph [76]). Thus, questions 1 and 3 fall together on the basis of lex specialis.

Question 2 – Positive or Negative Obligations?

Albeit agreeing that Article 14 of the BORO involves different considerations, Chief Justice Cheung (“CJ“) and Justice Lam PJ differed from Justices Ribeiro PJ, Fok PJ and Keane NPJ in saying that Article 14 of the BORO does not impose a positive obligation on the Hong Kong government to ensure legal recognition of same-sex relationships.

The gist of the CJ’s judgment was that there was a distinction between the prevention of interferences under Article 14 of the BORO and a positive duty to enact laws to ensure “effective respect” for those rights absent interferences (as required under Article 8 of the European Convention on Human Rights (“ECHR“)) (see paragraph [25]). He further emphasised that the CFA must be cautious in applying Strasbourg jurisprudence as Article 14 of the BORO is derived from Article 17 of the ICCPR, rather than Article 8 of the ECHR –  and since Strasbourg jurisprudence was influenced by developments on the European continent, reliance on the interpretation of Article 8 of the ECHR was misplaced (see paragraphs [41] and [54]). Focusing on a textual analysis and relying on the drafting history and commentary on Article 17 of the ICCPR, the CJ concluded that the Hong Kong government only has a duty to prevent and prohibit interferences to the constitutional right enjoyed under Article 14 of the BORO. It followed that the non-recognition of same-sex partnership in Hong Kong does not constitute a violation of Article 14 of the BORO.

On the other hand, Justices Ribeiro PJ and Fok PJ adopted a different interpretation. They began by saying that whilst Article 14 of the BORO speaks of “privacy” and Article 8 of the ECHR refers to “private life“, the “two concepts are to be treated as indistinguishable” – and accordingly, Strasbourg jurisprudence provided persuasive guidance (see paragraph [138]).

Secondly, because the lack of means to acquire the legal recognition available to heterosexual couples is potentially demeaning of same-sex couples and “privacy is a concept inherently linked to a person’s dignity“, they held that Article 14 of the BORO is engaged (see paragraphs [142]-[143]),

“To say this is not to insist upon aligning same-sex unions with marriage.  Rather, it is to make the point that absence of legal recognition of same-sex unions as committed, loving, stable and long-term relationships between individuals who are mutually dependent on each other can be an occasion of arbitrary interference in the ordinary conduct of the private lives of those individuals.” (see paragraph [145])

Thirdly, following the line of authorities applying Article 8 of the ECHR (which was said to impose both positive and negative obligations), they considered that the focus must be on what needs to be done to make the rights contained in Article 14 of the BORO effective, rather than any narrow textual analysis (see paragraph [160]).

Fourthly, having decided that effective protection of the relevant rights require recognition of a positive obligation, they held that the CFA was required to go on to consider whether the proposed obligation strikes a fair balance between the competing interests of the individual and the community as whole (see paragraph [162]).

Finally, as regards Article 17 of the ICCPR, they were of the view that, inter alia, the word “guarantee” in the same commentary to which the CJ referred may entail a positive obligation on the State to adopt legislative measures to give effect to the substantive rights involved.

Implications

It was repeatedly stated in the judgment that the CFA was not addressing the question of whether in terms of social policy for Hong Kong same-sex unions should be recognised and afforded rights and obligations similar to those presently enjoyed by heterosexual couples (see, for example, paragraph [220]). In this regard, the Hong Kong government enjoys a flexible margin of discretion in deciding the content of the rights and obligations to be associated with the scheme of legal recognition. The Hong Kong government has been given 2 years to formulate the relevant framework.

See the full judgment here: legalref.judiciary.hk/lrs/common/ju/ju_frame.jsp?DIS=154774&currpage=T

On 11 February 2022, we published an article discussing the Court of First Instance’s (CFI) judgment in Tam Sze Leung & Ors v Commissioner of Police [2021] HKCFI 3118, in which the No Consent Regime as operated by the Commissioner of Police was held to be unconstitutional.  Our article published on 14 April 2022 provided an update on the relief granted by the CFI ([2022] HKCFI 772).

As a refresher, the No Consent Regime serves a crucial role in assisting victims of fraud to preserve the stolen funds in question, as it provides a quick and cost-effective way for the Police to “informally freeze bank accounts” which received the victims’ money before legal recourse can be pursued.

In April 2023, on appeal by the Commissioner of Police from the CFI’s decision, the Court of Appeal (CA) overturned the CFI ruling in its decision [2023] HKCA 537 for the following reasons:-

1. First and at the outset, it was not clear from the CFI judgment as to what the “No Consent Regime as operated by the Commissioner of Police” entails, and this leaves one in doubt as to what precisely is unlawful, and what systematic effect this ruling has on the No Consent Regime as a whole.
2. Second, the CA dismissed the “ultra vires” ground relied upon by the CFI. Based on the CA’s analysis, a bank account is “frozen” not because of any enforceable order by the Police, but because the bank chooses to withhold the funds due to its potential criminal liability for money laundering under section 25(1) of the Organised and Serious Crimes Ordinance (Cap 455) (OSCO).  The issuance of Letters of No Consent (LNCs) merely means that the banks do not have the Police’s consent to deal with the funds, but the Police do not have any power to compel the banks to freeze the account, just as the issue of consent does not compel the banks to release the funds.
3. The CA went further to say that even by alerting the banks to potential money laundering offences and subsequently issuing LNCs, as the Police did in this case, the Police were not acting beyond their powers (i.e. ultra vires). Indeed, it is part of the duties of the Police to take all steps necessary to prevent crime, and the Police’s power to give consent under the OSCO necessarily implies a power to withhold or refuse consent.
4. Third, the CA rejected the CFI’s view that the LNCs in this case were issued for the improper purpose of securing an informal and unregulated asset freeze. Upon receiving an LNC, whether or not to deal with the property is ultimately a decision for the bank to make.  In this case, the CA acknowledged that the purpose of the Police issuing the LNCs was to prevent dissipation of the funds, and accepted that this was consistent with the recognised purpose of OSCO to deprive offenders of proceeds from their criminal acts.  Further, the power of the Police to withhold consent can be exercised not only where they are satisfied in fact, but also where there is reasonable suspicion that the proceeds were derived from criminal conduct.  As such, the CA disagreed with the CFI that the LNCs were issued for an improper purpose.
5. Fourth, the CA disagreed with the CFI’s conclusion that (a) there was no clarity or certainty as to the scope of power in relation to LNCs and the manner of its exercise in the OSCO or the guidelines published by the Police, or that (b) the law did not provide adequate effective safeguards against abuse. The CA took the view that there were sufficient published guidelines which were accessible by the public to anticipate how the Police would exercise their power.  In addition, various challenges and remedies such as judicial review against the Police’s decision, civil action against the bank, the court’s power to award compensation to the account holder under the OSCO, and remedies in private law for infringement of property or contractual rights, are also available to guard the account holders against any arbitrary or capricious exercise of power by the Police.
6. Finally, the CA upheld its earlier judgment in Interush Limited v Commissioner of Police [2019] HKCA 70 that the object of the relevant provisions under OSCO was to deter criminal activity by restricting access to the proceeds of crime and that this was a legitimate societal aim. The CA clarified that the Interush judgment was still binding, and it failed to see how it could be distinguished by the CFI in this particular case in saying that the No Consent Regime was inherently disproportionate in interfering with the account holders’ fundamental rights.

The CA decision means that it remains constitutional for the Police to issue LNCs to banks where it has the requisite reasonable suspicion.

As an update, in light of the general or public importance of the decision, the CA had on 15 August 2023 ([2023] HKCA 959) granted leave to the applicants to appeal to the Court of Final Appeal (CFA).

We await to see how our highest court decides the matter once and for all.  Regardless, the CFA’s ruling will have a significant impact on how victims of fraud can preserve their stolen funds and recover their losses, as well as the banks’ compliance obligations when faced with funds suspected of representing proceeds of crime.

As the matter presently stands, the effect of an LNC informally freezes the account in question.  Victims would nevertheless have to resort civil proceedings themselves to apply to the court for a formal injunction order to prevent dissipation of their money, as there is a limit as to how long the Police will maintain the validity of its LNC, and to recover the stolen money from the fraudsters.  Our dispute resolution team has assisted numerous victims of such cases.