Hong Kong courts can aid outside arbitrations

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Hong Kong courts can issue interim orders in aid of arbitrations seated outside Hong Kong, which can be useful in preserving assets and evidence held in Hong Kong, usually by the respondent company.

Such interim measures are helpful because many companies, including PRC companies, often have assets in Hong Kong. These interim orders can cover relief that may not otherwise be available from the arbitral tribunal or the courts in the foreign seat of the arbitration.

One such example was recently seen in the Hong Kong case of Chen Hong Qing v Mi Jingtian & Others (judgment handed down on 27 June 2017). In this case, the court issued a receivership order on the shares of a Hong Kong company, which the plaintiff had alleged were at risk of being transferred to a third party in breach of a share pledge the plaintiff had entered into with the defendants.

CASE FACTS

In Chen Hong Qing v Mi Jingtian & Others, under the share pledge, the defendants pledged their Hong Kong shares as security for a RMB690 million (US$105.8 million) loan made to various borrowers. The share pledge prohibited the defendants from transferring the Hong Kong shares and exercising any voting rights without the plaintiff’s consent. The share pledge was governed by PRC law and provided for all disputes to be referred to CIETAC arbitration, which was seated in Beijing.

A dispute arose after the plaintiff alleged that the defendants had exercised their voting rights without the plaintiff’s consent. The plaintiff commenced a CIETAC arbitration in Beijing against the defendants, and after the arbitration had been commenced the defendants attempted to sell the Hong Kong shares to a third party without the plaintiff’s consent.

In response, the plaintiff commenced court proceedings in Hong Kong and sought an interim measure in the form of a receivership order to restrain the defendants from dealing with the Hong Kong shares, pending determination of the CIETAC arbitration in Beijing.

COURT RULING

The court held that the test for granting interim measures was largely the same as that for granting interim injunctions in Hong Kong court proceedings. This meant that the applicant had to show that it had a good arguable case on the merits. Additionally, the applicant had to show that granting the interim measure would carry a lower risk of injustice than if the interim measure had not been granted.

As a condition for granting the interim measure, the applicant had to undertake to pay damages to the counterparty if it later turned out that the interim measure should not have been granted. The court found that the defendants had blatantly acted in disregard of the plaintiff’s rights under the share pledge by attempting to sell the Hong Kong shares to the third party without the plaintiff’s consent. There was a real risk that control over the Hong Kong shares would be lost if the receivership order were not granted. A receiver would be in the best position to balance the competing interests of the parties (including the third party) in exercising the voting rights and preserving the value of the Hong Kong shares pending determination of the CIETAC arbitration. Such a course of action carried the lower risk of injustice and would help to preserve the status quo until the arbitral tribunal in the CIETAC arbitration had determined the dispute.

The defendants argued that, since the arbitration was seated in Beijing, either the CIETAC arbitral tribunal or the mainland courts would be the more appropriate forum to grant the interim measure.

The court rejected this argument and held that the interim measures were being sought only in aid of the CIETAC arbitration. This was also to take into account the fact that expert evidence had been given to the effect that receivership orders were not available in PRC courts (other than in bankruptcy), and there is uncertainty in any case as to whether any asset preservation orders made by a PRC court can apply outside the PRC to cover assets in Hong Kong (such as the Hong Kong shares).

Business Law Digest is compiled with the assistance of Baker McKenzie. Readers should not act on this information without seeking professional legal advice. You can contact Baker McKenzie by e-mailing Danian Zhang (Shanghai) at: danian.zhang@bakermckenzie.com