In Company A & Anor v Company C [2024] HKCFI 3505, the court granted the Plaintiffs’ application for interim measures (Injunctions) against the Defendant under s.45 of the Arbitration Ordinance, Cap 609 (AO), in aid of arbitration proceedings ongoing between the Plaintiff and Defendant outside Hong Kong. The court rejected the Defendant’s argument that the Tribunal had already granted the interim measures in the arbitration. It also rejected the argument that the court should decline to grant the interim measures on the ground that the interim measures were currently the subject of arbitral proceedings and it was more appropriate for them to be dealt with by the arbitral tribunal (Tribunal), by virtue of s.45(4) of the AO. The court emphasized that the object and aim of the AO is for the court to facilitate the fair and speedy resolution of disputes by arbitration without unnecessary expense and that s.45 AO expressly states that the court’s power to order interim measures is for the purposes of facilitating the process of the arbitral tribunal. Here, the court found that there had been procrastination and obstruction by the Defendant to execute an escrow agreement as directed by the Tribunal in the application before it for Injunctions and that it was appropriate, just and convenient for the court to grant the Injunctions in order to preserve the status quo, pending the Tribunal’s further and final orders and award in the arbitration.
Background
The Plaintiffs, as Claimants in an arbitration, claimed damages for breach of a settlement agreement of around US$55 million against the Defendant (Company C) and its wholly owned subsidiary, SZ. Whilst the arbitration was still ongoing, SZ issued an announcement of its intention to dispose of its 51% equity interest in the Defendant, including the transfer or disposal of the Defendant’s existing business operations and assets to SZ and companies connected to SZ. The Plaintiffs believed that the Defendant intended to fraudulently divest its assets to render itself judgment proof, thereby rendering any arbitral award to the Plaintiffs nugatory.
Emergency relief application to the Tribunal
The Plaintiffs therefore applied to the Tribunal for emergency relief to prevent the alleged fraudulent transfer (Emergency Relief Application). The application sought orders (i) restraining the Defendant from completing the transfer of assets from the Defendant to SZ and (ii) for the Defendant to deposit security of US$55.5 million (Escrow Relief) in an escrow account.
The Tribunal directed the parties to file submissions in support of and opposition to the Emergency Relief Application, but did not order any interim-interim stop-gap measure. However, the Tribunal agreed that the Plaintiffs could seek emergency interim relief from the Hong Kong Courts to stop the transfer, whilst the Tribunal considered the matter further. Accordingly, on 24 May 2024, the Plaintiffs obtained an ex parte Injunction on an interim basis, until the inter-partes hearing on 31 May 2024.
Originating Summons proceedings in Hong Kong
On 27 May 2024, the Plaintiffs issued an Originating Summons (OS), seeking Injunctions in terms mirroring the relief sought under the Emergency Relief Application, pending the final arbitral award or until interim measures were granted by the Tribunal. On 31 May 2024, the Defendant offered undertakings not to (i) transfer any of its assets to SZ or any associated entity; and (ii) not to remove from Hong Kong any of its assets up to the value of US$55.5 million (Undertakings), pending the Tribunal’s grant or refusal of the Emergency Relief Application in the arbitration.
Ongoing disagreements before the Tribunal
Whilst the above interim orders were granted by the Hong Kong Court, things were progressing in tandem before the Tribunal. The Defendant proffered 3 guarantees from the transferees of the Defendant’s assets, who claimed that they would protect the Plaintiffs’ interests (Guarantees). However, the Tribunal found this to be insufficient protection, and as early as 28 May 2024, the Tribunal had indicated that it was prepared to grant a preliminary injunction in the Plaintiffs’ favour. The Tribunal invited the Plaintiffs to submit a draft order, and the Defendant to submit objections. Thereafter, the main area of disagreement between the parties related to the terms of the Escrow Relief to be granted by the Tribunal, which had not been resolved by the time of the hearing of the OS before the Hong Kong Court in October 2024.
Defendant’s opposition to the OS
The Defendant opposed the continuation or grant of the Injunctions sought under the OS on the basis that (i) the Tribunal had already disposed of and granted the interim measures sought by the Plaintiffs in the arbitration, such that the relief now sought in the OS (pending the order of the Tribunal) was unnecessary. The Defendant also contended that the court should not exercise its power under s.45 of the AO, and should decline to grant the relief by virtue of s.45(4), as the interim measures were currently the subject of the arbitration before the Tribunal; and (ii) it was neither appropriate for the matter to be dealt with by the court, nor just or convenient for the court to grant the relief sought by the Plaintiff.
Section 45(7) of the Arbitration Ordinance
The court pointed out that s.45(7) of the AO sets out the reminder that in exercising the power under subsection (2) to grant an interim measure in relation to arbitral proceedings outside Hong Kong, the court must have regard to the fact that the power is ancillary to the arbitral proceedings outside Hong Kong and for the purposes of facilitating the process of a court or arbitral tribunal outside Hong Kong that has primary jurisdiction over the arbitral proceedings. The court said that the court should therefore pay heed to s.45 in this case, since the Plaintiffs’ application for interim measures, in the form of the Injunctions and for the Escrow Relief, had already been made to and heard by the Tribunal. The court should consider whether it was “more appropriate” (under s.45(4)(b) of the AO) for the Tribunal to deal with the Plaintiffs’ present application for the Injunctions to be granted or continued by the court, pending the issue of the award in the arbitration.
Court’s jurisdiction to grant interim measures
The court referred to the principles that the court’s jurisdiction to grant interim measures should be exercised “sparingly”, and only where there are special reasons to utilize the power, with emphasis on the court’s policy of minimal curial intervention in arbitrations, and the need to recognize the autonomy of the arbitral process. However, the court said that it is precisely because the power of the Hong Kong court to grant interim measures is for the purposes of facilitating the process of the arbitral tribunal outside Hong Kong (as stated in s.45(7)(b) of the AO) that the orders sought by the Plaintiffs in the OS should be granted in this case, in order to support the Tribunal and to facilitate the orders the Tribunal had so far made in the arbitration.
The Tribunal’s Procedural Orders
The court said that the progress of the Emergency Relief Application before the Tribunal could best be described as procrastination, and frustration. It was pertinent to note, the court said, that on 14 June 2024, the Tribunal had issued a Procedural Order No 32 (PO 32), whereby it found that it had jurisdiction to issue relief to prevent the disposal, transfer, movement or dissipation of the Defendant’s assets, in order to preserve the Tribunal’s ability to render meaningful relief in the arbitration and the parties had been directed to agree upon the terms and language of an escrow account arrangement or, alternatively, a bank guarantee arrangement, to address the Plaintiffs’ concerns about the Defendant’s transfer and intended transfer of assets and the Plaintiffs’ ability to collect on any net award and to submit a report to the Tribunal by 19 June 2024, including the text of a jointly agreed escrow account agreement or bank guarantee document.
Following PO 32, the Tribunal made a number of further procedural Orders regarding the escrow account arrangement, but after a lapse of around 5 months and at least until the hearing of the OS in Hong Kong on 22 October 2024, the escrow agreement had still not been signed as the parties had not been able to agree on the terms and contents. The court said it was clear from the Tribunal’s Procedural Orders since PO 32, that the execution of an escrow agreement had all along been envisaged and directed by the Tribunal and the escrow agreement was to contain the terms directed by it and set out in PO 35. It said that despite the Defendant’s claims in September 2024, that its Undertakings had already been discharged upon the Tribunal’s grant of interim measures, it was clear from the contents of the Procedural Orders since PO 32 (in June 2024) that the Tribunal had still to rule on the Plaintiffs’ application for the interim relief sought, and that the escrow agreement which the Tribunal had intended the parties to sign had yet to be finalized for the Tribunal’s acceptance. These interim measures as sought by the Plaintiffs could not therefore be said to have been finalized already, when the order for the measures had (even on the day of the hearing before the Court) yet to be approved, and made by the Tribunal.
The court said that the Tribunal had made the position clear in PO 37, when it stated that the Defendant’s Undertakings had not been discharged. The Undertakings were expressed to be valid “until the granting of interim measures in the Plaintiffs’ favour by the Tribunal as sought”, or alternatively, 7 days after the application for interim measures was refused by the Tribunal. Even if the Defendant was right, that the Tribunal had already granted the interim measures, by ordering the Defendant’s payment of its cash and non-cash assets into an escrow account, coupled with an order for the execution of an escrow agreement (on terms to be agreed or finalized), it was clear beyond peradventure that the Tribunal’s directions for the parties to negotiate and finalize an escrow agreement had fallen on deaf ears, and had not been complied with by the Defendant despite the lapse of over 4 months from June 2024 when PO 32 was issued.
Injunctions granted by the court
The court held that such delay and non-compliance on the Defendant’s part should not in any event be condoned by any court, when the object and aim of the AO is for the court to facilitate the fair and speedy resolution of disputes by arbitration without unnecessary expense (under s.3 (1) of the AO), and when s.45 expressly states that the court’s power to order interim measures is for the purposes of facilitating the process of the arbitral tribunal. In light of the procrastination and obstruction by the Defendant to the execution of the escrow agreement as directed by the Tribunal, it was appropriate, just and convenient, the court said, for it to grant the Injunctions sought by the Plaintiffs, in order to preserve the status quo pending the Tribunal’s further and final orders and award in the arbitration. Further, to the extent that any order for interim relief had already been made by the Tribunal by its procedural orders, it was appropriate and just for the court to grant leave to enforce those orders under s.61 of the AO, as an order or direction of the court.
The court accepted the Plaintiffs submission that an order from the court to enforce POs 36 and 41 was not sufficient to afford adequate protection for the Plaintiffs in view of the Defendant’s obstructive and un-cooperative attitude towards compliance with those orders of the Tribunal and agreed that to best facilitate the Tribunal, to preserve the status quo pending the Tribunal’s final orders on the Plaintiffs’ applications before the Tribunal, and pending the issue of the final award, orders should be made along the lines of the relief sought in the OS.
Comments
This case illustrates how the court should exercise its power to grant interim measures under s.45 of the AO and its interaction with the process of the arbitration, bearing in mind the court’s policy of minimal curial intervention in arbitrations. The main consideration is whether the granting of the interim measures by the court will facilitate the process of the arbitral tribunal which is consistent with the pro-arbitration approach adopted by the Hong Kong courts.
For further information, please contact:
Justin Yuen, Partner, Deacons
justin.yuen@deacons.com
