13 January 2021
In Changfeng Shipping Holdings Limited v Sinoriches Enterprises Co., Limited HCCT 59/2019; [2020] HKCFI 2703, the Hong Kong Court of First Instance laid down the principles applicable to service out of the jurisdiction of examination orders on officers of corporate judgment debtors pursuant to Order 48 rule 1 and Order 11 rule 9(4) of the Rules of the High Court (Cap. 4A) (RHC).
This case illustrates that Hong Kong courts have jurisdiction to issue examination orders against officers of corporate judgment debtors out of the jurisdiction, if satisfied that the officers had knowledge of the corporate judgment debtor’s finances and they were closely connected to the substantive claim from which the judgment arose.
Background
On 31 October 2019, the Applicant obtained leave under Order 73 rule 10(1) of the RHC to enforce a London arbitral award against the Respondent as a court judgment.
On 9 March 2020, the Applicant made an ex parte application for leave to examine the two directors of the Respondent, a Hong Kong company, pursuant to Order 48 rule 1 of the RHC and for leave to serve the examination order out of the jurisdiction, pursuant to Order 11 rule 9(4) of the RHC.
On 14 August 2020, a master granted the examination order but refused leave to serve the order out of the jurisdiction (Order). Following the decision of the Singapore Court of Appeal in Burgundy Global Exploration Corp v Transocean Offshore International Ventures Ltd [2014] SGCA 24, the master was not satisfied that the Applicant had shown a close connection between the directors and the Applicant’s substantive claim.
On 1 December 2020, Deputy High Court Judge To allowed the Applicant’s appeal against the Order.
Extra-territorial effect of Order 48 rule 1
The Judge considered that the underlying purpose of Order 48 rule 1 was to enable judgment creditors to obtain information about a judgment debtor’s finances. Such purpose could only be served against a corporate judgment debtor by extending the application of such rule to its officers within as well as outside the jurisdiction. The underlying purpose of the rule and Hong Kong’s background as an international commercial centre, where officers of foreign or international corporations may reside outside Hong Kong, are strong enough to displace the presumption against extra-territoriality. Accordingly, the Court has jurisdiction to issue examination orders against officers of a corporate debtor who reside outside Hong Kong.
Leave for service out of examination order
The Court clarified that leave to serve the order out on a judgment debtor already subject to the jurisdiction (such as a personal debtor within jurisdiction who has subsequently left jurisdiction) would not be required. Leave is required for service out on officers of a corporate judgment debtor since they are not parties to the proceedings and they have not submitted themselves to the jurisdiction.
Principles applicable to service out of examination order on officers of corporate debtors
The Court confirmed that the decision of the House of Lords in Masri v Consolidated Contractors International Company SAL and others [2009] UKHL 43 had no bearing on the present case ,since the scheme for examination orders and service out of the jurisdiction in the United Kingdom is different from that in Hong Kong.
On the other hand, the Court indicated that Burgundy Global was a persuasive authority, since the statutory regime in Singapore in relation to examination orders and service out is very similar to that in Hong Kong. The relevant principles in Burgundy Global were summarised by the Court as follows: (i) the fundamental question is whether the foreign officer is so closely connected to the substantive claim that the Singapore court is justified in taking jurisdiction over him; (ii) there should be no strict or exhaustive rules as to when leave should be granted, but the officer’s knowledge of the finances of the judgment debtor would be the basic threshold; and (iii) leave should be granted sparingly.
While the Court agreed with the Singapore Court of Appeal in Burgundy Global that the officer’s knowledge of the finances of the judgment debtor should be the prerequisite for invoking the Court’s jurisdiction, as to the close connection test, the Court preferred to formulate the test along the lines of the dicta in National Justice Cia Naviera SA v Prudential Assurance Co Ltd, The Ikarian Reefer (No 2) [2000] 1 WLR 603 instead. Furthermore, the Court refused to acceptthat the discretion should be sparingly exercised. The Judge commented that Hong Kong courts should adopt a pragmatic, instead of an unnecessarily restrictive approach, given the internationalisation of commercial activities in the jurisdiction.
The Court helpfully summarised the applicable principles under Order 11 rule 9(4) as follows:
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(1) |
The officer’s knowledge of the finances of the corporate debtor is a prerequisite, rather than part of the close connection test; |
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(2) |
The discretion may be exercised only if there is a close connection between the officer’s conduct in relation to the action from which the judgment debt arose and the subject matter of that action which makes it unjust not to exercise the jurisdiction; |
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(3) |
A close connection is created if the officer’s conduct is such as to make it unjust not to lift the corporate veil of the judgment debtor or not to bypass the principle of corporate personality and to allow the corporate debtor to withhold information about its finances so as to frustrate the execution of the judgment debt; |
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(4) |
Prima facie, a close connection is created by the conduct of the sole or substantial shareholder; the sole director or officer who is the alter ego or controlling mind of the corporate debtor or has instituted, controlled or financed the litigation. Officers who have played a key role in the events giving rise to the judgment creditor’s successful claim should be required to provide such information; |
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(5) |
Fault, negligence or blameworthiness are not at all relevant. If there are such features in the conduct of the officer, it is all the more appropriate for the discretion to be exercised; |
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(6) |
The burden of proof of close connection and knowledge is on the applicant. In the majority of cases, proof has to be by inference. The court has to draw inferences with a sense of realism appropriate to the circumstances; |
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(7) |
The discretion to order service out should be exercised with extreme caution, but there should be no bias against service out; and |
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(8) |
The application for leave to serve out consists of a two stage process:
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Application
On the facts, the Court did not find any serious or obvious flaw in the application. Adopting a broad brush approach, the Court was satisfied that the prerequisite knowledge of the Respondent’s finances and close connection of the directors’ conduct with the claim from which the judgment debt arose were proved. Having warned itself of the need for caution, the Court was satisfied that leave to serve out should be granted. Accordingly, the Applicant’s appeal was allowed.
Takeaway
This is an important decision setting out the principles applicable to serving an examination order out of the jurisdiction on officers of a corporate judgment debtor. It is worth mentioning, that the Court did not accept that the discretion should be exercised sparingly and indicated that there should be no bias against service out. Accordingly, officers of a company with knowledge of the finances of the corporate debtor who are closely connected to the substantive claim are unlikely to avoid an examination order pursuant to Order 48 rule 1 of the RHC simply by residing out of the jurisdiction.
For further information, please contact:
Peter So, Partner, Deacons
peter.so@deacons.com.hk
