The recent judgment of 信达澳亚基金管理有限公司 v 宜华生活科技股份有限公司 & Ors [2024] HKCFI 1957 concerns the application of the legal principles for registration and enforcement of Mainland judgments under the previous statutory regime of reciprocal enforcement of judgments between Hong Kong and Mainland China. This is because the underlying Mainland judgment was made before the implementation of the new statutory regime in January this year.
Specifically, the Court in this case found that an individual bondholder and a bond issuer were not parties to “a relevant choice of Mainland court agreement” (as required under the previous statutory regime), and set aside the registration of the Mainland judgment.
Background
By way of recap, on 29 January 2024, the Mainland Judgments in Civil and Commercial Matters (Reciprocal Enforcement) Ordinance (Cap. 645) (the “2024 MJREO“) came into effect. The 2024 MJREO effectively replaces the previous Mainland Judgments (Reciprocal Enforcement) Ordinance (Cap. 597) (the “2008 MJREO“) that had been in place since 2008. For the key differences between the 2024 MJREO and the 2008 MJREO, see our blogpost here.
The Plaintiff (P) in this case was the holder of two tranches of corporate bonds (the “Bonds“) issued by the 1st Defendant (D1), a company which was listed from the Shanghai Stock Exchange in March 2021 and is now listed on the National Equities Exchange in the Mainland.
D1 failed to redeem the Bonds, and the other Defendants failed to honour their guarantees of D1’s repayment obligations. P commenced proceedings and obtained a Mainland judgment in its favour. P then applied to the Hong Kong Court to register the Mainland judgment for enforcement and obtained a Court Order, and a notice of registration was served on D1.
D1 applied to set aside the enforcement on the basis that there was no “relevant choice of Mainland court agreement” between P and D1.
The Court considered the contractual framework against which arguments were ventilated between P and D1 as follows:
- Bond Trustee Agreement: this agreement was entered into between D1 and the trustee of the Bonds (i.e. GF Securities Co Ltd), whereby the parties agreed for the trustee to act for all the bondholders collectively in handling matters relating to the Bonds and to protect the bondholders’ interest. Specifically, the trustee may accept authorisation by the bondholders to issue legal proceedings against D1 in its own name. To that end, clause 9 provided that the trustee may commence proceedings in the Court where D1 is located (i.e. Shantou in the Mainland);
- Rules for Bondholders’ Meeting: shortly before the execution of the Bond Trustee Agreement, D1 issued these rules, under which the bondholders may exercise their rights at a bondholders’ meeting, including to authorise the trustee to issue proceedings in the event of D1’s default; and
- Bond Documents: these were issued by D1 to the public, which constituted the contract between D1 and the bondholders (including P). The Bond Documents made express reference to the Bond Trustee Agreement and the Rules for Bondholders’ Meeting, and the bondholders were deemed to have agreed to them.
The issue
In trying to seek recognition of the Mainland judgment P obtained against the Defendants, P has to satisfy, among other requirements, under the 2008 MJREO that there was a relevant choice of Mainland court agreement in the contract between the parties. The core issue between the parties, therefore, is whether a relevant choice of Mainland court agreement was made between them.
In opposing the set aside application brought by D1, P relied on clause 9 of the Bond Trustee Agreement and argued that:
- P should be regarded as a party to the Bond Trustee Agreement (the “Extension Argument“); and
- Further or alternatively, the Bond Documents incorporated clause 9 of the Bond Trustee Agreement (the “Incorporation Argument“).
Decision
The Court held that clause 9 of the Bond Trustee Agreement did not apply to the legal proceedings commenced by P (as an individual bondholder) against D1.
(1) The Extension Argument
As a starting point, the contractual framework in this case laid down a specific dispute resolution mechanism in the event of D1’s default. Specifically, the trustee should, after obtaining the authorisation at a bondholders’ meeting, commence legal proceedings in its own name against D1. Any proceedings directly commenced by a bondholder against D1 are contemplated only where the trustee has failed to act in accordance with the Bond Trustee Agreement.
The Court found that the proceedings directly commenced by P were not alleged to be a result of the trustee’s failure to act. Therefore, they fell outside of the contractual mechanism. P could not simply step into the trustee’s shoes and rely on clause 9 of the Bond Trustee Agreement. On this basis, the Extension Argument failed.
(2) The Incorporation Argument
The Court agreed that the Bond Documents had incorporated clause 9 of the Bond Trustee Agreement. However, this should be interpreted as only applying to legal proceedings commenced by the trustee in accordance with the contractual mechanism, but not to the proceedings commenced by individual bondholders outside the contractual mechanism.
To that end, the Court emphasised that D1 and the bondholders (including P) had never specifically negotiated any dispute resolution clause between them in the Bond Documents.
As P failed to prove that there was a relevant choice of Mainland court agreement between P and D1, the Court set aside the registration order and the notice of registration.
Comment
This case is a reminder that the 2008 MJREO may still apply under certain circumstances, in particular where the underlying Mainland judgment was obtained before 29 January 2024 and the contract did not contain a relevant Mainland choice of court agreement.
However, the silver lining is that this should no longer be an issue for judgment creditors if they obtain the underlying Mainland judgment after 29 January 2024. Under the 2024 MJREO, there is no need to prove any relevant choice of Mainland court agreement, or an agreement of an exclusive or non-exclusive jurisdiction of the Mainland court between the parties.
Also, even if an attempt to enforce a Mainland judgment under the MJREO fails, the party which has obtained such judgment may still seek to enforce it at common law by issuing a Writ of Summons as usual, which P has done after the handing of this judgment.
For further information, please contact:
Jojo Fan, Partner, Herbert Smith Freehills
Jojo.Fan@hsf.com
