In 宁波梅山保税港区和光泰润二号股权投资中心 v 北京微影时代科技有限公司 & ORS [2024] HKCFI 2723, the court dismissed the 1st Respondent’s application for an extension of time to set aside an Enforcement Order in respect of a Mainland CIETAC arbitral award because the application had been made 1 year and 2 days out of time. The court said that, on any view, a delay of over a year was significant and it did not accept the 1st Respondent’s reasons for the delay, namely that it had been labouring under the mistaken advice of its Mainland lawyers that by taking out Mainland setting aside proceedings (which it did), enforcement of the Enforcement Order would be stayed and also due to the COVID pandemic its management had been homebound. The court made it clear that any challenge to an award should be made promptly, so that it can be disposed of quickly and in accordance with the aims of the Rules of High Court (RHC) Order 73, rules 5 and 10 (which set out the time limits for applications under the Arbitration Ordinance) to achieve early resolution of the status of the award.
Background
There had been four Respondents in the Mainland CIETAC arbitration – the 1st Respondent in these High Court proceedings was the 4th Respondent in the arbitration and the Applicant was the Applicant in the arbitration.
An arbitral Award was made in the Applicant’s favour on 19 May 2022 providing that the Respondents jointly bear the responsibility for the equity purchase in question and pay the Applicant RMB 200 million for the repurchase plus interest. On 29 July 2022, the Hong Kong court granted the Applicant leave to enforce the Award in Hong Kong (Enforcement Order). The 1st Respondent did not make the present application for an extension of time to set aside the Enforcement Order until 30 October 2023.
Application to set aside Enforcement Order – Grounds
The grounds of the 1st Respondent’s application were as follows.
Material Non-Disclosure (MND) Ground: The Enforcement Order was obtained by the Applicant on an ex parte basis and the Applicant had failed to make full and frank disclosure to the court that (a) the Respondent had commenced an application with the Mainland Supervisory Court to set aside the Award and (b) Conditions Precedent to the 1st Respondent’s share redemption obligation under the Award were not satisfied
Not Yet Binding Ground: The Award was not yet binding as the Condition Precedent in relation to the 1st Respondent’s share redemption obligation under the Shareholders’ Agreement between the parties had not been fulfilled and enforcement should therefore be refused under s.95(2)(f)(i) of the Arbitration Ordinance, Cap 609 (AO).
Illegality Ground:The Award, which required the 1st Respondent to specifically perform the share repurchase/ redemption obligation under the Shareholders’ Agreement, was unenforceable because the performance was contrary to public policy, illegal and gave rise to a matter which was not capable of settlement by arbitration. In particular, performance was contrary to Mainland and Hong Kong Laws, including the Companies Ordinance, Cap 622 and enforcement should be refused under s.95(3)(a)-(b) of the AO.
The Applicant opposed the 1st Respondent’s application on the basis that there had been inordinate and unexplained delay in making it.
Delay
Under the terms of the Enforcement Order, leave was granted to the Applicant to serve it on the 1st Respondent out of jurisdiction at its Beijing address and the Respondent could apply to set it aside within 14 days after service of the Order on it. The Enforcement Order was served on the 1st Respondent on 14 October 2022 via the Mainland Judiciary and the 14 days therefore expired on 28 October 2022.
The court referred to the fact that once an award is made, the parties are entitled to expect it to be final, and binding, and if any permissible recourse is to be made to the court, it should be made promptly, so that any challenge to the award can be clarified and disposed of quickly, and parties know without unnecessary delay where they stand in relation to the award, and its recognition and enforcement; the aim of RHC O.73 rr.5 and 10 (which set out the time limits for applications under the Arbitration Ordinance) being to achieve early resolution of the status of the award.
The court said that the 1st Respondent’s delay of 1 year and 2 days in making its application was, on any view, significant. The reasons for delay advanced by the 1st Respondent, were that it had been labouring under the mistaken advice of its Mainland lawyers that by taking out Mainland setting aside proceedings (which it did), enforcement of the Enforcement Order would be stayed. It also suggested that the COVID pandemic had had an adverse effect, because the 1st Respondent’s management had been homebound.
The court did not accept the 1st Respondent’s reasons for the delay. A letter dated 28 October 2022 from the 1st Respondent’s Hong Kong solicitors stated that the 1st Respondent had taken time to review the Enforcement Order and sought Hong Kong legal advice and indicated that the 1st Respondent intended to apply to set aside the Enforcement Order. The court said that this letter demonstrated that the 1st Respondent was able to instruct solicitors and obtain Hong Kong legal advice not later than 14 days after receiving the Enforcement Order and unless there was a proper explanation for the delay in making the set aside application, the inescapable inference was that the 1st Respondent had made a deliberate choice not to pursue such application until 30 October 2023. Possibly, the court said, the 1st Respondent was hoping that the set aside application it made in the Mainland and its resistance to the Mainland enforcement actions taken by the Applicant might prevail.
The court noted that the 1st Respondent had made two applications to the Mainland Supervisory Court to set aside the Award. The 1st Application was dismissed on 29 September 2022, before the Enforcement Order was served on the 1st Respondent. The second one was not made until 22 November 2022 (and was dismissed on 9 February 2023). Hence, there was no Mainland set aside application on foot which could have, according to the alleged erroneous advice, acted as a stay when the Enforcement Order was served on the 1st Respondent on 14 October 2022. The court found considerable force in the Applicant’s submission that the alleged erroneous advice was an attempt to mislead the court. Therefore, apart from the inordinate delay, the 1st Respondent had tried to mislead the court on the reasons for delay. Such reprehensible behaviour, the court said, would justify a rejection of the 1st Respondent’s application as it would be wrong for the court to countenance such behaviour. Therefore, for the reason of delay alone, the court decided that the application must be dismissed.
Although the delay was sufficient reason to dismiss the 1st Respondent’s application, the court went on to consider the merits of the three grounds for setting aside the Enforcement Order, should it be wrong on the delay issue, and to see if they could justify the application.
Material Non-Disclosure (MND) Ground
It was the 1st Respondent’s case that by the time the application for the Enforcement Order was heard on 29 July 2022, it had taken out the 1st Application with the Mainland supervisory court to set aside the Award and the Applicant had failed to disclose this to the Hong Kong Court when it made its ex parte application for leave to enforce the Award in Hong Kong. However, the court found that the 1st Application had in fact been made after the Enforcement Order was granted and so this was not in truth a matter of MND, but rather whether the Applicant should have gone back to court to inform it of the change of circumstances. Although the court acknowledged that there was a duty on the Applicant to inform the court of a change in circumstances, since the 1st Application had been dismissed before the Enforcement Order was served on the 1st Respondent, there was no real suggestion that the 1st Respondent had been prejudiced by the Applicant’s failure to inform the court. Indeed, by the time the Enforcement Order was served on the 1st Respondent, there was no setting aside application on foot and the court had no reason to believe that the failure on the Applicant’s part was anything other than inadvertence and there was insufficient reason, it said, to discharge the Enforcement Order.
Not yet binding ground
The grounds for refusing enforcement of a Mainland award are exhaustively listed under s.95 of the AO and the fact that an award has yet become binding on the parties is one such ground. The court said that an award is binding if it is not open to appeal on the merits and in the present case, there was no viable suggestion that the Award was open to appeal on the merits and so this was the end of the matter for this ground. In truth, the court said, the 1st Respondent’s case about the difficulty or impossibility of carrying out a reduction of capital so as to allow the repurchase of the Applicant’s shares was an argument of impossibility of performance and not whether the Award was binding and such argument was not relevant to the enforcement of the Award.
Secondly, in September 2023, the 1st Respondent had brought another arbitral proceeding before CIETAC seeking confirmation that if it needed to perform the repurchase obligation under the Shareholders’ Agreement, it should treat the completion of capital reduction in accordance with the law as a precondition for performance. In July 2024, the tribunal issued an award rejecting all of the 1st Respondent’s claims. It was fair to say, the court said, that the 1st Respondent had taken out multiple proceedings in the Mainland to set aside the Award and to resist enforcement of the same, none of which were successful, whereas the Applicant had been successful in various enforcement proceedings against the 1st Respondent in the Mainland. Therefore, this ground was also rejected.
Illegality / public policy ground
The court did not accept that performance of the 1st Respondent’s obligations under the Award was against Mainland law, especially in light of the fact that the Award had been upheld by the Mainland Court, the Mainland Court had granted enforcement relief in the Applicant’s favour and the 1st Respondent had failed in its arbitration. Further, it is trite, the court said, that where public policy is relied upon as a ground to resist enforcement of an award, it is the domestic public policy of the court of enforcement (in this case, Hong Kong) which is relevant. As regards, the 1st Respondent’s contention that performance was contrary to the Hong Kong Companies Ordinance, the court said that the Companies Ordinance had no application to the 1st Respondent, since it is a Mainland company. This ground was also therefore rejected.
Comments
Although the 1st Respondent had raised various arguments in support of its application for an extension of time for setting aside the award, given the facts as disclosed in the judgment, it is unsurprising that the Court had no difficulty in dismissing the application.
For further information, please contact:
Kwok Kit (KK) Cheung, Partner, Deacons
K.K.Cheung@deacons.com
