Hong Kong court appoints receivers to preserve assets in aid of arbitral proceedings in China

by Hogan Lovells
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The Hong Kong High Court has appointed receivers over shares in a Hong Kong company as an interim measure to preserve the status quo and the value of the shares, pending the outcome of CIETAC arbitration proceedings in mainland China.

The decision provides useful guidance on how parties can seek interim relief in aid of foreign arbitral proceedings, particularly in mainland China or other jurisdictions that do not have comprehensive provisions for granting interim relief to preserve of assets pending the outcome of arbitral proceedings.

In particular, the judge noted that the appointment of receivers in this case was not the draconian measure that it was argued to be, as the shares being placed in receivership were shares in an asset holding company (as opposed to an active business where receiver and managers would be required) and accordingly, there would be minimal adverse effect on any business operations.

Given the many businesses operating in China that are under or related to a holding company in Hong Kong, this is a welcome decision for parties engaged in, or considering arbitration proceedings in the mainland.

Background

The case relates to a protracted series of disputes over shares held in China Shanshui Investment Company Limited ("CSI"), which owns a large number of shares in a Hong Kong listed company.

The current case before the Hong Kong court was for interim measures in aid of CIETAC arbitration proceedings in Beijing over ownership of a particular portion of the CSI shares (the "Shares").  The dispute concerned the validity and enforceability of a Pledge Agreement governed by PRC law whereby the Defendants had purported to pledge the Shares to the applicant as security.  The applicant alleged that in breach of the Pledge Agreement, the Defendants had not only exercised their voting rights in respect of the Shares without the knowledge of the applicant, but had sold and transferred the Shares to a third party under  share purchase agreements ("SPAs"). The applicant sought, inter alia, an order to appoint receivers in respect of Shares.

Power of Hong Kong courts to grant interim relief in aid of arbitral proceedings outside Hong Kong

The Defendants' argument that the PRC court or the arbitral tribunal was the proper forum for the grant of any relief was rejected by the Hong Kong court.  While it was appreciated that a Mainland court, as the supervisory court of the CIETAC arbitration, would be in the best position to decide questions as to the validity and enforceability of the Pledge Agreement governed by PRC law, it did not follow that a Hong Kong court should not exercise its powers under s.45 to grant a form of interim measure which is appropriate and necessary, to facilitate the arbitral tribunal or the Mainland court which has the primary jurisdiction over the CIETAC arbitration.

The court held that under s.45 of the Arbitration Ordinance, the Hong Kong courts have both power and jurisdiction to grant interim measures to facilitate the process of a court or arbitral tribunal commenced outside of Hong Kong.  In fact, s.45 envisaged that there be a (non-Hong Kong) court with primary jurisdiction over the arbitral proceedings, in this case the PRC court, as the supervisory court over the arbitration.  The Hong Kong court may, however, decline to grant the measure if it considers it “more appropriate” for the interim measure sought to be dealt with by the arbitral tribunal.

The status quo

The court discussed what constituted the status quo.  The Defendants had started to exercise their voting rights in the Shares in January 2017.  The CIETAC arbitration was commenced in February 2017, by which the applicant complained of breaches of the Pledge Agreement.  The Defendants entered into the SPAs to transfer the Shares to a third party in March 2017.  Here, the status quo was prior to the SPAs and prior to the Defendants' execution of the transfers of the Shares in favour of a third party.  The Court considered the position existing immediately before the commencement of arbitration as the status quo.

The receivership order

It was agreed that under PRC law, there is no concept of a receiver taking over the shares other than in a bankruptcy, and there is doubt as to whether any order for asset preservation that may be made by the Mainland courts can extend to assets which are in Hong Kong.  Nevertheless, the Ordinance is clear that the court may exercise its powers to grant interim measures irrespective of whether or not similar powers may be exercised by an arbitral tribunal.

The court then considered the question of whether a receivership order is a type of measure which the court has power to grant in relation to arbitral proceedings in Hong Kong and whether on the facts of this case, such a receivership order should be made, bearing in mind the established principles for the grant of a receivership.

The court found that the power to appoint receivers was founded under s.21L High Court Ordinance and is a discretionary power to be exercised flexibly on a similar basis to that of an interlocutory injunction, to which the principles in American Cyanamid apply.  On the facts, the court found that there was a serious question to be tried and that there was a risk that the assets would be dissipated.

In terms of the balance of convenience, the principle that the court should adopt is the course which is likely to cause the lower risk of injustice, if it should turn out that the interim order (whether to grant or refuse the relief) is wrong.  Given that there were competing claims as to the ownership of the Shares, and each side claimed irreversible and irreparable harm should they not be permitted to exercise rights in the Shares, the appointment of a receiver to "hold the ring" in the interim of the making of an award in the arbitration, should cause the lower risk of injustice to either side.

Relevance

Section 45 of the Arbitration Ordinance makes it clear that Hong Kong courts have the power to grant interim relief in aid of foreign arbitral proceedings.

This is another arbitration friendly decision by the Hong Kong courts which granted interim measures in order to facilitate the process of the CIETAC arbitral tribunal or the Mainland court which has primary jurisdiction over the arbitration.

For parties who have commenced arbitral proceedings in jurisdictions without a comprehensive legal regime for granting interim relief, the provision can be a helpful tool for parties to seek the appointment of receivers, injunctive relief or to restore the status quo of parties pending the decision of the foreign arbitral proceedings. This would be of particular relevance for parties who wish to preserve assets held in Hong Kong, but with pending arbitration in the mainland China or foreign jurisdictions.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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