Fruit of collusion: Hong Kong Court set aside an enforcement order for a Mainland award

On a rare occasion, the Court of First Instance has set aside an enforcement order for a Mainland award (made under the auspices of the Zhanjiang Arbitration Commission) on the basis that the underlying contract was a sham, the arbitration agreement was not valid, and thus it would be contrary to public policy to enforce the award.

廣東順德展煒商貿有限公司 v Sun Fung Timber Company Limited [2021] HKCFI 3823

Background

The Respondent (Company) was 50% owned by ST and 50% owned by a company, NI, of which DL was the majority shareholder.  ST and DL were both directors of the Company.

In late 2016, a dispute arose between the two shareholders and directors.  As a result, the Company started to wind down its operations, with talks between ST and DL about selling the assets of the Company.

On 14 April 2017, ST purportedly entered into a contract on behalf of the Company with the Applicant (GD) for the sale of marble (Contract).  The Contract contained many peculiar features.  The Company’s usual business involved only timber retailing, as opposed to marble stones.  The Contract, nonetheless, was for the sale of a substantial amount of marble to GD for the significant sum of RMB 220 million.  The consideration was some 62 times of the Company’s annual sales revenue, and GD was incorporated only 3 months before the date of the Contract.  Pursuant to the Contract, the delivery of the marble was to be made within 6 days, failing which the Company had to pay RMB 2.2 million per day as penalty.  The Company failed to deliver the marble.

On 15 May 2017, pursuant to the arbitration agreement in the Contract (Arbitration Agreement), GD commenced arbitral proceedings before the Zhanjiang Arbitration Commission against the Company for breach of the Contract (Arbitration).  ST conducted the entire Arbitration on behalf of the Company, and caused the Company to admit liability and confirm that the Company should pay damages in the sum of RMB 59 million.  Within 4 days, GD obtained an award against the Company in the agreed amount (Award).

GD sought to wind up the Company based on the Award.  NI and DL only became aware of the Award during the course of the winding-up proceedings, which were subsequently dismissed by the Hong Kong court on the basis of a bona fide dispute over the debt.

GD then applied ex parte for and obtained an order granting leave to enforce the Award in Hong Kong (Enforcement Order).  NI obtained leave to intervene in these proceedings and sought to set aside the Enforcement Order on the grounds that ST lacked authority to enter into the Contract, that the Contract (including the Arbitration Agreement therein) was void, that the Company had not been given proper notice of the Arbitration, and that the enforcement of the Award would be contrary to public policy.  In particular, NI argued that the Contract was in reality a sham orchestrated by ST and GD to enable ST to receive valuable assets of the Company without the need to share such assets with NI, should the Company be dissolved in the usual way.

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