HONG KONG COURT GRANTS ANTI-SUIT INJUNCTION TO RESTRAIN CONTINUATION OF PRC PROCEEDINGS

In Chen Hongqing v Persons whose names are set out in the second column of the Schedule Hereto, HCA 2648/2017 (unrep., 29 May 2018), the Hong Kong Court of First Instance granted an anti-suit injunction in favour of the Plaintiff, an intended purchaser of a Hong Kong company, to restrain the continuation of certain PRC proceedings commenced by the Defendants. Considerations such as non-exclusive jurisdiction clause, a real risk of deprivation of a fair trial in the foreign court and coercion exerted by senior management to cooperate with the local government were all relevant to the Court’s decision.

Background

The case arose from the Plaintiff’s attempt to gain control over China Shanshui Investment Company Limited (CSI), a Hong Kong company, and the subsequent decision of the Jinan City Government in the PRC to take over China Shanshui Cement Group Limited (CSCG), a PRC company listed in Hong Kong. CSI is the largest shareholder of CSCG. The Defendants were representatives of certain employees with shareholdings in CSI (CSI employees).

The CSI employees’ shares were held on trust by an individual named Zhang. In 2014, a dispute arose between Zhang and the CSI employees over the shares, leading to the commencement of a court action in the PRC (Trust Action). Subsequently, the Plaintiff became interested in purchasing the shares from the CSI employees. In June 2015, the Plaintiff reached an agreement with the Defendants that:

(i) if the CSI employees were successful in the Trust Action, the Defendants would procure the transfer of the shares subject to dispute to the Plaintiff;

(ii) the Plaintiff would pay a majority of the consideration as a loan to the Defendants, as recorded in signed loan agreements; and

(iii) the Defendants would sign share pledge agreements to provide security for the loan.

As a result, various share pledge agreements and loan agreements were signed between the Plaintiff and the Defendants.

In March 2017, following the Jinan City Government’s intervention to attempt to take over CSCG by setting up a scheme to acquire all the CSI employees’ shares, the Defendants disputed the existence and nature of the various loan and share pledge agreements that they had signed with the Plaintiff. The Plaintiff, therefore, reacted by commencing an action in Hong Kong and obtained an order for substituted service on two law firms representing the Defendants in the Trust Action. In response, the Defendants commenced proceedings in the Jinan City (Jinan Proceedings) to seek confirmations that the various agreements with the Plaintiff were invalid or void.

Thereafter, the Plaintiff applied for an injunction to restrain the Defendants from continuing the Jinan Proceedings, or commence any other proceedings in the PRC on the same matter until final determination of the Hong Kong action.

Findings

The Court found in favour of the Plaintiff and granted an anti-suit injunction. In reaching its conclusion, the Court held that (i) Hong Kong was clearly and distinctly the appropriate forum for the trial of this action; (ii) the institution of the Jinan Proceedings were vexatious, oppressive and unconscionable; and (iii) most interestingly, there was a real risk that steps had been taken to manipulate the Jinan Proceedings to the detriment of the Plaintiff and to deprive him of a fair trial.

(i) Hong Kong the more appropriate forum

In considering the question of the appropriate forum, the Court observed, among others, that (a) the subject matter of the Plaintiff’s claim related to shares of a Hong Kong company, which was also the majority shareholder of a company listed in Hong Kong; (b) the proper governing law of the shares ought to be in CSI’s place of incorporation, namely Hong Kong; (c) the fact that an order for substituted service of the writ out of Hong Kong was granted was prima facie evidence that Hong Kong was the forum conveniens; and (d) on proper consideration, the governing law of the loan agreements, the share pledge related agreements, and the sales and purchase agreements ought to be Hong Kong law.

The Court, however, made it clear that in these day and age, little weight would be accorded to costs and inconvenience in witness’ travel in deciding the question of forum conveniens as such inconvenience could be easily overcome by video-link. In fact, given that some of the witnesses were turned back at the border and pressurised by the PRC government officials not to testify in the Trust Action, the Court felt that it may well be more viable for them to give evidence through video-link to the Hong Kong Court than to appear in a court in the PRC.

Additionally, the issue of non-exclusive jurisdiction clause was also raised as part of the forum conveniens arguments. The Defendants, in particular, tried to rely on a certain clause which provides to the effect that any dispute arising shall be resolved by the Peoples’ Court in the place of the registered household of the Plaintiff and the court shall have absolute jurisdiction over the dispute, to support their argument that Hong Kong Courts were not the appropriate forum. The Court, however, held that the word “absolute” referred to the extent or scope of the jurisdiction rather than its exclusivity; hence, it only gave the court absolute but not exclusive jurisdiction as against the whole world. For a party to give up that freedom and agree to submit to the exclusive jurisdiction of one particular jurisdiction must require unequivocal language, and “absolute” was both ambiguous and insufficient.

(ii) Institution of the Jinan Proceedings vexatious, oppressive and unconscionable

The Court ruled that there was “almost irrefutable evidence” that the Defendants were fabricating a false case in the Jinan Proceedings, which lacked a reasonable cause and were wholly unnecessary as (a) the facts and issue were virtually identical with the other set of PRC proceedings which had already been decided and resolved; and (b) the issues raised would have been resolved if the parallel CIETAC arbitration was to run its course.

(iii) Real risk of deprivation of fair trail

The Jinan City Government decided to step in and acquired all the shares from the CSI employees regardless of whether they had been sold to any third party. Specifically, the Court found that the CSI employees were subject to overwhelming coercion from the senior management to facilitate the local government’s takeover. For example, arrangements were made to transport the CSI employees to factory premises to sign certain documentation to facilitate the takeover. Those who were willing to cooperate and sign were given gifts, whereas those who refused suffered reduction in salary or were subject to other unfavourable treatment.

Hence, the Court was satisfied that the surrounding factual circumstances gave rise to a real risk that steps had been taken to manipulate the Jinan Proceedings to the detriment of the Plaintiff and to deprive him of a fair trial.

Comment

There is a conflict of first instance authorities in Hong Kong as to whether it is necessary, at least as a general rule, for the Hong Kong applicant to have sought a dismissal or stay of the foreign proceedings on jurisdictional or similar grounds before seeking an anti-suit injunction in Hong Kong. Nevertheless, the Court held in this decision that, on the facts of the case, the Plaintiff had no alternative because there were no effective means under PRC law to enable the Plaintiff to stop the Defendants from pursuing the Jinan Proceedings, or to challenge the PRC court’s jurisdiction to hear the Jinan Proceedings in favour of a foreign court. This means the question of whether there is a requirement for a plaintiff to first apply in the foreign court to stay those proceedings before seeking an anti-suit injunction in Hong Kong remains unresolved, so we would expect the Hong Kong Courts to address this issue in a future case.

 

Dominic Geiser
Dominic Geiser
Partner, Dispute Resolution Hong Kong
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+852 2101 4629
Jojo Fan
Jojo Fan
Senior Associate, Dispute Resolution Hong Kong
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+852 2101 4254

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Filed under China, Hong Kong, Interim applications, Jurisdiction

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