Formerank Ltd v Luo

1. [1]

   The plaintiff, Formerank Ltd, is a company incorporated in the Hong Kong Special Administrative Region of the People’s Republic of China.

2. [2]

   The defendant, Mr Luo, is a businessman based in Xiamen in the PRC as well as a permanent resident in Hong Kong. [1]

3. [3]

   Formerank and Mr Luo are parties to two arbitrations currently underway in Hong Kong before a panel of three Hong Kong Senior Counsel. The arbitrations are being administered under the Arbitration Rules of the Hong Kong International Arbitration Centre (“the HKIAC Rules”).

4. [4]

   Mr Luo is the only active respondent to Formerank’s claims in the arbitrations; the other respondents are in liquidation or bankrupt.

5. [5]

   Formerank’s claim against Mr Luo is under guarantees he executed in relation to the alleged indebtedness to Formerank of another Hong Kong company, Takyiu International Company Ltd (now in liquidation). Takyiu International was formerly known as Tak Yun International Company Ltd and is referred to in the arbitrations as “Tak Yun”. I will adopt the same shorthand.

6. [6]

   The arbitrations are currently scheduled to be heard in August 2021.

7. [7]

   Were Formerank to be successful in the arbitrations, an award:

8. [8]

   On 15 October 2020, as Commercial Arbitration List Duty Judge, I made an ex parte freezing order restraining Mr Luo from dealing with his Australian assets (which include two parcels of land in metropolitan Sydney) in aid of a “prospective judgment” [3] that Formerank hopes to achieve were it to be successful in the Hong Kong arbitrations.

9. [9]

   On 10 November 2020 I heard argument as to whether the freezing orders should continue. Pending delivery of this judgment, the freezing order has been extended until 5 pm the day following delivery of these reasons.

Decision

1. [10]

   I am not persuaded the freezing orders should continue.

The test for a freezing order

1. [11]

   A freezing order is an exceptional remedy and one that should not be granted lightly. [4]

2. [12]

   Freezing orders are dealt with in Division 2 of Part 25 of the Uniform Civil Procedure Rules 2005 (NSW).

3. [13]

   Rule 25.11 provides:

4. [14]

   Rule 25.14 provides, relevantly:

5. [15]

   The rule speaks of there being a “good arguable case on an accrued or prospective cause of action” in this Court or in “another court”.

6. [16]

   As set out at [7] Formerank relies on both these possibilities: direct enforcement in the Court of an award of the Hong Kong Arbitral Tribunal and registration in this Court of a judgment of the Hong Kong Court of First Instance referable to such an award.

7. [17]

   It has been held that a “good arguable case” is one “which is more than barely capable of serious argument, and yet not necessarily one the judge considers would have a better than 50% chance of success”. [5]

8. [18]

   The rule also speaks of there being a “sufficient prospect” of there being a judgment in favour of the applicant for a freezing order in the “other court”; that is “that there be sufficient prospect that the other court will give a favourable judgment”, [6] and of that judgment being registered in and enforced in this Court.

9. [19]

   Thus, the expression “good arguable case” is used in the sense of there being “sufficient prospects” of the applicant for a freezing order obtaining a favourable judgment in the “other court” or this Court to warrant the making of a freezing order. [7]

10. [20]

    Accordingly, here, it is necessary to have regard not only to Formerank’s prospects of making out its case in chief in the Hong Kong arbitration, but also to its prospects of winning overall and obtaining a favourable award.

11. [21]

    Formerank must also show a “danger” that, relevantly, Mr Luo will dispose of his Australian assets.

Background

1. [22]

   Formerank entered into contracts with Tak Yun for the supply of electronic products on 1 January and 8 May 2016 (“the Agreements”).

2. [23]

   Mr Luo guaranteed Tak Yun’s obligations under the Agreements.

3. [24]

   Each of the Agreements is subject to the law of Hong Kong and each contains a submission to arbitration under the HKIAC Rules and under the laws of the Hong Kong Special Administrative Region.

4. [25]

   Mr Smallbone, who appeared for Formerank, summarised the effect of the Agreements as follows:

5. [26]

   Formerank claims that Tak Yun has defaulted under the Agreements and that Mr Luo is liable under his guarantees to pay to Formerank the amount owing by Tak Yun to Formerank.

6. [27]

   On 12 March 2019 Formerank made demand on Mr Luo for some US$7 million under one of the guarantees and some US$16.5 million under the other.

7. [28]

   Formerank commenced the arbitral proceedings on 7 May 2019.

8. [29]

   As I have said, Mr Luo is now the only active respondent.

9. [30]

   In the arbitrations:

10. [31]

    Formerank’s case in chief, as articulated in its Statement of Claim, is that:

11. [32]

    In his Statement of Defence and Counterclaim, Mr Luo alleges that:

12. [33]

    Formerank has made a detailed response to those allegations in its Statement of Reply.

13. [34]

    Each of Mr Luo’s Defence and Formerank’s Reply exceeds 40 pages.

14. [35]

    On 26 May 2020, Formerank through the HKIAC applied to the Intermediate People’s Court of Xiamen City, Fujian Province, for an asset preservation order pursuant to the “Arrangement Concerning Mutual Assistance in Court Ordered Interim Measures in Aid of Arbitral Proceedings by the Courts of the Mainland and the HKSAR”.

15. [36]

    On 1 July 2020, the Xiamen Intermediate People’s Court made a Civil Ruling, in the nature of a freezing order in respect of certain of Mr Luo’s assets in China including real estate, a cash deposit and shares.

16. [37]

    Those orders were made under Article 28 of the Arbitration Law of the People’s Republic of China and under Articles 102, 103 and 154 of the Civil Procedure Law of the People’s Republic of China.

17. [38]

    On 31 July 2020, Formerank applied to the Hong Kong Arbitral Tribunal for an “interim measure” concerning Mr Luo’s Hong Kong assets.

18. [39]

    That application was made under Article 23.2 of the HKIAC Rules which provides that:

19. [40]

    Such interim measures include:

20. [41]

    The same application could have been made to the Arbitral Tribunal under Article 17 of the UNCITRAL Model Law on International Commercial Arbitration 1985 (“the Model Law”) that provides that:

21. [42]

    The Model law was adopted in Hong Kong by s 35 of the Arbitration Ordinance (Cap. 609) (“the Arbitration Ordinance”).

22. [43]

    The “interim measures” available under the Model Law include:

23. [44]

    The interim measures sought by Formerank were in the nature of a freezing order restraining Mr Luo from:

24. [45]

    Formerank supported its application with an affirmation by Mr Lin [10] which asserted that it “appeared” that Mr Luo “had been dissipating his assets” including a residential property in Kowloon (referred to as the “Bayview Property”) and the pledging and transfer of his shareholding in various companies apparently associated with Tak Yun.

25. [46]

    In relation to the Bayview Property, Mr Lin deposed that Mr Luo:

26. [47]

    Mr Lin has affirmed an affidavit in support of the application before me and has deposed to these same matters.

27. [48]

    On 4 August 2020, Mr Luo’s Hong Kong solicitors wrote to the Arbitrators stating, in relation to the sale of the Bayview Property, that Mr Luo was “entitled to put the [Kowloon commercial] property on sale” and that:

28. [49]

    Mr Luo’s solicitors nonetheless proposed that, upon Formerank giving an undertaking as to damages:

29. [50]

    On 6 August 2020 the Arbitrators made an Interim Measure Order to that effect.

30. [51]

    Formerank commenced these proceedings on 15 October 2020 on which occasion I made the freezing order referred to at [8].

31. [52]

    That order has been extended with Mr Luo’s consent (given without admissions) pending delivery of these reasons.

Concurrent jurisdiction

1. [53]

   There is no dispute that I have jurisdiction to make the freezing order by reason of Article 17J of the Model Law which, by reason of s 16 of the IA Act, has the force of law in Australia.

2. [54]

   Article 17J provides for “court-ordered interim measures” and provides that:

3. [55]

   Nor is there any dispute that the Hong Kong Arbitral Tribunal itself has jurisdiction to make an “interim measure” restraining Mr Luo from dealing with his Australian assets. As I have set out, the Arbitral Tribunal has recently made interim measure concerning Mr Luo’s Hong Kong assets, albeit by consent.

4. [56]

   Amongst the matters relevant to obtaining an interim measure under Article 17A is that:

5. [57]

   This is reflected HKIAC Rule 23.4(b) which uses the same language.

6. [58]

   There is New Zealand authority suggesting this test requires something akin to a “serious question to be tried” for an interlocutory injunction and, arguably a higher threshold. [13] Australian authority, albeit in dicta, suggests the test reflects [14] or is substantively similar to [15] that required for interlocutory relief.

7. [59]

   It is not necessary for me to express any final view about this matter, save to observe that the test is differently worded to that under the UCPR although, just as UCPR provisions have been construed, it appears to be directed to the overall result of the arbitration.

8. [60]

   The Court of First Instance of the Hong Kong High Court also has jurisdiction to grant an interim measure in arbitration. [16]

Good arguable case/sufficient prospects of success

1. [61]

   Formerank’s case in chief is likely to be documentary and formal.

2. [62]

   As Mr Smallbone submitted:

3. [63]

   Mr Smallbone continued:

4. [64]

   In my opinion, the situation is a little more nuanced than this.

5. [65]

   As I have set out above, [17] the question here is whether Formerank has a “good arguable case” in the sense of one where there are “sufficient prospects” of obtaining a favourable judgment to warrant the making of a freezing order.

6. [66]

   That involves consideration of the prospects of, first, Formerank making out its case in chief. I am satisfied that this is likely.

7. [67]

   But it also involves consideration of the matters raised by Mr Luo in his Defence and Counter Claim.

8. [68]

   It is true that Mr Luo has not yet given evidence in the Hong Kong arbitration about these matters and has not put evidence on before me.

9. [69]

   But I cannot, as Mr Smallbone invites me to do, simply ignore the very serious allegations that he, in the solemn context of an arbitration, has made in his Defence and Cross Claim; and in very great detail.

10. [70]

    There is no evidence before me as to the provision made in the law of Hong Kong concerning the defences and causes of action Mr Luo seeks to agitate. Formerank had adduced no evidence from a Hong Kong lawyer to the effect that, assuming the truth of the factual matters for which Mr Luo contends, they could not lead to the legal consequences he alleges.

11. [71]

    Although Mr Smallbone submitted that Mr Luo’s defences “do not appear prepossessing” I cannot see what conclusion I could come to about them, save that if they are made out they will be a complete defence to Formerank’s claim. [18]

12. [72]

    It appears that there will be a stark contest of fact before the arbitrators.

13. [73]

    I cannot predict what the outcome of that contest will be, and thus what prospects Formerank has of achieving a favourable award in the arbitration.

14. [74]

    For this reason, I am not prepared to extend the freezing order that I made on 15 October 2020.

15. [75]

    In any event, this raises allied questions.

16. [76]

    The first is whether the Arbitral Tribunal is in any event in a better and more appropriate position to form any view about Formerank’s prospects than I am.

17. [77]

    The second is whether “comity and deference”, to adopt the words of Mr Redwood, who appeared for Mr Luo, compel the conclusion that, as a matter if discretion, I should not entertain Formerank’s application because:

18. [78]

    In Duro Felguera Australia Pty Ltd v Trans Global Projects Pty Ltd (in liq) [19] the Western Australian Court of Appeal said:

19. [79]

    The circumstances in Duro were different from those before me and the Court earlier emphasised that Article 9 of the Model Law expressly provides that it is not incompatible with an arbitration agreement for a court to grant an interim measure, including a freezing order and that:

20. [80]

    And in Duro, the court upheld the trial judge’s decision to grant a freezing order in aid of a pending arbitration.

21. [81]

    There is another consideration.

22. [82]

    Were the Arbitral Tribunal to review an application by Formerank for an Interim Measure restraining Mr Luo from dealing with his Australian Assets, it would have regard to a differently worded test to that under UCPR 25.14, namely, that I have set out at [55] above. No doubt the Arbitral Tribunal would be familiar with those words, and the manner in which they have been construed, including in the authorities to which I have referred and perhaps also in Hong Kong.

23. [83]

    Mr Redwood also drew attention to Mr Gary Born’s International Commercial Arbitration [22] in which he stated:

24. [84]

    In these circumstances, I am persuaded that Mr Redwood was correct to submit that in circumstances where the order sought by Formerank concern an international arbitration seated in Hong Kong:

25. [85]

    I find this a further reason to not make the freezing order.

Risk of dissipation

1. [86]

   Because of the conclusions I have reached above, it is not necessary for me to consider whether there is a “danger” that any award obtained by Formerank in the Hong Kong arbitration, or any judgment it obtains as a result of such an award will not be satisfied because of Mr Luo’s disposition with his assets.

2. [87]

   Mr Smallbone pointed to what he described as being the “troubling” evidence concerning Mr Luo’s dealings with the Hong Kong Bayview Property. [24]

3. [88]

   However, this application directed to Mr Luo’s Australian property which, relevantly, comprises real estate, and there is no evidence that Mr Luo might deal with those assets adversely to Formerank’s interest.

4. [89]

   Mr Luo purchased one of the properties, at Gordon, in October 2014 and the other, at Catherine Field, in 30 May 2018.

5. [90]

   There is evidence suggesting that no one is in occupation of the Gordon property.

6. [91]

   Mr Smallbone submitted that:

7. [92]

   However, as Mr Smallbone candidly said to me on the hearing of the ex parte application on 15 October 2020:

8. [93]

   And, as Mr Redwood submitted, many months have elapsed since Formerank obtained the Chinese Freezing Order and the Hong Kong Interim Order. Mr Luo, despite having the opportunity to do so, has made no attempt to dispose of his Sydney properties.

9. [94]

   In these circumstances, were it necessary to me to come to a conclusion on this matter, I would not be satisfied that there is a “danger” of dissipation of Mr Luo’s Australian assets sufficient to make a freezing order

Conclusion

1. [95]

   The parties should confer and agree on the orders needed to give effect to these reasons.