The Hong Kong courts can issue interim orders in aid of foreign (including the PRC) seated arbitrations, which can be useful in preserving assets and evidence held in Hong Kong (usually by the respondent company). Such interim measures are helpful because many companies (including PRC companies) often do have assets in Hong Kong. These interim orders can cover relief which may not otherwise be available from the arbitral tribunal or the courts in the foreign seat of the arbitration.
1. Recent Developments
One such example was recently seen in the Hong Kong case of Chen Hong Qing v Mi Jingtian & Others (judgment handed down on 27 June 2017). In this case, the court issued a receivership order on the shares of a Hong Kong company (“HK Shares”), which the plaintiff had alleged were at risk of being transferred to a third party in breach of a share pledge (“Share Pledge“) the plaintiff had entered into with the defendants.
2. Facts and Judgment in the Hong Kong Case
In Chen Hong Qing v Mi Jingtian & Others, under the Share Pledge, the defendants pledged their HK Shares as security for a RMB 690 million loan made to various borrowers. The Share Pledge prohibited the defendants from transferring the HK Shares and exercising any voting rights without the plaintiff’s consent. The Share Pledge was governed by PRC law and provided for all disputes to be referred to CIETAC arbitration that was seated in Beijing.
A dispute arose after the plaintiff alleged that the defendants had exercised their voting rights without the plaintiff’s consent. The plaintiff commenced a CIETAC arbitration in Beijing against the defendants. After the arbitration had been commenced, the defendants attempted to sell the HK Shares to a third party without the plaintiff’s consent.
In response, the plaintiff commenced court proceedings in Hong Kong and sought an interim measure in the form of a receivership order to restrain the defendants from dealing with the HK Shares pending determination of the CIETAC arbitration in Beijing.
The court held that the test for granting interim measures was largely the same as that for granting interim injunctions in Hong Kong court proceedings. This meant that the applicant had to show that it had a good arguable case on the merits. Additionally, the applicant had to show that granting the interim measure would carry a lower risk of injustice than if the interim measure had not been granted. As a condition for granting the interim measure, the applicant had to undertake to pay damages to the counterparty if it later turned out that the interim measure should not have been granted.
The court found that the defendants had blatantly acted in disregard of the plaintiff’s rights under the Share Pledge by attempting to sell the HK Shares to the third party without the plaintiff’s consent. There was a real risk that control over the HK Shares would be lost if the receivership order were not granted. A receiver would be in the best position to balance the competing interests of the parties (including the third party) in exercising the voting rights and preserving the value of the HK Shares pending determination of the CIETAC arbitration. Such a course of action carried the lower risk of injustice and would help to preserve the status quo until the arbitral tribunal in the CIETAC arbitration had determined the dispute.
The defendants argued that, since the arbitration was seated in Beijing, either the CIETAC arbitral tribunal or the Mainland courts would be the more appropriate forum to grant the interim measure. The court rejected this argument and held that the interim measures were being sought only in aid of the CIETAC arbitration. This was also to take into account the fact that expert evidence had been given to the effect that receivership orders were not available in PRC courts (other than in bankruptcy), and there is uncertainty in any case as to whether any asset preservation orders made by a PRC court can apply outside the PRC to cover assets in Hong Kong (such as the HK Shares).
3. What This Means For You
This case serves as a good reminder to consider whether and how the courts in Hong Kong can make appropriate interim orders in aid of an arbitration that is seated outside of Hong Kong.
Accordingly, if you are dealing with a counterparty that has assets or documentary evidence in Hong Kong, do discuss with your legal advisers as to whether it would be helpful to your case to seek appropriate interim measures from the Hong Kong courts. As was the case in Chen Hong Qing v Mi Jingtian & Others, such interim measures may not be available from the courts in the place where the arbitration is seated. This could also apply to assets that may be situated outside of Hong Kong.
The grant of interim measures could significantly strengthen your position in the arbitration by preserving evidence and/or preventing the dissipation of important assets (for example, the HK Shares), both of which could render the arbitration futile.
Conversely, please do note that there is a risk that your assets in Hong Kong could also be the subject of an interim order by the Hong Kong courts and this should inform your decision on whether to contest the arbitration or seek a settlement.