Formerank Ltd v Luo

Solicitors: Accuro Maxwell (Plaintiff/Respondent) Clayton Utz (Defendant/Applicant) File Number(s): 2020/296516

Judgment

1. The plaintiff, Formerank Ltd, is a company incorporated in the Hong Kong Special Administrative Region of the People's Republic of China.
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. 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. Mr Luo is the only active respondent to Formerank's claims in the arbitrations; the other respondents are in liquidation or bankrupt.
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. The arbitrations are currently scheduled to be heard in August 2021.
7. Were Formerank to be successful in the arbitrations, an award: 1. would be a foreign award for the purpose of s 3 of the International Arbitration Act 1974 (Cth) ("the IA Act") capable of direct recognition and enforcement in this Court under s 8 of the IA Act as if a judgment of this Court; or 2. could be the subject of an order of the Court of First Instance in Hong Kong which could then be registered in this Court under the Foreign Judgments Act 1991 (Cth) [2] and the Foreign Judgments Regulations 1992 (Cth).
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. 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. I am not persuaded the freezing orders should continue.

The test for a freezing order

1. A freezing order is an exceptional remedy and one that should not be granted lightly. [4]
2. Freezing orders are dealt with in Division 2 of Part 25 of the Uniform Civil Procedure Rules 2005 (NSW).
3. Rule 25.11 provides: 25.11 Freezing order (1) The court may make an order (a freezing order), upon or without notice to a respondent, for the purpose of preventing the frustration or inhibition of the court's process by seeking to meet a danger that a judgment or prospective judgment of the court will be wholly or partly unsatisfied. (2) A freezing order may be an order restraining a respondent from removing any assets located in or outside Australia or from disposing of, dealing with, or diminishing the value of, those assets.
4. Rule 25.14 provides, relevantly: 25.14 Order against judgment debtor or prospective judgment debtor or third party (1) This rule applies if - … (b) an applicant has a good arguable case on an accrued or prospective cause of action that is justiciable in - (i) the court, or (ii) in the case of a cause of action to which subrule (3) applies - another court. … (3) This subrule applies to a cause of action if - (a) there is a sufficient prospect that the other court will give judgment in favour of the applicant, and (b) there is a sufficient prospect that the judgment will be registered in or enforced by the court. (4) The court may make a freezing order or an ancillary order or both against a judgment debtor or prospective judgment debtor if the court is satisfied, having regard to all the circumstances, that there is a danger that a judgment or prospective judgment will be wholly or partly unsatisfied because any of the following might occur - …. (b) the assets of the judgment debtor, prospective judgment debtor or another person are - … (ii) disposed of, dealt with or diminished in value. (Emphasis added.)
5. 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. 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. 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]

Background

1. Formerank entered into contracts with Tak Yun for the supply of electronic products on 1 January and 8 May 2016 ("the Agreements").
2. Mr Luo guaranteed Tak Yun's obligations under the Agreements.
3. 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. Mr Smallbone, who appeared for Formerank, summarised the effect of the Agreements as follows: "The contract debts 32. The Arbitrations concern the performance of two agreements, both of which were entered into between Formerank on the one part, and [Tak Yun, Mr Luo and two other individuals] on the second part. 33. The genesis of the two agreements was in mid-2012, when Mr Luo on behalf of a corporate entity proposed two types of transactions to Formerank, which are referred to as 'Transaction A' and 'Transaction B' throughout the Arbitrations and in this proceeding. These transactions were effectuated pursuant to written agreements. There have been several iterations of the agreements over time, but the actions are being brought under the latest agreements. 34. Mr Sing Yun Lin represented Formerank. 35. Transaction A was in the nature of a purchase agent agreement wherein Formerank is the purchase agent for [Tak Yun]. Under Transaction A, [Tak Yun] would inform Formerank of what products it wished to buy. Formerank would use its credit facilities with banks to buy and pay for those products. Formerank would then re-sell those products to [Tak Yun] with a mark-up and [Tak Yun] was to pay Formerank within 90 days upon Formerank paying the suppliers. 36. The latest of these agreements, dated 8 May 2016, is the subject of one of the Arbitrations. 37. Transaction B involved Formerank buying unsold inventory of [Tak Yun], which the former would then re-sell to certain downstream distributors. The prices charged by Formerank on the re-sale included a mark-up on the prices it paid to [Tak Yun]. 38. The agreement sued upon was dated 1 January 2016. It is the subject of the other Arbitration."
5. 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. 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.

Concurrent jurisdiction

1. 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. Article 17J provides for "court-ordered interim measures" and provides that: "A court shall have the same power of issuing an interim measure in relation to arbitration proceedings, irrespective of whether their place is in the territory of this State, as it has in relation to proceedings in court. The Court shall exercise such power in accordance with its own procedures in consideration of the specific features of international arbitration."
3. 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. Amongst the matters relevant to obtaining an interim measure under Article 17A is that: "There is a reasonable possibility that the requesting party will succeed on the merits of the claim." [12]
5. This is reflected HKIAC Rule 23.4(b) which uses the same language.
6. 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. 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. 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. Formerank's case in chief is likely to be documentary and formal.
2. As Mr Smallbone submitted: "There appears to be no substantial issue in the Arbitrations that the contracts on their face contain the obligations that are sued upon, or that the amounts claimed are mathematically correct."
3. Mr Smallbone continued: "Mr Luo's defences are of their nature claims that he will have to make out and do not impeach the proposition that, for present purposes [Formerank] has a good arguable claim. His defences will be a matter for trial. They do not answer the point that [Formerank] has a good arguable claim."
4. In my opinion, the situation is a little more nuanced than this.
5. 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. That involves consideration of the prospects of, first, Formerank making out its case in chief. I am satisfied that this is likely.
7. But it also involves consideration of the matters raised by Mr Luo in his Defence and Counter Claim.
8. 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. 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. 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. 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. It appears that there will be a stark contest of fact before the arbitrators.

Risk of dissipation

1. 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. 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. 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. Mr Luo purchased one of the properties, at Gordon, in October 2014 and the other, at Catherine Field, in 30 May 2018.
5. There is evidence suggesting that no one is in occupation of the Gordon property.
6. Mr Smallbone submitted that: "The concern is that now that [Mr Luo] knows [Formerank] is aware of Australian assets, [Mr Luo] may undertake prejudicial actions in respect of those assets unless restrained."
7. However, as Mr Smallbone candidly said to me on the hearing of the ex parte application on 15 October 2020: "I can't point to any known step taken in Australia to engage in any imminent disposition of property…"
8. 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. 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. The parties should confer and agree on the orders needed to give effect to these reasons.

Endnotes

1. According to allegations he makes in his defence in the arbitrations pending in Hong Kong to which I refer below.
2. Sections 4 and 5.
3. UCPR r 25.11.
4. For example Severstal Export GmbH v Bhushan Steel Ltd (2013) 84 NSWLR 141; [2013] NSWCA 102 at [57] (Bathurst CJ; Beazley P and Barrett JA agreeing).
5. Ninemia Maritime Corp v Trave GmbH & Co KG (The Niedersachsen) [1983] 2 Lloyd's Rep 600 at 605 (Mustill J).
6. Severstal Export v Bhushan Steel Ltd (supra) at [51].
7. Per Sackar J in Bhushan Steel v Severstal Export [2012] NSWSC 583 at [144]; not disturbed on appeal.
8. Article 23.3.
9. Article 17(2)(c).
10. To whom I have referred above at [25] and [32(a)] and who is the sole director of and a shareholder in Formerank.
11. See [27] above
12. Article 17A(1)(b) of the Model Law which, by reason of s 36 of the Arbitration Ordinance has effect in Hong Kong.
13. Safe Kids in Daily Supervision Ltd v McNeill [2012] 1 NZLR 714 at [30] (Asher J); followed in New Zealand Association of Credit Unions v Finszoft Solutions (New Zealand) Ltd [2019] NZHC 3198 at [30] (Wylie J) and Green Acres Franchise Group Ltd [2014] NZHC 402 at [6] (Lang J).
14. Hancock Prospecting Pty Ltd v DFD Rhodes Pty Ltd [2020] WASCA 77 at [448] (Quinlan CJ, Beech and Vaughan JJA).
15. Transurban WGT Co Pty Ltd v CPB Contractors Pty Ltd [2020] VSC 476 at [75] (Lyons J).
16. Section 45 of the Arbitration Ordinance which states that Article 17J of the Model Law does not have effect in Hong Kong but which makes separate provision for that court's power to grant an interim measure.
17. At [18] and [19].
18. As Mr Smallbone's reply submissions appeared to accept: at [52].
19. [2018] WASC 136 ("Duro").
20. At [150].
21. At 153.
22. G Born, International Commercial Arbitration (2nd Ed, 2014, Kluwer Law International) at 2558..
23. Citing Borden Inc v Meiji Milk Products Co., 919 F.2d 822 (2d Cir. 1990); Channel Tunnel Group Ltd v Balfour Beatty Construction Ltd [1993] AC 334; 'Lady Muriel' v Transorient Shipping Ltd [1995] HKCA 615 (HK Ct App).