In Changfeng Shipping Holdings Limited -v- Sinoriches Enterprises Co., Limited HCCT 59/2019;  HKCFI 2703, Edward Liu and Maggie Lee of Hill Dickinson Hong Kong, together with Edward Alder of Prince's Chambers, on the instruction of Hill Dickinson Hong Kong, acted for the successful applicant for an examination order against two directors of a chartering company as judgment debtor for a London arbitral award, which had been recognised and enforced in Hong Kong. More importantly, by refusing to follow the Singaporean case of Burgundy Global Exploration Corp -v- Transocean Offshore International Ventures  SGCA 24, the judge granted the leave to serve the examination order out of jurisdiction by holding that the discretion should be exercised with extreme caution, instead of sparingly, but there should be no bias against service out.
The applicant and respondent were companies incorporated in Hong Kong. In particular for the respondent, its paid up and authorised share capital was HK$10,000. There were three shareholders, namely Royalship Maritime Inc, which was a company incorporated in BVI, Ms. Wang and Ms. Yang, each holding 8,400, 800 and 800 shares respectively. They were also directors of the respondent. The respondent had an office address in Hong Kong.
The respondent's business was mainly carried out in the mainland China. The address of the respondent as stated in the charterparty at dispute was an office building in Dalian.
On 25 February 2017, the applicant as owners and respondent as charterers entered into the charterparty for the hire of MV "CF DIAMOND", which provided for arbitration in London. Dispute arose between the parties. The applicant subsequently referred certain disputes under the charterparty to arbitration. On 16 October 2017, the arbitrator issued an award in favour of the applicant for more than USD$1 million plus certain interest and costs.
On 31 October 2019, the applicant obtained leave under O.73 r.10(1) to enforce the award as a judgment of the Hong Kong court. The enforcement order was served on the respondent on 1 November 2019. On 12 December 2019, the applicant served a statutory demand on the respondent.
Throughout, the respondent ignored the arbitral proceedings and did not satisfy the award or the statutory demand or took any part in the Hong Kong enforcement proceedings.
On 9 March 2020, the applicant made an ex parte application for leave to examine the two directors of the respondent, whom appeared to be residents in Dalian, mainland China, pursuant to O.48 r.1 of the Rules of the High Court (RHC) and for leave to serve the examination order on the two directors out of Hong Kong, pursuant to O.11 r.9(4).
On 14 August 2020, the master granted the examination order but refused leave to serve the order out of the jurisdiction. In refusing leave to serve out, the master quoted para.11/9/1H of Hong Kong Civil Procedure 2020 (which was rewritten in apra.11/9/17 of Hong Kong Civil Procedure 2021) and expressed the view that the fundamental question was whether the foreign directors of the respondent are so closely connected to the substantive claim that the Hong Kong court ws justified in taking jurisdiction over then. The master followed the Singapore Court of Appeal decision in Burgundy Global Exploration Corp -v- Transocean Offshore Int'l Ventures Ltd  SGCA 24 quoted in Hong Kong Civil Procedure 2020, but was not satisfied that the applicant has shown a close connection between the directors and the claim.
The applicant subsequently decided to appeal against the ex parte order of the master. The issues raised in the appeal were (1) whether the court has jurisdiction to make examination orders under O.48 r.1 against officers of a corporate judgment debtor who was resident outside Hong Kong and was not a party to the action from which the debt arose; and (2) if it has, how the discretion in granting leave to serve such an order out of the jurisdiction under O.11 r.9(4) was to be exercised.
Deputy High Court Judge To heard the applicant's submissions and decided to allow the appeal by setting aside the master's order. The judge granted leave to serve the examination orders by the master pursuant to O.48 against the two directors out of the jurisdiction at their addresses in Dalian. Having regard to the COVID-19 pandemic and the impractically of personal service, the judge also granted leave to serve the said order by substituted service by the post to the said addresses and to the respondent's address in Hong Kong.
Issue (1): Whether O.48 r.1 has extra-territorial effect
In order to consider how the discretion under O.11 r.9(4) was to be exercised, the judge considered the court's jurisdiction under O.48 r.1. As the judge noted, O.48 r.1 expressly provided that an examination order may be served on officers of a corporate debtor who were not parties to the action from which the judgment debt arose. The operation of this rule involved factual issues and presented little problem, save where the judgment debtor or its officer in the case of a corporate debtor, was out of the jurisdiction. Under such circumstances, leave to serve the examination order out of the jurisdiction under O.11 r.9 may be required.
In Hong Kong, the courts have accepted that O.48 r.1 has extra-territorial effect (see eg Navig8 Chemical Pools Inc -v- Inder Sharma HCMP 2885/2016, (unreported) 14 February 2017). From the judge's point of view, there was nothing in the wording of the rule to suggest that the rule was applicable only to officers of the judgment debtor within the jurisdiction. However, it was trite principle of statutory interpretation that there was a presumption against extra-territoriality (see Marsi -v- Consolidated Contractors Int'l (UK) Ltd and others (No.4)  1 AC 90 at para.17).
O.48 r.1 was invoked when a judgment debtor failed to pay a debt that was adjudged to be paid after due process, and the judgment creditor has no information as to the debtor's assets that could be made available to satisfy judgment. The underlying purpose of the rule was to enable judgment creditors to obtain information about a judgment debtor's finances. This purpose could only be served against a corporate judgment debtor by extending the application of the rule to its officers within, as well as outside, the jurisdiction. Hong Kong was an international commercial centre. There were many foreign or international corporations carrying on business in Hong Kong with officers resident outside Hong Kong. The underlying purpose of the rule and Hong Kong's background as an international commercial centre were strong enough to displace the presumption against extra-territoriality. Having regard to the circumstances in Hong Kong and applying the fair, large and liberal construction and interpretation, the judge was satisfied that the purpose of the rule would be best served if it is construed to have extra-territorial effect and applicable to officers of corporate debtors resident inside, as well as outside, Hong Kong.
Issue (2): Whether service out of jurisdiction should be granted
Before discussing this issue, the judge first considered the distinction between personal jurisdiction and subject-matter or substantive jurisdiction, which was relevant to the issue of service. Relying upon the decision of Hoffmann J (as he then was) in Mackinnon -v- Donaldson, Lufkin and Jenrette Securities Corporation  Ch 482 at p.493G-H, the judge opined that personal jurisdiction referred to the question of whether a person was amenable to the jurisdiction of the court and could be brought before it. Substantive jurisdiction referred to what a court was permitted to do in terms of regulating the conduct in another country of someone over whom it had personal jurisdiction. Substantive jurisdiction was therefore concerned with giving effect to the presumption against extra-territoriality. On the other hand, that a state should refrain from demanding obedience to its sovereign authority by foreigners in respect of their conduct outside the jurisdiction was a rule of practice arising out of comity in the field of international law and international relations, rather than a principle of statutory construction.
Service of examination orders was governed by O.11 r.9(4), which required that service out of jurisdiction of any summons was only permissible with leave of the court unless in proceedings in which the writ, originating summons, motion or petition may be served out of the jurisdiction without leave. Thus, if judgment was obtained in an action commenced against a personal debtor within jurisdiction, and the debtor has subsequently gone out of the jurisdiction, leave to serve out was not required as the debtor was already subject to jurisdiction. But this exception did not apply to officers of a corporate judgment debtor because they have a separate legal personality from the company and have never been subject to jurisdiction (see Masri, at para.17). Leave to serve out of the jurisdiction on them was required. This was the situation in the present case.
The judge noted that there were few authorities on the principles applicable to service out of such examination orders on officers of corporate debtors. Para.11/9/17 of Hong Kong Civil Procedure 2021 quoted the decision of the House of Lords in the UK in Masri and the Singapore Court of Appeal decision in Burgundy Global.
Given the equivalent procedure under the English CPR r.71.2 was now different from the equivalent pre-CPR provisions applicable to Hong Kong, the judge confirmed that the result of Masri had no bearing to the present case, though its exposition of the common law was nevertheless relevant.
On the other hand, the judge noted that the statutory regime in Singapore in relation to debtor examination orders and service out was very similar to that in Hong Kong. Burgundy Global was a decision about service of an examination order out of jurisdiction under a similar regime from the highest court in Singapore. It was therefore a persuasive authority for the present case.
In Burgundy Global, the Singapore Court of Appeal distinguished Masri because the regime under CPR r.71.2 was different from the Singapore regime. It also held that O.48 r.1 has extra-territorial effect. The question for the court was whether it should impose limits on its application and, if so, how. As service of the examination order was the crucial act that engaged the court's jurisdiction over a foreign person, it formulated the close connection test as the means to limit the application of the rule. Upon perusal of the Burgundy Global decision, the judge summarised the principles applicable to service out of such examination orders as follows: (a) the fundamental question was whether the foreign officer was so closely connected to the substantive claim that the Singapore court was justified in taking jurisdiction over him; (b) there should be no strict or exhaustive rule as to when leave should be granted but the officer's knowledge of the finance of the judgment debtor was the basic threshold; and (c) leave should be granted sparingly.
Turning to Hong Kong, from the judge's point of view the fundamental questions were whether the foreign officer had knowledge of the corporate debtor's finance and was so closely connected to the substantive claim that the court was justified in taking jurisdiction.
The judge agreed with the Singapore court that the officer's knowledge of the finance of the judgment debtor was a prerequisite for invoking the court's jurisdiction. If the officer had no knowledge of the finance of the debtor or if the extent of his knowledge was not even of marginal utility, the question of service out did not even arise. That knowledge was information in the possession of the officer. It was a prerequisite rather than part of the close connection as could justify overriding the jurisdiction of the foreign state over its own nationals within its geographical jurisdiction. As the knowledge was something personally known to the officer and not to the applicant, what the applicant had to prove was its subjective belief on reasonable grounds that the officer had knowledge of the finance of the corporate debtor. This threshold was not a particularly high one, particularly at the ex parte stage.
As for the close connection test, in the judge's view, the discretion was exercisable where there was a close connection between the officer's conduct in relation to the action from which the judgment debt arose and the subject matter of that action, which made it unjust not to exercise the jurisdiction. What constituted close connection depended on the factual circumstances of the case. It was an abstract concept difficult to define. In the context of the court's discretion to order service out of an examination order requiring an officer of a corporate debtor, who was resident outside Hong Kong and not a party to the litigation, to submit himself to jurisdiction by coming to Hong Kong to provide information to the judgment creditor for the purpose of enforcing the judgment debt. The officer's conduct that created this nexus must be such as to make it unjust not to lift the corporate veil of the judgment debtor or not to bypass the principle of corporate personality, and to allow the corporate debtor to withhold information about its finance so as to frustrate the execution of the judgment debt (The Ikarian Reefer (No.2)  1 WLR 603 was preferably referred).
Prima facie, a close connection was created by the conduct of the sole or substantial shareholder; the sole director or officer who was in the alter ego or controlling mind of the corporate debtor or has instituted, controlled or financed the litigation. This was because his conduct was effectively the conduct of the corporate debtor. It would be unjust not to require him to provide information about the finance of the corporate debtor. These people may be interested in the debt not being enforceable against the corporate debtor. If a debt was owed, it was just that it should be repaid. The corollary was that it was unjust that those responsible for its creation and interested intis non-payment be allowed to hide behind the corporate veil of the corporate debtor. Thus, despite that they were not parties to the claim from which the debt arose, their connection with the debt was close enough to make it unjust not to require them to disclose information about finance of the corporate debtor. For the same reason, it was also not just that officers who had played a key role in the events giving rise to the judgment creditor's successful claim should be required to provide such information.
The process was all about disclosure of financial information, which the corporate debtor was obliged to provide, albeit through its officers. Compelling a non-party to give information against a corporate debtor did not offend the principle of corporate personality. The corporate debtor may suffer loss in that its safety concealed assets may be exposed and subjected to execution, but the officers did not suffer loss for making the disclosure. The loss, if any, suffered by an officer who was also a shareholder was just reflective loss, which he could not claim as a matter of law because of the principle of corporate personality. Thus, the liability of the judgment debtor and its officers remain separate and unaffected. The corporate personality of the corporate debtor and the personal liability of the officer were preserved.
There may be many reasons why an officer had, in the ordinary course of his employment, possession of information and documents about the finance of its employer. The above formulation of close connection would not catch the accountants and junior employees whose involvement was no more than arranging movement of funds or assets and keeping records at the direction of the controlling mind of the company, even though they may have information about the company's finances. The judge thought such a formulation would represent a fair balance between the interest of the judgment creditor and the interest of the officer of the corporate debtor. Those officers were not required to be examined, not because they were protected by the principle of corporate personality but, because their connection with the claim was not close enough as to justify the local court to override the competing rights of the foreign state in exercising jurisdiction over its own nationals within its own geographical jurisdiction.
The judge respectfully differed from the Singapore court that this discretion should be sparingly exercised, though the judge agreed that it should be exercised with extreme caution. But this qualitative restraint should not be translated into a quantitative restraint. It was unduly restrictive and contrary to the very robust approach that had all along been adopted by the Hong Kong Court of Appeal in this type of cases (see Re B + B Construction Co Ltd (in liquidation)  2 HKLRD 478).
Referring to Abela and others -v- Baadarani and another  1 WLR 2043 at para.53, in which Lord Sumption JSC in his dicta describing service of process out of the jurisdiction as an 'exorbitant' jurisdiction, the judge opined that the court should adopt a pragmatic approach instead of unnecessarily restrictive approach. As commercial activities move from the domestic arena to the international arena, the differences or inequalities between foreign and domestic litigation were reduced. Yesterday's concern about exorbitant jurisdiction simply disappeared with increase in commercial activities in the international arena, both in scope and volume. The process of the law should reach as far as the reaches of corresponding commercial activities.
On the other hand, there was a large measure of internationalisation of commercial law and practice. In the international arena, if a judgment debt was proved against a debtor and the debt remained unsatisfied, the machinery available for enforcement of judgment should not be any different depending on whether the judgment debtor was abroad or within the jurisdiction. There should be no predilection or presumption against service out of jurisdiction. A judgment debtor, which was an individual, should be made to answer their debts and be examined as to where their assets were located, even if they was out of the jurisdiction. The same principle should be applicable to a corporate judgment debtor. Such examination should be extended to its officers if there was a close connection between the officers and the debt. If the prerequisite requirement of knowledge and close connection were satisfied, the examination order should be issued without any bias against service out.
Lastly, the burden of proof was on the applicant. As the existence or otherwise of a close connection was a matter solely within the knowledge of the corporate debtor, direct evidence and documentary evidence may not be available to the judgment creditor. In the majority of cases, proof has to be by inference. The court has to draw inference with a sense of realism having regard to the circumstances. This burden was not a heavy one at the ex parte stage, though it may be a heavy one should be service be challenged at the inter parte stage.
The present case
Upon examination of the documents adduced by the applicant to the court, the judge noted that Ms. Wang was actually discharging the function of the respondent at the respondent's operation address during the visit by the applicant's staff in November 2017. As for Ms. Yang, she was obviously closely involved in the charterparty and in some way involved in the respondent's finance as well.
It was important to note that the respondent was a three-person company. For a company with only HK$10,000 authorised capital carrying on a very substantial business of a charterer, the inference could be readily drawn that the three directors that constituted the controlling mind of the company, were the financial backers of the company, and they had knowledge of the finance of the company. This was particularly the case for the only two natural person directors.
Although the judge noted that the evidence of involvement against Ms Wang was 'very flimsy', this did not matter as the respondent was a three-person company and Ms Wang was part of its controlling mind and one of its financial backers. Also, the judge could not ignore the fact that the business of the respondent was to carry on the business of a charterer and there were only two natural person directors carrying on such a substantial business. Viewing the circumstances with realism, the judge was able to draw from the available evidence of Ms Wang's and Ms Yang's involvements, the only reasonable inference that there as a close connection between their conducts and the judgment debtor. If a debt was owed, it was just that it should be repaid and unjust that the respondent should hide behind the corporate veil and ignore the demand to pay without disclosing its assets to justify its inability to pay.
This is a very significant judgment, which will certainly be the landmark decision in Hong Kong on the issue concerning service of an examination order out of jurisdiction.
It is respectfully suggested that the reasons given by the judge in his decision are very persuasive. The overriding purpose of O.48 as the judge identified is to enable a judgment creditor to come to an informed decision as to who best to enforce its judgment. Because the judgment debtor has committed a wrong in failing to pay, the court must not be overly solicitous in its favour and the court should refrain from drawing too refined distinctions as to what can or cannot be encompassed in an O.48 examination (Bloomsbury Int'l Ltd -v- Nouvelle Foods (Hong Kong) Ltd  2 HKLRD 64, per Reyes J, at para.16.
It is commonly accepted that Hong Kong is a physically small but economically important jurisdiction in the world. In particular, many Hong Kong companies have directors in mainland China. This is both commonplace and desirable, given the relentless economic integration of Hong Kong and mainland China as two jurisdictions in the same country and Hong Kong's position as a reliable and efficient business centre. Thus, as the judge emphasised, an unduly restrictive approach would be frustrating the reasonable expectation of the international commercial communities towards Hong Kong as an international commercial centre and damaging to Hong Kong's image as such.
Therefore, it would be fair to suggest that where persons from other parts of China or foreign countries chose to become directors of Hong Kong companies, they should expect to be subject to Hong Kong law and procedure in that regard. In this era of easy telecommunications, that must be so wherever they choose physically to carry out their duties. There can be nothing 'exorbitant' or 'extravagant' about that.
In the case of Hong Kong company directors who are resident in mainland China, it is no longer reasonable or appropriate to regard them wholly as 'foreigners' or 'abroad', or for the court to have undue concerns of 'international comity of nations' or even 'invasion of sovereignty' so as to give rise to reluctance to make and serve O.48 orders against such directors merely on the basis of their residence out of Hong Kong. Being two jurisdictions of the same country, Hong Kong and mainland China increasingly co-operate in matters of jurisdiction and administration of civil justice, eg enforcement of interim measures, arbitral awards, and judgment etc. Therefore, it would be safe to say that where a Hong Kong company has been sued by service in the jurisdiction as of right in a trial in the Hong Kong court, it would often be appropriate to grant an O.48 order against the directors, even if they happen to reside outside Hong Kong and ancillary leave to serve out is required to make the order effective, especially if they are in mainland China.
As regards to the approach for the court to justify in taking jurisdiction over the officer as suggested in Burgundy Global, ie to ask whether the particular officer of the corporate judgment debtor is 'so closely connected to the substantive claim', as noted by the judge the Singapore court seemed not purport to lay down a rigid test of showing close connections between the directors and the substantive claim. Instead, it was only an example of a possible approach.
Where the judgment debtor is Hong Kong incorporated, and it is simply the directors who are outside Hong Kong, the court should strongly incline to granting leave to serve any O.48 order out of the jurisdiction, unless there is some particular reason not to. After all, the directors have voluntarily decided to take up office as directors of a Hong Kong company and make use of the Hong Kong legal system. Giving evidence under O.48 is one of the responsibilities of volunteering to act as a director of a Hong Kong company.
In addition, this judgment also has far-reaching implications on shipping business. It is very common for a company like the respondent in the present case with only nominal sum of authorised capital carrying on a very substantial business of a charterer. When dispute arises, the shipowner may have concerns on whether it is worthy to pursue the claim against the charterers whom may have limited assets to be enforced. The decision may clarify the position of the shipowners for their future claims against the charterers in similar circumstances. As the judge explicitly stated, given the size of the company, the inference could be readily drawn that the relevant directors constitute the controlling mind of the company, are the financial backers of the company, and they have knowledge of the finance of the company. In such circumstances, these persons who have been established close connection with the charterers as judgment debtor will be exposed to oral examination by disclosing the judgment debtor's assets to justify its inability to pay the judgment debt. However, as clarified by the judge, this decision is not to lift the corporate veil of the judgment debtor, ie it does not mean that the person who has close connection with the judgment debtor shall be liable for the judgment debt.
Originally Published by Hill Dickinson, December 2020
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