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Bank Of Communications Trustee Ltd v China Energy Reserve And Chemicals Group Overseas Co Ltd And Another

Judgment Cited authorities 2 Cited in Precedent Map Related
Vincent
Judgment Date26 February 2021
Neutral Citation[2021] HKCFI 486
Year2021
Judgement NumberHCA146/2020
Subject MatterCivil Action
CourtCourt of First Instance (Hong Kong)
HCA146/2020 BANK OF COMMUNICATIONS TRUSTEE LTD v. CHINA ENERGY RESERVE AND CHEMICALS GROUP OVERSEAS CO LTD AND ANOTHER

HCA 146/2020

[2021] HKCFI 486

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 146 OF 2020

____________

BETWEEN
BANK OF COMMUNICATIONS TRUSTEE LIMITED Plaintiff

and
CHINA ENERGY RESERVE AND CHEMICALS GROUP OVERSEAS COMPANY LIMITED 1st Defendant
CHINA ENERGY RESERVE AND CHEMICALS GROUP COMPANY LIMITED 2nd Defendant
(中國國儲能源化工集團股份公司)

____________

Before: Hon Au-Yeung J in Chambers
Closing Date for Written Submission: 29 January 2021
Date of Decision: 26 February 2021

_____________

D E C I S I O N

_____________

A. Introduction

1. This is the Defendants’ renewed application for stay pending appeal and to file 2 affirmations in support.

2. Master Rebecca Lee granted summary judgment against the Defendants on 29 October 2020 (“Judgment”) for repayment of sums under bonds due 2022 (“2022 Bonds”) in the sum of HK$2 billion, with interest plus costs and expenses in the sum of US$258,537.24. Those bonds were issued by D1 and guaranteed by D2.

3. The Defendants filed a notice of appeal and a summons for stay of execution pending appeal on the following day (“Stay Application”). The hearing of the appeal is scheduled for 23-24 August 2021 (“Appeal”).

4. On 21 December 2020, Master Rebecca Lee dismissed the Stay Application, but granted an interim stay of 21 days for the Defendants to renew their application for a stay of execution before a judge in chambers, which expired on 11 January 2021.

5. Before me is a summons dated 30 December 2020 taken out by the Defendants, on 2 outstanding matters:

(1) A renewed application for a stay of execution of the Judgment pending the final disposal of the Appeal (“Renewed Stay Application”);

(2) An application for leave to adduce and rely on the 4th and 5th affirmations of Norman Lin dated 7 December 2020 (“Lin 4th”) and 30 December 2020 (“Lin 5th”), respectively. They contain developments and updates to the restructuring negotiations since the Judgment, in support of the Renewed Stay Application (“New Evidence Application”).

6. On 11 January 2021, I ordered that Lin 4th and 5th be admitted de bene esse without prejudice to the Plaintiff’s argument that they should not have been filed.

7. With regard the Renewed Stay Application, it is the Defendants’ case that:

(1) There exist strong grounds for the Appeal, which is in itself a reason to grant a stay of execution.

(2) Alternatively, the Appeal is at the very least arguable, and there are good reasons justifying a stay, namely, that execution of the Judgment would lead to serious and deleterious financial consequences to the Defendants which may lead to liquidation, thereby rendering the Appeal nugatory.

(3) The Plaintiff would not suffer any significant prejudice from the stay because, on its own evidence, the Plaintiff would not gain any priority over other creditors of the Defendants but would merely be treated para passu upon winding up of the Defendants.

8. The Plaintiff opposes both Applications. In respect of the New Evidence Application, the Plaintiff says that the relevant evidence could have been obtained with reasonable diligence and filed with leave before the Master either prior to the Judgment or the dismissal of the Stay Application. In fact, the Master had already made a case management decision to disallow any new affirmation evidence.

9. In respect of the Renewed Stay Application, the Plaintiff says that the appeal does not meet the basic merits threshold for stay. The alleged impact of the Judgment on the debt restructuring negotiations is an irrelevant consideration and is speculative in that there is no evidence of any imminent support for any restructuring proposal more than 2½ years after the event of default. As to their financial position, the Defendants have long been insolvent prior to the Judgment. Enforcing the Judgment would not have the effect of putting a viable and going business concern into financial jeopardy.

B. Background

10. The 2022 Bonds, together with seven other bonds (the “Other Bonds”), form part of a series of eight bonds totalling US$2 billion, which are guaranteed by D2 as the common guarantor (the “China Energy Bonds”) and issued by indirectly owned subsidiaries of D2. The Plaintiff is the common trustee across all the China Energy Bonds.

11. In respect of the 2022 Bonds, D1 is the issuer and the Plaintiff is the trustee for the sole bondholder, ie China Life Trustee Limited (“China Life”).

12. There is no dispute that an event of default occurred on 11 May 2018 under one of the Other Bonds due 2018 (“2018 Bonds”), such that cross-defaults were triggered across all of the China Energy Bonds.

13. On 25 October 2018, the Plaintiff issued a notice to, amongst others, the Defendants, confirming that cross-defaults had occurred in relation to, amongst others, the 2022 Bonds. The notice required the issuers to make payments at specified bank accounts operated by appointed Agents.

14. On 29 October 2018, a further event of default occurred as the Defendants did not pay the Plaintiff the accrued interest in respect of the 2022 Bonds.

15. On 25 January 2019, the Plaintiff issued a Demand and Acceleration Notice demanding immediate repayment under the 2022 Bonds.

16. Save for a partial payment for accrued interest on 20 December 2018, D1 and D2 have failed to pay the outstanding amount due pursuant to the 2022 Bonds, and legal expenses and remuneration which the Plaintiff was entitled to.

17. Meanwhile, on 6 June 2018, the Defendants and issuers of the Other Bonds engaged FTI Consulting, Inc. (“FTI”) as their independent financial advisor for restructuring negotiations. Restructuring proposals have been made and continued into January 2021.

18. The defence and counterclaim raised by the Defendants, are twofold:

(1) Estoppel by convention, ie the Plaintiff and China Life are estopped by convention from acting contrary to the “Common Understanding” between themselves, the Defendants and all bondholders, namely, that all bondholders of the China Energy Bonds should be treated equally. No action should be taken by them and no payment would be made by the Defendants to any one of them, if it would prejudice the bondholders of the Other Bonds. China Life departed from that Common Understanding in demanding for payment and taking out this action, whilst taking part in restructuring negotiations to the prejudice of other bondholders.

(2) Implied duty of good faith, ie China Life’s contractual rights to request the Plaintiff to institute legal proceedings to enforce repayment against the Defendants are subject to an implied duty of good faith not to exercise such rights arbitrarily, capriciously or unreasonably. China Life has breached such implied term, which is prejudicial to the interests of the bondholders of the Other Bonds and jeopardises the restructuring negotiations in which China Life itself continues to participate.

It is said that these are fact sensitive issues which should not be disposed of summarily.

19. I will deal with the New Evidence Application before the Renewed Stay Application.

C. New Evidence Application

20. At the same hearing when the Judgment was given, the Defendants applied for and was granted an interim stay.

21. The Stay Application was eventually disposed of on the papers by way of written submissions without exchange of affirmations. The Master did not give leave to file Lin 4th, which the Defendants attempted to file with their second round of reply submission.

22. The jurisdiction of this Court to entertain an application for a stay of execution is concurrent to that of the Court below: see HKCP 2021, §59/13/7; Tsang Wing Kwai v Tsang Wing Fai [2018] 5 HKLRD 350 (CA) at §24(b).

23. There is a greater need for evidence to be filed in applications for stay of execution than for leave to appeal (§27). Filing of evidence is permitted where there is good justification (§§26 and 24(f)).

24. The present application for a stay is brought as a renewed application and not as an appeal against the Master’s case management decision of disallowing the filing of Lin 4th.

25. The evidence necessary to justify a stay is different from evidence relevant to resist an Order 14 application.

26. Lin 4th dealt with ownership of a sum of US$120 million and the Defendants’ expectation that further restructuring proposal be put before bondholders. Lin 5th repeats part of Lin 4th and introduces evidence of facts after 13 November 2020, the final date laid down by Master Rebecca Lee for the parties to lodge submission on the Stay Application. It is evidence about how the Appeal may bring deleterious effect on the Defendants and render the Appeal nugatory.

27. The evidence is relevant, I allow the filing of Lin 4th and 5th.

D. Relevant legal principles on stay of execution

28. The starting point is that an appeal does not operate as a stay of proceedings. The successful party is not to be deprived of the fruits of his success. To decide whether to grant a stay, the Court need only form a preliminary view as to the merits of the appeal. The burden is on the appellant to show (i) an arguable appeal (ie one with reasonable prospects of success), which is the minimum but not sufficient requirement; and (ii) good reasons or special circumstances justifying a stay. On the other hand, if the appellant can show that there exists a strong likelihood of success of the appeal, this would by itself enable a stay to be granted. See Star Play Development Ltd v Bess Fashion Management Co. Ltd [2007] 5 HKC 84 at §9(5)-(7).

29. The Court will generally exercise its discretion in favour of granting a stay...

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