G v N

HCCT 38/2021
HCCT 28/2023
HCCT 52/2023
(heard together)

[2023] HKCFI 3366

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 38 OF 2021

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CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 28 OF 2023

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AND

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 52 OF 2023

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D E C I S I O N

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Background

1. This case involves the interesting question of the application of public policy in a case where illegality is raised as a defence to a claim, and the extent to which the Court can intervene under Article 34 of the Model Law. This is in the context of a case where the arbitral tribunal had, in the course of reaching its decision on whether to grant or deny relief after a finding on illegality, considered the question of what the tribunal perceived to be the public policy of the relevant jurisdiction. Can it be contended that the tribunal’s decision on public policy is erroneous? If the tribunal’s decision on public policy is to be challenged, should it be characterized as an error of law, which is not subject to the Court’s review? Or is the Court entitled to set aside the award as it finds that the award is in conflict with public policy because the tribunal’s view of the public policy was erroneous?

2. In these proceedings, the Plaintiff (“G”) seeks to set aside the awards on liability and on quantum made by the arbitrator in an arbitration commenced by G (“Arbitration”) against the Defendant (and respondent in the Arbitration), on the ground that the awards are in conflict with the public policy of Hong Kong on illegality, and contain decisions on matters beyond the scope of the submission to arbitration and not in accordance with the parties’ agreement on procedure. In the alternative, G seeks an order to suspend the setting aside proceedings for the matter to be remitted to the arbitrator under Article 34(4) of the Model Law, to give the arbitrator an opportunity to take such action as he considers will eliminate the grounds for setting aside.

3. There have been meticulous arguments raised on behalf of G in this case, on the basis of the Courts’ decisions in Tinsley v Milligan[1994] 1 AC 340, Patel v Mirza[2017] AC 467, Betamax v State Trading Corp[2021] UKPC 14, and Monat Investment Ltd v All Person(s) In Occupation of Part of The Remaining Portion of Lot No 591 in Mui Wo DD 4 No 16 Ma Po Tsuen, Mui Wo, Lantau Island CACV 448/2020 [2023] HKCA 479. The gist of G’s contention is that it is not seeking in this case to challenge the awards of the arbitrator on the ground of any error of law when the arbitrator decided on illegality on the test propounded in Tinsley (instead of Patel), but that the awards should be set aside as they would be contrary to the public policy of Hong Kong, which is now confirmed by the Court of Appeal in Monat to be reflected in and be guided by the decision of the English Court in Patel.

The facts

4. The background facts are not in dispute. They have been referred to in the judgment of the Commercial Court in proceedings between the same parties in the BVI, and in the arbitral awards which are the subject matter of these proceedings for setting aside.

5. G is a company incorporated in the BVI. It is a wholly-owned indirect subsidiary of Kaisa Group Holdings Limited (“K”) which is listed on the Hong Kong Stock Exchange.

6. The Defendant (“N”) is also incorporated in the BVI, and is a real estate developer and operator which conducted its main business on the Mainland. N is the sole owner of Nam Tai Group Ltd, which indirectly owns significant assets and shares in Mainland companies, including the 100% subsidiary of N Nam Tai Investment (Shenzhen) Co Ltd (“NTI”). NTI holds the vast majority of N’s assets.

7. At the material time in September 2020, K was the largest shareholder of N, holding such shares through G and controlling the management and board of N.

8. As reflected in the 1^st Partial Award issued in the Arbitration on 6 April 2023, N started life as a high-tech company in Shenzhen, but evolved into a successful property investment company and became listed on the New York Stock Exchange.

9. Amongst the shareholders of N was an American investment fund, IsZo Capital LP (“IZ”).

10. Disputes emerged, when the management of N decided to make a substantial investment of US $100 million in the purchase of more land in Dongguan, but without reference to the board of directors of N. IZ disagreed with the purchase, and having lost confidence in the board of N, IZ and other shareholders supporting it proposed to call a meeting of the shareholders of N to consider a change of some of the directors on the board. As found by the BVI Court and accepted by the arbitrator, had the shareholders’ meeting been held, it was likely that the requisitionists would have succeeded, and the composition of N’s board of directors would have been substantially altered and the directors related to K would have been removed.

11. On IZ’s case, N then arranged for an allotment of shares in order to thwart the likely outcome of a vote by the shareholders of N. On 5 October 2020, N and G entered into a Securities Purchase Agreement (“SPA”) for a placement known as “PIPE” (a private investment in public equity). Pursuant to the SPA, N was to allot 16,051,219 shares to G in exchange for the price of US $146,868,653 (“Consideration Monies”). The allotment would have increased G’s shareholding in N from approximately 23.9% to 43.9%. Approximately 4.5% of N’s issued shares was offered to one West Ridge Investment Limited (“WR”), which had not previously owned any shares in N. The placement under the SPA gave K and its supporters the necessary votes to defeat IZ’s requisition for a shareholders’ meeting.

12. On 13 October 2020, IZ commenced proceedings in the BVI Commercial Court to seek a declaration that the placement to G and WR was void and should be set aside, on the ground that in breach of section 121 of the BVI Business Companies Act (“Act”), the placement was not made in the interests of N and the directors had not exercised their powers for a proper purpose. In a judgment of 3 March 2021 (“BVI Judgment”), Jack J set aside the placement on the ground that it was not in the interests of the company. He found that four of the directors of N were controlled by K and heavily committed to supporting K’s de facto control of N, and that the purpose of the four directors in approving the PIPE was to give K de facto control of N and to defeat the shareholders’ request for a meeting. The PIPE was executed for an improper purpose under BVI law, and was accordingly held to be void. The BVI Court ordered a special meeting of shareholders of N, which was held on 30 November 2021, when most of the members on the board were voted out and a new board of management was voted in.

13. G and N (by its former board controlled by K) appealed against the BVI Judgment, but the Court on appeal affirmed the decision of Jack J, that the PIPE had been made for an improper purpose and that the allotments to G and WR were void. The Court of Appeal only allowed part of the appeal, by finding that although the directors of N had acted in breach of section 121 of the Act, which require them to exercise their powers as directors for a proper purpose and not in a manner which contravenes the Act or the memorandum or articles of the company, they were not in breach of their duties under section 120(1) of the Act, which require them to act honestly and in good faith and in what they believe to be in the best interests of the company.

14. The SPA between G and N is governed by Hong Kong law, and contains an arbitration clause in favor of the Hong Kong Arbitration Centre (“Clause 6.10”).

15. After the judgments in the BVI proceedings, G commenced the Arbitration on 12 March 2021 in Hong Kong, to seek restitution of the Consideration Monies it had paid for the placement under the SPA. In the Arbitration, G made a personal claim against N based on unjust enrichment for mistake or total failure of consideration, and restitutionary claims including proprietary restitution on the basis of constructive trust arising out of fundamental mistake. By way of defence, N claimed illegality of the placement, and contended that G should not be permitted to recover the Consideration Monies by virtue of illegality in respect of G’s personal claim, and relying on the principle of unclean hands in respect of G’s proprietary claim. N also counterclaimed for costs and damages sustained by it in relation to the SPA and the placement held to be invalid.

16. Shortly after commencement of the Arbitration, G...