News & Events

Deacons Litigation & Dispute Resolution Newsletter - Issue 4, 2013

Submitted By Firm: Deacons

Contact(s): Cynthia Chung

Author(s):

Karen Dicks

Date Published: 12/3/2013

Article Type: Legal Update

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The Court of Appeal confirms that a bankruptcy or winding up petition is considered an ''action'' and subject to section 4(4) of the Limitation Ordinance (Cap 347), by Richard Hudson (richard.hudson@deacons.com.hk) and Benjamin Ng (benjamin.ng@deacons.com.hk)

On 30 August 2013, the Court of Appeal handed down an important judgment in Re Li Man Hoo which confirms that bankruptcy and winding up petitions fall within the definition of an "action" under section 4(4) of the Limitation Ordinance (the "Ordinance"). As a result, any bankruptcy or winding up petition based on judgment debts that are more than 12 years old will be statutorily time-barred. The judgment is welcome judicial clarification in light of previously conflicting case law existing both in England and Hong Kong.

The Relevant Provisions

Section 4(4) of the Ordinance provides that "An action shall not be brought upon any judgment after the expiration of 12 years from the date on which the judgment became enforceable, and no arrears of interest in respect of any judgment debt shall be recovered after the expiration of 6 years from the date on which the interest became due."

Section 2 of the Ordinance defines "action" as "includes any proceedings in a court of law."

Previously Conflicting Decisions

The English Court of Appeal, considering the equivalent sections of the English limitation legislation, in which the wording is materially identical to the provisions in Hong Kong, established in the case of W.T. Lamb & Sons v Rider [1948] 2 KB 331 that "action" has a restricted meaning and refers only to an "action upon a judgment" – a new set of proceedings brought for the purpose of re-establishing the judgment debt. Such a meaning excludes bankruptcy or winding up proceedings, as a bankruptcy or winding up petition is not an action on a judgment in the strict sense.

This decision was not free from controversy, as subsequent English decisions remarked upon the inconsistency. In Lowsley v Forbes [1999] HC 329, the English House of Lords acknowledged that the decision in W.T. Lamb was erroneous. However, since there was clear evidence that when enacting the revisions to the English limitation provisions the UK Parliament had proceeded on the understanding that W.T. Lamb was correct, the House of Lords held that it must have been Parliament's intention at that time to give the word "action" the restricted meaning as in W.T. Lamb, rather than the wider meaning which would include bankruptcy or winding up proceedings, and the House of Lords had to give effect to the restricted meaning.

In the first instance decision of Re Li Man Hoo [2012] 2 HKLRD 743 the court followed the English authorities and held that section 4(4) of the Ordinance does not bar presentation of a bankruptcy or winding up petition, as the case may be. However, two further decisions of the Hong Kong Court of First Instance, Re Man Po International Holdings Limited [2012] 5 HKC 539, a decision of Harris J, in front of whom Li Man Hoo was not cited, and Re Lau Wan [2013] 3 HKLRD 567 a decision of Anthony Chan J, both held that there was nothing to suggest that the legislature in Hong Kong had a particular meaning of "action" in mind at the time the Ordinance was introduced. In the absence of any established authorities to the contrary, the correct approach in Hong Kong was to give section 4(4) the construction found by the House of Lords in the Lowsley case, and there was no reason why Hong Kong should read into its law a construction which was wrong and against the plain reading of section 4(4).

The Decision of the Court of Appeal

In an appeal brought in the Li Man Hoo proceedings, the Court of Appeal overturned the first instance decision and held that "action" shall be given a wider meaning so as to catch bankruptcy or winding up proceedings based on judgment debts that are more than 12 years old. The Court of Appeal held that, as a matter of ordinary language, a bankruptcy or winding up petition is clearly a "proceeding in a court of law" pursuant to section 2 of the Ordinance, and insofar as the debt on which it is founded is a judgment debt, it would appear to be a proceeding that is "brought upon" the judgment under which the judgment debt arose.

The Court of Appeal did acknowledge that it should not only consider the literal meaning of the provisions but also the preceding case law. When considering the abovementioned English cases, the Court of Appeal was of the view that the English courts have come to reach their current position by tracing the legislative history of the limitation provisions in England. The Court of Appeal, following Harris J and Anthony Chan J's reasoning, held that the Hong Kong courts need not be burdened by the legislative history of the English law and should interpret the Ordinance in whatever way was the correct interpretation of such legislation.

The Court of Appeal also clarified a point concerning the recovery of interest on a judgment debt. It was held that the effect of the second part of section 4(4) of the Ordinance is to bar the recovery of interest on a judgment debt more than six years after it becomes due. As interest accrues from day to day, the effect of the provision is that only interest accruing due within six years of the date of commencement of proceedings can be claimed.

The judgment gives much needed certainty to the Hong Kong law of limitation of actions: bankruptcy or winding up petitions (as the case may be) cannot be used to "enforce" a judgment more than 12 years after it is delivered.

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Provisions on enforcement of Macau Arbitral Awards in Hong Kong to come into effect on 16 December 2013, by Philipp Hanusch (philipp.hanusch@deacons.com.hk)

In Issue 3 of 2013 of our Litigation & Dispute Resolution Newsletter, we reported on the passing of the Arbitration (Amendment) Bill 2013, by which the "Arrangement Concerning Reciprocal Recognition and Enforcement of Arbitral Awards Between the Hong Kong Special Administrative Region and the Macau Special Administrative Region" signed by the Hong Kong and Macau Governments was implemented.

On 7 October 2013, the Secretary for Justice gave notice that the relevant provisions of the Arbitration (Amendment) Ordinance 2013 will come into operation on 16 December 2013.

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Court confirms that parties who unsuccessfully challenge arbitral awards will pay costs on an indemnity basis, by Philipp Hanusch (philipp.hanusch@deacons.com.hk)

Background

On 29 June 2011, the Court of First Instance ("CFI") granted an application of Pacific China Holdings Ltd ("Pacific China") Holdings Ltd to set aside an International Chamber of Commerce (ICC) arbitral award ("the Award") made against it in favour of Grand Pacific Holdings Ltd ("Grand Pacific") for US$55 million. The Award was set aside under Article 34 (2) of the UNCITRAL Model Law (which is incorporated in Hong Kong's Arbitration Ordinance) on the grounds that Pacific China had been unable to present its case and/or that the arbitral procedure had not been in accordance with the parties' agreement.

By a unanimous decision, on 9 May 2012, the Court of Appeal reversed the CFI's decision and reinstated the Award. On 19 February 2013, the Court of Final Appeal ("CFA") refused to grant Pacific China leave to appeal to the CFA, the Court of Appeal having previously also refused leave.

The decisions of the Court of Appeal and CFA have further cemented and enhanced Hong Kong's reputation as an attractive arbitration seat. More details on the decisions of the Court of First Instance, Court of Appeal and CFA can be found in Issue 1 of 2013 of our Construction and Arbitration Newsletter.

Decision on costs

On 23 July 2012, the Court of Appeal decided on the costs of the unsuccessful challenge. In its ruling, the Court of Appeal followed the principle that, in the absence of special circumstances, a party that is unsuccessful in setting aside an arbitral award in Hong Kong shall pay the successful party's costs on an indemnity basis. The Court of Appeal left open, however, in what circumstances to allow the Court to depart from the indemnity costs principle in such cases.

The indemnity basis is the most generous basis and allows the successful party to recover all of its legal costs incurred, unless they are of an unreasonable amount or have been unreasonably incurred, with any doubt in this regard being resolved in favour of the successful party.

The Court of Appeal adopted the rationale for awarding costs on the most generous basis previously laid down by Reyes J in A v R [2010] 3 HKC, as follows:-

  • A party who obtains an award in its favour should be entitled to expect that the Court will enforce the award as a matter of course. Applications by a party to appeal against or set aside an award or for an order refusing enforcement should be exceptional events. Where a party unsuccessfully makes such application, it should in principle expect to have to pay costs on a higher basis. This is because a party seeking to enforce an award should not have had to contend with this type of challenge.
  • Further, if the unsuccessful party is only made to pay costs on a conventional party-and-party basis, the successful party would in effect be subsidising the unsuccessful party's unsuccessful attempt to frustrate enforcement of a valid award. The successful party would only be able to recover about two-thirds of its costs of the challenge and would be out of pocket as to one-third. This is despite the successful party already having successfully gone through an arbitration and obtained an award in its favour. The unsuccessful party, in contrast, would not be bearing the full consequences of its unsuccessful application.
  • Such state of affairs would only encourage the bringing of unmeritorious challenges to an award. It would turn what should be an exceptional and high-risk strategy into something which was potentially "worth a go".
  • Accordingly, in the absence of special circumstances, the court will from now on normally award costs against an unsuccessful party on an indemnity basis.

On 16 August 2013, the CFA refused to grant Pacific China leave to appeal to the CFA against the Court of Appeal's decision on costs, thereby confirming that parties, who are unsuccessful in setting aside arbitral awards made in Hong Kong, will generally be ordered to pay costs on an indemnity basis.

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Tiger Asia - Date fixed for Market Misconduct Tribunal Proceedings, by Joseph Kwan (joseph.kwan@deacons.com.hk)

In Issue 3 of 2013 of our Litigation & Dispute Resolution Newletter, we reported on the SFC commencing proceedings in the Market Misconduct Tribunal (MMT) against Tiger Asia Management LLC and three of its officers for market misconduct, contrary to sections 270 (insider dealing), and 274 (false trading) of Part XIII of the Securities and Futures Ordinance (Cap 571). Those proceedings have now been set down for hearing on 5 May 2014, with 30 days reserved.

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Court orders re-trial on insider dealing case - CITIC Pacific Limited, by Joseph Kwan (joseph.kwan@deacons.com.hk)

On 10 September 2013, the Court of First Instance allowed the appeal of Mr Simon Chui Wing Nin, a former assistant director of finance at CITIC Pacific Limited (CITIC Pacific), against his convictions for insider dealing and ordered a re-trial. In November 2012, Chui was found guilty at Eastern Magistrates' Court of two counts of insider dealing in CITIC Pacific shares and sentenced to 15 months' imprisonment, fined HK$1,018,855 and ordered to pay the SFC's investigation costs of HK$228,469. He was also disqualified from being a director of corporations in Hong Kong, including listed corporations, for three years.

The Magistrate heard that Chui was involved in assessing the impact of the fall in the Australian dollar in mid-2008 on a number of foreign exchange derivatives contracts, including target redemption forward contracts in Australian dollars, that CITIC Pacific had entered into to hedge its position in funding an Australian mining subsidiary. The target redemption forward contracts were similar to accumulator contracts, requiring CITIC Pacific to purchase a multiple amount of Australian dollar if it fell below designated strike rates.

By late August 2008, the Australian dollar had fallen significantly against the designated strike prices in the contracts. Chui was involved in calculating the financial impact on CITIC Pacific and knew that CITIC Pacific faced a very substantial mark to market loss that would materially impact the company's financial position. Whilst in possession of that information and before it was generally available, Chui sold most of his shares in CITIC Pacific.

On 20 October 2008, CITIC Pacific announced a mark to market loss, as at that point, of over HK$14.7 billion, sending the share price down approximately 60%.

Mrs Justice Bokhary found that the trial Magistrate had not given adequate reasons in his decision when dismissing Chui's arguments concerning expert evidence on the price sensitivity of the information that the SFC alleged was in Chui's possession. Chui's lawyer had argued that the expert's opinion was deficient, but the Magistrate dismissed those arguments. Mrs Justice Bokhary said that the arguments put forward by Chui's lawyer needed to be addressed by the Magistrate in giving his reasons because giving adequate reasons is a principle of paramount importance in the common law system. Mrs Justice Bokhary therefore quashed Chui's conviction, set aside his sentence and ordered a re-trial.

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Recent Deacons' publications

November

The new Companies Ordinance

Gearing up for the New Companies Ordinance

Human Resources and Pensions Newsletter, Issue 4 of 2013: November

October

Closer Economic Partnership Arrangement Between Mainland China and Hong Kong

Financial Services Newsletter, Issue 7 of 2013: October

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Altra Industrial Motion Inc.

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In my career I have been a practicing attorney, counsel to the Governor of Maine, and CEO of a major public utility. I have worked with many lawyers in many settings. When the American University in Bulgaria needed help with employment litigation in federal court in Syracuse, New York, we turned to Pierce Atwood, the ELA member we knew and trusted in Maine, for a referral. We were extremely pleased with the responsiveness and high quality of service we received from Bond Schoeneck & King, the ELA's firm in upstate New York. I would not hesitate to recommend the ELA to any employer.

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Barrett Business Services, Inc.

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Capgemini Outsourcing Services GmbH

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Stephen J. Hirschfeld
Partner 

Hollywood Entertainment Corporation

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Konami Gaming

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Nikkiso Cryo, Inc.

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Assistant General Counsel

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Michael A. DiGregorio
General Counsel  

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