Hong Kong Court Lays Down Principles for Applications to Serve Examination Orders on Foreign Officers of Corporate Judgment Debtors

Synopsis

In the recent case of Changfeng Shipping Holdings Ltd v Sinoriches Enterprises Co Ltd [2021] 1 HKLRD 117, the Court of First Instance laid down the principles for applying for leave to serve examination orders out of jurisdiction on foreign officers of a Hong Kong debtor company. More importantly, the case also demonstrates the court’s willingness to extend its jurisdiction to such foreign officers in light of the internationalization of commercial activities.

The Facts

The Applicant and the Respondent are both companies incorporated in Hong Kong.

The Applicant appealed against the Master’s order.

The Principles

The court explained that O.48 r.1 of the RHC has extra-territorial effect. The purpose of this rule is to enable judgment creditors to obtain information about a judgment debtor’s finances. This purpose could only be achieved against a corporate judgment debtor by extending the application of the rule to its officers within as well as outside the jurisdiction.

In a case involving a corporate judgment debtor, the officers have a separate legal personality from the company. If the officers have not previously submitted to the court’s jurisdiction, leave is required under O.11 r.9(4) of the RHC to serve the examination orders out of jurisdiction, so that the court’s jurisdiction can reach these officers.

There is no rule that the court shall sparingly exercise its discretion to grant such leave. The court referred to the case of Re B+B Construction Co Ltd (In Liq), a case concerning the private examination of foreign directors of a Hong Kong company under the Companies (winding Up and Miscellaneous Provisions) Ordinance for the purpose of asset investigation and recovery. In that case, the Court of Appeal held that since a person becomes an officer of a Hong Kong company by his own choice, he must abide by Hong Kong company law. Therefore, it is completely against the principles of good corporate governance to suggest that the court should not make an examination order in circumstances where it would otherwise be appropriate to do so, simply on the basis that the officer is resident abroad. Although the issue in Re B+B Construction Co Ltd (In Liq) was examination under the companies winding up regime, this rationale is equally applicable in the context of an O.48 examination order.

The court will be pragmatic in considering whether to grant leave to serve examination orders out of jurisdiction. As commercial activities are becoming internationalized, the differences or inequalities between foreign and domestic litigation are reduced. In the international arena, if a judgment debt is proved against a debtor and the debt remains unsatisfied, the machinery available for enforcement should not be different depending on whether the judgment debtor is abroad or within the jurisdiction. There should be no bias or presumption against service out of the jurisdiction. Such an approach would frustrate the reasonable expectation of the international commercial communities towards Hong Kong as an international commercial centre.

The court then helpfully summarized the principles regarding applications to serve examination orders out of jurisdiction under O. 11 r.9(4) of the RHC:

1. The officer’s knowledge of the finances of the corporate debtor is a prerequisite for leave to be granted.


2. The discretion to order service out may be exercised if there is 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 makes it unjust not to exercise the jurisdiction.


3. A close connection is created if the officer’s conduct makes it unjust 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.


4. A close connection is created by the conduct of the sole or substantial shareholder, the sole director or officer who is the alter ego or controlling mind of the corporate debtor or has instituted, controlled or financed the litigation. The same applies to officers who have played a key role in the events giving rise to the judgment creditor’s successful claim. These officers should be required to provide such information.


5. Fault, negligence or blameworthiness are not at all relevant. If there are such features in the conduct of the officer, it is all the more appropriate for the discretion to be exercised in favour of granting leave.


6. The burden of proof of close connection and knowledge is on the applicant. As the existence of a close connection and knowledge are matters solely within the knowledge of the corporate debtor, direct evidence and documentary evidence may not be available to the judgment creditor. In most cases, proof has to be by inference. The court has to draw inference with a sense of realism appropriate to the circumstances.


7. The discretion to order service out should be exercised with extreme caution but there should be no bias against service out.


8. The application for leave to serve out consists of a two-stage process. At the ex parte stage, the burden is on the applicant to make out a good arguable case on jurisdiction. The applicant need not make out a ‘cast iron’ case. Subject to the need for caution in the exercise of this long arm jurisdiction, the court will take a broad brush approach and will almost always grant leave to serve out unless there is a serious or obvious flaw in the application. At the inter partes stage, if service is challenged, the court will reconsider the matter afresh and weigh the evidence of both parties. If not satisfied that the officer has knowledge of the finance of the judgment debtor and that the close connection test is met, the ex parte leave will be set aside.

The Decision

In this case, the 2 directors in the PRC were also minority shareholders of the Respondent. Under the Respondent’s articles of association, the 2 directors have equal voting power in the board despite being minority shareholders. There was also evidence of both directors’ involvement in the charterparty under dispute.

As the Respondent was only a company with HKD10,000 authorized capital carrying on the substantial business of a charterer, the inference could only be that the 2 directors (together with the 3rd director) were the controlling mind and financial backers of the Respondent, and therefore had knowledge of the finance of the Respondent.

Based on the above, the court was satisfied the close connection test was met, and found no serious or obvious flaw in the application. The court therefore granted leave to the Applicant to serve the examination orders out of the jurisdiction on the 2 foreign directors.

The Takeaway

In Hong Kong, there is no requirement for a company to have a director or shareholder who resides in Hong Kong. Foreign investors may hire company service providers who will use their office as the company’s registered office in Hong Kong. This flexibility promotes business development in Hong Kong, but also means that there are many companies whose shareholders and directors reside outside of Hong Kong.

The court’s willingness and readiness to grant leave to serve examination orders on these foreign directors is no doubt welcome and provides a powerful tool for judgment creditors to locate the corporate judgment debtor’s assets for execution. If the officer ignores the examination order, he/she may face any of one or more of the following consequences:

1. the court may issue an arrest warrant, so that the officer will be arrested when he/she enters Hong Kong;


2. the officer may be liable for contempt of court, which is punishable by a fine and/or sequestration, and in more serious cases even imprisonment;


3. the officer, if he/she is a director, may also be disqualified from acting as a director of private companies for a certain period of time on the ground that the officer is unfit to be concerned in the management of a company.