In RACP Pharmaceutical Holdings Ltd v Li Xiaobo HCA 490/2007, the Court considered for the first time circumstances in which the Hong Kong courts will permit a worldwide freezing order to be enforced abroad.

Worldwide Freezing Order

Worldwide freezing order (“WFO”) (also known also worldwide Mareva injunction) prohibits a defendant from removing assets, whether money or goods, from the jurisdiction; or to deal with assets which are located outside the jurisdiction, up to a stated limit pending the trial of an action. 

WFO could be a very effective tool available to a plaintiff to preserve the status quo of the defendant’s assets. However, the Court will only grant permission to enforce a WFO abroad in very limited circumstances due to its draconian nature and the possibility that the defendant may have to defend parallel proceedings around the world.  

Background

In RACP Pharmaceutical Holdings Ltd v Li Xiaobo HCA 490/2007, the Court was invited to consider for the first time circumstances in which the Hong Kong courts will permit a worldwide freezing order to be enforced abroad.  The plaintiff was a BVI company beneficially owned by a US company.  The defendant was a medical doctor and businessman, who owned a 100% shareholding in a Singapore company, which in turn owned a pharmaceutical company in Mainland China.  In 2006, the plaintiff and the defendant entered into a stock purchase agreement whereby the plaintiff brought from the defendant the entire shareholding in the Singapore company for a total consideration of US$11.125 million.  However, the plaintiff subsequently found out that the account receivables of the Chinese subsidiary had been overstated by about RMB$20 million.

The plaintiff then applied for and successfully obtained a WFO to freeze the defendant’s assets up to a value of US$6 million.  Once that order was granted, the plaintiff approached a local bank to ascertain the balance standing to the credit of the defendant’s bank account.  It transpired that the balance was only a little over HK$130,000.  Consequently, the plaintiff applied for leave to enforce the WFO in Canada on the ground that the defendant had insufficient assets within the jurisdiction to satisfy its claim.

Guidelines on the Enforcement of WFO Abroad

In giving judgment, the Court applied for the first time in Hong Kong the “Dadourian Guidelines” as established in the decision of the English Court of Appeal in Dadourian Group International Incorporated & Ors & Simms & Ors [2006] 3 All ER 48.  The guidelines now applicable to Hong Kong are set out below :-

Ø    Guideline 1 – Just and Convenient

The Court’s discretion to grant permission must be exercised in a way which is just and convenient for the purpose of ensuring the effectiveness of the WFO and it should not be oppressive to any of the parties to the domestic proceedings or to third parties who may be joined to the foreign proceedings.

In the present case, the Court considered that it was just and convenient to grant leave as only by doing so was it likely to ensure the effectiveness of the order.  There was no suggestion that such a course would be oppressive to any of the parties who are or who may be joined.

Ø    Guideline 2 – All the Relevant Circumstances and Options

The Court will take into account all the relevant circumstances and options.  In particular, consideration should be given to (1) granting relief on terms, for example, terms as to the extension to third parties with the undertaking to compensate for costs incurred as a result of the WFO and as to the type of proceedings that may be commenced abroad; and (2) the proportionality of the steps proposed to be taken abroad.

Ø    Guideline 3 – Proportionality

The interest of the plaintiff should be balanced against the interests of the other parties joined or to be joined to the proceedings.

In the present case, one of the three properties said to be registered in the name of the defendant in Canada was subject to a mortgage.  That being said, the Court was of the view that the undertakings given by the plaintiff were sufficient to protect any third party holding a mortgage over the properties.

Ø    Guideline 4 – No Superior Relief Abroad

The plaintiff should not be allowed to obtain relief in the foreign proceedings which is superior to the relief given by the WFO.

Ø    Guideline 5 – Evidence in Support

The evidence in support of the application should contain all the information so far as it can reasonably be otained in the time availble necessary to enable the Court to reach an informed decision.  That included evidence as to (1) the applicable law and practice in the foreign court; (2) the nature of the proposed proceedings to be commenced; and (3) the assets believed to be located in the jurisdiction of the foreign court and the names of the parties by whom such assets are held.

Ø    Guideline 6 – Location of Assets

The plaintiff must show that there is a real prospect that the assets in question are located within the jurisdiction of the foreign court.

Ø    Guideline 7 – Risk of Dissipation

There must be evidence of a risk of dissipation of the assets in question.

In the present case, the plaintiff argued such risk was said to exist by way of inference drawn from the lack of honesty in the defendant’s conduct in the dealings.  It was also apparent from the evidence given by a Canadian lawyer that at least one of the properties owned by the defendant was on the market for sale.

Ø    Guideline 8 – Notice

Normally, the application should be made on notice to the defendant.  In cases of urgency, permission might be given without the defendant’s notice but that party should have the earliest practicable opportunity of having the matter reconsidered by the Court.

In the present case, the application was made without notice to the defedant.  However, the Court had no hesitation in granting the relief as the plaintiff had responsibly sought a short return date for the inter-parties summons.

Having considered the circumstances of the case, the Court was satisfied that it was appropriate for it to exercise the discretion in favour of the plaintiff to grant permission to enforce the WFO abroad.