Hong Kong court clarifies that Chabra jurisdiction extends to Mareva only

The Hong Kong Court of First Instance recently clarified the operation of the Hong Kong courts’ Chabra jurisdiction in China City Construction (International) Co, Ltd (In Creditors’ Voluntary Liquidation) v. Champ Prestige International Ltd and Dingway Investment Limited [2022] HKCFI 2314, stating that only a Mareva injunction would be available under the courts’ Chabra jurisdiction.

The Chabra jurisdiction is exercised as an exceptional remedy which allows the courts to grant interim freezing orders against third parties. It is named after the English case TSB Private Bank International SA v Chabra [1992] 1 WLR 231 and is adopted in Hong Kong: see XY, LLC v Jesse Zhu [2016] HKEC 2630.

Factual Background

This is the most recent judgment amongst a series of decisions in Hong Kong arising from the aftermath of China City Construction (International) Co, Ltd (CCCI)’s default on bonds in 2016 and its subsequent winding-up. The factual background of the case is complex. The following aspects of the fact are most relevant for the purpose of this update.

CCCI was a 55 percent shareholder of Dingway Investment Limited (Dingway). In January 2019, CCCI entered into voluntary liquidation and liquidators were appointed. On 24 January 2022, CCCI liquidators commenced a winding-up petition (HCCW 30/2022) against Dingway based on the ground, inter alia, that Dingway had no means to repay its shareholder’s loan of HK$403 million owed to CCCI (HCCW Action).

Dingway, BVI incorporated, was a holding company which held a piece of land in Miami through three levels of wholly owned Delaware subsidiaries. The immediate wholly owned subsidiary of Dingway was Company A. On 15 October 2019, a director of Dingway transferred (Transfer 1) its entire shareholding in Company A to China City Construction and Development Co., (Hong Kong) Limited (CCCHK). In November 2019, CCCHK transferred (Transfer 2) the entire shareholding in Company A to a Californian company for a stated consideration of US$70 million. Transfer 1 and Transfer 2 are alleged to be part of an unlawful scheme to deprive Dingway of its indirect interest in the land in Miami to keep the land from CCCI’s creditors.

On 25 January 2022, upon the ex parte application of CCCI, Ng J granted an interim order under the court’s Chabra jurisdiction providing for, amongst other things, as follows:

A worldwide proprietary injunction against CCCHK in respect of the sum of US$70 million (the proceeds of Transfer 2) and the traceable substitutes thereof, topped up by a worldwide Mareva injunction up to US$103 million. (Chabra Injunction)

Summons were taken out to continue the Chabra Injunction.

For completeness, Dingway was subsequently wound up by a BVI court in March 2022 and liquidators were appointed (Dingway Liquidators). On 1 April 2022, the Dingway Liquidators commenced HCA 309/2022 against CCCHK as the first Defendant and eight other defendants for damages and equitable compensation caused by Transfer 1 and Transfer 2 (HCA Action). Apart from the summons to continue the injunctions granted in the HCCW Action, the instant judgment also deals with other summonses arising from two further injunction orders in the HCA Action which are not subjects of this article.

The Chabra Injunction

In his judgment, Chan J explained the basis on which the Chabra Injunction was granted.

The substantive claim which CCCI relied on in the HCCW Action was its shareholder’s loan to Dingway. There were no direct claims brought by CCCI against CCCHK and therefore the latter was a third party. CCCI applied for an injunction against CCCHK invoking the court’s Chabra jurisdiction.

Under the Chabra jurisdiction, the court may grant freezing orders against third parties:

1. Where the third party is holding or in control of assets beneficially owned by the defendant (1st limb); or
2. Where some process, ultimately enforceable by the court, such as the appointment of a liquidator, is or may be available to the claimant as a consequence of a judgment against that defendant, pursuant to which the third party may be obliged to contribute to the funds or property of the defendant to help satisfy the claimant’s judgment against the defendant (2nd limb). (§113)

The court’s Chabra jurisdiction was found under the 2nd limb above on the facts that if CCCI obtained the winding-up order against Dingway, liquidators of Dingway could take actions against CCCHK and CCCHK might be obliged to contribute to the funds or property of Dingway.

The “process” referred to under the 2nd limb was the appointment of liquidators to Dingway. As mentioned above, the liquidators of Dingway did commence the HCA Action against CCCHK and eight other defendants subsequently on 1 April 2022.

Chabra jurisdiction clarified by Chan J

In the application before Chan J, CCCHK sought to discontinue the proprietary injunction against CCCHK, arguing that the Chabra jurisdiction is confined to Mareva or in personam relief and not proprietary relief.

Whilst noting that there appears to be no direct authority on the point, Chan J considered that there is indirect support in the authorities for CCCHK’s argument. The authorities about the Chabra jurisdiction clearly covered a propriety claim by the defendant against the third party. He went on to rule that under the Chabra injunction, the court should only grant Mareva as opposed to proprietary relief, even where the defendant has a proprietary claim against the third party for key reasons below:

“The difference between a Mareva relief and a proprietary injunction is that in the case of the latter (a) there is a lower application threshold, eg, demonstrating a serious issue to be tried as opposed to a good arguable case; and (b) the absence of some of the mitigating provisions in favour of the affected party, eg, the payment of legal expenses with the frozen assets;

Given the extraordinary nature of the Chabra jurisdiction, the court should act with all appropriate caution and not extend it beyond what is essential for the safeguard of the claimant’s interest. I see no reason why a Mareva relief would not normally be sufficient for the protection of a claimant;

Fundamentally, the claimant has no cause of action against the third party. There is a conceptual difficulty in granting the claimant a relief which he would not be entitled against the defendant. Put another way, it is difficult to see why it is just and convenient to grant the claimant a relief against the third party which he would not be entitled against the defendant.” (§123(4)-123(6))

Chan J’s decision on the Chabra jurisdiction was a discrete legal decision. It does not bear implications on the parties’ actual positions because CCCI and the Dingway Liquidators also applied for a transfer of the Chabra Injunction to the HCA Action. The court supported the transfer application noting that: (i) Dingway clearly had a proprietary claim over the consideration of US$70 million purportedly received by CCCHK in Transfer 2 (§146); and (ii) Dingway is entitled in its own right (without relying on the Chabra jurisdiction) to a proprietary injunction in respect of the US$70 million (§158).

Comments

The case offers a good refreshment on the legal tests for the court exercising its Chabra jurisdiction. It further offers the clarification that the courts’ Chabra jurisdiction only extends to Mareva injunctions instead of proprietary injunctions.

In short, an applicant seeking to invoke the courts’ Chabra jurisdiction is required to fulfil the following tests:

• In relation to Chabra jurisdiction, there is a good reason to suppose that either:
  
  • The third party is holding or in control of assets beneficially owned by the defendant; or
    
  • The third party is amenable to some process, ultimately enforceable by the court, which may oblige it to contribute to the funds or property of the defendant to help satisfy the claimant’s judgment against the defendant;
    

• In relation to Mareva injunction:
  • There is a good arguable case for the claimant’s substantive claim against the defendant;
    
  • There is a real risk of dissipation of assets by the defendant as well as the third party, which would render the plaintiff’s judgment of no effect; and
    
  • The balance of convenience lies in favour of granting an injunction.
    

If there is any appeal on the point on the Chabra jurisdiction, we will offer an update.