Pacific China Holdings Ltd Appellant v Grand Pacific Holdings Ltd Respondent

• Jurisdiction: British Virgin Islands
• Judge: GEORGE-CREQUE, J.A.
• Judgment Date: 20 September 2010
• Neutral Citation: VG 2010 CA 9
• Judgment citation (vLex): [2010] ECSC J0920-2
• Court: Court of Appeal (British Virgin Islands)
• Docket Number: HCVAP 2010/007
• Date: 20 September 2010

[2010] ECSC J0920-2

IN THE COURT OF APPEAL

On Appeal From The Commercial Division

Before:

The Hon. Mr. Hugh A. Rawlins Chief Justice

The Hon. Mde. Janice George Creque Justice of Appeal

The Hon. Mr. Davidson Baptiste Justice of Appeal

HCVAP 2010/007

Between:

Pacific China Holdings Ltd

Appellant

and

Grand Pacific Holdings Limited

Respondent

Appearances:

Mr. Richard Millett, QC, Mr. Mark Forte and Ms. Tameka Davis for the appellant

Mr. Jack Husbands for the respondent

Civil Appeal -Convention award, application to appoint liquidators based on award -The Arbitration Ordinance Section 36(2) - Convention defences - whether debt genuinely disputed on substantial grounds -the scope of the court's discretion under section 36(2) of the Arbitration Ordinance.

The respondent company sought the winding up of the appellant company, claiming that the appellant owed the respondent over US$55 million based on a Convention award made by an arbitration tribunal in Hong Kong. The appellant, in disputing the debt raised Convention defences under section 36(2) and (3) of the Arbitration Ordinance and argued in respect of the arbitral proceedings that: (1) it was unable to present its case; (2) the arbitral process was not in accordance with the parties' agreement, and accordingly (3) enforcing the award would contravene public policy, and that for these reasons the court ought to exercise its discretion and refuse to appoint liquidators in respect of the appellant. The trial judge having concluded that the grounds raised by the appellant could not be dismissed as being incapable, on full argument in an application to set aside an order for enforcement, of being developed so as to give rise to a substantial dispute as to enforceability, went on further to conclude that the irregularities giving rise to those grounds, had they not occurred would not have in any event impacted the outcome. Accordingly, he granted the order in favour of the respondent and appointed liquidators in respect of the appellant. From this order the appellant appealed in essence on the basis that the trial judge had erred as a matter of law in exercising a broader discretion than that accorded under section 36(2) and (3) of the Arbitration Ordinance.

Held: allowing the appeal and setting aside the order of the learned trial judge and awarding costs to the appellant, that:

• 1. The court's discretion under section 36(2) of the Ordinance is a narrow one in which a court is justified in overriding a Convention defence where there has been waiver or circumstances giving rise to an estoppel on some such legally recognised principle, or where the error is minor and prejudicially irrelevant;

  Dardana Ltd v. Yukos Oil Co. [2002]1 All ER (Comm) 819, Kanoria v. Guinness [2006] 2 All ER (Comm) 413, Dallah Real Estate and Holding Co.v. Ministry of Religious Affairs of the Government of Pakistan [2009] EWCA Civ 755; approved; dictum of Kaplan J made obiter in Paklito Investment Ltd v Klockner East Asia, [1993] HKLR 39, doubted;

• 2. Where a real question of enforceability of an arbitration award is raised and thus a real or bona fide dispute on substantial grounds on the debt has arisen it is not open to the court to proceed to make a winding up order on the debt grounded on the award;

  Dictum of Byron CJ in Sparkasse Bregenz Bank v Associated Capital Corporation, British Virgin Islands Civil Appeal No. 10 of 2002, applied;

• 3. The learned trial judge, having concluded that defences had been raised which on full argument in an application to enforce the award was capable of giving rise to a substantial dispute as to enforceability, erred in exercising a broader discretion than permitted under section 36(2) by undertaking a merits review of the Convention award and importing therein a consideration as to whether, the matters complained of in respect of the defences raised, were material to or would have impacted the outcome.

GEORGE-CREQUE, J.A.

1 On 11 ^th January 2010, the trial judge of the Commercial Division, in effect, made an order for the winding up of Pacific China Holdings Limited ("PCH") by the appointment of joint liquidators. The order is based on a debt said to be due by PCH to Grand Pacific Holdings Limited ("GPH") in a sum in excess of US$55 million, plus costs and arbitration fees, pursuant to an ICC arbitration award dated 24 ^th August 2009, ("the Convention award") published by a tribunal in Hong Kong ("the HK tribunal").

2 PCH, being dissatisfied with that order, has appealed. The trial judge, pending the outcome of an appeal of his decision, in effect, stayed his order. However, the joint liquidators are entitled to take over the management of PCH.

3 The Virgin Islands has incorporated into its Arbitration Ordinance 1, (" the Ordinance") the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards adopted by the United Nations Conference on International Commercial Arbitrations on 10 ^th June 1958 ("the Convention") Section 36(2) of the Ordinance sets out instances (normally referred to as Convention defences) in which the court may refuse to enforce a Convention award. Section 36(2) and (3) of The Ordinance, as relevant to this appeal, are as follows:

"36. (2) Enforcement of a Convention award may be refused if the person against whom it is invoked proves -

(a) …

(b) …

(c) that he was not given proper notice of the appointment of the arbitrator… or was otherwise unable to present his case;

(d) …

(e) that the composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties or failing such agreement, with the law of the country where the arbitration took place;

(f) …

(3) Enforcement of a Convention Award may also be refused if the award is in respect of a matter which is not capable of settlement by arbitration, or if it would be contrary to public policy to enforce the award. (my emphasis)

4 It must be noted however, that GPH has not sought enforcement of the Convention award. Rather, GPH has sought to wind up PCH based on the Convention award although no steps have been taken to enforce it. The application to appoint liquidators, as the learned trial judge correctly reminded himself, is not an application to enforce the Convention award. It is recognised however, that the principles to be applied in determining whether to wind up based on a Convention award are analogous to those on an application for enforcement. 2

5 Before the trial judge, PCH argued that it was not insolvent and that the debt was disputed on bona fide and substantial grounds in that the Convention award was open to challenge either directly in the Hong Kong courts or indirectly by application of Convention defences in any enforcement proceedings taken by GPH. This, it says, is based on the manner in which the HK tribunal conducted the proceedings before it. PCH relied on three main grounds falling within the Convention defences namely, that:

• (1) it was unable to present its case [s.36(2)(c)];

• (2) the arbitral procedure was not in accordance with the agreement of the parties [s.36(2)(e)]; and

• (3) it would be contrary to public policy to enforce the HK award.

6 The Insolvency Act 2003 of the Virgin Islands, section 10(3), in effect, says that unenforceable claims are not admissible in a winding up, and further says [s. 9(1)], that the holder of an unenforceable arbitral award is not a creditor for the purposes of the said Act.

7 The relevant and undisputed test in determining whether the debt is genuinely disputed is well settled and is as stated by Byron CJ in Sparkasse Bregenz Bank v Associated Capital Corporation where at paragraph 3 he stated it this way:

"The reason for not paying the debt must be honestly believed to exist and must be based on substantial or reasonable grounds. Substantial means having substance and not frivolous, which disputes the court should

ignore. There must be so much doubt and question about the liability to pay the debt that the court sees that there is a genuine question to be decided."

Trial judge's findings/conclusions

8 The trial judge, after setting out the background of the claim and the challenge to the application made by PCH, at paragraph 6 of his judgment, stated in part as follows:

"… It follows that under the scheme of the Act 3 itself a dispute about enforceability involves a dispute about whether the Applicant [GPH] is a creditor. If such a dispute is substantial (in the sense of being other than flimsy) the court should not appoint liquidators."

9 At paragraph 7 of his judgment the trial judge set out the approach to be adopted in determining whether he should appoint liquidators based on the Convention award debt. He formulated the approach in this way:

"… I do not have to be satisfied, in order for the Company [PCH] to succeed on this part of its case, that I would have refused enforcement if that had been the application before me. I have to be satisfied merely that sufficiently substantial grounds are identified by the Company to raise a real question whether the award is one that should be enforced. If that point is reached, I should refuse to appoint the liquidators and leave the Applicant to establish enforceability in an application brought for that purpose." (my emphasis)

Neither side takes issue (nor could they) with this approach. Indeed, GPH in its skeletal arguments, at paragraph 18 stated that 'the point for determination by Bannister J was whether the "Convention defences" were capable of amounting to a bona fide dispute on substantial grounds.' This says the same thing though formulated more succinctly.

10 At paragraph [14] the trial judge then had this to say:

"Consistently with the approach which I have explained in paragraph [7] of this judgment, I do not think that on an application for the appointment of liquidators I can or...