Falsification of transactions, abuse of arbitration procedures, the use of arbitration awards made by the Mainland arbitration Commission have been…

2022-07-31 0 By

Information from:The arbitration award made by the Mainland Arbitration Commission was rejected by the Hong Kong court on December 29, 2021.The High Court of Hong Kong (” The Court “), in its judgment in the case between Guangdong Shunde Zhanwei Trading Company Limited (” Zhanwei Company “) and Xifeng Mohang Company Limited (” Xifeng Company “) ([2021] HKCFI 3823), refused to enforce an arbitral award made by zhanjiang Arbitration Commission,The dispute was caused by the sales contract between the applicant And the respondent, Xinfeng Company. However, the transaction was actually the result of collusion between ST, director of Xinfeng Company, and Xinfeng Company to infringe the interests of the company.The court made the decision on four grounds: that the contract entered into by the parties was invalid, xinfeng had not been properly informed and stated the facts of the arbitration proceedings, that enforcement of the award was contrary to public policy, and that Zhanwei deliberately concealed the facts of the case from the enforcement court.1. Background Introduction Xinfeng Company was established in Hong Kong in 1989. Its main business is timber retail, which is 50% owned by natural person ST and another company NI.DL and ST, controlling shareholders and directors of NI, are co-directors of Xinfeng.DL and ST’s wife are sisters. Before the conflict between the two escalated at the end of 2016, DL handed over the daily operation of Xinfeng Company to ST, and ST and his wife were the only full-time employees of the company.On April 14, 2017, ST, in the name of Xinfeng Company, entered into a marble sales contract of 220 million yuan with the buyer Zhanwei Company. It was agreed that the goods would be delivered within 6 days. The delay in performing the delivery obligation would result in a huge compensation of 2.2 million yuan per day.Unusually, Zhanwei was just established three months before the contract was signed, and the contract price of 220 million yuan was 62 times xinfeng’s total annual sales in 2015.Subsequently, Zhanwei company for xinfeng company breach of contract, arbitration to the Zhanjiang Arbitration Committee.On May 19, 2017, only four days after the applicant applied for arbitration, the Zhanjiang Arbitration Committee made an arbitration award, which ordered Xinfeng Company to pay Zhanwei Company 59 million yuan and bear the arbitration costs.On the basis of the arbitration award, Zhanwei Company applies to the court of Hong Kong for enforcement and starts the winding up procedure against Xinfeng Company.DL did not become aware of the existence of the arbitration award until the winding-up proceedings began.NI/DL applied to the court in April 2020 and received leave from the court in March 2021 to intervene in the proceedings and request that the arbitration award be set aside.2. The court held that the focus of the dispute in this case was carried out from four aspects :(1) whether the contract involved in this case is valid can be used as the basis for zhanwei company to initiate arbitration. DL claimed that the signing of the contract involved in this case was a sham without the resolution of the board of directors.In addition to the abnormally high amount of the target, there is no written correspondence and documents between the two parties to reflect normal transactions.NI pointed out that according to the relevant laws in mainland China, if Zhanwei Company knew or should have known that ST lacked the authorization to contract on behalf of the company, but still chose to sign the contract, the contract will be invalid.There is no evidence that ST was authorized.On the other hand, Weiwei argues that ST has an implied authority to enter into the contract, on the ground that NI/DL has authorized THE day-to-day management of the company to ST.ST has emerged over the past 20 years of operation as de facto Managing Director, which of course has the authority to initiate contracts and participate in arbitration proceedings on behalf of the company.In addition, since Xinfeng Company is established in Hong Kong and the contract stipulates that laws more favorable to the observant party shall be adopted for interpretation, the authority of ST and whether the company shall bear the legal consequences of its behavior shall be determined in accordance with the laws of Hong Kong.The court held that ST’s directorship did not naturally confer an implied authority and that, according to the articles of association, only when two directors acted together,Directors have power under the articles only whenthey act together as the board collectively.In addition, even under Hong Kong law, this case does not help the exhibition Wei company or ST.It is said that an implied authorization can only be established in a courseof transactions (a courseof undesirable) between ST and ZHW.The facts and evidence of this case show that ST did not have the implied authority to initiate the contract.Even though according to The defense of Zhanwei, its shareholders SW and ST have been engaged in transaction practices for many years, the nature, size and amount of the contract involved in this case are far different from previous transactions between the two parties.In addition, in view of DL’s “fraud” accusation, the court carefully examined and evaluated the performance of Zhanwei Company, ST, SW and other relevant parties in the arbitration award execution procedure and winding up procedure, and made an adverse inference to Zhanwei Company based on the anomalies in the contract mentioned in the above background introduction.To sum up, the court held that the behavior related to the contract in ST’s filing was entirely based on personal interests rather than the interests of the company, and did not constitute apparent agency. Xinfeng Company should not bear the legal consequences caused by its behavior.SW did not have good faith in the transaction. Even according to the law of mainland China, the court held that Zhanwei /SW knew or should have known that ST did not have the authority to initiate the contract on behalf of Xinfeng.Therefore, the contract involved in the case is invalid.Although the arbitration agreement is independent, considering that the arbitration clause is included in the contract, the arbitration agreement cannot be binding on Xinfeng Company without the authorization of ST as a document.(2) Whether xinfeng has been properly informed of the arbitration procedure and the arbitration award in this case, and whether it should refuse to enforce the NI claim in the arbitration award in this case according to Article 95 of the Arbitration Ordinance. ST has no right to accept the notice of arbitration and participate in the arbitration procedure on behalf of the company without the authorization of the Board of Directors.Moreover, the company was not properly notified — the address of the notice of arbitration was Shop C, which xinfeng Company had sold.Wei Argues that ST, as the de facto general manager of the company, has an implied or general authority to make decisions on the ordinary business of the Company, and that such board authority includes authority to initiate legal proceedings (which should include arbitration proceedings) and to defend.The court believes that, according to the above determination, from the signing of the contract involved in the case, the violation of the agreement to the favorable verdict of The Exhibition Wei Company caused xinfeng company to assume a huge amount of debt, ST acting company does not have good faith.Therefore, he has no so-called implied or general authority to represent the Company in the arbitration proceedings and his actions are not binding on the Company.In addition, the arbitration notice in this case was not “properly” served, although the address of service is xinfeng company registered address, but has been sold by ST, it is difficult to make Xinfeng company notice the occurrence of arbitration.The court therefore found that Xinfeng failed to present its facts in violation of being given proper notice of the arbitration.According to article 95 of the Arbitration Ordinance, failure by a party to receive “proper notice” of the arbitration proceedings or to state its facts constitutes grounds for refusal to enforce the award.(3) Whether the ruling related to the execution violates public policy The Court held that, considering the above facts, ST entered into the contract related to the arbitration with SW company or ZHW Company for its own selfish interests, it was undoubtedly a violation to the conscience of the Court to allow ZHW Company to implement the ruling related to the arbitration.ST, with the assistance of Chinwei, abused the arbitration process and award and the enforcement of the award constitutes a breach of public policy in Hong Kong.(4) whether to execute court deliberately concealing facts court case, exhibition Hui undisclosed delivery address corresponding to the facts of the real estate has been selling, service is likely to lead to the notice of arbitration is controversial, this poses a serious, deliberately, substantial hide, its execution court made misleading statements, has issued the execution of the command shall be revoked, and no reason to approve again.3. It is not uncommon to review the cases of fake transactions and abuse of arbitration procedures in China. In recent years, China has paid more attention to the governance of fake arbitration.At the end of 2020, when the Supreme People’s Court issued the Annual Report on Judicial Review of Arbitration in China (2019), Ma Dongxu, a judge of the Civil Division of the Supreme People’s Court, said that in judicial practice, the legitimate rights and interests of outsiders have been harmed by malicious application for arbitration or “hand in hand” fake arbitration.Fake arbitration, like fake litigation, should be curbed and punished.Since 2019, the Supreme Court has issued a series of judicial interpretations to facilitate property preservation and mutual enforcement of arbitral awards in mutually assisted arbitration procedures between the mainland and Hong Kong. However, there are also emerging cases of abuse of arbitration procedures using the convenience measures of the two places, which need to arouse the vigilance of arbitration commissions and arbitrators on the mainland.This case involving two jurisdictions, Hong Kong and the mainland trade both parties as the main body in the Hong Kong, mainland chose the arbitration commission, the arbitration procedure within 4 days after the start that the arbitration award, the Hong Kong court revealed a case involved in the program of judicial review of the major suspects (not by application square main business, excessively high quantities, there is no evidence to the contracting and the performance of the necessary communication, etc.),The representatives signing the sales contract (including the arbitration clause) have defects of authorization, and the arbitration notice has not been sent to the effective address, etc. The essence of disputes involved in the case is pointed out, that is, shareholders’ dispute and family dispute.In this case, the court clarified that, under the Hong Kong law, it should not be ignored whether the person acting on behalf of the company acts in the interests of the company or his own interests, and whether he acts in good faith.In this case, the directors contracted by Dai Xinfeng intentionally signed contracts that were not the main business and far exceeded the company’s debt capacity, concealed the fact that the business premises listed in the company’s registered address had been sold, and served it as the address of the arbitration notice, so as to collude with the buyer and seize the company’s property, which was obviously malicious.The legal consequences of its actions should certainly not be borne by the company.