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- A Recap on Hong Kong Tax System and the Latest Updates
By Anna Chan, Partner
When is a validation order required?
When a company is subject to winding up proceedings, the company’s properties including its bank account would be frozen and could not be dispensed with. To gain access to the company’s bank account in the meantime would require a validation order from the Court.
A mere procedural requirement for Solvent Companies?
The Court’s decision in Cheng Eric Tak Kwong v Emagist Group Limited & Others  ruled that in cases where the winding up proceedings is derived from shareholders’ dispute, the Court would usually grant validation order for the company’s expenses made in the ordinary course of business to enable the proper functioning of the company “once the court is satisfied of the solvency of the company and the fact that it has an active and ongoing business.”
The Court is also has the view that the petitioner’s suspicion on how his fellow director ran the company and conducted its affair is not justification to turn an application for validation order more adversarial and complicated than is necessary. Such concerns of the petitioner can be alleviated in the validation order itself by conditions such as the company’s undertaking to provide a regular summary of expenses.
Unreasonable resistance to validation order. Non-sensible decision in case of Solvent Companies can be costly
In a more recent decision, Marrakesh Investments Ltd v Tangiers Holdings Ltd & Others  (Unreported), the Court has further indicated that litigants should give a pragmatic and sensible approach in dealing with validation orders for solvent companies in order to avoid unnecessary urgent applications made to the Companies Court. In the future, the Court will be more inclined to make punitive costs order on indemnity basis if the petitioner does not sensibly consent to validation order.
What OLN can do for you
OLN has abundance of experience in advising and handling shareholders’ dispute and companies’ winding up matters. For a better understanding of how OLN can assist you, please feel free to contact our partner, Anna Chan.
By Stephen Chan, Partner
Since the case of Cyberworks1 in 2010, the Courts in Hong Kong have viewed third party litigation funding arrangements to be lawful in the context of certain insolvency matters.
Usually, after granting leave for a liquidator or trustee to enter into a third party litigation funding arrangement, the Court will also make a further order for the affidavit exhibiting the terms of the funding agreement to be sealed and not to be disclosed without leave of the Court. This has been done on the basis that the terms of funding are generally private and confidential between the funder and the funded party, and should be of no concern to any third party including a party in litigation with the funded party. As long as the Court did not make any further orders, the funding agreement would remain safe from disclosure to any third parties.
It would therefore be of significant concern if at a later date, despite the contents of the funding agreement being sealed, the Court made a discovery order for a party to disclose their funding agreement to the other party in proceedings. This is precisely what happened in Enrich Future2. The facts of the case can be briefly summarized as follows:
- The liquidators of Sunlink International Holdings Limited (“Sunlink”) issued proceedings against Deloitte Touche Tohmatsu, the Defendant for alleged negligence.
- The writ was extended on 4 occasions (the “Extensions”). The Court found the number of Extensions to be quite exceptional.
- Each of the writ extensions were supported by affidavits (the “Affidavits”) with an accompanying order that the same be kept confidential. Some of the Affidavits exhibited a litigation funding agreement with a third party.
- The writ eventually came to be served on the Defendant some 4 years after the initial issue of the writ.
- The Defendant applied to set aside the orders for the Extensions and sought production of the Affidavits, which the Plaintiff produced but with redactions relating to the funding arrangements.
In considering whether to order disclosure of the redactions (i.e. the terms of the funding arrangement), the Court considered:
- That the funding arrangement was already a matter in the public domain by way of documents accessible in a different set of proceedings which were not sealed.
- While normally non-adversarial, the funding arrangement in the present case became an adversarial issue as it formed the basis of the Extensions.
In light of these circumstances, the Court considered the Defendant was entitled to see all of the evidence and ordered that the Affidavits be fully disclosed, including the litigation funding agreements exhibited.
While we do not consider Enrich Future to stand for the proposition that litigation funding arrangements are generally discoverable in proceedings, we do consider that litigants should take care to (1) keep the litigation funding arrangements away from the public domain and (2) avoid situations where funding arrangements could be made to be a relevant issue in the material proceedings.
  2 HKLRD 1137
 Enrich Future Limited & Ors v Deloitte Touche Tohmatsu (HCCL 10/2011) 22 June 2016
Stephen Chan regularly acts for parties in matters involving third party litigation funding and has successfully applied for Court sanction of a number of third party litigation funding agreements with insolvency practitioners.
This article is for information purposes only. Its contents do not constitute legal advice and readers should not regard this article as a substitute for detailed advice in individual matters.
In an arbitration, it is arguable that the most important actor is the arbitrator, for it is he who handles the dispute through the dispute resolution process till a final settlement or the dispensing of an award. With such a central role, the parties to the dispute have a legitimate expectation that their arbitrator will be independent from any party with an interested outcome in the dispute, and be impartial in determining the issues of the case, without which, there can be no fair trial. As the English court in ASM Shipping Ltd of India v TTMI Ltd of England put it, “[t]here can be no more serious or substantial injustice than having a tribunal which was not, ex hypothesis, impartial, determine parties’ rights.”
Duty to treat the parties equally, and be independent and impartial
It is because the arbitrator plays such a crucial role in ensuring the proceedings and its outcome are fair, they are, by law, duty bound to be fair, independent and impartial.
Section 46 of the Arbitration Ordinance (Cap. 609) and Article 18 of the UNCITRAL Model Law provides inter alia that (1) the parties must be treated with equality, and (2) the arbitral tribunal is required (a) to be independent, and (b) to act fairly and impartially as between the parties.
The duty to treat the parties with equality is usually connected with the arbitrator’s discretion in controlling the opportunities and manner in which the parties may present their case. Arbitrators are not bound to give the parties strictly equal opportunities to present their cases, for example in Brunswick Bowling & Billiards Corp v Shanghai Zhonglu Industrial Co Ltd, the parties had agreed to a chess-clock method of allocating hearing time, but the tribunal granted extra time to the claimant. In a challenge against tribunal for treating the respondent unequally, the court found no inequity, holding that “where arbitrators discern a potential problem with the opportunity to a party presenting his case fairly arising from a procedure agreed by the parties, they are obliged to raise it with the parties instead of following blindly what has been agreed… they should take steps to conduct the arbitration in such a manner that could redress the problem instead of being constrained by an unworkable agreement of the parties.”
However, albeit strict equality in governing the arbitration is not mandated, the parties must be given reasonable opportunity to present their case and to deal with the case of their opponents. In Pacific China Holdings Ltd v Grand Pacific Holdings Ltd, it was held that “the denial of an opportunity to make a submission in reply on a matter of law will invariably constitute a serious violation. It is a matter of basic fairness.”
Independence and Impartiality
The duty of arbitrator independence has been defined in AT & T Corp v Saudi Cable Co as “connot[ing] an absence of connection with either of the parties in the sense of an absence of any interest in, or of any present or prospective business or other connection with, one of the parties, which might lead the arbitrator to favour the party concerned.” This definition, is however rather too narrow, as aside from commercial and business interests, professional and social links can also affect the independence of an arbitrator. For example, in Chan Man Yiu v Kiu Nam Investment Corp Ltd, an arbitrator was removed because he had been a close friend of the authorized representative and expert witness for the respondents for 25 years.
In Hebei Import & Export Corp v Polytek Engineering Co Ltd, Bokhary J saw the impartiality required of arbitrators and judges to be the lack of bias. Lord Woolf MR of the English Court of Appeal in AT&T Corp v Saudi Cable stated that if there is any justification for different standards to apply between judges and arbitrators, the court would expect a higher threshold to apply to judges, as arbitrators are selected by the parties.
In the Hebei case, a distinction was made between actual bias and apparent bias. It was found that two standards arose in dealing with domestic and international arbitration, where in the domestic context, public policy would dictate that the apparent bias of the arbitrator cannot be accepted, but in international arbitration, under the principle of comity and pro-enforcement policy, it would take something more which will violate the most basic notions of morality and justice, for the Hong Kong courts to refuse to recognize an award; the court also pointed out that if the apparent bias was strong enough, usually actual bias could be inferred, or other bases of challenge could be relied upon.
The Bias Threshold: Real Possibility or Real Danger
The test of whether bias exists has traditionally been the “real danger of bias test”, which is passed when there is a real danger that the arbitrator might unfairly regard of have unfairly regarded with favour, or disfavor the case of a party or the issue under consideration by him.
However, the House of Lords in Porter v Magill modified the real danger test to adhere more closely with the “reasonable suspicion or possibility test” which has been adopted in other common law jurisdictions such as Australia and South Africa. In the case of Deacons v White & Case LLP, the Court of Final Appeal seems to have found the new modified approach in Porter v Magill as authoritative.
If at any time after the arbitral tribunal has been constituted, the parties doubt the impartiality or independence of an arbitrator, a challenge may be commenced under section 26 of the Arbitration Ordinance, unless arbitration rules which contain arbitrator challenge provisions have been adopted for the arbitration, in which case the arbitration rule’s procedures should be followed instead.
Any challenge under s.26 of the Arbitration Ordinance must be instituted within 15 days of the latter of either (1) the constitution of the tribunal, or (2) the discovery of relevant circumstances leading to the doubt of the arbitrator’s impartiality or independence.
The challenge must first be made to the tribunal itself. If the challenge is rejected by the tribunal, the challenging party may then opt to institute a further challenge at the Court of First Instance within 30 days of the rejection by the tribunal.
Due to the time limits of making challenges, parties must pay attention to any information they receive about their arbitrators, especially disclosure documentation, so that they will not be time barred from raising a challenge.
On the other side of the coin, arbitrators will want to make all relevant disclosures to the parties which could lead to a challenge of apparent bias, even if he is subjectively confident in his own independence or impartiality. A good standard of disclosure to adhere to is the Guidelines on Conflicts of Interest in International Arbitration published by the International Bar Association.
When appointing arbitrators, parties may feel more assured by having an arbitration institution such as the Hong Kong International Arbitration Centre (“HKIAC”) appoint an arbitrator from their panel of professional arbitrators.
But while it is true that there is some extra degree of comfort in relying on a competent arbitration institution to appoint an independent and impartial arbitrator, it is no substitution for the party’s own judgment.
This is because according to Section 105 of the Arbitration Ordinance, any person, who appoints an arbitral tribunal or performs any administrative function in connection to the arbitral proceedings, are liable in law, only if it is proved that his act or omission is dishonest. In the recent case of Gong Benhai v Hong Kong International Arbitration Centre, a challenge against the HKIAC in the High Court for allegedly appointing an impartial arbitrator was struck out partly due to such lack of legal liability by the HKIAC, since in the challenge, no dishonesty was pleaded.
If you are interested in protecting your business through arbitration clauses, instituting or defending arbitrations, need help in choosing independent and impartial arbitrators or need advice on challenging possibly biased arbitrators, please do not hesitate to give us a call.
By Vivien Wong
The history of the modern banking system can be traced back to the 16th century. Nowadays, the vast majority of the world’s population are customers of banks. With banks providing a diversity of services, how much do you know about your relationship with your bank?
Duty of Care
Banks and their officers often carry themselves out as professionals in assisting people with their assets and finances. Many people assume that banks owe a duty of care to protect their assets deposited with the banks. The legal position is that banks do owe a duty of care to their customers under contract and/or in tort. However, it is the extent of that duty that is often misconceived.
Contractual and/or Tortious Duty of Care
When a potential customer opens an account with a bank, the bank would normally provide a service agreement containing terms which govern the bank-customer relationship. The terms set out the nature and the scope of the services that bank is contracted to provide. At common law, it is implied in contracts under which a professional or skilled person provides services to his customer in return for a fee, that he will exercise reasonable skill and care in rendering those services. In the context of bank services, the bank is under an implied contractual duty to exercise reasonable skill and care in carrying out its customers’ instructions.
Further or alternatively, banks owe a duty of care in tort to render services with reasonable skill and care. For example, banks have the duty to make queries where there is suspected fraud. Failing to exercise due care may give rise to a cause of action in negligence.
Profession duties relating to the provision of investment advice?
However, whether the bank owes further professional duties to manage the customer’s account, advise the customer, ensure that recommended investments are suitable for customers or ensure that the customer understood the nature and risks of recommended products is subject to debate and facts of the case. Banks often include express terms in their service agreements that the bank is responsible for the execution of transactions only; the bank is not required to provide any advice to the customer; any investment decisions are made solely upon the customer’s judgment and discretion and the customer should seek independent financial or legal advice before making investment decisions.
The doctrine of contractual estoppel was recognized by the Court of First Instance in the case of DBS Bank (Hong Kong) Ltd. v San-Hot HK Industrial Company Ltd  HKEC 352, as being applicable in Hong Kong. This means that a bank customer may not imply duties on the part of the bank which are contrary to its express terms. The customer may be estopped from claiming that he had relied on representations made by the bank when investing. That said, the application of the doctrine remains a controversial issue and is subject to vigorous debate in Hong Kong. Moreover, the case law so far only concerns sophisticated investors. The full extent of its application remains untested in Hong Kong.
Also in the San-Hot case, as part of the customer’s contention that the bank owed professional duties, there was the issue on whether the Code of Conduct issued by the Securities and Futures Commission formed part of the services agreement between the bank and the customer. In that case, the bank had succeeded in arguing that it was not based on the interpretation of the relevant clause in the agreement. It is possible that the Court may arrive at a different conclusion with another agreement.
Following the global financial crisis in 2008, there are a considerable number of bank customers bringing legal action against their banks claiming for the substantial losses they suffered as a result of investing in or being advised to invest in high risk products such as accumulators. It should be noted that the law with respect to the banks’ potential liabilities in this area is still developing.
Regardless of the development with law in this area, bank customers should always be conscious of their objectives in asset management and take extra caution when partaking in transactions that they do not understand or are not familiar with.
By Stephen Chan
In dispute resolution and commercial litigation, whether the client is a multinational company or an aggrieved individual, usually the first physical piece of work you will see from your lawyer is a letter of demand to the other party.
Why is a letter of demand useful and important?
The letter of demand is quite likely the first opportunity you have to fully set out the facts (as you see them), tell the other side precisely what it is that you want and provide an opportunity for discussion and resolution. The idea is to inform the other party what they are up against, and what consequences they face if the dispute remains unresolved.
The letter of demand is useful even if the other party completely ignores it.
If the matter proceeds to court action, a good succinct letter of demand can form the foundation of a Statement of Claim. Rather than there being any duplication of time, the exercise of drafting the Statement of Claim is reduced.
More importantly, a letter of demand forms part of the evidence of your case. Many cases are determined on the basis of credibility of witnesses. If a party completely ignores your letter of demand, but then concocts a defence at trial, the mere fact that the defence was not put forward at the earliest opportunity (i.e. by replying to the letter of demand) can be a factor in determining whether the defence is to be believed.
What sort of information do I need?
List of the most important dates relevant to your case (approximately month/year is sufficient in most cases). What dates are important will differ from case to case but in most instances, you will want to identify:
• When you and the other party first had contact;
• The date on which any agreement was entered into (written or verbal);
• The dates on which breakdown of the relationship occurred; and
• Any other dates which may be relevant.
Collect all of the documents which support your claim. This means any written agreements, email correspondences, text messages, notes or any other forms of written material.
Write down or mentally compose a list of what you want ideally to happen. You may also want to consider a second list of what you would be prepared to accept as a compromise.
The letter of demand is an important tool for dispute resolution.
A poorly crafted letter of demand can, at best, antagonise the other party by misstating facts, making unreasonable accusations and propose unacceptable solutions. At worst, it can open a party up to counterclaims through inadvertent admissions.
On the other hand, a well-crafted letter of demand can lay out the cards for all to see, provide a platform for dialogue between aggrieved parties and ultimately streamline the dispute resolution process.