Foreign Party Without Assets In Hong Kong – Is This Relevant For A Fortification Order Or Only For Security For Costs?
Legal News & Analysis - Asia Pacific - Hong Kong - Insolvency & Restructuring
14 May, 2019
In Banco De Chile v Yong Ming Tai Technology Trade Co Ltd  HKCFI 316, the Court of First Instance (“Court“) held that where a plaintiff applying for an injunction order is a foreign party with no assets in the jurisdiction, that factor would weigh significantly in favour of ordering a plaintiff to fortify its cross-undertaking in damages. Since the underlying rationale of the legal tests for security for costs and fortification are similar (although the tests are different), it was held that a defendant should not be any less entitled to the protection of fortification than for security for costs (without cogent factors to the contrary).
Banco De Chile (“Plaintiff“) is a licensed bank in Chile with no branch or assets in Hong Kong. Yong Ming Tai Technology Trade Co. Limited, the second defendant in this case (“Defendant“), is a licensed Money Service Operator (“MSO“) in Hong Kong providing money exchange, remittance and payment services. The Plaintiff alleged that, as a result of a cyberattack, approximately USD2 million was fraudulently transferred to a bank account held by Boruida Trade Co Ltd (“BTCL“), which then transferred HKD3,832,782 (“Sum“) to a bank account held by the Defendant.
The Plaintiff obtained an ex parte proprietary injunction restraining the Defendant from disposing or otherwise dealing with the Sum. The injunction order was made with the usual cross-undertaking in damages given by the Plaintiff. The Defendant applied for, amongst others, an immediate order for fortification of the Plaintiff’s cross-undertaking in damages at a rate of 5% of the Sum per annum.
Legal principles applicable to fortification
The Court drew upon the following well-settled legal principles applicable to fortification:
- the Court has a general power to order fortification where it appears just and proper to protect the defendant by making such order;
- the merit of the parties’ case is not a necessary consideration. However, if the plaintiff has a strong case, it may not appear just and proper to make the protection available to the defendant;
- the burden falls on the defendant to show the need for fortification and the appropriate quantum;
- it is also for the defendant to show the likelihood of a significant loss arising as a result of the injunction and to demonstrate that the plaintiff will be unable to make good that loss.
In relation to the first two principles, the Defendant contended that it was a bona fide purchaser or recipient for value without notice as it had no direct dealings with BTCL but rather received the Sum from an institutional MSO client and was instructed to remit it to another institutional MSO client. After conducting all due diligence and compliance checks, the Defendant (upon instructions) remitted the Sum to beneficiaries in other parts of the world. Keeping the second principle in mind, the Court held that the case advanced by the Defendant could not be said to be without substance and the Plaintiff’s case against the Defendant could not be said to be so strong that the Defendant ought to be deprived of fortification (if it otherwise would be entitled to such protection).
In demonstrating a need for fortification pursuant to the third principle, the Defendant emphasised that the Plaintiff was a foreign entity with no assets in Hong Kong and therefore might be unable to make good any loss suffered by the Defendant. Notably, the Plaintiff argued that the test for ordering fortification was different from that for security for costs. The mere fact that a plaintiff is a foreign plaintiff with no assets in the jurisdiction would be ordinarily sufficient for ordering security for costs (except in certain circumstances), however this is not enough to justify an order for fortification. While the Judge accepted that the two tests were different, the fact that the Plaintiff was a foreign party with no assets in the jurisdiction was still considered to be a factor of significant weight in favour of fortification.
However, this was not necessarily conclusive and the Court said that it must consider whether the estimated loss to be suffered was a significant one and whether there was a real risk that the Defendant would be unable to enforce or at least have difficulties enforcing, the Plaintiff’s cross-undertaking in damages, should it be entitled to do so.
The Court dismissed the application for an immediate order for fortification without prejudice to any further application for fortification, deciding the following:
- while the Court accepted a rate of 5% per annum as the estimated loss of the use of the Sum until the injunction was discharged, it was important to consider the period to be covered by the fortification. The longer the injunction was continued, the greater the estimated loss to the Defendant;
- given (i) the Plaintiff’s standing as a banking institution with substantial assets, and (ii) there was no suggestion that it was in any financial difficulty, there was no real risk that the Plaintiff would be unable to make good the loss and breach its cross-undertaking in damages; and
- the balance weighed against ordering immediate fortification since the loss to the Defendant between this judgment and the adjourned hearing was likely to be modest.
He left open the possibility of the Defendant being granted fortification if (at the adjourned hearing of the application to discharge the proprietary injunction) the injunction were to be continued until trial.
This case demonstrates that despite the differences between the respective tests for fortification and security for costs, the fact that a plaintiff is a foreign party without assets in the jurisdiction is a significant factor the courts look at in determining whether to order both security for costs and fortification in order to protect the defendant. The Court, in this case, commented that the potential loss from an interlocutory injunction may be far greater than the potential loss of irrecoverable costs and there is no reason why a defendant should be any less entitled to the protection of fortification if he were entitled to the protection of security for costs from the same plaintiff.
The challenges of enforcement in a foreign jurisdiction are the same whether it is an undertaking as to damages or a costs order. However, the test for fortification has an additional hurdle where the Court needs to consider whether the estimated loss is significant and whether there is a real risk that a party would not be able to enforce a cross-undertaking should it be entitled to do so.
For further information, please contact:
Gareth Thomas, Partner, Herbert Smith Freehills