Tuesday, December 15, 2009

Hong Kong’s Wing Lung Bank in a spot over Shanghai lawsuit

An unprecedented court case to be heard on December 28 in Shanghai could have far-reaching implications for the banking and legal community in Hong Kong.

An unidentified investor in China is suing Hong Kong-based Wing Lung Bank over losses incurred relating to purchase of bonds issued by the government of Ecuador. The trades took place between 2005 and 2007, after the investor approached an employee of Wing Lung Bank branch in Hong Kong with the aim of buying Hutchison Whampoa’s US dollar bonds.

Instead, the employee is said to have persuaded the investor to buy Ecuador paper following which the investor executed several subsequent trades buying and selling Ecuador bonds.

However, following the advent of the global financial crisis Ecuador found it was unable to meet interest payments on the bonds and in late November 2008 announced a one-month grace period with the idea of working out a plan to resolve payments in arrears.

In the meantime, the Chinese investor, allegedly under the advice of the Wing Lung Bank employee, sold his holdings of Ecuador paper at a deep discount before the end of the grace period.

It turned out that Ecuador eventually redeemed its paper after the grace period, but at a much higher price than that at which the Chinese investor had sold his holdings.

The investor is seeking compensation from Wing Lung Bank for losses in principal, interest, commission paid on the trades and related legal expenses totalling around Rmb1.4m (US$203,000).

It is intriguing that the investor has filed the lawsuit in Shanghai and not in Hong Kong. Moreover, it is also not clear on what basis the Shanghai court is admitting the lawsuit.

Some suggested that the investor was optimistic of obtaining a favourable ruling from the court in his hometown.

Cross-border litigation is nothing new, but is more often than not complicated. The best example is the as-yet unresolved court case between Morgan Stanley and China Haisheng Juice Holdings relating to the latter’s losses of at least US$26m from foreign exchange swap contracts.

An English court ruled that the legal dispute between the two parties can be heard in two separate jurisdictions. The US bank lost the plea to hear the case only in England, but won an anti-suit injunction restraining China Haisheng from suing it (the swap counterparty) in China. However, China Haisheng can sue the bank’s subsidiary, Morgan Stanley Asia, in a Chinese court.

In Wing Lung’s case, should the Shanghai court rule in favour of the plaintiff, the question that arises is whether the judgement is enforceable in Hong Kong.

“Even if the plaintiff gets a favourable ruling from the Shanghai court, there are still many hurdles – several conditions to be met – before a mainland judgement is enforceable in Hong Kong,” said a China legal expert.

One key hurdle is that a contract usually stipulates where disputes will be heard. If Hong Kong was picked as the place, then any judgements outside Hong Kong will not be enforceable. If there is an exclusive jurisdiction clause, then the investor has to pursue its case in a Hong Kong court like some mainland investors have done in the Lehman mini-bond cases.

One possibility for the PRC judgement to be recognised in Hong Kong is a reciprocal enforcement regime that came into effect on August 1 2008, which provides for the mutual recognition of qualifying judgments between the PRC and Hong Kong.

If all the hurdles can be overcome and the PRC judgement is enforced, then the case will set a precedent. It could open up possibilities of PRC courts reciprocating and enforcing judgements made by Hong Kong courts.

However, given the lack of consistency and transparency in China’s legal system, it is difficult to predict with any certainty the chances of foreign judgements being enforced in China in reliance on the principle of reciprocity, said a China based lawyer.

Market observers believe Wing Lung will likely opt for an out-of-court settlement with the investor as it would want to avoid litigation and any subsequent damage to its reputation.

The amount is not big and Wing Lung Bank can easily write it off. For the bank, the potential losses in business could be much larger than losing the case.

Nethelie Wong


No comments:

Post a Comment