Kwok Ho Wan v UBS AG (London Branch)
| Jurisdiction | England & Wales |
| Judge | Mrs Justice Cockerill |
| Judgment Date | 09 February 2022 |
| Neutral Citation | [2022] EWHC 245 (Comm) |
| Docket Number | Case No: CL-2020-000345 |
| Court | Queen's Bench Division (Commercial Court) |
[2022] EWHC 245 (Comm)
Mrs Justice Cockerill DBE
Case No: CL-2020-000345
IN THE HIGH COURT OF JUSTICE
OF ENGLAND AND WALES
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Rolls Building
Fetter Lane,
London, EC4A 1NL
Sa'ad Hossain QC and Matthew Hoyle (instructed by Harcus Parker Limited) for the Claimant/Respondent
David Quest QC and Scott Ralston (instructed by Herbert Smith Freehills LLP) for the Defendant/Applicant
Hearing dates: 20 January 2022
Approved Judgment
I direct that no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Introduction
By this application dated 10 November 2020 the Defendant, the London branch of a well-known investment bank, challenges the jurisdiction of the Court in relation to the claims made by the First and Second Claimants.
The issue is whether this Court has special jurisdiction under Article 5(3) and/or Article 5(5) of the Convention on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters signed at Lugano II on 30 October 2007 (“the Lugano Convention”).
The Defendant's position is that, under Article 2 of the Lugano Convention, it must be sued in the courts of Switzerland, its place of domicile.
The First and Second Claimants in this action (respectively, “Mr Kwok” and “Ace Decade”) have brought claims against the Defendant (“UBS London”, “UBS”) based upon the consequences of what are said to be negligent misstatements and advice provided by UBS (“the Claims”). It is their case that the misstatements and advice given led them to make an investment that was almost completely lost when (contrary to such statements and advice) UBS London exercised security over shares held by it in London as mortgagee.
No jurisdictional issue arises in relation to claims made by the Third Claimant (“Dawn State” and the “Dawn State Claims”). That is because UBS London accepts that these fall within the jurisdiction clauses contained within certain contracts entered into between them.
As will appear below, the issue which arises is an interesting one because it engages a question where the authorities are less than entirely clear; and does so on the basis of facts which are rather more complicated than has been the case in previous reported challenges.
I should note that this is a jurisdictional application at an early stage. Matters proceed only in relation to the issues relevant to that jurisdictional dispute. UBS has put down a clear marker that should the matter proceed here (or elsewhere) the claims are denied in their entirety. It also reserves all its rights in relation to the claims made, including as to the governing law and the adequacy of the Claimants' pleaded case.
The Factual Background
The Investment
The Claims concern an indirect investment by Ace Decade/Mr Kwok in certain shares (so called “H-Shares”) issued by a major Chinese financial institution, Haitong (“the Investment”).
In Autumn 2013, after discussions with its CEO, Mr Kwok resolved to invest around US$3bn in Haitong. He was subsequently approached by a trusted friend and advisor, Mr Stephen Wong (then a Managing Director of Wealth Management at UBS), who had learned of Mr Kwok's intentions.
Mr Wong informed Mr Kwok that UBS were aware that Haitong would be issuing new H-Shares on the HK stock exchange (“HKEX”) and that UBS wished to participate as a placement agent. He stated that if Mr Kwok could commend UBS to Haitong, he and UBS would assist and advise Mr Kwok in acquiring H-Shares in an advantageous manner.
Mr Kwok decided to invest around US$1bn in partnership with UBS (and the remainder through other institutions) and to that end also recommended UBS to Haitong, leading to their appointment as placement agents.
Mr Wong proposed structuring his investment so as to (lawfully) avoid triggering the need for approval by the Chinese securities regulator which would be required by a direct investment of US$3bn in Haitong. The form ultimately proposed by Mr Wong in or around June 2014 was that the H-Shares would be acquired by a corporate vehicle owned and controlled by a third party. This purchase would be funded in part by Mr Kwok (through Ace Decade) and in part through a leveraged finance “Facility” provided by UBS (secured against the H-Shares). Following the acquisition of the shares, Mr Kwok or a nominated entity would have the option to acquire the vehicle. The result was that Mr Kwok's investment prior to the exercise of that option would not be in the shares directly but would be what is known as a synthetic investment.
As a result of further advice from Mr Wong, a Chinese financial services firm called Haixia was chosen to act as the third party, and Dawn State (at that time owned by Haixia) was selected as the relevant corporate vehicle.
Further negotiations took place between UBS (through Mr Wong), Haixia and Ace Decade (through Mr Kwok and others) through November and December 2014. On 21 November 2014 UBS Limited/UBS's London Branch produced an indicative term sheet proposing UBS AG or one of its affiliates as the Lender. From 12 December 2014 at the latest, UBS London was identified as the branch through which the arrangements with UBS would be made. Thus, on 12 December 2014, UBS London and Dawn State entered into a Custody Agreement which created a “Custody Account” (later referred to as a “Secured Account”) which was governed by English law, jurisdiction and financial services regulation.
A “Co-Investment Agreement” was signed between Haixia, Ace Decade and Dawn State in December 2014 followed by a “Letter Agreement” on 18 December. This gave Ace Decade (defined as “the Investor”) the option to acquire Dawn State in return for a fee and assuming primary responsibility for the financing and costs of the Investment.
Under the Co-Investment Agreement:
i) Haixia Management would arrange for the subscription in the amount of US$1,250 million to the H-Shares (the Project), for which Dawn State was the expected subscription vehicle;
ii) Ace Decade undertook to indemnify Haixia both against fees and costs in relation to any sums or losses which Haixia had to pay “ in connection with” the Financing;
iii) In return for a further US$500m contribution to the Project (“the Monetary Contribution”), Ace Decade acquired a contractual right to participate, in accordance with the terms of the Co-Investment Agreement, in certain distributions made from the H-Shares to be acquired by Dawn State;
iv) It was contemplated that Dawn State would arrange for loan financing from a commercial bank in the sum of US$750 million for the Project;
By the Letter Agreement it was agreed that two months after completion of the Project, Ace Decade would be entitled to call for the transfer of the share capital in Dawn State to itself or its nominee. The Letter Agreement records on its face that all parties executed it in Shenzhen, China.
As contemplated by the Co-Investment Agreement, Dawn State subscribed for the H-Shares. There was a series of transaction documents and contracts which embodied this transaction.
UBS provided the loan financing to Dawn State pursuant to a Financing Letter dated 19 December 2014. For present purposes the critical part of the contractual documentation was the term within the “ Full Mandatory Pre-payment Events” which provided:
“The Lender, at its option, may terminate this Transaction if any of the following events occur after Utilisation Date: …
(ii) the Closing Price of the Reference Shares on any Scheduled Trading Day is less than (a) 85% of the Closing Price on the previous Scheduled Trading Day; or (b) 75% of the Closing Price on any of the 5 immediately preceding Scheduled Trading Days;..”
In all contracts with Dawn State to which a UBS entity is a party, it is expressly identified as “UBS London” or “UBS London Branch”.
Between December 2014 and April 2015, Mr Kwok, through Ace Decade, transferred to Dawn State approximately US$500m. Pursuant to the Facility Agreement between Dawn State and UBS London this was paid to UBS London (as “Custodian”) in two parts.
On 15 May 2015, in accordance with the Settlement Authorisation given by Dawn State, the US$500m (along with the Facility provided by UBS London) was used to discharge Dawn State's liability under its Subscription Agreement with Haitong.
Pursuant to clause 6.2(a) of the Security Agreement between Dawn State and UBS London, the H-Shares subsequently allotted to Dawn State (the “Acquired Shares”) were assigned to UBS London by way of security and deposited in the Secured Account held with and registered to UBS London as Custodian. These charges were registered on Dawn State's company charges register in favour of “UBS AG, London Branch”.
The failure of the Investment
Between 1 and 6 July 2015, there was a substantial drop in the Chinese stock markets, including the HKEX. The price of the H-Shares declined very rapidly, which triggered a series of events critical to both the Claims and Dawn State's claim:
i) The decline in H-Share price entitled UBS London (as Lender), under clause 7.7 of the Facility Agreement, to demand a Mandatory Prepayment of the entire Facility over the subsequent three days.
ii) This demand was made by notice in the name of “UBS London Branch” on the evening of 6 July 2015. Pursuant to the Letter Agreement, Ace Decade...
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