In Asia Growth v. Qiao, 2023 BCSC 2173, the claimant was successful in its international arbitration and obtained a damages award of more than $17 million. However, the path to recovery was not simple as the respondent quickly transferred his only asset in B.C., his house, to his daughter. To recover, the claimant not only had to bring enforcement proceedings but also an action to set aside the transfer as a fraudulent conveyance. The claimant got default judgment against the respondent, his daughter and his wife (the other co-owner). Yet, that was still not the end of the story for the claimant. It then had to try to engage in a sale process to sell the respondent’s interest in the property, only to be faced with an application to set aside the default judgment. In this decision, the B.C. court dismissed the application, ultimately clearing a path to recovery for the claimant. This exemplifies that even after the court issues an order enforcing the arbitral award, the path to recovery is not always simple.
Background – The defendant/respondent in the arbitration, Mr. Qiao, owed more than $17 million to the plaintiff/claimant in the arbitration, Asia Growth VII LP, pursuant to an international arbitral award issued in 2018 in the People’s Republic of China (the “Award”). In or around October 2020, Asia Growth commenced proceedings in Vancouver against Mr. Qiao, seeking recognition of the Award. In August 2021, the B.C. court granted an order recognizing the Award.
Mr. Qiao’s house, that he jointly owned with his spouse, Ms. Qin, was his only known exigible asset in B.C. In October 2021, he transferred his 50% interest in the property to his daughter, Ms. Qiao. The transfer was registered on the same day that Asia Growth attempted to register its judgment on title to the property. Shortly thereafter, Asia Growth commenced an action to set aside the transfer as a fraudulent conveyance against Mr. Qiao and his wife and daughter, who were also named as defendants.
Asia Growth obtained an alternative service order and was permitted to serve the defendants by mailing the court documents to the property and affixing them to the front door in an envelope. The defendants did not respond or otherwise contact Asia Growth. In January 2022, Asia Growth obtained an order for default judgment and the transfer was declared void as against Asia Growth.
Following this, Asia Growth obtained an order (on notice to the defendants via the terms of the alternative service order) to sell Mr. Qiao’s 50% interest in the property. It appears as though the house was not occupied, as the defendants were in China, and they had entrusted a family friend to gather their mail during their absence from Canada. Asia Growth engaged bailiffs to list for sale Mr. Qiao’s interest in the property and in or around June 2023, those bailiffs posted notices regarding the sales process on the front door of the property. A neighbour contacted counsel for Asia Growth and made inquiries about the notice on the front door. Shortly after this, Ms. Qiao contacted Asia Growth, through counsel, and advised she had not received the notice and applied to set aside the default judgment. She claimed that the transfer from the father to her was consideration for a debt made from a company she owned in China to Mr. Qiao, and that she was holding the property in trust for that company.
The Court ultimately dismissed Ms. Qiao’s application to set aside default judgment, making the following findings:
First, Ms. Qiao did not provide a plausible explanation for her alleged lack of knowledge of the proceedings. Her evidence that she was residing in China, not at the property, and that the transfer was effected to repay a debt was inconsistent with her sworn evidence to the Land Title and Survey Authority of B.C. and the Minister of Finance that the consideration for the transfer was “$1 and natural love and affection,” she had continually lived at the property for more than 18 years and it was her residence as at September, 2021, and would continue to be her residence. If her new evidence was to be believed, then she had committed a fraud to evade property transfer and non-resident taxes.
Furthermore, her B.C. lawyer was put on notice by counsel for Asia Growth with regard to the outstanding judgment and Asia Growth’s allegation of fraudulent conveyance. He had a duty to inform his clients of this matter. There was no allegation by the defendants or any Law Society complaint that he had breached his fundamental duty to his clients.
Second, Ms. Qiao had not established that Asia Growth failed to meet its duty in an ex parte proceeding to make full and frank disclosure when it obtained its alternative service order or default judgment order. Ms. Qiao argued that Asia Growth did not inform the Court that Mr. Qiao was represented by counsel in China in the arbitration and was in contact with that counsel. However, just a few months before the alternative service application, Mr. Qiao’s arbitration counsel refused to accept service for Mr. Qiao in connection with enforcement proceedings that were underway in China, Mr. Qiao had represented himself in an application in one of the Chinese enforcement proceedings, and Asia Growth had to obtain alternative service orders in those enforcement proceedings.
Third, Ms. Qiao did not meet the test for the Court to set aside the default judgment under its discretionary powers. Firstly, Ms. Qiao was evading service and deliberately failed to respond to the plaintiff’s action. Secondly, Ms. Qiao did not apply to set aside the default judgment as soon as possible. The court, rejected her evidence that she did not receive notice of the claim in 2021 and found that she was likely in receipt of the default judgment when it was delivered soon after its issuance in June 2022. Yet, she did not apply to set it aside until June 2023. Thirdly, Ms. Qiao did not have a defence worthy of investigation. There were a number of facts showing that badges of fraud were present in connection with the transfer and she did not present evidence suggesting she could show otherwise.
Fourth, Asia Growth would suffer prejudice if the default judgment was set aside, as very little of the $17 million Award had been recovered and it would be contrary to the interests of justice to allow Mr. Qiao to continue to avoid judgment enforcement by relying on affidavits that contradicted earlier representations to the Land Title and Survey Authority of B.C. and the Minister of Finance.
Contributor’s Notes:
There are two points in respect of arbitration matters that I take away from this decision.
First, it serves as a reminder of the difficulties our clients may experience in trying to enforce arbitral awards. There are many reasons to promote jurisdictions that are subject to the UNCITRAL Model Law or the NY Convention, as these instruments seek to facilitate the enforcement of foreign arbitral awards. However, this case exemplifies that having a pro-enforcement jurisdiction may not be enough. Ultimate recovery of an award needs to remain top of mind. When deciding to undergo the time, effort and cost of an arbitration, the client needs to be aware of the risks of ultimately recovering any amounts if successful. Where are the assets of the defendant located? Can they be traced or identified? What is the likelihood the courts in the location of those assets will enforce the award? If the defendant seeks to hide and transfer assets out of their name, what is the path to stopping or reversing such conduct? This case exemplifies the further risk of recovery even after a successful recognition and enforcement proceeding.
This was a case against an individual, but these considerations get only more complex where the defendant is a state or state-owned entity. Other considerations then arise such as whether the jurisdiction where the assets are located has a broad or restrictive doctrine of sovereign immunity, namely whether a state’s commercial activities can ever be subject to court proceedings.
Second, as seen in this B.C. court case, default judgment can be an effective tool in civil actions. A defendant who fails to respond to claims and against whom default judgment is obtained is deemed to have admitted those claims and can face serious results for failing to respond. This threat should therefore incentivize defendants to respond to claims and avoided wasted time and money. But this is not the state of affairs in arbitrations. Default judgment is not available. Even if the respondent fails to appear or respond to the arbitration, the respondent continues to be entitled to notice at every statg. The arbitration must proceed and the claimant is still put to the burden of proving both liability and damages. If the arbitrator does not do so, and ensure that the claimant’s evidence is properly and thoroughly scrutinized, it faces the risk of an unenforceable award.However, if the claimant finds itself in a situation of a non-appearing respondent, it could consider the option of seeking summary judgment in the arbitration – so long as the respondent gets notice. As a reminder, in Optiva Inc. v. Tbaytel, 2022 ONCA 646, the Ontario Court of Appeal confirmed that an arbitration can be determined by summary judgment (see Case Note #667; Case Note #699). However, the appropriateness of this and whether it will actually lead to efficiencies given the lack of an active respondent must be considered in the context of each individual case. The arbitrator must always be careful to ensure proper notice and a fair hearing to the non-appearing respondent to protect against procedural unfairness arguments later in the context of a set aside or enforcement challenge.