Key takeaways

Ordinarily, a company that is petitioned for winding-up must present evidence to show a bona fide defence on substantial grounds to oppose the petition. At issue is whether, and, if so, how, such a requirement applies where the company contends that the petitioning debt is subject to a dispute that should be arbitrated.

A different but, in one view, a similar scenario is where a respondent to a bankruptcy or winding-up petition argues that it should be dismissed because the petitioning debt is disputed and has arisen from an agreement containing an exclusive jurisdiction clause for disputes to be resolved in another jurisdiction. The court of final appeal in Guy Lam ruled that in the ordinary case of an exclusive jurisdiction clause, absent countervailing factors such as the risk of insolvency affecting third parties and a dispute that borders on the frivolous or abuse of process, the petitioner and the debtor ought to be held to their contract.

First instance authorities disagree on whether the reasoning in Guy Lam applies to arbitration clauses. The court of appeal's decision will hopefully provide much-needed clarity on the principles. Meanwhile, this area of law is also developing in other jurisdictions — watch this space.

In more detail

Two schools of thought

It is well known among insolvency and arbitration practitioners in Hong Kong that two schools of thought have existed for some time in case law regarding the interplay between insolvency and arbitration.

One view stems from a creditor's statutory right to petition and an entitlement to a bankruptcy or winding-up order if the debt is undisputed. The following dictum of the Honourable Madam Justice Linda Chan in Re Simplicity & Vogue Retailing (HK) Co., Ltd [2023] HKCFI 1443 at [37] represents this view:

It does not seem to me to be right that once there is an arbitration clause in the agreement which gave rise to the petitioning debt, the Companies Court should invariably refuse to consider the merit of the 'defence' raised by the company and require the parties to litigate their dispute in arbitration. There is no reason why the Companies Court should adopt such a mechanistic approach or fetter the exercise of its discretion in this way. In my view, where, as here, the company raises a substantive 'defence' to the petitioning debt, the court should consider whether the 'defence' is one which can readily be shown to be wholly without merit. If the court is able to come to that view without considering any detailed arguments or disputed evidence, it would have no difficulty in concluding that the 'defence' is one which 'borders on the frivolous or abuse of process' even if Guy Lam approach applies. There is no proper basis to require the parties to refer their 'dispute' to arbitration in the absence of any genuine 'dispute' in respect of the debt.

This view was reiterated by her Ladyship in Re NT Pharma International Company Limited [2023] HKCFI 1623 and adopted in substance by Deputy High Court Judge Le Pichon in Re Inversion Productions Limited [2023] HKCFI 2400.

The other view was, in Hong Kong, pioneered by the Honourable Mr Justice Harris in Re Southwest Pacific Bauxite (HK) Ltd [2018] 2 HKLRD 449 and is commonly known as the Lasmos approach. Under this approach, the following applies:

1. if a company disputes, the debt relied on by the petitioner;
2. the contract under which the debt is alleged to arise contains an arbitration clause that covers any dispute relating to the debt; and
3. the company takes the steps required under the arbitration clause to commence the contractually mandated dispute resolution process (which might include preliminary stages such as mediation) and files an affirmation in accordance with r.32 of the Companies (Winding-Up) Rules (Cap.32H, Sub.Leg.) demonstrating this;

the petition should generally be dismissed …

(Southwest Pacific Bauxite at [31]).

Upcoming appeals

Unsurprisingly, his Lordship adhered to the same view in Re Shandong Chenming Paper Holdings Ltd [2023] 4 HKLRD 359. In addition, the learned judge in that case held that the court of final appeal's reasoning in Guy Lam applied analogously and provided further support for the Lasmos approach.

In granting leave to appeal in Shandong Chenming on 25 October 2023 ([2023] HKCFI 2731), his Lordship noted that the court of appeal would hear an appeal in Simplicity & Vogue on 29 February 2024 and indicated that it would be desirable for both appeals to be heard at the same time.

The court of appeal considered the law in But Ka Chon v. Interactive Brokers LLC [2019] 4 HKLRD 85 and Sit Kwong Lam v. Petrolimex Singapore Pte Ltd [2019] 5 HKLRD 646. However, both decisions predated Guy Lam. The upcoming hearing will be an opportunity for the court of appeal to take recent jurisprudence into account and provide judicial guidance at an appellate level.

Other jurisdictions

In Shandong Chenming, the learned judge also stated that the Lasmos approach had "recently been considered and approved by the Supreme Court in Republic of Mozambique v. Privinvest Shipbuilding [[2023] Bus LR 1359] and the Privy Council in FamilyMart [i.e., Familymart China Holding Co Ltd v. Ting Chuan (Cayman Islands) Holding Corporation [2023] UKPC 33]" (at [2]). Conceivably, on appeal, the petitioner in Shandong Chenming may seek to distinguish those authorities on the following grounds:

• Privinvest Shipbuilding did not involve a bankruptcy or winding-up petition.
• The petition in FamilyMart sought a "just and equitable" winding-up as opposed to an insolvent liquidation. Moreover, in a Cayman authority that postdated Shandong Chenming, namely Re BPGIC Holdings Ltd (20 November 2023, Ramsay-Hale CJ), it was concluded that, in the legislative context of Section 4 of the Foreign Arbitral Awards Enforcement Act, "the approach of the Cayman Courts … is to determine the threshold question of whether the dispute is genuine and substantial before dismissing a petition in favour of arbitration" (at [27]).

At the same time, developments have been seen and are anticipated in other jurisdictions. For example, the Singapore Court of Appeal in Founder Group (Hong Kong) Ltd v. Singapore JHC Co Pte Ltd [2023] SGCA 40 affirmed and clarified the principles in AnAn Group (Singapore) Pte Ltd v. VTB Bank (Public Joint Stock Co) [2020] 1 SLR 1158, which require the court to consider whether:

1. there is an arbitration agreement between the parties that appears prima facie to be valid (AnAn at [56]);
2. the dispute or cross-claim which the defendant raises appears prima facie to fall within the scope of the arbitration agreement (AnAn at [56]); and
3. upon a consideration of factors which do not relate to the merits of the dispute in respect of the debt or the merits of the cross-claim, the court is satisfied that the defendant is not abusing the court's process by raising the dispute or cross-claim (AnAn at [99]–[100])

(Founder at [15]).

On top of all of the above, further inspiration is keenly awaited from the privy council, which will hear an appeal from the British Virgin Islands in Sian Participation Corporation (In Liquidation) v. Halimeda International Ltd on 19 March 2024, focusing on similar issues.

Conclusion

In Hong Kong and many other jurisdictions, modified universalism is the embraced approach of insolvency law, and the UNCITRAL Model Law on International Commercial Arbitration is adopted. There is much to be said for more consistency at an international level on how best to address the inherent tension between the two branches of law. As the Hong Kong courts continue to address the issues, insights from other jurisdictions will be of great value.