Hong Kong Courts’ Approach to bankruptcy / winding-up proceedings involving arbitration clauses

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Authored by: Vivien Wong

The interaction of arbitration clauses and bankruptcy/winding-up proceedings has been subject to much legal discussion and debate.  As the Courts in Hong Kong and other common law jurisdictions have taken different approaches in tackling the issue, the legal community has been hoping for further guidance from the appellate courts.

The opportunity came when Re Guy Kwok-Hung Lam [2023] HKCFA 9 (“Re Guy Lam”) came before the Court of Final Appeal (“CFA”).  In the much anticipated judgment handed down on 4 May 2023, the Court of Final Appeal unanimously affirmed the Court of Appeal (“CA”)’s majority position that in an ordinary case of a foreign exclusive jurisdiction clause (“EJC”), the Court should give effect to the EJC and dismiss the bankruptcy petition, unless there were countervailing factors, such as the right of the debtor’s insolvency impacting third parties or the dispute bordering on frivolous or abuse of process.  In the judgment, the Court of Final Appeal held that the “Established Approach” that a petitioner will ordinarily be entitled to a bankruptcy or winding  up order if the petition debt is not subject to a bona fide dispute on substantial grounds is not appropriate in cases where an EJC is involved.

However, the Court of Final Appeal expressly left open the issue whether the same approach would apply to an arbitration clause. 

It did not take long before that issue appeared before the Courts again in Re Simplicity & Vogue Retailing (HK) Co., Limited [2023] HKCFI 1443.  This is the first case in which the Companies Court considered the principles in Re Guy Lam in the context of arbitration clauses.   In this case, The Honourable Madam Justice Linda Chan emphasized that the Court maintains a discretion to dismiss or stay a bankruptcy or winding-up petition despite the presence of an arbitration clause. The Court should not adopt a mechanistic approach or fetter the exercise of its discretion in cases involving arbitration clauses. The Court was of the view that the ratio in Re Guy Lam only applies to EJCs, not arbitration clauses, and Re Guy Lam did not lay down any general rule that if the underlying agreement giving rise to the petition debt contains an arbitration clause and there are no supporting creditors to the petition, the Court must dismiss or stay the winding-up petition without considering the merits of the defence raised by the debtor company.  In exercising the Court’s discretion in insolvency proceedings, the Court is guided by the principles stated in the Court of Appeal’s judgments in But Ka Chon v Interactive Brokers LLC [2019] 4 HKLRD 85 and Sit Kwong Lam v Petrolimex Singapore Ptd Ltd [2019] 5 HKLRD 646. The Court will also consider whether the requirements in Re Southwest Pacific Bauxite (HK) limited [2018] 2 HKLRD 229 (“Lasmos”) are satisfied. 

More recently, the Companies Court (the case came before The Honourable Mr. Justice Harris) was again faced with the same issue in Re Shangdong Chenming Paper Holdings Limited [2023] HKCFI 2065, although this time, Court was concerned with a disputed cross-claim rather than a disputed petition debt.  In this case, the debtor company raised a cross-claim of value greater than the petition debt in an arbitration against the petitioner.   The Court was therefore required to decide whether the petition should be stayed pending arbitration of the debtor company’s cross-claim against the petitioner.

Having considered the reasoning from both the CA and the CFA in Re Guy Lam, which drew on Lasmos and a number of overseas authorities dealing with arbitration clauses, Harris J concluded that both the CA and the CFA were of the view that the same principles and approach applied to EJCs and arbitration clauses.

Harris J considered that in the judgments of the CA and CFA, the principle in Re Guy Lam J which applies to disputed petition debts also applies to cross-claims.  As a general principle of insolvency law, there is no distinction between a claim and a cross-claim when considering whether a defence to a winding-up petition has been established.  Harris J agreed with the judgment by the Singapore CA in AnAn Group (Singapore) Pte Ltd v VTB Bank (Public Joint Stock Co) [2020] SGCA 33 that when the court is faced with a cross-claim, the winding-up proceedings should be stayed or dismissed as long as (a) the cross-claim is subject to a valid arbitration agreement, and (b) the cross-claim falls within the scope of the arbitration agreement, provided that the dispute is not being raised by the debtor company in abuse of the Court’s process.

Conclusion

The recent judgments discussed above are all significant decisions to bear in mind when considering the Hong Kong Courts’ approach to EJCs and arbitration clauses in insolvency proceedings.  The CFA affirmed in Re Guy Lam, the general approach in dismissing bankruptcy proceedings in favour of upholding the parties’ agreed choice of forum under an EJC.  The position regarding arbitration clauses remains less certain, as there appears to be conflicting views within our Companies Court as to whether the Re Guy Lam approach should equally apply to arbitration clauses.  Further, the recent discussions by the CA and the CFA in Re Guy Lam on the widely-debated Lasmos approach are obiter and the CFA has yet to express a view on the correctness of the Lasmos approach.  Whilst we hope that further clarification from the appellate courts will be available soon, the Companies Court’s judgments in Re Simplicity & Vogue Retailing (HK) Co., Limited and Re Shangdong Chenming Paper Holdings Limited confirm that the Lasmos approach shall continue to apply to insolvency proceedings involving arbitration clauses.