Background

In our previous issue of Insolvency & Restructuring newsletter (the “Previous Issue”), we discussed the impact of an arbitration clause on the right of the creditor to present a winding-up petition. 

The leading authority in Hong Kong at that time was Re Quicksilver Glorious Sun JV Ltd [2014] HKLRD 759, in which Harris J explained that in order for the company to defeat the winding-up petition, it must demonstrate that it has a bona fide defence on substantial grounds to the claim for the underlying debt.  The petition will not be automatically stayed in favor of arbitration simply because the debt arises under an agreement which contains an arbitration clause.  This is because winding-up proceedings were not considered an “action” within the meaning of section 20 of the Arbitration Ordinance (Cap 609), which provides that “a court, before which an action was brought in a matter which was the subject of an arbitration agreement, shall refer the parties to arbitration.” The Companies Court is therefore not required by the Arbitration Ordinance to refer the parties to arbitration.

The decision in Re Quicksilver, however, is not in line with the position in England.  In the Previous Issue, we also discussed the English case Salford Estates (No.2) Limited v Altomart Limited [2014] EWCA Civ 1575, in which the English Court of Appeal considered whether it shall stay a winding-up petition, due to the fact that the debt which was the subject of the petition arose out of a lease that contained an arbitration clause.  The English Court took the view that while the mandatory stay provisions in the Arbitration Act 1996 had no application to a winding-up petition, the discretion of the court to wind up a company should be exercised, save in exceptional circumstances, consistently with the legislative intent embodied in the Arbitration Act 1996.  For courts to exercise their discretion otherwise would inevitably encourage parties to seek to by-pass the arbitration agreement by presenting a winding-up petition.  It would also encourage the creditor, through the draconian threat of liquidation, to apply pressure on the alleged debtors to pay up immediately.  The English Court concluded that the petition should be stayed or dismissed so as to compel the parties to resolve their dispute over the debt by their chosen method of dispute resolution rather than require the court to investigate whether or not the debt is bona fide disputed on substantial grounds.

Salford Estates was decided after Re Quicksilver. It was thus uncertain then as to whether the Hong Kong courts would be persuaded to follow the approach in Salford Estates.  The opportunity finally presented itself in the recent case of Re Southwest Pacific Bauxite (HK) Ltd [2018] HKCFI 426, in which Harris J decided that Hong Kong law should develop in a similar manner.

Facts

The Petitioner issued a petition to wind up Southwest Pacific Bauxite (HK) Ltd (the “Company”) relying on an unsatisfied statutory demand, which sought payment of US$259,700.48 said to arise under a management services agreement (the “Agreement”) entered into between the Petitioner and the Company.  The Agreement however contains an arbitration clause, providing for arbitration by a sole arbitrator in accordance with the Hong Kong International Arbitration Centre Administered Arbitration Rules in the event of dispute.  The Company applied to strike out the petition.

Judgment

Harris J devoted a significant part of the judgment in summarizing the previous position of the law in Hong Kong as embodied in  Re Jade Union Investment Limited (unreported, HCCW 400.2003, 5 March 2004) and Hollmet AG v Meridian Success Metal Supplies Ltd [1997] 4 HKC 343. 

The thinking behind such approach focuses on what a creditor is doing when presenting a petition, namely, invoking a class right to have an insolvent company wound up.   It was said that the creditor does not seek to recover the sum due to him; rather he seeks to put an insolvent company into liquidation for the benefit of all its creditors.  Harris J considered that such statements, though correct, are misleading.  A petitioner is seeking to recover a debt.  He does so by invoking the court’s insolvency jurisdiction, which will allow him to prove for the debt in liquidation.  In any event, his Lordship took the view that there is no reason why the fact that what is sought is a class remedy should be relevant to the method by which it is determined whether or not a debt is owed.

Harris J then went on to consider the English and the Singaporean authorities.  The position in Salford Estates was discussed in detail. His Lordship noted that as in England, there is also a strong leaning in Hong Kong towards advancing a policy encouraging and supporting party autonomy in determining the means by which a dispute arising between them should be resolved.  The Companies Court should thus hold a party to his contractual bargain, namely to resolve any dispute by arbitration.

However, the presence of an arbitration clause does not oust the Companies Court’s jurisdiction.  In exceptional circumstances, such as where assets of the company had gone missing, a creditor whose debt is disputed would be justified in issuing a petition before an arbitration had been concluded and apply for the appointment of provisional liquidators: see for example Jinpeng Group v Peak Hotels and Resorts (unreported, BVIHCMAP 2014/25 and 2015/0005, 8 December 2015).

Harris J concluded that he would thus depart from the approach in the earlier Hong Kong decisions and hold that the petition should generally be dismissed:-

1.       if 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 and files an affirmation in accordance with Rule 32 of the Companies (Winding Up) Rules (Cap 32H) demonstrating this.

In the present case, the Company disputes the debt and requires the dispute to be resolved in accordance with the arbitration clause contained in the Agreement.  Accordingly, his Lordship ordered the winding-up petition be struck out.