Introduction

In the recent case of Re Hong Kong Bai Yuan International Business Co., Ltd [2022] HKCFI 960, the Court of First Instance (“Court”) ordered the respondent (“Company”) to pay the debt owed to the petitioner (“Petitioner”) if it wished to avoid a winding up order, notwithstanding that the debt is governed by an arbitration agreement. The Court clarified that in exercising its discretion, while the Court would give considerable weight to the arbitration agreement, it would not automatically defer the matter to arbitration.

Background

The Petitioner presented a petition (“Petition”) on 10 June 2021 seeking a winding up order against the Company on the ground that the Company has failed to comply with a statutory demand in respect of a debt of EUR955,000 (“Debt”), and is therefore deemed insolvent pursuant to s. 178 of the Companies (Winding-up and Miscellaneous Provision) Ordinance (Cap. 32) (“CWUMPO”).

The Debt arose out of a sales contract entered into between the Company and the Petitioner (“Sales Contract”). The Sales Contract provided that “all disputes are to be referred to CIETAC for arbitration under Chinese law in English language” (“Arbitration Agreement”).

In response, the Company sought to dismiss the Petition on the following grounds:

1.       There was a prima facie dispute which should be referred to arbitration under the Arbitration Agreement;

2.       There were bona fide disputes on substantial grounds in relation to the Debt; and

3.       The Company had a cross-claim against the Petitioner which exceeded the amount of the Debt.

Decision

1^st Ground

The Court took the view that when facing a debt covered by an arbitration agreement, it is incumbent upon the debtor to first demonstrate that there is a genuine dispute on the debt which requires determination of a tribunal. The Court sees no point in having the parties resolving their dispute through the contractually agreed forum when no genuine dispute exists. The Court would therefore review the evidence and arguments adduced by the parties to see whether there is a genuine dispute over the debt. If there exists a genuine dispute, the Court would ordinarily dismiss the petition.

Whilst the Court would give considerable weight to the fact that there is an arbitration agreement between the parties and other relevant circumstances, the Court would not follow the approach laid down by Harris J in Re Southwest Pacific Bauxite (HK) Ltd [2018] 2 HKLRD 449 (“Lasmos”), which provided that a petition should generally be dismissed if the company could show that (a) the debt is not admitted; (b) the dispute is covered by an arbitration clause; and (c) the company has taken step to commence arbitration.

As discussed below, the Court took the view that there is no bona fide dispute over the Debt which justifies handing over the dispute to arbitration.

2^nd Ground

The Company argued that while it has not paid the Debt to the Petitioner, it “had been prepared to effect payment to the Petitioner” upon determining certain issue with the quality of the cargo. In response, the Court ruled that the Company has failed to demonstrate that there is a bona fide dispute in respect of the Debt as the Company has clearly admitted liability to pay the Debt but merely considered itself entitled to suspend payment pending determination of the quality issue. Further, the Company could not identify any provision under the Sales Contract or other documents which entitles it to withhold payment of the Debt. Accordingly, the Petitioner was entitled to issue the statutory demand and to present the Petition upon the Company’s failure to comply with the same.

3^rd Ground

The Company further contended that it had a serious cross-claim against the Petitioner for breach of other contracts to which the amount of losses sustained by the Company exceeded that of the Debt. However, on the facts of this case, the Court took the view that the Company had failed to demonstrate that it had a serious cross-claim against the Petitioner. Further, on the evidence adduced by the Company, it was shown that the loss suffered by the Company was not caused by the alleged breaches of the Petitioner. The Court also noted that even if the Company did in fact have a serious cross-claim against the Petitioner, there was no valid basis for the Company to withhold payment of the Debt pending determination of the cross-claim: (a) the cross-claim arose from a separate set of contracts independent of those of the subject matter and (b) there was no contractual provision present in those contracts conferring a right on the Company to retain the Debt as security for its cross-claim.

Accordingly, the Court allowed the Company 14 days from the date of the Order to settle the Debt if it wished to avoid a winding-up order. In the event that the Company fails to do so, the Petitioner may restore the Petition for hearing whereupon a usual winding-up order will be made against the Company.

Key takeaway

The decision clarifies the position of the Hong Kong courts in face of debts governed by arbitration agreements. However, as this case is decided by Linda Chan J whose approach is noticeably different from that of Harris J, whether Lasmos can come into play in future cases remains to be seen. Nonetheless, one should be aware that it is incumbent on debtors to demonstrate a genuine dispute on the debt when disputing a winding-up petition and the mere existence of an arbitration agreement pertaining to the debt would not suffice as a valid ground to stay or dismiss a winding-up petition. 

 

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.

Published by ONC Lawyers © 2022