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Staying Winding-Up Petitions to Arbitration

2014-08-01

Introduction


In the recent case of Quiksilver Greater China Limited v. Quiksilver Glorious Sun JV Limited HCCW 364/2013, the Court has recently decided that the winding up proceedings be stayed, pending the outcome of arbitration between the shareholders.



Background


In Quiksilver Greater China Limited v. Quiksilver Glorious Sun JV Limited HCCW 364/2013, Quiksilver Greater China Limited v. Quiksilver Glorious Sun Licensing Limited, HCCW 365/2013 (heard together), the First Respondents were two joint venture companies (the “Companies”) set up pursuant to a joint venture agreement between the Petitioner, Quiksilver Greater China Limited (“Quiksilver”) and the Second Respondent, Glorious Sun Overseas Company Limited (“Glorious Sun”).


In late 2010, Quiksilver concluded that the joint ventures were not developing as expected. After buy-sell negotiations between Quiksilver and Glorious Sun to buy over each other’s interest in the Companies failed, Glorious Sun served a notice to commence arbitration proceedings seeking to enforce a purchase by Glorious Sun of Quiksilver’s interests pursuant to the joint venture agreement, relying on the arbitration clause in the joint venture agreement which stated that “Any controversy arising under or relating to this Agreement, and any amendment thereof, or any breach thereof, shall be determined and settled by arbitration…” In return, Quiksilver issued winding-up petitions over the Companies on just and equitable grounds. Glorious Sun applied for the petitions to be struck out or stayed pending the outcome of the arbitration.



Preliminaries


Harris J expressed that an arbitrator would not be able to grant the winding-up orders that Quiksilver sought as a company is created in Hong Kong through statute and can only be dissolved through the statutory winding up procedures. Nevertheless, the Court held that this was not a barrier to a stay. The Court cited Patten LJ’s decision in the UK case of Fulham Football Club (1987) Ltd. v. Richards [2012] Ch 333 in support: in Fulham, the English Court of Appeal held that an arbitration agreement could extend to determining whether the presentation of a petition was justified and that a shareholder would be permitted to present a winding up petition only after such a determination had been made by the arbitrator.



Exercising a Class Right?


Quiksilver advanced two main arguments against the application for a stay. Firstly, it argued that a shareholder’s petition to wind a company up is an exercise of a class right. The shareholder applicant’s right in this regard is inalienable, it enjoys that right of access to the Companies Court and is also entitled to the Companies Court’s determination of its winding up petition. Even if an arbitration clause covers the subject matter of the dispute, a stay should not be ordered because the petitioner is exercising a class right.


In considering this line of argument, the Court distinguished between winding up on the grounds of insolvency and on just and equitable grounds, holding that the grant of a stay of the winding-up proceedings would differ in these two scenarios.


Unlike a winding-up petition on the ground of insolvency, where the petitioning creditor seeks to wind up an insolvent company for the benefit of all creditors and thereby exercises a class right, the position under a winding up on the just and equitable ground is different. Commonly this involves the shareholder demonstrating sufficient interest in the winding-up, asserting that the company is solvent and that he would be entitled to a distribution following the liquidation. In such a case, the “class” interested in the petitions would be limited to the shareholders of the company. The winding-up applications in respect of the Companies belonged to this category and the class is limited to the two shareholders, Quiksilver and Glorious Sun, both of whom are parties. It does not affect persons other than the parties. In the circumstances it was difficult to see why the underlying dispute between the parties was not arbitrable.



Winding-Up Proceedings Not an Action


Quiksilver also submitted that section 20 of the Arbitration Ordinance[1] , under which the court is duty bound to refer the parties to an arbitration agreement to arbitration, did not apply to a winding up petition and that the Court did not have residual inherent jurisdiction to stay a winding up petition purely to allow the complaints in the petition to be dealt with through a mechanism that the parties privately agree on, such as arbitration.


The Court accepted Quiksilver’s submission that section 20 of the Arbitration Ordinance did not apply to winding-up proceedings as winding-up proceedings are not an action (Sky Datamann (Hong Kong) Limited HCCW 487/2001) since the duty to refer the parties to arbitration arises only when what was brought before the courts was an action.



Proper Approach


In determining whether the winding-up petition should be stayed to arbitration, the Court held that the correct approach would be to identify the substance of the dispute between the parties and ask whether or not that dispute is covered by the arbitration agreement. In the present case, that dispute concerns the basis upon which the joint venture is to end, with Quiksilver desiring to wind the Companies up whereas Glorious Sun preferred to buy Quiksilver out. This issue could be determined by arbitration, with the winding-up petitions stayed pending the outcome of the arbitration. If the arbitrators conclude that Quiksilver is correct, an application can then be made to the Court for winding-up orders.



Arbitrate First


Whilst an arbitrator will not be able to make a winding-up order, the Hong Kong Courts will be open to allowing disputes between contracting parties to proceed to arbitration first before winding up proceedings advance in full steam. This signals the Court’s commitment to alternative dispute resolution methods, which are practical and desirable. Potential shareholders should however note that different considerations would apply where the company is being wound up on grounds of insolvency.




[1]        Section 20 of the Arbitration Ordinance (Cap 609) incorporates article 8 of the UNCITRAL Model Law and provides that a court before which an action is brought shall refer the parties to arbitration. See section 20(1): “(1) A court before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so requests not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.”



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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.


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