Court of First Instance draws distinction between arbitration clauses and exclusive jurisdiction clauses in winding up proceedings

Further to our recent news update on the Court of Final Appeal judgment in Re Guy Kwok-Hung Lam [2023] HKCFA 9 (“Guy Lam“), on 30 May 2023, in Re Simplicity & Vogue Retailing (HK) Co., Limited [2023] HKCFI 1443, the Court of First Instance considered the effect of Guy Lam in the context of arbitration clauses in winding up proceedings, and remarked that the ratio in Guy Lam only applies to exclusive jurisdiction clauses, but not to arbitration clauses.

In Re Simplicity & Vogue Retailing (HK) Co., Limited, the subject company acted as the guarantor to discharge obligations of an issuer of certain convertible bonds under a bond instrument. Upon the issuer’s default, the company failed to satisfy a statutory demand within time limit and a petition was presented to wind up the company. The decision by Linda Chan J concerned the application by the company to, among other things, file an affirmation in opposition to the petition out of time and adjourn the petition hearing.

The court held that, as the company failed to demonstrate any good reasons to justify the extension of time or the adjournment sought, there was no proper basis for the court to grant the company’s application, and accordingly, granted a winding-up order. In course of her decision, Linda Chan J also dealt with the grounds raised in the proposed affirmation in opposition, namely:

  1. there was a bona fide dispute as to whether the guarantee had been discharged by reason of a variation of the principal contract between the petitioner and the issuer (Discharge Ground); and
  2. there were arbitration clauses in both the bond instrument and in the guarantee such that the dispute should be referred to arbitration (Arbitration Ground).

In respect of the Discharge Ground, the court found that it was wholly without merit and consequently there was no proper basis to require the parties to refer the “dispute” to arbitration, even if the approach in Guy Lam were to be applied.

In respect of the Arbitration Ground, the court remarked that the ratio in Guy Lam (namely that in an 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) only applies to exclusive jurisdiction clauses, but not to arbitration clauses.  As far as arbitration clauses are concerned, the principles set out in the But Ka Chon v Interactive Brokers LLC [2019] 4 HKLRD 85 and Sit Kwong Lam v Petrolimex Singapore Pte Ltd [2019] 5 HKLRD 646 should be followed, namely whether or not there is a bona fide dispute on substantial ground, and in that context, the court will also consider whether the 3 requirements in Lasmos are satisfied. The Court does not read Guy Lam as laying down any general rule that if the agreement which gave rise to the petitioning debt contains an arbitration clause and there are no supporting creditors to the petition, the court must dismiss or stay the winding-up petition. To invariably refuse to consider the merit of the “defence” and require to parties to litigate their dispute in arbitration is to adopt a mechanistic approach and fetter the exercise of the court’s discretion. Absence any genuine “dispute” in respect of the debt, as in this case, there is no proper basis to require the parties to refer their “dispute” to arbitration.

It should be noted that the observations re Guy Lam are, strictly speaking, obiter, as the court has already concluded that there is no proper basis to grant the company’s application to adjourn the petition hearing and the Discharge Ground is without merit. Nevertheless, the arguments on Guy Lam were considered “in view of the importance of the point which arises in many cases coming to the Companies Court.” Given the state of flux in this area of law, it may be expected that more cases concerning the effectiveness of arbitration clauses in winding up proceedings will come to be decided by the courts. Until further deliberation by the appellate courts, it appears that a distinction is drawn in respect of the treatment of exclusive jurisdiction clauses and arbitration clauses in a bankruptcy / winding up context.

For further details, the full judgment can be found here.

12 June 2023
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