Court of First Instance rules again on the effect of arbitration agreement on winding up petitions

Following our previous article in August 2020 (Is an arbitration clause a trump card against winding-up petitions?), the Court of First Instance recently had another chance to determine the legal effect of an arbitration agreement governing the underlying debt on a winding-up petition in Re Hongkong Bai Yuan International Business Co., Limited (HCCW 219/2021).

The petitioner in Re Hongkong Bai Yuan International Business Co., Limited sought a winding up against Hongkong Bai Yuan International Business Co., Limited (the “Company“) on the ground of insolvency by reason of the Company’s failure to comply with a statutory demand regarding outstanding cargo price payable by the Company to the petitioner under a sales contract concluded between the parties. The Sales Contract provided, amongst other terms, that all disputes under the contract were to be referred to CIETAC for arbitration. One of the grounds under which the Company sought dismissal of the petition is that there is a “prima facie” dispute on the debt that the case shall be referred to arbitration.

Rather than urging the court to adopt either the traditional approach (i.e. debtor company may only apply to dismiss or stay a winding-up petition if it can show there is a bona fide dispute on substantial grounds) or the Lasmos approach (i.e. winding-up petition should generally be dismissed if (a) the debtor disputes the debt, (b) the dispute is covered by the arbitration clause, and (c) the debtor company has taken step to commence arbitration), counsel for the Company submitted that the court should instead adopt the Singapore approach expounded in AnAn Group (Singapore) Pte Ltd v VTB Bank (Public Joint Stock Company) [2020] SGCA 33, §§60-74 and the English approach in Salford Estates (No.2) v Altomart Ltd (No.2) [2015] 1 Ch 589, such that the court should dismiss a petition if the court finds there is a “prima facie” dispute on the debt.

Linda Chan J held that it serves no purpose to distinguish the linguistic difference between a prima facie standard (adopted by Singapore and English courts) and a bona fide dispute on substantial grounds standard (adopted by Hong Kong court) as the real test is whether the debtor could demonstrate that there is “a genuine dispute on the debt which requires determination of a tribunal“. In addition to approving the traditional approach, the judge further provided that the courts in exercising its discretion to wind up a company should “give considerable weight to the fact that there is an arbitration agreement between the parties and other relevant circumstances“.

While the debate between the advocates of the traditional approach and the Lasmos approach will continue until decisions from appellate courts are handed down, it is now becoming clearer that the Court of First Instance is generally in favour of Kwan VP’s obiter comments in But Ka Chon v Interactive Brokers LLC [2019] 4 HKLRD 85 and the traditional approach is to be preferred. Although arbitration agreements are not to be treated as a “trump card” under the traditional approach, the existence of an arbitration agreement is now expected to be an important factor weighing against winding-up.

For details, the full judgment can be found here.

28 April 2022
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