Court of First Instance stays winding-up petition in light of an arbitrable cross-claim

Harris J’s judgment in Re Shandong Chenming Paper Holdings Limited gives a new perspective on a line of cases regarding the effect of exclusive jurisdiction clauses and arbitration clauses in the context of bankruptcy or winding-up proceedings.

For background, please refer to the decision of Re Guy Kwok-Hung Lam [2023] HKCFA 9 (“Guy Lam“) (see our news update), where the Court of Final Appeal (the “CFA“) affirmed the Court of Appeal (the “CA“)’s decision to dismiss a bankruptcy petition in light of an exclusive jurisdiction clause. After the CFA decision, in Re Simplicity & Vogue Retailing (HK) Co., Limited [2023] HKCFI 1443 (see our news update), the Court of First Instance remarked (obiter) that the ratio of Guy Lam applies only to exclusive jurisdiction clauses, but not to arbitration clauses.

In Re Shandong Chenming Paper Holdings, the subject company sought a dismissal or adjournment of the winding-up petition which relied on the ground of insolvency for non-payment of an arbitral award. The company then commenced another arbitration against the petitioner, which was a cross-claim in excess of the first arbitral award. The substantive hearing of the arbitration was fixed to take place soon in less than one year.  This was its basis for seeking a dismissal or adjournment of the winding-up petition.

The issue before the Court of First Instance was whether Guy Lam would apply where the debtor relies on a cross-claim and not a disputed debt. If it did apply, the debtor would not have to show that the cross-claim was based on substantial grounds, and that it exceeds the debt. If Guy Lam did not apply, then to dismiss the winding-up petition, the company would have to rely on the ground that there is a bona fide dispute of the debt on substantial grounds. In that case, the company would have to show that the cross-claim is genuine, serious, and of substance.

Harris J held that the Guy Lam approach would apply to arbitrable cross-claims . The Judge stated in his judgment that it was clear from the reasoning of both the CA and CFA in Guy Lam that in bankruptcy and winding-up proceedings, the existence of exclusive jurisdiction clauses and arbitration clauses would be a reason to dismiss such applications, unless there were countervailing factors such as risk of insolvency affecting third parties and a dispute that borders on the frivolous or abuse of process.. It was further interpreted that in the application of Guy Lam, there is no difference between disputed debts and cross-claims when considering whether there is a defence to a winding-up petition – in other words, the court would dismiss a petition for bankruptcy or winding-up subject to an arbitration based on either a disputed debt, or a cross-claim.

Given the long history of the matter, instead of dismissing the winding-up petition, the Judge stayed the petition.

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

25 August 2023
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