Hong Kong | The Dust Settles - The Interplay Between Arbitration Clauses and Winding-Up Petitions

On 23 April 2024, the Court of Appeal handed down two eagerly anticipated judgments of Re Shandong Chenming Paper Holdings Ltd [2024] HKCA 352 and Re Simplicity & Vogue Retailing (HK) Co Ltd [2024] HKCA 299. Both appeals raise a common question of law concerning the proper approach when faced with a disputed winding-up petition where the underlying debt is subject to an arbitration clause.

In a step towards achieving much needed clarity, the twin decisions confirmed that, the principles regarding exclusive jurisdiction clauses ("EJC") laid down in Re Guy Kwok Hung Lam [2023] HKCFA 9 ("Guy Lam") also apply to arbitration clauses. In essence, unless there are countervailing factors, the Court should generally uphold arbitration clauses and decline to exercise its insolvency jurisdiction.   

The Guy Lam Approach

The general rule is that a petitioner will ordinarily be entitled to a winding-up order unless the petition debt is subject to a bona fide dispute on substantial grounds. The Court has discretion to determine whether there is a bona fide dispute, so too does it have the discretion to grant, dismiss or stay the petition. 

The Court of Final Appeal's decision in Guy Lam highlighted the importance of contractual autonomy; the fact that the parties agreed to have all their disputes under the agreement giving rise to the debt to be determined in another forum is highly relevant in the Court's exercise of discretion. The CFA held that in the ordinary case of a foreign EJC, absent countervailing factors such as the risk of insolvency affecting third parties and a dispute that borders on frivolous or abuse of process, the mutually agreed EJC should be upheld. 

Adopting the Guy Lam Approach in the Context of Arbitration Clauses

The background of the two cases are similar. In Re Simplicity, the dispute sought to be referred to arbitration is the petition debt itself. In Re Shandong Chenming, the debtor company does not dispute the petition debt, but sought to refer its cross-claim to arbitration which is greater in value than the amount of the petition debt. 

To summarise, the Court of Appeal confirmed in the two decisions that: - 

• The Court's approach in exercising its discretion to grant, dismiss or stay the petition is "multi-factorial". The Court may decline to hold the parties to the agreed dispute resolution mechanism where the defence is one which is frivolous or an abuse of process. 
• Debtors are required to demonstrate a genuine intention to arbitrate- the burden is not an onerous one. Even if no steps had been taken to commence arbitration, the Court could still, depending on the circumstances, exercise its discretion to grant a short adjournment for the debtor to commence arbitration and require an undertaking from him to proceed with the arbitration with all due dispatch. 
• If the debtor company opposes the winding-up petition based on a cross-claim that exceeds the petition debt (i.e. a complete set-off), it is tantamount to a dispute of the petition debt. Where the cross-claim is subject to an arbitration clause, it would be against the parties' agreement if the Court engages into a discussion on its merits and determines that there is no genuine and serious cross-claim. Such a determination would be akin to giving summary judgment in favour of the defendant.   

Key Takeaways

The twin decisions affirm Hong Kong's position as a pro-arbitration jurisdiction and, at least in the context of winding-up proceedings, cements the court's view that a contracting party should be bound by an arbitration clause unless the ground of opposition borders on being frivolous or an abuse of process, or where there is a risk to prejudice a community of creditors. This uniformity provides predictability and fairness in handling such cases, while maintaining a safeguard against the abuse of the arbitration process.