The Saga on Winding Up vs Arbitration Continues: Perspectives from Hong Kong, Singapore, Australia, and the UK

When a creditor pursues a company for a debt, the creditor (Petitioner) may commence winding up proceedings by presenting a winding up petition against the debtor company (Company), on the basis that the Company is insolvent or unable to satisfy its debts. What happens, however, if such petition debt concerns a dispute between the Petitioner and the Company which falls within the parties’ arbitration agreement?

This insight focuses on the tension that exists when the petition debt concerns a dispute that is subject to an arbitration agreement. On that basis, should the winding up petition be dismissed or stayed in favour of arbitration? How should winding up courts balance the competing interests between:

(a)    the Petitioner’s statutory right to pursue a debt and wind up the insolvent Company to realise its assets; and

(b)    upholding the parties’ agreement to resolve their disputes by way of arbitration.

With this conundrum in mind, we examine recent decisions of the courts in Hong Kong, Singapore, Australia and the United Kingdom to see how they have tackled this question. In essence:

(a)   Hong Kong and Singapore courts have demonstrated a robust pro-arbitration approach – a winding up petition will be dismissed or stayed, where there is a dispute between the parties subject to the parties’ arbitration agreement.

(b)   There has been limited judicial consideration of this issue in Australia, which has focused on whether the presence of an arbitration clause is a discretionary 'other reason' under the Corporations Act 2001 (Cth) to set aside a statutory demand.

(c)   The UK Privy Council in a recent BVI case rejected the prior English law position on this issue, such that the Company will be wound up unless the dispute over the debt is genuine and substantial.

It remains to be seen how the UK Privy Council’s approach will be tested before other common law courts. As a result of the recent case developments, some businesses may have concerns that arbitration clauses could limit their ability to wind up debtors in Hong Kong and Singapore. However, those concerns may be misplaced, as arbitration remains a strong option for resolving disputes, especially in emerging markets, due to the ease of cross-border enforcement of New York Convention arbitration awards.

Read more about each jurisdiction:

Key Takeaways

Drawing Comparisons

In light of the cases discussed, we share some comparative observations:

(a)    Merits of defence: Hong Kong and Singapore courts adopt different approaches when considering the merits (or the lack thereof) of the Company’s defence. The lack of merits of a Company’s defence is not a ground for finding abuse of process in Singapore (see AnAn), yet in Hong Kong the Company’s unmeritorious defence may be regarded as frivolous or abusive (see Re Simplicity).

(b)    Validity and scope of arbitration: In Re Simplicity and Re Shandong Chenming, there was no dispute as to the validity and scope of the relevant arbitration clauses. The Singapore court in AnAn made clear that it will only review this issue on a prima facie standard.

(c)    'Genuine' dispute question: Where the Petitioner and the Company are in dispute as to whether the debt subject to an arbitration agreement was genuinely disputed on substantial grounds, should this question be determined by the insolvency court or in arbitration? The Hong Kong court in Re Shandong Chenming suggests that this should be left for determination in arbitration. In Sian Participation, the lower courts had established that the debt (while denied by the debtor) was not genuinely disputed on substantial grounds.

(d)    Pro-arbitration approaches: The approach of the Hong Kong courts in Re Simplicity and Re Shandong Chenming and Singapore courts in AnAn have been lauded by the legal community for taking a robust pro-arbitration stance. It is, however, noted that the Privy Council emphasised repeatedly in Sian Participation that its conclusion is not anti-arbitration:

i.    In the Privy Council’s reasoning, it seeks to clarify the dividing lines between two aspects of public policy: the public interest in winding up insolvent companies and the public interest in holding parties to their arbitration agreements.

ii.   The Privy Council emphasised that none of the general objectives of arbitration legislation (such as efficiency, party autonomy and non-interference by the courts) are offended by allowing a winding up to be ordered, where the creditor’s debt is not genuinely disputed and to 'require the creditor to go through an arbitration where there is no genuine or substantial dispute as the prelude to seeking a liquidation just adds delay, trouble and expense for no good purpose'. By ordering liquidation, the court is not resolving anything about the debt nor interfering with its resolution.

(e)    Relevance of an arbitration agreement: Courts in Australia have regarded the existence of an arbitration agreement as relevant to the consideration of whether a winding up order should be made. In exercising its discretion under the Corporations Act, the Court will consider whether the statutory demand process is being improperly used to avoid an arbitration agreement, but the presence of an arbitration agreement will not result in an automatic setting aside of the statutory demand. The judicial reception of Sian Participation in Australia remains to be seen.

Practical Lessons

In light of the above developments, financial institutions may be concerned that the inclusion of an arbitration clause in financial transaction agreements will reduce their ability to wind up borrowers in breach of their loan agreements for borrowers domiciled in Hong Kong and Singapore. However, arbitration continues to be the best dispute resolution choice for loan agreements where one or more of the borrowers are resident in an emerging market jurisdiction. Arbitration allows for comparatively easy cross-border enforcement in many jurisdictions and the ability to enforce in many jurisdictions simultaneously.

The practical implications are significant for commercial parties that are party to an arbitration agreement, as the approach taken by courts in different jurisdictions can impact the choice of dispute resolution methods, arbitral seat, the enforcement of debts, and/or the strategy that parties may adopt when disputes over payments arise. Future case law will likely continue to shape the balance between winding up petitions and arbitration agreements, providing further clarity and guidance for commercial parties:  

Looking Ahead

If common law courts follow the Privy Council’s recent approach in Sian Participation, the debtor’s defence to the petition debt should be 'genuine and substantial', even where the petition debt concerns a dispute that is subject to the parties’ arbitration agreement. This position is contrary to the current settled law in Hong Kong and Singapore, although it remains to be seen how the higher courts in these jurisdictions will interpret the approach in Sian Participation where such opportunity arises in future cases.

All commercial parties should continue to keep abreast of the developments post-Sian Participation.

For more on international arbitration from our global team, visit our insights:

• Hong Kong’s Unparalleled Advantages as an Arbitral Seat: Reflections on Arbitration-Related Reciprocal Arrangements with China Mainland
• Recent developments in anti-arbitration injunctions: tug of war between courts and arbitral tribunals? 
• Now In Force. Updated HKIAC Administered Arbitration Rules (2024)
• Latest China international economic and trade arbitration commission Hong Kong Arbitration Centre (CIETAC Hong Kong) statistics

The authors would like to thank Richard Mazzochi, Minny Siu, David Lam, Jessica Zhou and Katherine Ke for their invaluable comments in the preparation of this insight.