Charting the progress of Hong Kong law from the pro-arbitration approach in Lasmos, to Re Guy Lam, Re Simplicity, and Re Shandong Chenming, and in light of the recent UK Privy Court decision in Sian Participation, this Chapter sets out the current position in Hong Kong on the relationship between the winding-up jurisdiction and arbitration. Read about the position in Singapore, Australia and in the United Kingdom – using the links above – for a wider comparative understanding of the legal landscape on this topic.
Lasmos signals a pro-arbitration approach
One of the earlier landmark cases in Hong Kong on this issue is Lasmos Ltd v Southwest Pacific Bauxite (HK) Ltd[1] (Lasmos). Justice Harris followed the approach of the English Court of Appeal in Salford Estates (No 2 Ltd) v Altomart Ltd (No 2)[2] (Salford Estates), and decided that a winding-up petition should be 'generally dismissed' save in 'exceptional circumstances' if:
(a) the Company disputes the debt relied on by the Petitioner;
(b) the contract giving rise to the debt contains an arbitration clause that covers any dispute relating to the debt; and
(c) the Company takes the required steps under the arbitration clause to commence the contractually mandated dispute resolution process and file an affirmation demonstrating the steps taken. Note that this limb was introduced in Lasmos and went beyond the Salford Estates test.
In doing so, Lasmos departed from the approach in earlier Hong Kong decisions,[3] which considered that a dismissal / stay of petition (based on a disputed debt subject to an arbitration clause) required the Company to demonstrate it had a bona fide defence on substantial grounds.
Lasmos received mixed judicial treatment in subsequent cases,[4] with the Court of Appeal twice declining to address it.[5]
Re Guy Lam sheds light on exclusive jurisdiction clauses
An exclusive jurisdiction clause (EJC) is an agreement between the parties in which they agree that any disputes relating to the contract will be resolved exclusively by a particular court.
In Guy Kwok-Hung Lam v Tor Asia Credit Master Fund LP (Guy Lam), the parties’ agreement contained an EJC in favour of New York courts. A bankruptcy petition was filed against Mr Lam in Hong Kong, who then disputed the petition debt and sued the Petitioner in New York. At first instance in Hong Kong,[6] it was found that Mr Lam failed to show that there is a bona fide dispute on substantial ground in respect of the debt, a bankruptcy order was granted against Mr Lam. In subsequent appeals, both the Court of Appeal[7] and the Court of Final Appeal[8] ruled in Mr Lam’s favour.
Mr Lam referred to Lasmos. However, the Court of Appeal and the Court of Final Appeal deliberately left the issue of Lasmos open, given that the Guy Lam case concerned an EJC rather than an arbitration agreement. Nevertheless, in reversing the first instance judgment, both the Court of Appeal and the Court of Final Appeal emphasised the importance of holding parties to their contractual bargain. Hong Kong courts would give effect to the parties’ agreed dispute resolution venue and exercise its discretion to decline bankruptcy jurisdiction, absent countervailing factors (such as the risk of insolvency affecting third parties and a dispute that borders on the frivolous or abuse of process).
Conceivably, commercial parties were eager to test Guy Lam in court in respect of its application to arbitration agreements. The Court of Appeal soon clarified the position by handing down two judgments on 23 April 2024, namely Re Simplicity and Re Shandong Chenming.
Re Simplicity clarifies that Guy Lam principles apply to arbitration
In Simplicity & Vogue Retailing (HK) Co., Limited (Re Simplicity), upon failure of the Company to pay under a corporate guarantee and a bond instrument (both documents contain an arbitration clause), the Petitioner petitioned for the Company to be wound up. At first instance,[9] the judge granted the winding up order. The Company had failed to file any evidence to oppose the petition. The judge also found that the Guy Lam principles applied to EJC and not to arbitration clauses, and even if it applies, there is no proper basis to require parties to refer their dispute to arbitration in the absence of any genuine dispute in respect of the debt.
On the Company’s appeal, the Court of Appeal[10] affirmed that the principles laid down in Guy Lam, by analogy, extended to winding up cases involving arbitration clauses. In respecting the parties’ bargain, a party should be bound by an arbitration clause (as by an EJC) in the contract, unless there are countervailing factors (such as where a dispute to the petition debt is frivolous or abusive). The Court of Appeal also emphasised that the court’s discretion in declining or accepting jurisdiction on the petition debt is 'multi-factorial', retaining flexibility to deal with cases as circumstances require.
However, the Company’s appeal was dismissed by the Court of Appeal because the Company failed to raise any evidence to dispute the petition debt, and in any event the Company’s objection to the petition was considered 'wholly without merit'. The case met the high threshold of the Court exercising its winding up jurisdiction.
Furthermore, the Court of Appeal confirmed that the Company should show a genuine intention to arbitrate its dispute in relation to the petition debt. This is to prevent the Company from merely using the arbitration clause as a tactical tool to put off the evil day. Referring to the 3rd requirement under Lasmos, the Court of Appeal emphasised that taking steps to commence arbitration is not onerous and may include preliminary stages such as mediation. The Company in this case took no steps in commencing an arbitration.
Re Shandong Chenming further clarifies that Guy Lam principles apply to cross-claims
In Arjowiggins HKK2 Limited v Shandong Chenming Paper Holdings Limited (Re Shandong Chenming), the Company argued that it had a cross-claim against the Petitioner that was subject to an arbitration agreement between the parties. As such, the winding up petition should be stayed until the conclusion of the arbitration.
King & Wood Mallesons acted for the successful Company and stayed the winding-up petition both at first instance[11] and before the Court of Appeal[12].
In light of the judgment in Re Simplicity, the issue in Re Shandong Chenming before the Court of Appeal boils down to whether the Guy Lam principles should apply in relation to cross-claims. More specifically, in a situation where the petition debt is not disputed, and the Company has a cross-claim larger in sum against the Petitioner that is subject to an arbitration agreement.
Although on a strict reading Guy Lam does not elucidate the position in respect of cross-claims, the Court of Appeal considered that the approach concerning a dispute over a petition debt also applies. Properly understood, in the context of winding-up, there is no real difference between a dispute on the petition debt and a cross-claim. The Court held that the true question is whether the Petitioner is ultimately a net creditor having an interest in the Company being wound up.
The Court of Appeal once again emphasised respecting the parties’ bargain. For the court to determine whether there is a genuine and serious cross-claim, or one that is of substance, it would be akin to the court giving a summary judgment, and that is contrary to the parties’ agreement to arbitrate.
The Court of Appeal was also not persuaded that applying the Guy Lam approach would create a 'debt dodger’s charter'. This is because the Company has to show a valid exclusive forum agreement (eg an arbitration agreement) between the parties that governed the cross-claim. The Guy Lam approach also builds in a safety valve for the rule to be displaced, where the dispute is frivolous or an abuse of process. On the facts, the Court found that the Company’s cross-claim was not frivolous or an abuse of process, nor did the Petitioner so argue. Although there was delay by the Company in bringing its cross-claim, the Company offered a satisfactory explanation.
Where does Hong Kong law now stand?
With the recent Court of Appeal decisions in Re Simplicity and Re Shandong Chenming, the test is now clear in Hong Kong – where there is a disputed petition debt or cross claim which falls within the ambit of the parties’ arbitration agreement, the Company may dismiss or stay a winding up petition by commencing steps to arbitrate the disputed petition debt or cross claim, so long as there are no countervailing factors such as third parties being affected or that the Company’s dispute to the petition debt or cross-claim is frivolous or an abuse of process. This approach was recently confirmed by (1) a Hong Kong first instance judgment in Re Mega Gold Ltd and Re Man Chun Sing Matthew[13] (Mega Gold), which found that the Guy Lam reasoning should be followed in Hong Kong notwithstanding the UK Privy Council’s judgment in Sian Participation (see further discussion below); and (2) the Court of Appeal in Re Inversion Productions Ltd[14] (Re Inversion) which did not make reference to Sian Participation.
The court’s discretion on whether to exercise its winding up jurisdiction takes into account a range of considerations. Re Simplicity demonstrates the relevance of the merits of the Company’s defence (contrasted with the Singapore position below) and the requirement of actual steps being taken in arbitration. In Re Shandong Chenming, delay in disputing the petition debt may 'in appropriate circumstances' constitute abuse.
It will be interesting to see how future case law in Hong Kong will develop and we await further judicial guidance as to how the court would exercise its discretion.
[2018] HKCFI 426
[2015] Ch 589
For example Hollmet AG v Meridian Success Metal Supplies Ltd [1997] 4 HKC 343; Re Sky Datamann (Hong Kong) Limited (unrep., HCCW 487/2001) (29 January 2002); Re Jade Union Investment Limited (unrep., HCCW 400/2003) (5 March 2004); Re Southern Materials Holding (H.K.) Co Ltd (unrep., HCCW 281/2007) (13 February 2008)
Lasmos was doubted in Dayang (HK) Marine Shipping Co., Ltd v Asia Master Logistics Ltd [2020] HKCFI 311
But Ka Chon v Interactive Brokers LLC [2019] 4 HKLRD 85; and Sit Kwong Lam v Petrolimex Singapore Pte Ltd [2019] 5 HKLRD 646
[2021] HKCFI 2135
[2022] HKCA 1297
(2023) 26 HKCFAR 119
[2023] HKCFI 1443
[2024] HKCA 299
[2023] HKCFI 2065
[2024] HKCA 352
[2024] HKCFI 2286
[2024] HKCA 884