Hong Kong – HK Courts Clarify Stance On Insolvency Petition Pending Cross-Claims Or Arbitration.
Recent efforts have been made to strengthen Hong Kong’s position as an international alternative dispute resolution hub. One of the questions is whether the Hong Kong courts will stay insolvency petition pending determination of a cross-claim or arbitration clause, extending the principles in the case of Re Lam Kwok Hung Guy (2023) 26 HKCFAR 119.
Case Background
The appeal decision of Re Shandong Chenming Paper Holdings Ltd (2024) HKCA 352 helps to clarify the Hong Kong courts’ position on whether the winding-up of the Company should be stayed pending determination of a cross-claim against the Petitioner. Re Shandong relates to a series of disputes arising from a joint venture agreement (the “JVA”) between Arjowiggins HKK 2 Ltd (the “Petitioner”) and Shandong Chenming Paper Holdings Ltd (the “Company”). The Petitioner commenced arbitration in the HKIAC under the JVA against the Company, alleging the Company’s failure to supply steam. The arbitration resulted in an award ordering the Company to pay damages of RMB167,860,000 to the Petitioner, and the Petitioner obtained leave to enforce the award in Hong Kong. The Company then applied to set aside the award, but the application was dismissed.
Meanwhile, the Petitioner served a statutory demand on the Company for damages, against which the Company applied for an injunction to prevent the Petitioner from filing a winding-up petition against the Company. The injunction application was unsuccessful.
The Company in turn applied to dismiss or adjourn the winding-up petition of the Company, by reason of a cross-claim against the Petitioner in a separate arbitration commenced. In that separate arbitration, the Company claimed damages and asserted a cross-claim against the Petitioner with an amount exceeding the outstanding petition debt.
Harris J at the first instance adopted the approach taken in Re Lam Kwok Hung Guy and stayed the insolvency petition pending determination of the cross-claim in the separate arbitration. The Petitioner appealed.
Court’s Rulings
The general rule for a winding-up petition is that a petitioner will customarily be entitled to a winding-up order unless there is a bona fide dispute on substantial grounds in respect of the petition debt. The Court has the discretion to determine whether there is a bona fide dispute, and consequently to determine whether to grant, dismiss or stay the petition.
Despite the fact that the Guy Lam approach does not expressly relate to cross-claims (meaning claims that cannot be invoked as set-off to the petition debts), and is therefore not binding on the Court of Appeal in Re Shandong, the Court nevertheless confirmed that the Guy Lam approach should be extended to cross-claims. There is also no dispute between the parties that the Guy Lam case applied by analogy where the petition debt is subject to an arbitration clause.
The Court considered a line of English rulings since re Bayoil SA [1999] 1 WLR 147, and decided to follow the English position that there is no real difference in principle between cross-claims and disputes of debt as grounds for resisting winding-up petitions. In both cases, the Court has to decide on the question of whether the petitioner is a net creditor that has an interest in having the debtor wound up or bankrupted. In particular, the Court, in exercising its insolvency jurisdiction, does not “wear blinkers” and looks only at the petition debt itself, but would look at the overall picture by considering the relationship between the parties. This essentially affirmed Guy Lam’s multifactorial approach.
Having considered the above, the Court came to the conclusion that when the cross-claim is subject to an arbitration clause, it would be against the parties’ initial intentions if the Court goes into the merits of the cross-claim to determine whether there is a genuine and serious cross-claim. It naturally follows that such public policy consideration would sway the Court into staying or dismissing the insolvency petition. The Petitioner’s appeal was accordingly dismissed.
The Court, in obiter, said that a delay in putting forward a cross-claim may in some circumstances support a finding that there was an abuse of court’s process, especially if the delay is considered as an excuse to stave off the winding up. This would invoke the exception in Guy Lam that allows the Court to dismiss an insolvency petition. However, in the present case, the Court accepted that the Company’s delay in raising its cross-claims was due to the failure of the Petitioner to provide the joint venture documents, therefore not amounting to an abuse of process.
It is helpful to note that the Re Shandong decision was subsequently followed by a Hong Kong first instance judgment in Re Mega Gold Ltd and Re Man Chun Sing Matthew (2024) HKCFI 2286, notwithstanding a contrary approach taken by the UK’s Privy Council in a judgment handed down shortly after Re Shandong.
Significance
The Re Shandong case should be read together with the decision of Re Simplicity & Vogue Retailing (HK) Co Ltd (2024) HKCA 299, which both help clarify the uncertainties of the Guy Lam decision. It is now evident that the Guy Lam approach would be equally applicable to insolvency petitions involving a cross-claim or arbitration clause.
It should be noted that the existence of an arbitration clause in a contract would not lead to an automatic dismissal of the insolvency petition. There is also a “fail-safe” in place to protect the interest of the creditors that allows the usual Guy Lam approach to be displaced where the dispute borders on the frivolous or abuse of process.
If you have any questions on the above eNews or require assistance in arbitration or insolvency matters, experienced lawyers in our Litigation and Dispute Resolution team will be happy to assist you.
For further information, please contact:
Angela Wang, Partner, Angela Wang & Co
angelawang@angelawangco.com
