Privy Council Pivots From Hong Kong Court Of Final Appeal To Decide Winding Up Petition Does Not Offend Against Arbitration Agreement.
Sian Participation Corp (In Liquidation) -v- Halimeda International Ltd [2024] UKPC 16
On an appeal from the Eastern Caribbean Court of Appeal of the British Virgin Islands, the Privy Council has decided that before a winding up application can be dismissed or set aside due to an existing arbitration agreement, the debt has to be genuinely disputed on substantial grounds. This “Substantive Dispute Test” was set out in 2015 in Jinpeng Group Ltd -v- Peak Hotels and Resorts Ltd BVIHCMAP2014/0025.
In doing so, the Privy Council held that the Court of Appeal decision in Salford Estates (No.2) Ltd -v- Altomart Ltd [2014] EWCA Civ 1575 (Salford Estates) was wrongly decided and expressly directed that the English Companies Court should no longer follow it. This is the first time that the Privy Council has done so since it was recognised by the English Supreme Court in Willers -v- Joyce [2016] UKSC 44 that it may be appropriate for the Privy Council to decide that the House of Lords, Supreme Court or Court of Appeal in England were wrong, and to direct that domestic courts should treat the decision of the Privy Council as representing English law.
Previously, under Salford Estates, where the underlying contract included an arbitration agreement, the approach taken by the English courts would be to stay or dismiss a winding-up petition in favour of arbitration upon non-admission of the debt by the debtor company, whether genuine or not.
The approach taken in Salford Estates has also been adopted by the Hong Kong Court of Appeal in decisions discussed below.
Do winding-up petitions involve determination of merits?
The overturning of Salford Estates by the Privy Council is premised on the view that in winding-up/liquidation proceedings, the Court does not seek to, nor does it, actually resolve or determine any matters that would be caught within the scope of an arbitration agreement. In particular, the Privy Council pointed out that the ‘light-touch’ approach by the Companies Court would not produce anything similar to a judgment, and the ordering of a liquidation does not resolve anything nor interfere with the resolution of any dispute. The Privy Council also held that, accordingly, the presentation of a winding-up petition does not offend the negative obligation under an arbitration agreement to not have disputes resolved outside of arbitration.
Further, as to whether the adoption of the Substantive Dispute Test would encourage creditors to bypass an arbitration agreement and exert pressure on debtors by seeking a winding-up application, the Privy Council took the view, amongst other things, that the Companies Court already has sufficient protections in place against such abuse of process, being the power to order indemnity costs. It considered that there is no good reason to require a creditor to go through arbitration where there is no genuine dispute as such process will only add delay, trouble and expenses.
Meanwhile, last year, the Court of Final Appeal in Hong Kong (CFA) handed down a landmark decision in Re Guy Kwok Hung Lam [2023] HKCFA 9 (Guy Lam CFA), which decision endorsed the earlier Court of Appeal decision [2022] HKCA 1297 (Guy Lam CA). In brief, the CFA judgment stated that, in an ordinary case where the underlying dispute of the petition debt is subject to an exclusive jurisdiction clause, the courts should dismiss the petition unless there are ‘countervailing factors’, such as the risk of the debtor’s insolvency impacting third parties, the debtor’s reliance on disputes that border on the frivolous, or an occurrence of an abuse of process. The approach of the CFA is consistent with the general policy of the courts in Hong Kong in favour of holding parties to their contractual bargain including jurisdictional agreements.
Relevantly, the Hon G Lam JA in Guy Lam CA found that the test previously applied by the courts when determining an insolvency order (i.e. whether there is a bona fide dispute of the debt on substantial grounds) was ultimately broadly similar and broadly equivalent to the determination of a summary judgment application in a writ action (i.e. whether there is an issue or question in dispute which ought to be tried), and that it would be “most unlikely to result in different outcomes when applied to the same facts”. This observation mirrors the reasoning in Salford Estates as to the analogous nature of summary judgment proceedings and the Substantive Dispute Test. The Guy Lam CFA approach was later endorsed and extended by the Hong Kong Court of Appeal to include arbitration agreements in Re Simplicity & Vogue Retailing (HK) Co Ltd [2024] HKCA 299 and Re Shandong Chenming Paper Holdings Ltd [2024] HKCA 352.
It is also worth noting that a few years earlier, in Re Asia Master Logistics Ltd [2020] 2 HKLRD 423, DHCJ William Wong SC considered the Substantive Dispute Test, sharing the same view that the Court “makes no determination on the parties’ rights and obligations” in insolvency applications, and rejected the Salford Estates approach as an ‘unprecedented fetter on the Court’s discretion’. Nonetheless, Asia Master was essentially overruled by Guy Lam CA and Guy Lam CFA. In particular, the Court of Appeal in Guy Lam CA expressly disagreed with the view in Asia Master that there is no determination of merits in a winding-up petition. In any event, Guy Lam CFA remains the leading authority in Hong Kong.
Comment
While judgments of the Privy Council are strictly speaking not binding precedent in Hong Kong, they are traditionally treated as highly persuasive by the Hong Kong courts. However, given that there appears to be no pending appeal(s) to the Court of Final Appeal as regards the Court of Appeal’s judgments in Re Simplicity or Re Shandong Paper, Guy Lam remains good law in Hong Kong on the subject for the foreseeable future, and further consideration of the Privy Council’s judgment in Sian -v- Halimeda by the Hong Kong courts may have to wait for another day.
It should also be noted that the scope of the exclusive jurisdiction clause in Guy Lam was drafted broadly and encompassed “all legal proceedings arising out of or relating to” the contract, and, as a result, the Court held that the subject bankruptcy proceedings fell within the scope of “all legal proceedings”.
By contrast, this was not the case in Sian -v- Halimeda, where the parties were required to refer “any claim, dispute or difference of whatever nature” to arbitration pursuant to the arbitration agreement. The Privy Council considered the arbitration agreement in Sian -v- Halimeda to have been drafted broadly to cover a wide range of “disputes”, but that it did not have the effect of barring ancillary legal proceedings.
Furthermore, the Privy Council acknowledged later in the judgment that its conclusion may be confined to a “generally worded” arbitration agreement or exclusive jurisdiction clause, and different considerations may arise if the agreement or clause was framed in terms which could potentially capture a liquidation application. This point was also considered in Guy Lam CA by Hon Chow JA, who commented that the ‘true construction’ of the relevant clause and its wording would be the first question for consideration as a matter of principle. Indeed, DHCJ William Wong SC in Asia Master has gone as far as suggesting that there is ‘nothing against public policy’ for a creditor to voluntarily agree to fetter its rights to issue a winding up petition against a debtor company.
Despite the apparent diverging findings between the Privy Council’s judgment in Sian -v- Halimeda and the CFA’s judgment in Guy Lam CFA, the CFA did make it clear that the Court still retains a discretion to grant a bankruptcy order in circumstances where the dispute “borders on the frivolous or abuse of process”. The Court of Appeal in Hong Kong in Re Simplicity considered the company’s defence to be such a case (although the appeal was dismissed on different grounds). This seems to suggest that the Hong Kong courts will nevertheless have to consider, to some degree, the merits of a debtor’s defence in any event, and whether, practically, the Guy Lam CFA approach results in an outcome which would be materially different to an outcome under the Substantive Grounds Test remains to be seen.
