Can you petition for winding up if your debt is subject to arbitration? The debate continues

Following the Court of Final Appeal's landmark decision in Guy Lam, Hong Kong's Court of First Instance (the "Court") considers that winding up petitions can be stayed by reason of ongoing cross-claims that are the subject of an arbitration clause

Recently, the Court of Final Appeal confirmed that a Hong Kong bankruptcy petition should generally be stayed or dismissed if the debt in question is subject to a non-Hong Kong exclusive jurisdiction clause. Our discussion on this landmark decision of Guy Kwok-Hung Lam v Tor Asia Credit Master Fund LP [2023] HKCFA 9 can be found here.

Since then, the application of the principles Guy Lam has been considered by the Court of First Instance in the context of a winding up petition, which we have written about here. In that case Linda Chan J took the view that the approach in Guy Lam did not apply where, instead of a non-Hong Kong exclusive jurisdiction clause, there is an arbitration clause.

Recently, in Re Shandong Chenming Paper Holdings Limited [2023] HKCFI 2065, the Court of First Instance (with Harris J presiding) had yet another occasion to consider the same question, i.e. whether a winding up petition against a Company ought to be dismissed or stayed. In this case, an underlying cross-claim was advanced by the debtor company in an arbitration against the petitioner, the value of which exceeded the value of the debt on which the petition was based. The cross-claim was the subject of an arbitration clause (not an exclusive jurisdiction clause).

Harris J therefore had to consider whether the petition in question should be stayed pending arbitration of the debtor company's cross-claim against the petitioner. In this case, Harris J answered the question in the affirmative and stayed the petition.

Harris J observed that, as a general principal of insolvency law, there is no distinction between a claim and a cross-claim when considering whether a defence to a bankruptcy or winding up petition has been established.

Harris J also took the view that there was no difference in the applicable principles in terms of whether the underlying dispute or cross-claim was the subject of an exclusive jurisdiction clause or an arbitration clause.

Harris J therefore found that, insofar as cross-claims are concerned, so long as the debtor can demonstrate that (1) there is a valid arbitration clause between parties; (2) the cross-claim fell within the scope of the arbitration clause; and (3) the cross-claim is genuine, serious and of substance, the petition ought to be stayed or dismissed. The only remaining way for the petitioner to press on with the petition was only if the debtor company's cross-claims were brought as an abuse of process (which was not the case in Shandong Chenming).

As things stand, therefore, the Court of First Instance does not seem to have taken a consistent approach to the effect of arbitration clauses in winding up petitions. (A decision of a judge of the Court of First Instance does not bind another judge of the Court of First Instance.) It is therefore hoped that the position will be clarified soon by an appellate court.

For more information, please contact Gareth Thomas, Partner, Rachael Shek, Partner, Jojo Fan, Partner, Peter Ng, Senior Associate, Jody Luk, Senior Associate, or your usual Herbert Smith Freehills contact.