What is the effect of Guy Lam on winding up petitions involving an arbitration clause? A third voice

Where a winding up petition is based on a debt arising from a contract with a non-Hong Kong exclusive jurisdiction clause, the court will tend to dismiss or stay the winding up petition in favour of the parties' agreed forum unless there are strong countervailing factors. The Court of Final Appeal confirmed this approach in its recent landmark decision in Re Guy Kwok Hung Lam [2023] HKCFA 9 ("Guy Lam”; which we discussed here). However, the Court of Final Appeal specifically left the question open for cases involving an arbitration clause.

Case law from lower courts since Guy Lam has not been consistent in approaching this open question. In Simplicity & Vogue Retailing (HK) Co., Limited [2023] HKCFI 1443 ("Simplicity”) where our firm successfully acted for the petitioning creditor, Linda Chan J took the view that the Guy Lam approach is limited to non-Hong Kong exclusive jurisdiction clauses, and therefore inapplicable where the underlying debt is subject to an arbitration clause (see our blogpost). In contrast, in Re Shandong Chenming Paper Holdings Limited [2023] HKCFI 2065 ("Shandong Chenming”), Harris J took the view that there was no difference in the applicable principles when the underlying dispute was subject to an arbitration clause (see our blogpost).

Recently, the Court (with Le Pichon J presiding) had yet another opportunity to formulate its approach in Sun Entertainment Culture Limited v Inversion Productions Limited [2023] HKCFI 2400. The factual background is a typical one: the parties entered into a loan agreement with an arbitration dispute resolution clause, and the debtor company failed to repay when the debt fell due. The creditor therefore petitioned to wind up the debtor company.

The debtor company opposed the winding up petition relying on two grounds. This blog post only focuses on the "Arbitration Ground”, where the debtor company argued that the Court should follow Shandong Chenming and refer the dispute to arbitration in accordance with the arbitration clause as set out in the loan agreement.

At the outset of the judgment, Le Pichon J recognised the different approaches in Simplicity and Shandong Chenming on the application of Guy Lam. However, she rejected the debtor company's reliance on the Arbitration Ground for the following reasons:

1. In the earlier part of the judgment, the Court found the debtor company's defence (by relying on an excessive interest argument under the Money Lenders Ordinance) was frivolous. Therefore, the debtor company failed to demonstrate that there was a bona fide or substantial dispute relating to the debt. There was accordingly no proper basis for staying or dismissing the winding up petition.

2. In any event, even if Shandong Chenming was followed (thereby extending the approach in Guy Lam to cases involving an arbitration clause), the frivolous nature of the debtor company's defence would be a recognised "countervailing factor” against staying or dismissing the petition.

3. Further, if the debtor company was not wound up, it would engage in the production of a movie which necessarily involved the debtor company employing staff and entering into different types of agreements, thereby incurring debts to various creditors. The Court could not rule out that a credit community might be put at risk. This again is a recognised "countervailing factor” under the Guy Lam approach.

In light of the above, the Court granted an immediate winding up order against the debtor company, notwithstanding its opposition and the existence of an arbitration clause in the underlying loan agreement.

Comments and conclusion

Even in winding up petitions involving an arbitration clause, it seems that the Court's latest approach is not to mechanically refer all such cases to arbitration without considering the merit of any defence raised by the debtor company.

A key determinant in all three cases we have written about (i.e. Simplicity, Shandong Chenming and the present case) is the nature of the debtor company's defence – is it frivolous / abuse of process, or is it genuine, serious and of substance? The defence was found to be frivolous in Simplicity and the present case. It follows that the outcome of these cases would likely have been the same even if the approach in Guy Lam had expressly applied. After all, the frivolous nature of the debtor company's defence would be a "countervailing factor” against staying or dismissing the winding up petition.

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