Hong Kong Court of First Instance follows the Guy Lam approach notwithstanding the recent English Privy Council's decision in Sian Participation

We recently blogged (here) about the Privy Council decision of Sian Participation Corporation (In Liquidation) v Halimeda International Ltd [2024] UKPC 16 (Sian) and the departure of the English law position from the Hong Kong law position in respect of the interplay between arbitration and insolvency law.

Following Sian, the first case has arisen for the Hong Kong Courts to consider its approach where a winding-up petition is presented on a debt subject to an arbitration agreement. In Re Mega Gold and Re Man Chun Sing Matthew (heard together in [2024] HKCFI 2286) (Mega Gold), the Court of First Instance (CFI) held that it would follow the Hong Kong approach as established in the Court of Final Appeal decision in Re Guy Kwok Hung Lam [2023] HKCFA 9 (Guy Lam) and the Court of Appeal decision in Simplicity & Vogue Retailing (HK) Co., Limited [2024] HKCA 299 (Re Simplicity) as a matter of stare decisis.

To recap, the Hong Kong approach as established in Guy Lam (which we blogged here) and Re Simplicity (which we blogged here) is that if the contract under which the debt allegedly arises is subject to an arbitration or exclusive jurisdiction clause, the Court has a discretion to determine whether to exercise or decline its jurisdiction over the disputed debt based on a multi-factorial approach. Absent any countervailing factors, such as where the dispute borders on the frivolous or an abuse of process, the parties' agreement will generally be respected and upheld by the Hong Kong Courts.

In contrast, the Privy Council in Sian held that a winding-up petition would not be stayed or dismissed where the underlying debt is subject to an arbitration agreement, unless the debt is genuinely disputed on substantial grounds.

Background

Two petitions were heard together in Mega Gold, namely a winding-up petition against Mega Gold Holdings Limited (the Company), and a bankruptcy petition against the founder and CEO of the Company (Debtor).

Both petitions concerned alleged debt arising out of a put option and redemption right given to the Petitioner by the Company under certain agreements. Pursuant to those agreements, the Debtor agreed to guarantee the performance of the Company's obligations. All of the relevant agreements contained an arbitration agreement. The petitions were presented after the Company and the Debtor failed to make payment regarding the alleged debts in accordance with statutory demands served on them.

The Company and the Debtor asked the Court to stay the petitions in favour of arbitration based on the following grounds:

• The Company and the Debtor disputed the alleged debt on the basis that the petitioner had waived and/or was estopped from exercising the put option and redemption right, based on certain alleged representations by the petitioner and shared assumptions reached amongst the parties. Further, the Company did not have "legally available funds for distribution", as set out under the agreements;

• Each of the agreements contained an arbitration clause covering the dispute on the alleged debt;

• The Company and the Debtor had commenced arbitration; and

• Applying Guy Lam and Re Simplicity, there were no countervailing factors against the enforcement of the arbitration clauses, i.e. there was no evidence that third party interests would be prejudiced if the dispute underwent arbitration, and the Company and Debtor had already drew the petitioner's attention to the arbitration clauses in earlier correspondence.

On the other hand, the petitioner contended that:

• Despite filing a Notice of Arbitration (Notice), the Company and the Debtor lacked genuine intention to arbitrate as the Notice was filed months after it had become aware of the petitioner's claims; and

• The grounds of opposition bordered on the frivolous or abuse of process such that the petitioner ought to be entitled to exercise its statutory right to seek winding-up and bankruptcy orders.

There was no dispute between the parties on the relevant applicable legal principles, and the core issue related to the application of such principles, namely, whether the disputes raised by the Company and the Debtor "border on the frivolous or abuse of process".

Discussion

First, the CFI addressed the Privy Council's decision in Sian, and held that it would follow the Hong Kong approach as established in Guy Lam and Re Simplicity as a matter of stare decisis.

Secondly, the CFI noted that the threshold to establish instances which are “frivolous” or amount to an “abuse of process” is a rather high one and always fact-specific. This usually requires one to show that the claim or defence is bound to fail and hence does not warrant a chance to be further investigated at trial. In conducting such assessment and unless a plain and obvious case is shown, the Court should be more ready to decline to exercise its insolvency jurisdiction to determine the dispute, leaving it to be resolved by the agreed arbitration mechanism and with regard to the public policy in holding the parties to their agreement.

Applying these principles, and upon a preliminary examination of the evidence put forward by the parties, the Court held that this was not a case where there was a complete absence of corroborating written records or documentary evidence, and that there were factual disputes necessitating a careful examination of all relevant oral and documentary evidence. In the least, the Court held that this was not a "plain and obvious case" that the factual account provided by the Company and the Debtor was hopelessly unbelievable and/or bound to fail. Therefore, the Court was not satisfied that the dispute on waiver/estoppel borders on the frivolous and/or amounts to an abuse of process.

The Court also disagreed that the "no adequate legally available funds" defence was frivolous or bordered on an abuse of process as there were outstanding factual questions to be answered.

Further, the Court did not consider the delay by the Company and Debtor in filing the Notice to be so serious to negate a genuine intention to arbitrate.

Comment

This case makes it clear that the test in Sian, and the approach established in Guy Lam and Re Simplicity is different. The parties can expect that the threshold for finding a dispute to be bordering on the frivolous or an abuse of process to be higher than finding a bona fide dispute on substantial grounds.

It would appear that the Hong Kong Court will be slow to find a defence to be an abuse of process or borders on the frivolous where there are outstanding factual questions, at least some written records or other evidence supporting a debtor's defence, and an arbitration has already been commenced.

For more information, please contact Jojo Fan, Manging Partner, Gareth Thomas, Partner, Rachael Shek, Partner, Jody Luk, Senior Associate, Trevor Ho, Senior Associate, Siqi Huang, Associate, or your usual Herbert Smith Freehills contact.