Reshaping the Guy Lam principle? The implication of the English Privy Council decision on Hong Kong's approach to the effect of contractual dispute resolution clauses on winding up proceedings

In a recent landmark decision Sian Participation Corporation (In Liquidation) v Halimeda International Ltd [2024] UKPC 16 (Sian, see our blog post here), the Privy Council held that where winding up proceedings involve a contract containing an arbitration agreement between the parties, the correct test for a Court exercising its discretion to determine whether the company should be wound up is whether the debt is disputed on genuine and substantial grounds. The ruling overturned the previous position established in Salford Estates (No 2) Ltd v Altomart Ltd (No 2) [2014] EWCA Civ 1575, which held that a winding up petition would likely be dismissed or stayed in favour of an arbitration pursuant to the contractual arbitration clause if the debt relied on by the petitioner was not admitted by the company.

The Privy Council decision now diverges from the Hong Kong position established not long ago in the Court of Final Appeal decision in Re Guy Kwok Hung Lam [2023] HKCFA 9 (Guy Lam, about which we blogged here) and the Court of Appeal decision in Simplicity & Vogue Retailing (HK) Co., Limited [2024] HKCA 299 (Re Simplicity, about which we blogged here).

• Pursuant to the Hong Kong approach, 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 coming to its conclusion, the Privy Council in Sian departed from the reasoning of the Hong Kong Courts in Re Guy Lam and Re Simplicity. In particular, the Privy Council disagreed that the presentation of a winding up petition is a claim seeking the determination by the Courts of a dispute about the debt (which is simply not something which the creditor has agreed to in a typical arbitration agreement). As such, the Privy Council held that the Court’s discretion to wind up a company in insolvency proceedings should not be fettered by policy considerations that would come into play where the parties agree to submit a dispute to arbitration, including respecting party autonomy and the principle that contractual agreements should be enforced. The Privy Council specifically acknowledged that to require the creditor to go through an arbitration as the prelude to seeking a liquidation where there is no genuine or substantial dispute as to the debt "just adds delay, trouble and expense for no good purpose."

Comment

In reality, although the English (and BVI) law now depart from Hong Kong law, which continues to adopt the approach of the Hong Kong Court of Final Appeal in Re Guy Lam, the concern about misusing arbitration to delay winding up proceedings is nevertheless shared by the Hong Kong Courts.

It is clear that under both Hong Kong and English law as it currently stands, a debtor seeking to challenge a winding up petition on the basis of an arbitration or exclusive jurisdiction clause would be prevented from using such clauses solely as a delaying tactic to obstruct or impede winding up proceedings. Such a tactic would either fail the "genuine and substantial grounds" test under the English position, or, under the Hong Kong position, be considered as a "countervailing factor" (i.e. a dispute bordering on the frivolous or an abuse of process) militating against the Court’s exercise of discretion to decline jurisdiction and hold the parties to their forum agreement.

It remains to be seen though whether the Hong Kong Courts will reconsider the approach and adopt the Sian test going forward.

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