Hong Kong Court clarifies the applicability of Re Guy Lam in Winding-Up Cases with Arbitration Clauses

In a significant development, the Hong Kong Court of First Instance provided clarity on the application of the landmark ruling of Re Guy Kwok Hung Lam [2023] HKCFA 9 in winding-up cases with arbitration clauses.

In Re Guy Lam (previously discussed here), the Court of Final Appeal held that a winding up petition should be dismissed where the underlying dispute over the petition debt is subject to an exclusive jurisdiction clause (EJC) unless there are strong causes for departing from an EJC, such as the risk of the debtor’s insolvency on other creditors or the debtor’s reliance on disputes that “borders on the frivolous or abuse of process”.

In the recent case of Simplicity & Vogue Retailing (HK) Co Ltd [2023] HKCFI 1443, the Court of First Instance considered the landmark ruling of Re Guy Lam handed down in May 2023 for the first time and explicated that Re Guy Lam only applies to EJC, not arbitration clauses.

For winding-up petitions concerning arbitration clauses, the principles laid out in the Court of Appeal Cases of But Ka Chon v. Interactive Brokers LLC [2019] HKCA 873 and Sit Kwong Lam v Petrolimex Singapore Pte. Ltd [2019] HKCA 1220 should be considered alongside the Lasmos approach.

 

The Case of Simplicity & Vogue Retailing (HK) Co Ltd

A winding up petition was brought against the Company which acted as the guarantor to discharge payment obligations under certain convertible bond instruments. The issuer failed to repay upon maturity. The Company sought leave to file an affirmation in opposition to the petition out of time, which was granted by the Court, contingent upon the Company paying the full amount of the debt into Court within 21 days (the Condition).

The Company subsequently sought a three-month time extension after failing to comply with the Condition. The time extension application was dismissed by the Court on the basis that the Company had failed to demonstrate its ability to raise sufficient funds to comply with the Condition. Consequently, the Court made a winding up order against the Company.

Grounds of Opposition considered by the Court

The following grounds of opposition raised by the Company were considered in Linda Chan J’s decision:

1. There was a bona fide dispute on substantial grounds in relation to the petition debt regarding whether the guarantee had been discharged pursuant to variations of the contract between the Petitioner and the issuer (Discharge Ground); and
2. The case should be referred to arbitration as an arbitration clause was incorporated in the bond instrument and the guarantee (Arbitration Ground).

In short, the Court found the Discharge Ground to be wholly without merit as it was expressly provided in the guarantee that despite variations, the principal contract would not be discharged.

With regards to the Arbitration Ground, the Petitioner relied on the approach adopted in Lasmos Limited v. Southwest Pacific Bauxite (HK) Limited (2018) HKCFI 246 (Lasmos) where it was held that a creditor’s winding-up petition should “generally be dismissed” if three requirements are met:

1. If a company disputes the debt relied on by the petitioner;
2. The contract under which the debt is alleged to arise from contains an arbitration clause that covers any dispute relating to the debt; and
3. The company takes the steps required under the arbitration clause to commence the contractually mandated dispute resolution process (which might include preliminary stages such as mediation) and files an affirmation in accordance with rule 32 of the Companies (Winding-Up) Rules, Cap 32H, demonstrating this.

In particular, the Petitioner argued that pursuant to the arbitration clause, the winding-up petition should not be stayed as the Company had failed to satisfy a requirement of the Lasmos approach, namely that it had not embarked on any action to commence arbitration.

The Company did not advance any arguments to contradict this point but contended that instead of Lasmos, the Re Guy Lam decision should be followed and as such, the petition should be dismissed.

The Court accepted the Petitioner’s submissions and dismissed the Arbitration Ground for the following reasons:

1. The Court distinguished the case from Re Guy Lam, noting that the latter was only applicable to EJCs and not arbitration clauses.
2. In winding-up petitions concerning arbitration clauses, the principles laid out in the prior cases of But Ka Chon and Sit Kwong Lam and the requirements in Lasmos should be considered.
3. The Court did not consider and interpret Re Guy Lam to establish a general rule that the Court must dismiss or stay the winding-up petition if the agreement giving rise to the petitioning debt contained an arbitration clause and the petition did not have supporting creditors.
4. There is no reason why the Court should adopt a mechanistic approach or fetter the exercise of its discretion to invariably refuse to consider the merit of the “defence” raised by the company and require the parties to litigate their dispute in arbitration once there is an arbitration clause. Where a substantive “defence” is raised, the Court should consider whether the “defence” is one that can be readily be shown to be wholly without merit. If the Court can reach that view without considering detailed arguments or disputed evidence, it could conclude that the “defence” “borders on the frivolous or abuse of process”, even if the Guy Lam approach is applicable. Where there is no genuine dispute to the petitioning debt, as was the case in Simplicity, there is no proper basis to require the parties to refer their disputes to arbitration.

 

Implications

The judgment clarifies that in the context of bankruptcy and winding-up petitions, the Court’s consideration of an EJC and an arbitration clause will be guided by different principles.

The decision also reaffirms the Lasmos approach but at the same time cautioned against its mechanical application and highlighted that the presence of an arbitration clause does not automatically constrain the Court’s discretion to consider the merits of the “defence”.

Whilst the “correctness” of the Lasmos approach remains to be considered in the higher courts, the Lasmos test is still required to be satisfied in petitioning debts involving arbitration clauses. However, the Lasmos approach should not be considered as a rigid rule that the Hong Kong Court would refuse all winding up petitions where there is an arbitration clause in the contract of the underlying dispute. The Court still retains a discretion to consider the merits of the substantive defence and wind up the company if it is clear that there is no genuine dispute.