Application of Re Guy Lam Re-examined in the Context of Winding-up Cases with Arbitration Clause

Earlier last year, we discussed the Hong Kong Court of First Instance decision in Simplicity & Vogue Retailing (HK) Co., Limited (2023) HKCFI 1443, which held that the ratio in Re Guy Kwok Hung Lam (2023) HKCFA 9 (Re Guy Lam) applies only in winding-up cases with exclusive jurisdiction clauses (EJC), but not arbitration clauses (previously discussed here). In the context of winding-up petition where the underlying contract contains an arbitration clause, the court should be guided by different principles, including those set out in Lasmos Limited v. Southwest Pacific Bauxite (HK) Limited (2018) HKCFI 246 (Lasmos).

However, in a recent turn of events, the Court of Appeal confirms that the principles laid down in Re Guy Lam also apply to winding-up cases involving arbitration clauses.

 

Factual Background

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

The appellant subsequently sought a three-month time extension after failing to comply with the Condition. The time extension application was dismissed by the Court of First Instance on the basis that the appellant had failed to demonstrate its ability to raise sufficient funds to comply with the Condition.

As its grounds of opposition in the affirmation in opposition, the appellant raised the following:

• there is a bona fide dispute as to whether the underlying guarantee has been discharged by reason of a variation of the principal contract (Discharge Ground); and
• there are arbitration clauses in the underlying contracts and hence should be referred to arbitration (Arbitration Ground).

The Court of First Instance 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 regard to the Arbitration Ground, the Court of First Instance accepted that the Lasmos approach instead of the Re Guy Lam approach should be followed and found that the requirements under the Lasmos approach were not satisfied. Consequently, the Court of First Instance made a winding-up order against the appellant.

 

Grounds of Appeal

The appellant’s main ground of appeal was premised on the Arbitration Ground, where it argued that the judge erred in failing to recognize that the reasoning in Re Guy Lam is in principle broad enough to apply by analogy to scenario where the parties had previously agreed to resolve any dispute by arbitration. To resolve the disputes between the petitioner and the appellant summarily, the judge went against the principles set out in Re Guy Lam, which stressed the importance of party autonomy and holding parties to their agreements.

 

Court of Appeal Decision

The Court of Appeal noted that the crux of Re Guy Lam is the Court’s discretion to decline jurisdiction in an insolvency petition where the underlying dispute about the petition debt is the subject of an agreed dispute resolution mechanism. The only difference is that Re Guy Lam was concerned with an EJC, whereas the present case is concerned with an arbitration clause.

Adopting the reasoning of the Court of Final Appeal in Re Guy Lam, the Court of Appeal held that:

• under the statutory framework protective of arbitration, there is an even stronger case for upholding the parties’ contractual bargain that disputes falling within the scope of an arbitration clause should be resolved by arbitration;
• the significance of the public policy of the legislative scheme for the Court’s insolvency jurisdiction may be diminished where there is no supporting creditor and no evidence of a creditor community at risk;
• the approach of the Court in exercising its discretion to decline jurisdiction is “ multi-factorial”, and the Court may have regard to “the risk of insolvency affecting third parties and a dispute that borders on the frivolous or abuse of process” as instances of “countervailing factors” in exercising its discretion, in which case the Court could retain flexibility to deal with a case as the circumstances require; and
• the Court would expect there is a genuine intention to arbitrate such that a debtor is deterred from merely raising an arbitration clause as a tactical move.

Taking into account the lines of authorities, the Court of Appeal confirms that the Re Guy Lam approach is applicable to dispute over a petition debt subject to an arbitration clause. That said, in light of the evidence before the Court, the Court of Appeal found that there was insufficient evidence to indicate that the petition debt was disputed and that the dispute would be referred to arbitration.

Even if the Court of Appeal accepts that the appellant has taken steps to initiate an arbitration and hence shown its intention to arbitrate, the appellant’s defence is “wholly without merit” and “borders on the frivolous or abuse of process”. Applying the principles in Re Guy Lam by analogy, there is sufficient countervailing factor which militates against the exercise of the Court’s discretion to decline jurisdiction in the winding-up petition. The appeal was accordingly dismissed.

 

Key Takeaway

There have been longstanding discussions over the jurisdiction of the Court in the event of a winding-up petition arising from a contract which contains an arbitration agreement. Adopting Re Guy Lam, the Court of Appeal has now aligned its approach in dealing with disputes over petition debt subject to EJC or arbitration clause and offered much needed clarity in this area of law.

Bearing in mind the pro-arbitration public policy in Hong Kong, the Court of Appeal emphasized that it will not automatically decline jurisdiction in light of an arbitration clause, but to examine the facts of the case holistically, taking into account multiple factors.

While it is important that commercial parties have put in place a desirable dispute resolution mechanism in the contract, it is equally important for them to take actions to initiate such mechanism.

At the end of the day, commercial parties should be reminded that they could not simply invoke an arbitration clause with an aim to dodge the Court’s jurisdiction whenever they please, as an unmeritorious defence would not save them from being denied an application to dismiss the winding-up petition in favour of arbitration.