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Pro-arbitration Attitude of the Hong Kong Courts
1 November 2018

Introduction

Hong Kong has long been an arbitration-friendly jurisdiction. 1 November 2018 marked the fifth anniversary of the 2013 HKIAC Administered Arbitration Rules and was also the day on which the new 2018 HKIAC Administered Arbitration Rules came into force. We take this time to examine some of the recent Hong Kong Court decisions in winding up cases where the petition was based on an alleged debt that comes within the terms of an arbitration clause in a contract and the debt was disputed.

The Cases
Lasmos Ltd v Southwest Pacific Bauxite (HK) Ltd

In October 2017, Lasmos issued a winding up petition against Southwest Pacific Bauxite on the basis of an unsatisfied statutory demand seeking payment of a debt arising from a management services contract. The contract contained an arbitration clause. Southwest Pacific Bauxite disputed the debt, opposed Lasmos’ petition and made an application to strike out the petition.

The CFI referred to recent relevant UK and Singapore authorities and reasoned that despite a winding up order is a class remedy, the essence of a creditor’s winding up petition is to recover payment of debts, thus the character of the exercise the court undertakes should not be different from that when faced with a claim in a writ action over a disputed debt. In other words, the determination of a winding up petition should also be subject to the normal consequences of the parties having agreed to arbitration. Besides, holding a creditor to his contractual bargain to arbitrate would not deprive it of the opportunity to access the insolvency regime. Accordingly, Harris J held that the court should generally dismiss a winding up petition if :-

(1) the company disputes the debt relied on by the petitioner;

(2) the contract under which the debt is alleged to arise 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 and files an affirmation in accordance with rule 32 of the Companies (Winding Up) Rules, Cap. 32H.

Arjowiggins HKK2 Ltd v Shandong Chenming Paper Holdings Ltd

The parties entered into a joint venture agreement in October 2005 which provided that any dispute arising out of or in connection with the agreement shall be resolved by arbitration in Hong Kong pursuant to HKIAC Arbitration Rules. Disputes arose and an arbitral award was granted in favour of Arjowiggins (the “Claimant”) on 20 November 2015.

The saga continued in July 2017 when Shandong Chenming (the “Respondent”) filed proceedings before the Intermediate People’s Court of Weifang City in the Shandong Province in China (“Weifang Court”) against the Claimant and its director, Mr Tong Chong, and the joint venture company (“2017 Proceedings”). The parties named were identical to the parties in earlier proceedings in 2013 also instituted by the Respondent before the Weifang Court. The earlier proceedings were withdrawn by the Respondent at the request of the Weifang Court judge in 2013.

The present case concerns an anti-suit injunction sought by the Claimant to restrain the Respondent from proceeding with the 2017 Proceedings. The Claimant submitted that the 2017 Proceedings were in breach of the parties’ arbitration agreement and the Respondent’s conduct was vexatious and oppressive since the claims have been decided by the arbitral tribunal and Hong Kong Court. The Respondent argued that the 2017 Proceedings were in fact tortious and derivative in nature since the remedy was sought on behalf of the joint venture company. The Respondent further argued that neither the joint venture company nor Tong were parties to the arbitration agreement and thus were not bound by it nor by the arbitral award.

The Court granted the Claimant’s anti-suit injunction, finding that since the claims in 2017 Proceedings were related to the joint venture agreement and the parties’ rights and obligations thereunder, the claims fell within the scope of the arbitration agreement and have already been determined by the arbitral tribunal. The Court emphasized that the Respondent also made the same claims against the director in the arbitration on the basis that the Claimant was vicariously liable for the director’s actions. Permitting the Respondent to continue with the 2017 Proceedings would discredit the findings made in the arbitral award. The Court also criticized that the Respondent “displayed complete disrespect for the arbitration agreement and the arbitral process”.

Hong Kong Sports Industrial Development Limited (formerly known as “LeTV Sports Culture Develop (Hong Kong) Co., Limited”)

The petitioners commenced arbitration proceedings against the debtor company (LeTV) in Singapore for recovery of debts, and simultaneously winding up proceedings against LeTV in Hong Kong. Harris J considered that LeTV failed to adduce any evidence to demonstrate a bona fide defence on substantial grounds to the petitioners’ claim on a specific sum and saw no justification for requiring the parallel arbitration to be completed before winding up LeTV.

This case may be distinguished from Lasmos Limited (supra) in that LeTV did not dispute the entire debt based on bona fide and substantial grounds. There was thus no fairness to be done in giving way to the ongoing arbitration.

Conclusion

The above cases show that the Court would respect parties’ autonomy in the choice of their dispute resolution mechanism and has little tolerance for parties who to observe arbitral awards, and would even restrain foreign court proceedings after the conclusion of arbitration in order to guard against attempts to re-litigate matters determined by the arbitral tribunal.

Of course, it should not be expected, that the Hong Kong Court would defer to arbitral proceedings, as for example, in the Hong Kong Sports Industrial Development Limited case if the debt or part of the debts are not disputed. Reading Harris J’s 2 decisions in conjunction shows that a bona fide defence on substantial grounds is necessary to ward off compulsory winding up.

The judgments indicate that the Hong Kong Court would go beyond the form of the proceedings to determine in substance whether the dispute is subject to arbitration. The above decisions are welcome reassurance that arbitration agreements and arbitral awards are recognized and respected, a party cannot get around the arbitration clause by presenting winding up petitions.

If you have any questions about the above eNews or legal queries generally, experienced lawyers in our Litigation and Dispute Resolution team will be happy to assist you.

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