Arbitration
Conflicting Decisions on Arbitrable Claims in Hong Kong
Re Shandong Chenming Paper Holdings Ltd, HCCW 175/2017, [2023] HKCFI 2065
Before Hon Harris J in Chambers
Date of Decision: 10 August 2023
Fact
Shandong Chenming Paper Holdings Limited (“Company”) filed a summons on 25 October 2022 to dismiss or adjourn a petition by Arjowiggins HKK 2 Limited (“Petitioner”) filed on 15 June 2017. The petition sought to wind up the Company based on alleged insolvency from non-payment of an arbitration award. After the Court of Final Appeal dismissed the Company’s appeal on 14 June 2022, the petition was re-listed.
On 20 June 2022, the Company initiated a second arbitration against the Petitioner, raising claims under the same agreement as the arbitration award in the petition. The hearing for the second arbitration is scheduled for May 2024.
During the 19 April 2023 hearing, the Company argued that a cross-claim in the second arbitration exceeded the debt established by the first arbitration award. The Company contended that the cross-claim should be resolved in the second arbitration, eliminating the need for a bona fide defense on substantial grounds. The hearing was adjourned until the Court of Final Appeal’s judgment in the Guy Lam appeal on 2 March 2023, expected to impact the Company’s main ground of opposition.
Ruling
In the decisions of Re Guy Lam, the Court of Appeal ([2022] 4 HKLRD 793), and the Court of Final Appeal ([2023] HKCFA 9), it ruled that the Court would generally dismiss or stay a bankruptcy/winding-up petition where the underlying dispute of the petition debt was subject to an exclusive jurisdiction clause (“EJC”), without requiring a bona fide dispute on the merits. In Re Shandong Chenming Paper Holdings Ltd [2023] HKCFI 2065, the court examined whether the same approach applied when the debtor raised an arbitrable cross-claim exceeding the petitioning debt.
The court’s attention was drawn to a decision by Madame Linda Chan in Simplicity & Vogue Retailing (HK) Co., Limited [2023] HKCFI 1443, dated 30 May 2023, which raised the question of whether the Guy Lam ratio applied to arbitration clauses. In that case, Chan J found that the Guy Lam’s approach only applied to EJC and not arbitration clauses.
Chan J referred to the principles stated in the Court of Appeal’s judgments in But Ka Chon and Sit Kwong Lam v Petrolimex Singapore Pte Ltd [2019] 5 HKLRD 646, [33]-[39], and emphasized that the court should consider the requirements in Lasmos when deciding whether to dismiss or stay a petition where the parties have agreed to an arbitration clause.
In [94] of Guy Lam, French NPJ, concurring with the majority in the CA, held that the “Established Approach” requiring a debtor to demonstrate a bona fide defence on substantial grounds is not applicable when an Exclusive Jurisdiction Clause (EJC) or an arbitration clause is involved. Absent exceptional circumstances such as the risk of insolvency affecting third parties and a dispute that borders on the frivolous or abuse of process, both parties should be bound by their contractual obligations. The court would also assert that the same principle applies in ordinary cases involving an arbitration clause.
By reference to Re Sinom (Hong Kong) Ltd [2009] 5 HKLRD 487 and French on Applications to Wind-up Companies, the court held that the Guy Lam’s approach did apply to arbitrable cross-claims. It was determined that there was no distinction between a claim and a cross-claim when considering a defence to a winding-up petition, and the higher courts in Guy Lam treated claims and cross-claims alike.
In addition to the domestic case law, the court also considered the decision of the Singapore Court of Appeal in AnAn Group (Singapore) Pte Ltd v VTB Bank (Public Joint Stock Co [2020] SGCA 33; [2020] 1 SLR 1158. The Singapore court concluded that when faced with either a disputed debt or a cross-claim subject to an arbitration agreement, the prima facie standard should apply.
This means that winding-up proceedings will be stayed or dismissed if (a) there is a valid arbitration agreement between the parties, and (b) the dispute falls within the scope of the arbitration agreement, provided that the dispute is not being raised by the debtor in abuse of the court’s process. The court in AnAn emphasized that there is no basis for applying a different standard of review to cross-claims compared to disputed claims, and the tests for both situations must mirror each other.
The Petitioner argued that AnAn is wrong and that the conclusion was unreasoned dicta. However, the court noted that the decision in AnAn was clearly reasoned, as demonstrated by specific portions of the judgment, and it was consistent with established principles. The court found that the approach in AnAn further supported the application of the Guy Lam’s approach to arbitrable cross-claims.
Based on the above principles, and the application of the Guy Lam’s approach to cross-claims, the court stayed the winding-up petition given the long and torrid history of this matter and ordered the petitioner to pay the company’s costs for their summons.
Comments
1. Unlike Madame Linda Chan’s ruling in Simplicity & Vogue Retailing (HK) Co., Limited that the Guy Lam’s approach only applied to exclusive jurisdiction clauses (“EJC”) and not arbitration clauses, the court establishes a conflicting judgment that the same approach should be taken to both exclusive jurisdiction clauses and arbitration clauses. The court takes one step further to rule that Guy Lam also applies to arbitrable cross claims.
2. This correlates to our Issue 49 of Wisdom newsletter which provides the courts will likely stay/dismiss winding-up and bankruptcy petitions should an arbitration clause be present.
3. We consider Re Shandong Chenming Paper Holdings Ltd to be a more proper interpretation of Guy Lam. Given the conflicting views of Re Shandong Chenming Paper Holdings Ltd and Simplicity & Vogue Retailing (HK) Co., Limited, we await the CA or the CFA to clarify their preferred view.
4. The court does not provide a ruling as to whether Guy Lam’s approach is only applicable to cross-claim in the same transaction. Different from Linda Chan J’s ruling in Re Silver Base International Development Co Ltd [2022] HKCU 2768, it is our view that Guy Lam’s approach should also apply where a company has a genuine and serious cross-claim under a different contract against the petitioner greater than or equal to the petitioner’s debt.