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AN ARBITRATION AGREEMENT IS NOT AN UNBREAKABLE SHIELD IN WINDING-UP PROCEEDINGS
Dayang (HK) Marine Shipping Co., Ltd v. Asia Master Logistics Ltd, HCCW 14/2019,  HKCFI 311, Deputy High Court Judge William Wong SC in Court, 12 March 2020.
A winding-up order has long been recognized as a draconian remedy. Many creditor-petitioners believe that presenting a winding-up petition is the most efficacious method of obtaining payment. However, it is not uncommon for a contract under which the debt is alleged to arise contains an arbitration clause which requires the dispute to be resolved by arbitration. In Re Southwest Pacific Bauxite (HK) Ltd  2 HKLRD 449 (“Lasmos”), Harris J held that in such circumstances, if the company disputes the debt and takes the steps required under the arbitration clause to commence the contractually mandated dispute resolution process, the winding-up petition should generally be stayed.
Despite these difficulties, we successfully acted for the Petitioner, the disponent owner of a vessel under a charterparty containing an arbitration clause, in obtaining a winding-up order against the charterer, the Respondent in this case.
The Petitioner, Dayang (HK) Marine Shipping Co., Limited, and the Respondent, Asia Master Logistics Limited, entered into a TCT charterparty whereby the Petitioner chartered its vessel, MV “Aoli 5” (the “Vessel”) to the Respondent. The amount of hire to be paid by the Respondent to the Petitioner is US$321,377.30 (the “Debt”). The Respondent did not deny that the Debt was due and owing, but it raised a counterclaim against the Petitioner in relation to an alleged breach of the fixture note. In particular, the Respondent alleged that during the unloading process, some bags of rice fell off. However, the captain of the Vessel was uncooperative and refused to follow the Respondent’s instructions in handling the cargo.
The Respondent further alleged that the Petitioner’s refusal to change the captain upon the Respondent’s request was in breach of the Petitioner’s duties under the fixture note, and the Petitioner should bear some responsibility for the losses it suffered by reason of the delay. It was submitted by the Respondent that the dispute should be dealt with by way of arbitration, pursuant to an arbitration clause contained in the fixture note.
The Learned Judge made a finding that the Debt was not disputed by the Respondent in good faith and on substantial grounds. Firstly, the Learned Judge was of the view that there was prima facie no dispute to the Debt. The Respondent had given no particulars as to the duration of the alleged delay and the extent of loss it suffered by reason of the alleged breach of the fixture note on the Petitioner’s part. Secondly, the Court considered that the Respondent’s counterclaim appeared to consist of bare allegations without any concrete evidence to substantiate its claims.
In respect of the arbitration clause, the Court was of the view that up to the date of the hearing, the Respondent had not commenced any arbitration proceedings. The Learned Judge accepted that the Respondent, who merely sent a draft request form (Form 1) to the Petitioner’s solicitors and requested to see if the Petitioner would be willing to attempt arbitration, had no genuine intention to arbitrate and agreed that the draft Form 1 was not properly served on the Petitioner as the Petitioner’s solicitors were not duly authorized to accept service. In the circumstances, the Court rejected the Respondent’s submissions that the Petition should be dismissed because of the existence of the arbitration clause.
For the sake of completeness had the Respondent properly commenced arbitration proceedings, the Learned Judge considered that without express limitations, the scope of the arbitration clause did not preclude the Petitioner’s right to commence winding up proceedings against the Respondent. Having considered all the relevant authorities in Hong Kong, Singapore and the UK, the Court clarified by way of obiter the present state of the law to be, inter alia, that whether or not the debt had arisen from a contract incorporating an arbitration clause, a debtor-company which intends to dispute the existence of a debt must still show there is a bona fide dispute of a debt on substantial grounds before the Court could exercise its discretion to stay or dismiss the winding-up proceedings.
The fact that arbitration proceedings have commenced or would be commenced may be relevant evidence that there is a bona fide dispute, but this alone would not be sufficient to prove the existence of a bona fide dispute on substantial grounds.
The Learned Judge further considered that the winding-up proceedings do not have the effect of resolving the disputes. It is the liquidator who finally resolves disputes over the debt (subject to the possibility of appeal). Accordingly, the presentation of a winding-up order per se does not amount to a breach of the parties’ contractual obligation to resolve disputes by way of arbitration. It follows that commencing winding-up proceedings is not against the policy behind the Arbitration Ordinance and the object of that Ordinance.
The above ruling comes as a piece of good news to all creditor-petitioners who have hesitation to present a winding-up petition when there is an arbitration clause in the contract. The debtor-company must still show that there is a bona fide dispute over the debt on substantial grounds. However, creditors-petitioners are also warned about the adverse costs consequence of abusing the winding-up process. The Court has made it clear that if a creditor-petitioner knows that the debt is disputed in good faith and on substantial grounds, the creditor-petitioner may be liable to pay the debtor-company’s costs on an indemnity basis and it may also be at risk of liability under the tort of malicious prosecution.
To the debtor-companies who are in fear that the winding-up process may be abused by some creditors, they should make sure the arbitration clause in the contract is carefully drafted such that it contains express limitations on the creditor-petitioner’ rights to wind-up. The Court, however, alerted that agreements excluding the right to present a winding-up petition may potentially be unenforceable as a matter of public policy. That is a risk that a debtor-company would have to assume if it wishes to obtain better bargain when a dispute over the debt arises.
Overall, the present Judgment is welcome. The obiter resolves the inflexibility of the Lasmos principle and preserves the Court’s hitherto flexible discretion to make a winding-up order. The Court is not required to dismiss or stay a winding-up petition as long as the threefold conditions in Lasmos have been satisfied. That will ensure the creditor-petitioner will not be deprived of all tangible remedies if the assets of the debtor-company have been dissipated by the time the action for debt has been completed by arbitration. This is particularly useful in shipping disputes.