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In Lasmos Limited v Southwest Pacific Bauxite (HK) Limited [2018] HKCFI 426, [2018] HKCU 702 the petitioner issued a winding-up petition against the respondent, alleging their failure to pay a service fee under a management services agreement between the parties dated 24 July 2013. The agreement contains an arbitration clause referring the parties to an arbitration in the event of a dispute if mediation has failed.
The legal issue before the Hong Kong Court of First Instance (HKCFI) involves the relevance of an arbitration clause in the context of a winding-up petition. If an arbitration clause is drafted into an agreement, the previous position in Hong Kong entailed that courts could only dismiss a petition if the debtor disputing the petition establishes a bona fide dispute on substantial grounds.
After comparing the established principle and recent authorities from the UK and Singapore, the HKCFI held that a winding-up petition issued on the ground of insolvency should generally be dismissed if there is an arbitration clause contained in an agreement giving rise to a debt relied on to support the petition.
HKCFI held that a winding-up petition should be dismissed if:
- A company disputes the debt relied on by the petitioner;
- The contract under which the debt is alleged to arise contains an arbitration clause that covers any dispute relating to the debt; and
- 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)
In essence, the presence of an arbitration clause in a contractual document is sufficient grounds in general for a winding-up petition to be dismissed and is a lower threshold to dismiss a winding-up petition than before. With this judgment, the court confirms its pro-arbitration stance and brings Hong Kong in line with authorities in England and Singapore. HKCFI reasoned that by dismissing the winding-up petition in favour of the arbitration clause, the court is simply holding the creditor to his contractual bargain to resolve disputes through arbitration. Furthermore, HKCFI pointed out that this verdict will not deprive creditors of the opportunity to access the insolvency regime immediately if the circumstances justify it.
For more information on the topic of winding-up and liquidation, please see:
The Hong Kong Corporate Insolvency Manual - Fourth Edition
Halsbury’s Laws of Hong Kong on Companies and Corporations
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