Arbitration And Winding Up – Lasmos & But Ka Chon Considered by HK Court

The interplay between insolvency proceedings and arbitration has attracted judicial attention over the past couple of years, particularly since the decision in the Lasmos case. It was considered again in the recent High Court decision in In The Matter of Golden Oasis Health Limited [2019] HKCFI 2173.

First, a brief recap.

In Re Southwest Pacific Bauxite (HK) Ltd [2018] HKCFI 426 (the Lasmos case), the HK High Court, departing from previous authority, held that a winding-up petition would generally 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 the 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 r.32 of the Companies (Winding-Up) Rules, Cap 32H, demonstrating this.

See here for a review of the Lasmos case.

In But Ka Chon v Interactive Brokers LLC [2019] HKCA 873, the HK Court of Appeal, obiter, questioned whether the discretion under the insolvency legislation should be exercised only one way since a statutory right is conferred on a creditor to petition for bankruptcy or winding up on the ground of insolvency, and it would be contrary to public policy to preclude or fetter the exercise of this statutory right. Hence, while the Lasmos approach may not be regarded as totally precluding a creditor from invoking the insolvency jurisdiction of the court, it is a substantial curtailment of his statutory right and there was no evidence to indicate any legislative intent to change the insolvency legislation when the Arbitration Ordinance was enacted.

See the review of the But Ka Chon case.

In Golden Oasis, the petitioner (Gold Swing Enterprises – GSE) issued a winding up petition against Golden Oasis; New Health Elite International Ltd (NHE), who together with GSE were parties to a shareholders agreement (which contained an arbitration clause), opposed the petition and relied on the arbitration agreement in the shareholders agreement to seek stay of the petition. NHE relied heavily on the Lasmos case and the Court considered both the Lasmos case and But Ka Chon.

The Court noted the reservations expressed by the CA in But Ka Chon, stating [22]:

“The obiter dicta of the CA concerned, firstly, the jurisdiction of the court to order a stay in that it is founded on the discretion of the court, and therefore it is questionable whether a firm rule in favour of a stay would be right (see §§58-67 of the judgment). Secondly, the CA expressed reservation whether the applicant for a stay should demonstrate that the petitioning debt is bona fide disputed on substantial grounds or, as suggested by the Lasmos, it is sufficient to show that the debt is not admitted (§§68- 73).”

In the circumstances of the case, the Court found that the second and third requirements in Lasmos had not been satisfied since the relevant contracts in dispute (a deed and possibly a sale and purchase agreement) did not contain an arbitration clause; on the contrary, both contained a jurisdiction clause conferring jurisdiction on the Hong Kong courts. In addition, the court also found that the dispute relating to the debt did not fall within the scope of the arbitration clause. Accordingly, the Court found it unnecessary to extensively review the CA’s reservations of Lasmos in But Ka Chon.

That said, the Court stated the following in respect of the third requirement [40-43]:

“The 3rd Requirement under the Lasmos had received the support of the CA in But Ke Chon where it was held at §53 that: “[i]t would make no sense to dismiss or stay an insolvency petition on the mere existence of an arbitration agreement when the debtor has no genuine intention to arbitrate”.

“In this case, no arbitral proceedings have been commenced by either the Company or NHE pursuant to the Arbitration Clause. This is notwithstanding the fact that GSE’s Statutory Demand against the Company was issued on 18 April 2018, the Petition was issued on 24 August 2018 and the Summons was issued on 12 February 2019. It is therefore very difficult to see any genuine intention to arbitrate on either the part of the Company or NHE.”

“…[It was] submitted that the failure to take any step to commence the arbitration could be explained as a matter of practicality in that any such step might not be taken very far due to the dispute over the relevance of the Arbitration Clause. I am unable to accept this submission the effect of which would be to render Requirement (3) redundant. For my part, I agree with respect the view expressed in But Ka Chon cited above.”

In the circumstances, the Court dismissed the summons seeking a stay to arbitration as there was no relevant arbitration clause to support it; on the contrary, the Court clearly had jurisdiction.

See also Harneys report on the China CVS case, where the Court stayed a winding up petition in favour of an arbitration clause.

About Phillip Rompotis

Phillip practices as a barrister and arbitrator in Hong Kong. He has over 25 years’ litigation and arbitration experience in commercial disputes relating to construction & engineering, financial services, joint venture & shareholders agreements, technology, trusts, property and landlord & tenant. He is a Fellow of the Chartered Institute of Arbitrators, the Singapore Institute of Arbitrators, the Malaysian Institute of Arbitrators, and a member of various lists/panels of arbitrators.

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