Hong Kong Court Refuses To Stay Shareholder’s Dispute To Arbitration

New HKIAC Administered Arbitration Rules further enhance efficiency of arbitrations

Phillip Rompotis reviews the Hong Kong High Court’s May 2019 decision in Dickson Holdings Enterprise Co. Ltd v Moravia CV and Others [2019] HKCFI 1424 (30 May 2019), where the Court dealt with an application by Moravia to have a winding up petition struck out on the grounds that Dickson (the petitioner) had no standing to present it, alternatively that further proceedings be stayed in favour of arbitration pursuant to an arbitration agreement in the shareholders agreement.

The dispute concerned a shareholder’s agreement, where shares were forfeited by Moravia resulting in a complaint by DHE against the forfeiture and relief from unfairly prejudicial conduct under the Companies Ordinance. The nature of DHE’s complaint was, first, a breach of the articles of association, in the form of failure to give notice of the proposed directors’ resolution and Moravia’s wrongful application of the forfeiture provisions to shares which had in fact been paid up and, second, the petition alleged an exercise of directors’ powers for wrongful purposes (and implicitly, therefore, in breach of fiduciary duties).

The shareholders agreement contained an arbitration agreement requiring any dispute, controversy or claim arising out of or relating to this Agreement, or the breach, termination or invalidity thereof, to be settled by arbitration pursuant to the HKIAC Rules.

The Court rejected the petitioners arguments in relation to having the petition struck out on the basis of an absence of standing, and then turned its attention to the stay to arbitration application. The Court set out some basic principles:

  • Stay of court proceedings in favour of arbitration is governed by s 20(1) of the Hong Kong Arbitration Ordinance, which gives effect to Article 8 of UNCITRAL Model Law.

In this case, the only issue was whether the dispute fell within the ambit of the arbitration agreement and, in determining that issue, the Court observed (by reference to Re Quiksilver Glorious Sun JV Ltd [2014] 4 HKLRD 759, §22, per Harris J), that the correct approach was to identify the substance of the dispute between the parties, and ask whether or not that dispute was covered by the arbitration agreement.

The Court observed that there was nothing preventing the substantive dispute in the petition proceedings from being determined by arbitration, such that even where certain relief sought by a party could only be granted by the court upon a petition, the petition proceedings could be stayed in favour of arbitration, with the stay being lifted, after the conclusion of the arbitration, for the court to make the appropriate orders in light of the arbitral findings (Re Quiksilver Glorious Sun JV Ltd, §23; Fulham Football Club (1987) Ltd v Richards [2012] Ch 333, at §§77, 88 and 92.)

In relation to the forfeiture of shares, the Court noted that from the affirmations filed thus far, the principal contentions revolved around questions of notice, payment, and purpose and, accordingly, the dispute did not appear on its face to have any direct connection with the Shareholders Agreement. The Court nonetheless went on to consider whether there was a dispute, controversy or claim arising out of or relating to the Shareholders Agreement, or the breach, termination or invalidity thereof, such that the dispute fell within the arbitration agreement and thus engage the stay provisions.

The Court considered Moravia’s arguments for a stay.

First, the arbitration clause was to be construed broadly, such that the parties are to be taken to intend that any dispute arising out of the same relationship is to be decided by the same tribunal. This was essentially a “one-stop-shop” argument, reliance for which was placed on the following well-known passages in Fiona Trust and Holding Corporation v Privalov [2007] UKHL 40 at §13 (per Lord Hoffman):

“In my opinion the construction of an arbitration clause should start from the assumption that the parties, as rational businessmen, are likely to have intended any dispute arising out of the relationship into which they have entered or purported to enter to be decided by the same tribunal. The clause should be construed in accordance with this presumption unless the language makes it clear that certain questions were intended to be excluded from the arbitrator’s jurisdiction.”

Longmore LJ (in the Court of Appeal in the same case: [2007] EWCA Civ 20 at §17)

“… For our part we consider that the time has now come for a line of some sort to be drawn and a fresh start made at any rate for cases arising in an international commercial context. Ordinary business men would be surprised at the nice distinctions drawn in the cases and the time taken up by argument in debating whether a particular case falls within one set of words or another very similar set of words. If business men go to the trouble of agreeing that their disputes be heard in the courts of a particular country or by a tribunal of their choice they do not expect (at any rate when they are making the contract in the first place) that time and expense will be taken in lengthy argument about the nature of particular causes of action and whether any particular cause of action comes within the meaning of the particular phrase they have chosen in their arbitration clause. If any business man did want to exclude disputes about the validity of a contract, it would be comparatively simple to say so.”

Second, the phrase “relating to” has a very wide meaning and includes disputes which “whilst not arising under the contract are related to or connected with it”: Yingde Gases Investment Ltd v Shihlien China Holding Co Ltd (unrep, HCA 2059/2012, 20 January 2014), at §38; El Nasharty v J Sainsbury plc [2004] 1 Lloyds Rep 309. These authorities were used to support the submission that since the Shareholders Agreement expressly governed the relationship between Moravia and DHE as shareholders of the Company, they concerned the management and affairs of the Company and as the Shareholders Agreement was expressed to be complementary to the articles, DHE’s complaints “arise out of” or “relate to” the Shareholders Agreement.

Third, it was sufficient to justify a stay for the respondents to show that there is a prima facie case that the dispute is covered by the arbitration agreement: Chee Cheung Hing Co Ltd v Zhong Rong International (Group) Ltd (unrep, HCA 1454/2015, 9 March 2016).

The Court noted that even bearing in mind the principles favouring a broad construction, Moravia’s argument was tantamount to saying that any dispute between the parties to the Shareholders Agreement about the affairs of the Company fell within the arbitration clause.

For the following reasons, the Court rejected Moravia’s submissions.

  • First, while the Shareholders Agreement was expressed to have been entered into for the purpose of governing the parties’ relationship as shareholders in the Company and for managing the affairs of the Company, only limited reference was made to the affairs of the Company.
  • Second, the presumption of one-stop adjudication must be approached having regard to the special features of company law, stating (at §40):

“Once the parties became shareholders in the Company, they did not only enter into a contractual relationship arising from and governed by the Shareholders Agreement, but also a relationship governed by the company law of Hong Kong as well as the articles of the Company arising simply from the fact that they were shareholders in the Company. There are various rights and obligations associated with membership of a company that exist independently of any shareholders’ agreement. There can be various types of disputes between shareholders on questions on which their shareholders’ agreement, as such, makes no provision at all.”

Since the complaint was based on a breach of the articles and of the fiduciary duty of directors and the Shareholders Agreement made no provision concerning notice of board meetings, payment for shares or forfeiture of shares, the proprietary rights of a member to its shares in the Company was not the subject matter of the Shareholders Agreement, but rather the complaint was governed by ordinary company law.

The Court noted that if the parties had intended otherwise, they could have easily devised an arbitration clause that expressly applied to any dispute between them relating to any affairs of the Company. The Court noted an example of a provision inserted into the articles of a company, requiring any difference relating to “any of the affairs” of the company to be referred to arbitration: Newmark Capital Corporation Ltd & Others v Coffee Partners Ltd & Another [2007] 1 HKLRD 718, §13.

The Court therefore concluded that the dispute could not be said to have arisen out of or to relate to the Shareholders Agreement or its breach, termination or invalidity, noting that this conclusion was consistent with and supported by persuasive authorities from other jurisdictions including: ACD Tridon Inc v Tridon Australia Pty Ltd [2002] NSWSC 896 – where the Court held that the issue of improper purpose did not touch and concern the rights and liabilities of the parties under the shareholders’ agreement because it was essentially a question about the discharge by the directors of their equitable duties to the company which did not fall within the arbitration clause; and the Singapore High Court’s decision in BTY v BUA [2018] SGHC 213, where the Court refused to stay the matter to arbitration, holding that the “matter” in litigation did not arise either out of or in connection with the shareholders’ agreement, but concerned the articles which created a separate legal relationship between the parties operating on a separate legal plane.

Accordingly, as Moravia had not shown, even on a prima facie basis that the matter or substance of the dispute fell within the ambit of the arbitration clause, the Court refused to strike out the petition.

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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