In our previous post, we considered the interplay between insolvency proceedings and arbitration. That post considered Re Southwest Pacific Bauxite (HK) Ltd  HKCFI 426 (the Lasmos case), But Ka Chon v Interactive Brokers LLC  HKCA 873, and In The Matter of Golden Oasis Health Limited  HKCFI 2173.
In Sit Kwong Lam v Petrolimex Singapore Pte Ltd  HKCA 1220, the Debtor appealed against a bankruptcy order made in April 2019, the petition for which was presented by Petrolimex in respect of a debt of over USD$30m. The issues raised in the appeal were:
- whether the Debt is covered by an arbitration clause; and
- if there is at least a good prima facie or reasonably arguable case on the first issue, whether the judge should have exercised his discretion to stay or dismiss the petition on the basis that the Debt is not admitted
Ultimately the Court of Appeal found that there was no arbitration clause in the relevant guarantee so it was not necessary for the Court to deal with the discretion.
In relation to Lasmos, But Ka Chon and Golden Oasis, the Court of Appeal stated [33-41]:
33. This is the second occasion within two months that the appeal court was asked to consider the correctness of the approach in the Lasmos case, in which Harris J departed from previous authorities at first instance and held that save for exceptional cases, a creditor’s petition to wind up a company should “generally be dismissed” where three requirements are met (at §31):
(1) if a company disputes the debt relied on by the petitioner;
(2) the contract under which the debt is alleged to arise contains an arbitration clause that covers any dispute relating to the debt; and
(3) 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, demonstrating this.
34. In But Ka Chon v Interactive Brokers LLC  HKCA 873, the Court of Appeal did not find it necessary to decide whether the Lasmos approach should be adopted in an application to set aside a statutory demand, because even if the Lasmos approach was adopted, the third requirement (the necessity of which was not challenged by the debtor in that case) was not satisfied as the appeal court upheld the finding below that the debtor had not taken any steps to commence arbitration and had no genuine intention to commence arbitration . However, in view of the importance of what should be the proper approach where the petitioning debt is covered by an arbitration clause, the Court of Appeal made a number of observations regarding the Lasmos case on an obiter basis.
35. Likewise, in the present appeal, we do not find it necessary to address the correctness of the Lasmos approach as the second requirement in that case (the existence of an arbitration provision) is not satisfied. We do not see the occasion to add to the obiter observations in But Ka Chon as the present situation is not an appropriate case to consider the proper exercise of discretion where the requirements in the Lasmos case are met.
36. Nevertheless, in view of the challenge mounted by Mr Dawes to the necessity of the third requirement, we should say something about this, to discourage debtors from making opportunistic attempts to invoke the Lasmos approach in future.
37. First, it should be apparent from Lasmos that for the court to exercise the discretion of dismissing or staying a creditor’s petition, it is not necessary that arbitration has been commenced by the time the insolvency proceedings are heard. All that is required of the debtor is that he has taken the steps required under the arbitration clause to commence the process of arbitration, which may include preliminary stages such as mediation, and file an affirmation in accordance with rule 32 of the Companies (Winding-Up) Rules, Cap 32H , demonstrating this. This sensible requirement is to demonstrate to the court that the debtor has a genuine intention to arbitrate and could hardly be considered onerous. As stated in But Ka Chon at §53, “it 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”. See also Re Golden Oasis Health Limited  HKCFI 2173 at §§40 to 43.
38. Second, that no mention was made of this requirement in Salford Estates (No 2) Ltd v Altomart Ltd (No 2)  Ch 589, upon which the Lasmos approach was modelled, is beside the point. It could not have been suggested in Salford that the company had no genuine intention to arbitrate, as arbitration had been commenced and concluded and the debt upon which the winding-up petition was founded comprised the sum due under the arbitration award plus further sums which had not yet been referred to arbitration. Nor does Eco Measure Market Exchange Ltd v Quantum Climate Services Ltd  BCC 877 support Mr Dawes’ contention that this requirement is unwarranted or otiose. The arbitration clause in Eco Measure provided that “after attempts by alternative dispute resolution procedure had been exhausted”, any dispute arising out of the agreement might be referred to arbitration by either party. Evidence was filed by the company confirming that it wished to refer the dispute to arbitration pursuant to that clause . Apparently, the preliminary stages of the contractually mandated dispute resolution process had been set in train (as envisaged in Lasmos). Again, there was no question of any lack of genuine intention to go to arbitration.
39. Third, the fact that the debtor has no substantive claim against the creditor is immaterial. It is entirely possible for the debtor to refer the dispute to arbitration and seek a declaration of non-liability in respect of the debt alleged by the creditor. This is accepted by Mr Dawes.
40. Turning to the facts of the present case, we do not think the third requirement in Lasmos is satisfied. The Debtor asserted in the notice of intention to oppose the petition filed on 14 December 2018 that the court should exercise its discretion to dismiss and stay the petition. He was aware of the requirements in Lasmos, as this case was mentioned in the skeleton submissions he filed for the first hearing before the judge on 7 January 2019. No mention was made in the subsequent affirmation he filed of any steps taken to commence the process of arbitration. In the skeleton submissions filed for the substantive hearing of the petition on 4 April 2019, the Debtor challenged the need for the third requirement and contended that “all that should be required is that the arbitration clause remains operable and capable of being performed”, and “if necessary, [the Debtor] can undertake to commence arbitration within a prescribed period since the arbitration clause is still operable” . The Debtor had ample opportunity to take steps to commence the arbitration process. He did not suggest there was any obstacle in taking the necessary steps. The belated and conditional assertion in the skeleton submissions of his counsel can hardly be regarded as indicative of a genuine intention to arbitrate.
41. This is an additional reason why it is unnecessary to consider if the discretion to dismiss or stay the petition should be exercised in the same way as the Lasmos case