HK Court Analyses the Salford-Lasmos Approach

The interplay between arbitration and winding up proceedings has been the subject of various court decisions since Harris J’s 2018 decision in the Lasmos Case. See our previous Posts:

In Dayang (HK) Marine Shipping co Limited v Asia Master Logistics Limited [2020] HKCFI 311, a decision of DCHJ Wong SC in the High Court of Hong Kong, the issue was again considered, with the Judge making several observations which he hoped would assist in the future determination of this important issue at the appellate level.

Lavesh Kirpalani, Counsel at Prince’s Chambers, appeared for the successful petitioner and has provided the following summary of the case.

Introduction

In Re Asia Master Logistics Limited [2020] HKCFI 311, Deputy High Court Judge William Wong SC reflected on the Salford-Lasmos approach, and conducted a careful exposition of the authorities, offering significant analysis of how a court could and should address a winding-up petition when a potential dispute may involve an arbitration clause.

Traditional vs. Modern (Salford-Lasmos Approach)

The traditional approach was confirmed in Re Sinom (HK) Ltd [2009] HKCFI 2201, where Kwan J (as she then was) confirmed that the existence of an arbitration clause, or the commencement of arbitration, does not prevent a court from considering whether the debtor-company has established the existence of a bona fide dispute of substance in relation to the debt on which the petition was based.

Harris J, in Lasmos [2018] HKCFI 426 adopted the Salford approach. The Court in both Salford and Lasmos held, where parties have contractually agreed to have their disputes resolved by arbitration, such a dispute resolution clause should be given more weight. The judge in Lasmos, therefore, held that a petition to wind-up a company on insolvency grounds should be dismissed when three requirements are met:

  • If the 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 r.32 of the Companies (Winding-Up) Rules, Cap 32H, demonstrating this.

However, in the recent decision in But Ka Chon v Interactive Brokers LLC [2019] HKCA 873, the Court of Appeal (in obiter) expressed reservations about the Salford-Lasmos approach particularly as to whether the court’s discretion should be exercised in a way that involves “a substantial curtailment” of the statutory right of a creditor to present a petition. The Court did, however, acknowledge that “considerable weight should be given to the factor of arbitration” in the court’s exercise of discretion.

The issue as to what is the appropriate approach has yet to be resolved by the Hong Kong courts. Hence, this decision may be of great significance, as it may provide some insight as to how the courts may deal with this issue in future cases.

Background

Dayang (HK) Marine Shipping Co Ltd (the Petitioner) filed a statutory demand claiming Asia Master Logistics Limited (the Respondent) owed US$321,377.30. The debt arose from the Respondent’s failure to pay the Petitioner for chartering the shipping vessel ‘MV Aoli 5’.

The Respondent did not deny that the debt was due and owing. Still, the Respondent raised a counterclaim against the Petitioner concerning an alleged breach of the fixture note and submitted that the dispute should be dealt with by way of arbitration, as the fixture note contained an arbitration clause.

Court of First Instance

The Judge held that, on any analysis, the debt was not being disputed in good faith on substantial grounds. In particular, the Respondent failed to put forward any concrete evidence to substantiate its counterclaim. Furthermore, even if the Salford-Lasmos approach were to be adopted, the Respondent had failed to commence or initiate any arbitration proceedings genuinely.

In the circumstances of this case, DHCJ Wong SC held that neither the traditiona nor the Salford-Lasmos approach had been satisfied on the facts of the case; therefore, the usual winding up order against the Respondent company should be made.

DHCJ Wong SC then went on to say that, if he was wrong on the application of the third limb of Salford-Lasmos, given the importance of the issue, he should make some observations as to whether Salford-Lasmos approach was correct.

DHCJ Wong SC having analysed the issue in great depth, was of the view that the present state of law can (and should) be stated in the following terms:

  • Where a debtor-company intends to dispute the existence of a debt, he must show that there is a bona fide dispute on substantial grounds. It should not suffice for the debtor-company to merely deny the debt. This test would apply in all cases whether or not the debt had arisen from a contract incorporating an arbitration clause.
  • The existence of an arbitration agreement should be regarded as irrelevant to the exercise of discretion.
  • The fact that arbitration proceedings have commenced or would be commenced may be relevant evidence that there is a bona fide dispute. However, this alone would not be sufficient to prove the existence of a bona fide dispute on substantial grounds.
  • Where the creditor-petitioner petitions in circumstances where it knows there to be a bona fide dispute over the debt on substantial grounds, it runs the risk of being liable to pay the debtor-petitioner’s costs on an indemnity basis. It would also be at risk of liability under the tort of malicious prosecution.

Comment

This case serves to show how the law in this area may further develop. In particular, post But Ka Chon v Interactive Brokers LLC [2019] HKCA 873 where the Court of Appeal expressed reservations about the Salford-Lasmos approach.

See also the reviews of this case by:

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 Hong Kong 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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