Background
In our previous alert relating to 广东顺德展炜商贸有限公司 v. Sun Fung Timber Company Limited [2021] HKCFI 2407, we examined a decision of the Hong Kong court to dismiss the application for security by an award creditor seeking to enforce a mainland award issued by the Zhanjiang Arbitration Commission in Hong Kong. The said decision followed an earlier decision of the Hong Kong court to dismiss a winding up petition lodged by the same award creditor in respect of the award debt. The award creditor appealed against the judge’s decision to dismiss the winding up petition.
Grounds of appeal and dismissal of the appeal
The award creditor advanced a number of grounds of appeal. In dismissing the appeal, the CA took the chance to clarify a number of important legal principles pertaining to a winding up petition based on an award debt.
First, the award creditor argued that the proper test in determining a winding up petition based on an award debt should be whether there was a “real prospect of success” in setting aside the arbitral award. The CA disagreed and held that the proper test should be whether there was bona fide dispute on substantial grounds in respect of the award debt. In particular, the CA was not persuaded that the threshold test for determining a winding up petition based on an award debt should necessarily be the same as the test for setting aside an arbitral award.
Second, the award creditor submitted that the first instance judge failed to consider the high threshold required for alleging fraud in relying on the “dubious features” of the underlying transaction in dismissing the winding up petition. The CA held that such a complaint had no substance, as the first instance judge was not tasked with making any findings of fraud or collusion. He was only required to determine whether there was a bona fide dispute on the award debt.
Third, the award creditor contended that the award debtor should be required to take steps to set aside the award in mainland China, pending which the winding up petition should be stood over but not dismissed. Apart from the fact that the award debtor was deadlocked and therefore could not take such steps, the CA held that the award creditor’s request was inconsistent with the “choice of remedies” principle. Such a principle allows a party to resist the enforcement of an arbitral award in Hong Kong without first having challenged the award in the supervisory jurisdiction. The CA held that the award debtor should not be compelled to choose an active remedy over a passive one.
Conclusion
The CA provided important clarifications as to the threshold test for determining a winding up petition based on an award debt. The CA also reinforced the application of the “choice of remedies” principle in Hong Kong, and in doing so, it applied the decision of the Court of Final Appeal in Astro Nusantara International BV v. PT Ayunda Prima Mitra (2018) 21 HKCFAR 118. It remains to be seen whether the award in this particular case will be enforced in Hong Kong once the arguments are fully ventilated in the substantive enforcement and setting aside proceedings before the Hong Kong court.
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Client Alert 2021-291