Summary of facts
The petitioner, ACTATRADE SA (Petitioner), and the Company entered into a number of contracts for the sale and purchase of methanol cargo (Cargo). The Petitioner lodged a petition for the winding up of the Company (Petition) on the ground of insolvency and on the basis that the Company had failed to comply with a statutory demand by paying to the Petitioner the outstanding purchase price for the Cargo (Debt). The relevant contract provided for all disputes, including those pertaining to the Debt, to be referred to CIETAC arbitration (Arbitration Agreement).
The Company sought the dismissal of the Petition on the following grounds:
- There was a prima facie dispute that should be referred to arbitration pursuant to the Arbitration Agreement (Arbitration Ground).
- There were bona fide disputes on substantial grounds in respect of the Debt (Bona Fide Dispute Ground)
- The Company had a cross-claim against the Petitioner which exceeded the Debt (Cross-claim Ground).
Decision
The court rejected all the Company’s grounds of opposition.
Arbitration Ground
On the first ground, the Company submitted that the court should not follow the approach in Lasmos or the traditional approach of requiring the debtor to demonstrate a bona fide dispute on substantial grounds. Instead, the Company urged the court to follow the Singapore approach expounded in AnAn Group (Singapore) Pte Ltd v. VTB Bank (Public Joint Stock Company) [2020] SGCA 33 and the English approach in Salford Estates (No.2) v. Altomart Ltd (No.2) [2015] 1 Ch 589, which applied the ‘prima facie’ standard; i.e., once the court found that there was a prima facie dispute, it would ordinarily dismiss the petition and would only grant a stay if there was legitimate concern about the solvency of the company and no triable issue was raised by the company.
The court held that, whether under the prima facie standard (as adopted by the Singapore and English courts) or a bona fide dispute on substantial grounds (as adopted by the Hong Kong courts), it would be incumbent upon the debtor to demonstrate that there was a genuine dispute on the debt which required the determination of an arbitral tribunal. It would be pointless to require the parties to resolve a dispute unless it was a genuine dispute. As observed in But Ka Chon v. Interactive Brokers LLC [2019] 4 HKLRD 85, prior to Lasmos, the court would, in the exercise of discretion, give considerable weight to the existence of an arbitration agreement and other relevant circumstances. The discretion was not exercised only one way as discussed in Lasmos; i.e., the petition should “generally be dismissed” save in “exceptional” or “wholly exceptional circumstances” if (1) the debt was not admitted, (2) the dispute was covered by the arbitration clause and (3) the company had taken steps to commence arbitration.
Bona Fide Dispute Ground
The court therefore went on to discuss the second ground and concluded that the Company had failed to show that there was a bona fide dispute as regards the Debt or that there were serious cross-claims which would justify withholding payment of the Debt.
The Company alleged that it was entitled to withhold payment of the Debt pending the determination of the cause of certain discoloration of the Cargo, i.e., whether the discoloration was due to the fault of the Petitioner and/or the carrier. The court held that this did not amount to a bona fide dispute, let alone a dispute on substantial grounds, in respect of the Debt because the Company had not identified any contractual provision that entitled it to withhold payment of the Debt. In any case, the discoloration issue had already been settled between the carrier and the owner of the Cargo. The Company had not identified any basis or adduced any evidence to show that it had suffered any loss from the discoloration issue or that the Petitioner caused the discoloration.
Cross-claim Ground
The Company further alleged that it had a serious cross-claim against the Petitioner for losses suffered by the Company due to the Petitioner’s breaches of separate contracts, which losses exceeded the Debt. The court held that the Company had failed to demonstrate that it had a serious cross-claim against the Petitioner on the facts. Further, the evidence adduced by the Company showed that the loss suffered by the Company was not caused by the Petitioner’s breaches. Alternatively, even assuming that the Company had a serious cross-claim against the Petitioner, there was no valid basis for the Company to withhold payment of the Debt pending determination of the cross-claim, as the cross-claim arose out of separate contracts and there was no contractual provision that entitled the Company to retain the Debt as security or otherwise for its cross-claim.
Consequential order
At the hearing, the Company proposed to provide full security for the Debt should the court uphold the Petition. The court held that the Company should pay the Debt within 14 days, failing which the Petitioner would have liberty to restore the Petition for hearing, whereupon a usual winding up order would be made against the Company.
Concluding remarks
Where the agreement giving rise to the petitioning debt contains an arbitration clause, there have been a number of decisions in Hong Kong and other jurisdictions as to how the court should approach the petition in the circumstances. In the present case, the court refused to follow Lasmos and held that, while in its exercise of discretion the court would give considerable weight to the existence of an arbitration agreement between the parties, as well as other relevant circumstances, it would be incumbent upon the debtor to show a genuine dispute on the debt requiring the determination of an arbitral tribunal. Based on this decision and contrary to Lasmos, the existence of an arbitration agreement pertaining to the debt alone, in the absence of a genuine or bona fide dispute as regards the debt, is not a sufficient ground for seeking a stay or dismissal of a winding up petition. It remains to be seen whether Lasmos will be followed in future decisions.
About Reed Smith’s international arbitration practice
Reed Smith is strongly positioned to provide the highest level of service in dispute resolution to our clients. With offices in the world’s leading arbitration centers, including London, Paris, New York, Singapore, Hong Kong, Dubai, Miami, and Houston, we have one of the largest and most diverse international arbitration practices in the world, with the ability to represent clients in every significant arbitral center and seat around the globe.
We are a recognized leader in international arbitration, and are ranked in the elite GAR 30, Global Arbitration Review’s ranking of the world’s leading international arbitration practices. We have substantial experience representing both claimants and respondents, and a strong track record of obtaining successful results. Our deep knowledge of industry sectors including energy, natural resources, life sciences, transportation, telecoms, insurance, and banking enables us to understand the industry-specific factors and environments affecting our clients’ disputes. This combination of deep arbitration experience, our lawyers’ advocacy skills, and industry knowledge gives us a competitive advantage when representing our clients.
Updates on the go
Listen to our international arbitration updates on the go and at your convenience through our podcast channel, Arbitral Insights. Presented by our international arbitration lawyers from across the Reed Smith global platform, the series explores trends, developments, challenges, and topics of interest in the field. Access our episodes at reedsmith.com.
The Reed Smith Arbitration Pricing Calculator
The Reed Smith Arbitration Pricing Calculator is a first-of-its-kind mobile app created to help arbitration users calculate the costs of arbitration around the world. The app is free and is available to download through the Apple and Google Play app stores. For more details, please visit reedsmith.com.
In-depth 2022-113
