Background facts
By a guarantee dated 27 November 2017 (Guarantee), the Company guaranteed the obligations of certain convertible bonds. The bonds issuer (the Issuer) failed to fulfil its payment obligations under the bond instrument (the Instrument) on maturity. The Petitioner pursued its claim against the Company and presented a winding-up petition on 6 December 2022 (the Petition).
The Company failed to file its affidavit in opposition to the Petition in time and at the first hearing of the Petition sought retrospective leave to file the same. The Judge granted such leave, on condition that the Company should pay into court US$30,942,398 (the Debt) within 21 days (the Condition).
Issues
The Company did not comply with the Condition within the time imposed and sought a three-month time extension to do so. The Judge refused to give the time extension. Consequently, there was no evidence in opposition to the Petition, and the Petitioner was entitled to a winding-up order.
However, the Judge went on to consider the two grounds of opposition raised in the Company’s affidavit:
- There was a bona fide dispute as to whether the Guarantee had been discharged by reason of a variation of the principal contract between the Petitioner and the Issuer, specifically an agreement to give time to the Issuer (the Discharge Ground).
- There were arbitration clauses in both the Instrument and the Guarantee and hence the dispute over the Debt should be referred to arbitration (the Arbitration Ground).
Discharge Ground
The Judge dismissed the Discharge Ground because the Guarantee expressly provided that there should be no discharge by reason of variation of the principal contract. The Judge considered that such ground was wholly without merit.
Arbitration Ground
According to Re Southwest Pacific Bauxite (HK) Limited [2018] 2 HKLRD 449 (Lasmos), petitions should generally be dismissed if:
- The company disputes the alleged debt
- The contract giving rise to the alleged debt contains an arbitration clause that covers any dispute relating to the debt
- The company takes the steps required under the arbitration clause to commence the contractually mandated dispute resolution process
In the present case, the Petitioner argued that, the Company had taken no steps to commence arbitration and, therefore, Lasmos did not assist the Company.
The Company, however, argued that while the court should not follow the Lasmos approach, it should nonetheless find the arbitration agreement to be binding, and should by analogy follow the approach in Re Guy Lam, which had been decided in the context of an exclusive jurisdiction clause (EJC), as opposed to an arbitration clause. In Re Guy Lam, the CFA had recently found that, when the contract giving rise to the alleged debt contained an EJC, then absent strong cause, such as one affecting third parties’ rights and a dispute that bordered on the frivolous or abuse of process, the EJC should be respected and the court should dismiss the petition.
The Judge rejected the Arbitration Ground for the following reasons:
- The ratio in Re Guy Lam only applied to EJCs, not arbitration clauses.
- As far as arbitration clause was concerned, the court was guided by the principles stated in the Court of Appeal judgments in But Ka Chon v Interactive Brokers LLC [2019] 4 HKLRD 85 (where in determining whether to dismiss or stay a petition, the court considered not just whether a dispute had arisen but whether it was a bona fide dispute on substantial grounds) and Sit Kwong Lam v Petrolimex Singapore Pte Ltd [2019] 5 HKLRD 646.
- The court, in deciding whether to exercise its discretion to dismiss or stay a petition where the parties had agreed to an arbitration clause, would also consider whether the requirements in Lasmos were satisfied.
- Re Guy Lam should not be read as laying down any general rule that the court must dismiss or stay the winding-up petition if the agreement that gave rise to the petitioning debt contained an arbitration clause and there were no supporting creditors to the petition.
- Where a company raised a substantive “defence” to the petitioning debt, the court should consider whether the “defence” could readily be shown to be wholly without merit and hence “bordered on frivolous or abuse of process”, rather than invariably require the parties to arbitrate their dispute.
Conclusion
The Simplicity case is the latest of several recent judgments of the Hong Kong courts involving the relationship between arbitration clauses and winding-up petitions.
Despite the pro-arbitration approach generally adopted by the Hong Kong courts, the companies court in Simplicity seems to have taken the view that the mere existence of an arbitration clause alone may not be sufficient to support an application for stay or dismissal of a winding-up petition. An applicant may still need to show a substantive defence that is not one which can be readily shown to be wholly without merit.
It will be interesting to see how Re Guy Lam will be applied towards arbitral disputes against other factual scenarios.
Client Alert 2023-125
