HK Landmark Judgment: Arbitration Trumps Winding-Up Petition

06 April 2018

Lasmos Limited v. Southwest Pacific Bauxite (HK) Limited [2018] HKCFI 426

On 2 March 2018, Harris J handed down a landmark judgment holding that, where a creditor presents a winding-up petition based on a disputed debt which is covered by an arbitration agreement between the creditor and the company, the court would generally dismiss the petition. 

In so holding, Harris J brought Hong Kong law in line with the position in England, Singapore and the Cayman Islands. The decision offers compelling reasons for developing Hong Kong law in this direction. 

The position is to be contrasted to a situation where the petition debt is disputed and there is no arbitration provision. In such a case, the court's general approach is to dismiss the petition only if the debt is subject to a bona fide dispute on substantial grounds. 

Comments

The Lasmos case arose out of the petitioner's unsatisfied claim for fees under a management services agreement, which contained an arbitration clause. The petitioner issued a statutory demand and then a winding-up petition against the Company. The Company's position was that the fees had not been agreed. 

Because the Company required the dispute to be resolved in accordance with the arbitration clause, the Court dismissed the petition. In any event, the Court also found that the petitioner's claim was disputed on bona fide substantial grounds. 

Prior to this decision, it was generally assumed that, once a winding-up petition was issued, the existence of an arbitration clause covering the petition debt would be irrelevant to the court's exercise of its winding-up jurisdiction. 

The decision to develop Hong Kong law here seems eminently sensible in principle because it gives primacy to the parties' agreed dispute resolution method. If a petition debt is subject to an arbitration clause, it is not appropriate for the Companies Court to try the dispute, even for the mere purpose of determining the existence of bona fide substantial dispute. Otherwise, a creditor could essentially repudiate the arbitration agreement by merely presenting a winding-up petition to collect a disputed debt. 

Upholding the parties' arbitration agreement, however, does not mean that the Companies Court's insolvency jurisdiction is ousted. The Court emphasised that, where exceptional circumstances exist, the Court could still exercise its insolvency jurisdiction (such as appointing provisional liquidators), despite the presence of an arbitration clause covering the disputed petition debt. 

Summary of the Companies Court's practice

After this landmark decison, the Companies Court's practice when dealing with a disputed petition debt may be summarised thus: 

     1. If there is no arbitration clause, the court will generally dismiss the winding-up petition only if there is a bona fide dispute on substantial grounds. 

     2. If there is an arbitration clause and the company wishes to refer the dispute to arbitration, the court would generally dismiss the winding-up petition. 

     3. The court retains the ultimate discretion to exercise its insolvency jurisdiction in exceptional circumstances, despite the presence of an arbitration clause. 

 

Christopher Chain represented the Company in this case.

Look Chan Ho

 

      

 

 

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