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Clarity Brought to the Court’s Approach in Restraining Arbitration and Other Proceedings Brought Against Companies Facing Winding Up Proceedings

27 Sept 2023  |  Authors: Alan Kwong, Sakinah Sat

As recognized by Recorder Abraham Chan SC in the very first line of his Reasons for Decision in China Evergrande Group v Triumph Roc International Ltd [2023] HKCFI 2432, it is no secret that the Plaintiff, China Evergrande Group, is in financial difficulties and further, in June 2022, winding up proceedings have been commenced.

Whilst pursuing a debt restructuring on that front, China Evergrande applied to restrain the parallel but separate arbitral proceedings brought by the Defendant pursuant to an investment agreement, relying on sections 181 and 329 of the Companies (Winding-Up and Miscellaneous Provisions) Ordinance (Cap. 32).

Having considered the whole of the circumstances and in exercising his discretion, Recorder Abraham Chan SC ordered that the Defendant be restrained from taking any further steps in the arbitral proceedings pending resolution of the winding up proceedings or further order.

In reaching this conclusion, the Court helpfully provided detailed guidance on the approach to be taken and made the following observations:

  • The principles governing applications under section 181 and section 186, the latter providing for the automatic stay of proceedings upon a winding up order being made, are “closely analogous”, and the two sections “complement each other” and share “a common purpose”.
  • The general principle and high threshold for the assessment of section 181 applications is that, where a petition has been presented which may result in a winding-up or scheme of arrangement, no creditor may thereafter gain priority over others in his class and that even if the execution has already been commenced, a stay should be granted unless there are very “exceptional circumstances”.
  • The general principle is explained by the following key concerns which should inform the exercise of discretion:
    • Ensuring that the assets of the company are administered in an orderly way for the benefit of all its creditors as a class, and preventing particular creditors from gaining an advantage by bringing separate proceedings against the company so as to gain priority over others of their class;
    • Protecting and preserving the assets available to the company’s creditors as a whole, in aid of the above noted aims of orderly and fair administration; and
    • Preventing the issue and pursuit of proceedings to determine issues which can be properly determined in the winding-up – this being part of the concern to preserve assets by inter alia avoiding unnecessary expenditure of assets otherwi?se available for distribution amongst creditors.
  • In sum, a winding-up process or scheme of arrangement should be, as far as possible, overseen and administered in an orderly and self-contained way, and individual claims brought in separate proceedings generally tend to disrupt or undermine those objectives. Another concern is deterring creditors from too readily seeking to pursue their claims outside of the insolvency regime and spurring other creditors into similar action.
  • In assessing whether there are sufficiently “exceptional circumstances” for refusing a stay, the Court may consider the following factors:
    • The stage and status of the winding-up proceedings and any proposed scheme of arrangement; the closer or more imminent the prospect of winding-up or appointment of provisional liquidators, the more inclined the Court may be towards the grant of a stay as a matter of its discretionary assessment under section 181.
    • The nature and stage of the other proceedings, including the nature of the rights invoked and what processes and procedures lie ahead. In this regard, Recorder Abraham Chan SC noted that (i) the fact that such proceedings have reached an advanced stage is unlikely to itself constitute an exceptional circumstance warranting a refusal of stay; and (ii) an undertaking by the resisting party not to enforce any order for relief may be a relevant factor but may ultimately be of limited weight as a factor in the overall balance.
    • The relative costs and benefits/detriments in either staying or allowing the other proceedings to continue in parallel with the primary winding-up or scheme proceedings, including: the extent to which the issues pursued in the other proceedings can be properly determined in the winding-up, the scope for any lasting adverse impact due to a stay on the other proceedings having regard to the likely duration of the stay, and the extent to which the product of any steps already taken in the other proceedings (e.g. the formulation of pleaded claims or the collation of evidence) may be redeployed in the winding-up or scheme process going forward. Recorder Abraham Chan SC further pointed out that (i) the ordinary process of winding-up and the determination of proofs of debt in that context is “inherently less expensive”; (ii) the lodging of a proof of debt in the ordinary way itself “carries with it a right of access to the Companies Court in the event that the proof is rejected”; and (iii) the duration of any stay may be limited to a specific timeframe or particular conditions.
  • While the contractual right of a party to commence and pursue arbitration is something that the Court will ordinarily be very slow to interfere with, it does not call for a fundamentally different approach or threshold to apply in cases where section 181 is invoked against arbitral proceedings. The legislature had recognized that there were strong reasons for generally empowering the Court to stay proceedings, including arbitral proceedings, and there were broader public interests, in the orderly administration of the assets of the company under Hong Kong’s insolvency regime, at play.

In this case, the Court considered that the primary concern of orderly administration and preservation of China Evergrande’s assets and fair treatment between all creditors as a class would be disrupted by the arbitral proceedings and that the Defendant’s claims in the arbitral proceedings could be properly determined under the scheme or in a winding up. The Court also took into account the period of restriction of the Defendant’s right to pursue arbitration, which was likely to be limited. Further, liberty to apply was granted to cater for any material change in circumstances in the future.

Des Voeux Chamber Mr Alan Kwong and Ms Sakinah Sat acted for the Defendant.

Des Voeux Chamber members Mr Jose Maurellet SC and Mr Look Chan Ho acted for the Plaintiff.

This article was co-authored by Mr Alan Kwong and Ms Sakinah Sat.


A full copy of the Reasons for Decision can be found here.

DVC Members Acted for the Defendant
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