Introduction
In Re Simplicity & Vogue Retailing (HK) Co., Limited [2024] HKCA 299, the Court of Appeal (Kwan VP, Barma and G Lam JJA) held that the approach regarding exclusive jurisdiction clauses in bankruptcy proceedings laid down by the Court of Final Appeal in Re Lam Kwok Hung Guy, ex p Tor Asia Credit Master Fund LP (2023) 26 HKCFAR 119 (“Guy Lam CFA”) (upholding the Court of Appeal’s judgment [2022] 4 HKLRD 793 (“Guy Lam CA”)) should be applied by analogy to winding-up proceedings where there is an agreement between the parties to refer their dispute relating to the petition debt to arbitration.
Key Takeaways
In the course of reaching this conclusion, Kwan VP (giving the judgment of the Court of Appeal) thoroughly analysed the reasoning in Guy Lam CFA and Guy Lam CA, as well as extensively reviewed the authorities in this area of law.
The following are some of the key points to note from the judgment:
(1) At its core, the Court is concerned with an exercise of discretion, whether it be the exercise of its jurisdiction to make a bankruptcy or winding-up order upon being satisfied with the proof of the petitioning debt, or in making a determination whether there is a bona fide dispute of the debt on substantial grounds, or in ordering the petition to be dismissed or stayed.
(2) The approach of the Court in exercising its discretion is “multi-factorial”. The public policy of the legislative scheme for the Court’s insolvency jurisdiction may assume greater prominence where the grounds for disputing the debt are obviously insubstantial.
(3) The significance of the above public policy may be much diminished where there is no supporting creditor and no evidence of a creditor community at risk.
(4) The “strong reasons” or “wholly exceptional circumstances” test should not “obscure the range of considerations relevant to the Court’s discretion”. The “countervailing factors”, being “the risk of insolvency affecting third parties and a dispute that borders on the frivolous or abuse of process”, are just instances where the Court may exercise its discretion not to hold the parties to the agreed dispute resolution mechanism. By this approach, the Court retains flexibility to deal with the case as the circumstances require.
(5) In this connection, it is “not onerous” to demonstrate that there is a genuine intention to arbitrate. For deterring a debtor from merely raising an arbitration clause as a tactical move with no genuine intention to arbitrate, the Court can require itself to be satisfied of such genuine intention so as to hold the parties to their agreed dispute resolution mechanism.
(6) That being so, there has to be before the Court sufficient and proper evidence to indicate that the petition debt was disputed and that the dispute would be referred to arbitration.
This judgment, together with the judgment of the same division of the Court of Appeal in Re Shandong Chenming Paper Holdings Ltd [2024] HKCA 352 (covered by an earlier Case Highlight co-authored by Des Voeux Chambers members), will be highly relevant in considering how winding-up petitions with an arbitration context should be brought or defended in the future.
The full judgment is available at https://legalref.judiciary.hk/lrs/common/ju/ju_frame.jsp?DIS=159561&currpage=T
Ms Eva Sit SC and Mr Danny Tang, instructed by Herbert Smith Freehills, for the Petitioner (Respondent)
Mr Clifford Smith SC and Mr Tommy Cheung, instructed by W K To & Co, for the Company (Appellant)
