Arbitration Clauses and Insolvency Proceedings

What Happened?

In But Ka Chon v Interactive Brokers LLC [2019] HKCA 873, the Court of Appeal cast doubt on the judgment of Harris J., in Lasmos Ltd v Southwest Pacific Bauxite (HK) Ltd [2018] HKCFI 426 (the “Lasmos case”).

Before the Lasmos case, it was generally understood that where a company contested a winding up petition on the ground that the debt was both disputed and arose from a contract containing an arbitration clause, the court would not normally exercise its discretion to dismiss or stay the petition unless the company could demonstrate that it had a genuine defence to the claim based on substantial grounds.

The Lasmos case departed from previous Hong Kong case law in holding that it was generally sufficient to secure a dismissal or stay if the company disputed (ie, did not admit) the debt, and took steps to commence an arbitration. The reasoning in the Lasmos case was heavily reliant on the judgment of the English Court of Appeal in Salford Estates (No 2) Ltd v Altomart Ltd (No 2) [2015] Ch 589 and represented a significant change.

To a large extent, the contrasting approaches taken in the Lasmos and But Ka Chon cases represent a difference in emphasis between:

• the pre-Lasmos position, which places more reliance on the statutory right of a creditor to petition for bankruptcy or winding up on the ground of insolvency; and

• the post-Lasmos position, which places more reliance on parties’ agreements to submit their disputes to arbitration.

What Does This Mean?

But Ka Chon does not overrule the Lasmos case – it did not need to because the Court of Appeal agreed with the lower court that the appellant had not commenced an arbitration proceeding and appeared to have no genuine intention of doing so. Hence, in any event, the appellant did not come within the post-Lasmos position. Therefore, the Court of Appeal’s comments regarding the Lasmos case are obiter.

Following But Ka Chon it would nonetheless be fair to state that the emphasis appears to have shifted back to the pre-Lasmos position. The Court of Appeal’s observations in But Ka Chon have already been cited with approval in Re Golden Oasis Health Ltd [2019] HKCFI 2173.

Anything Else?

There remains, however, a tension between the post-Lasmos position and the obiter comments of the Court of Appeal in But Ka Chon – a tension that deserves further appellate court clarification. The differences between the two seem pretty fundamental although, perhaps, not as great as may first appear. In But Ka Chon, for instance, the Court of Appeal acknowledged that the pre-Lasmos position may have given insufficient weight to the so-called “arbitration factor”.

The Court of Appeal’s obiter comments in But Ka Chon are underpinned, however, by some strong policy reasoning that cautions against any substantial curtailment of a creditor’s statutory right to petition for bankruptcy or wind up on the ground of insolvency. This is also consistent with offshore jurisdictions, such as the BVI.

In the meantime, a party that seeks to dismiss a winding up petition or set aside a statutory demand in a bankruptcy matter should have regard to the pre-Lasmos position – namely, they should seek to demonstrate, using evidence, that a debt is disputed on substantial grounds. Further, if a party means to arbitrate pursuant to an agreement to do so, they must be able to demonstrate that they have taken substantive steps to do so.

Parties entering into commercial contracts should also give greater thought to what type of dispute resolution clause they want. This can be a complex issue, but certainly if they wish to retain an unfettered statutory right to petition to wind up, and/or to use the litigation process, they should provide for that over arbitration.

Jurisdictions: 

Partner, RPC

Focusing on commercial disputes, Charles Allen is a solicitor advocate supporting clients in domestic and cross-border litigation as well as in international arbitrations across numerous jurisdictions.

During the course of more than 20 years of practice in Asia, Charles has been involved in a wide range of disputes before the Hong Kong courts as well as in other jurisdictions around the region, including China, Singapore and India. 

Charles also specialises in domestic and international arbitration across a range of industries and has extensive experience under various rules including HKIAC, ICC, LCIA, UNCITRAL and LMAA. He has handled numerous institutional and ad hoc arbitrations as counsel, and has also sat as arbitrator.

Among others, Charles is on the arbitrator panels of the Hong Kong International Arbitration Centre and the Law Society of Hong Kong. He is a Fellow of the Chartered Institute of Arbitrators.

Charles is a versatile and "very sharp and tactical lawyer" who represents clients on a variety of commercial disputes. He acts for a range of clients, including individuals, private and listed companies, multinationals, conglomerates and financial institutions.

He is dual qualified in Hong Kong where he has higher rights of audience in civil matters.