Winding-up Petition Dismissed in Favour of Arbitration

Lasmos Ltd v Southwest Pacific Bauxite (HK) Ltd [2018] HKCFI 426, 2 March 2018, is another in a line of cases that demonstrate the pro-arbitration stance of the courts in Hong Kong. The case decides that a petition to wind-up a company on the grounds of insolvency should generally be dismissed if:

  • the respondent company disputes the debt relied on by the petitioner;
  • the dispute relating to the debt comes within the terms of an arbitration clause in the contract under which the debt is alleged to arise; and
  • the respondent company takes steps required under the arbitration clause to commence the dispute resolution process and files an affidavit/affirmation in accordance with Rule 32 of the Companies (Winding-Up) Rules (Cap. 32H) confirming as much.

The judgment of the judge in charge of the “Companies List” of the High Court is a significant departure from previous thinking in Hong Kong – including: (i) that a petition to wind-up a company on the basis of insolvency would not be stayed in favour of arbitration even if the debt arises in connection with an agreement that contains an arbitration clause (Industry Insights, September 2014 – “Arbitrability of Shareholder Disputes”); and (ii) the respondent company opposing a winding up should demonstrate that it has a bona fidedefence on substantial grounds.

The judge’s reasoning is heavily reliant on case law developments from jurisdictions such as England and Wales and Singapore, the “Object and principles” of s. 3 of the Arbitration Ordinance (Cap. 609) – “party autonomy” – and the progressively pro-arbitration stance of the local courts, all of which are set out in a fully reasoned judgment.

The judgment also makes it clear that there may be “exceptional cases” in which a creditor whose debt is disputed would be justified in issuing a winding-up petition notwithstanding that the dispute appears to come within the terms of an arbitration clause. What these “exceptional cases” might be is an argument for another case, but an example given in the judgment is of a petitioner who can show a risk of a misappropriation of a respondent company’s assets such as to justify the appointment of provisional liquidators.

Lasmos Ltd v Southwest Pacific Bauxite (HK) Ltd represents not only a significant change in the law, it is also likely to have some important practical consequences. For example, following these developments, a court in Hong Kong should generally dismiss a winding-up petition that is based on an alleged debt that comes within the terms of an arbitration clause in a contract, provided the respondent company disputes the debt.

The judgment should also curtail the strategy of some petitioners who try to get around arbitration agreements by presenting winding-up petitions. Contracting parties should think twice before inserting arbitration clauses in contracts if there is a possibility later that they may want to access the courts to petition for winding up or to use other mechanisms that are available in the litigation process. Arbitration is not a panacea and there are situations when litigation may be better suited.

The judgment will generally be welcome in the arbitration community of Hong Kong.

At the time of writing no appeal is evident, although the legal principles raised are arguably deserving of appellate court review. That said, given that the judge found that even applying the previous law the respondent company had established a bona fide dispute on substantial grounds, such that he would have dismissed the petition, opportunities for an appeal might appear to be limited.

Jurisdictions: 

Partner, RPC

Senior Consultant, RPC