Hill Dickinson
Hong Kong United Kingdom /June 24 2024
Privy Council pivots from Hong Kong Court of Final Appeal to decide winding up
petition does not offend against arbitration agreement
Sian Participation Corp (In Liquidation) -v- Halimeda International Ltd [2024] UKPC 16
On an appeal from the Eastern Caribbean Court of Appeal of the British Virgin Islands, the
Privy Council has decided that before a winding up application can be dismissed or set
aside due to an existing arbitration agreement, the debt has to be genuinely disputed on
substantial grounds. This “Substantive Dispute Test” was set out in 2015 in Jinpeng Group
Ltd -v- Peak Hotels and Resorts Ltd BVIHCMAP2014/0025.
In doing so, the Privy Council held that the Court of Appeal decision in Salford Estates
(No.2) Ltd -v- Altomart Ltd [2014] EWCA Civ 1575 (Salford Estates) was wrongly decided
and expressly directed that the English Companies Court should no longer follow it. This is
the first time that the Privy Council has done so since it was recognised by the English
Supreme Court in Willers -v- Joyce [2016] UKSC 44 that it may be appropriate for the Privy
Council to decide that the House of Lords, Supreme Court or Court of Appeal in England
were wrong, and to direct that domestic courts should treat the decision of the Privy Council
as representing English law.
Previously, under Salford Estates, where the underlying contract included an arbitration
agreement, the approach taken by the English courts would be to stay or dismiss a winding-
up petition in favour of arbitration upon non-admission of the debt by the debtor company,
whether genuine or not.
The approach taken in Salford Estates has also been adopted by the Hong Kong Court of
Appeal in decisions discussed below.
Do winding-up petitions involve determination of merits?
The overturning of Salford Estates by the Privy Council is premised on the view that in
winding-up/liquidation proceedings, the Court does not seek to, nor does it, actually resolve
or determine any matters that would be caught within the scope of an arbitration agreement.
In particular, the Privy Council pointed out that the ‘light-touch’ approach by the Companies
Court would not produce anything similar to a judgment, and the ordering of a liquidation
does not resolve anything nor interfere with the resolution of any dispute. The Privy Council
also held that, accordingly, the presentation of a winding-up petition does not offend the
negative obligation under an arbitration agreement to not have disputes resolved outside of
arbitration.
Further, as to whether the adoption of the Substantive Dispute Test would encourage
creditors to bypass an arbitration agreement and exert pressure on debtors by seeking a
winding-up application, the Privy Council took the view, amongst other things, that the
Companies Court already has sufficient protections in place against such abuse of process,
being the power to order indemnity costs. It considered that there is no good reason to
require a creditor to go through arbitration where there is no genuine dispute as such
process will only add delay, trouble and expenses.
Meanwhile, last year, the Court of Final Appeal in Hong Kong (CFA) handed down a
landmark decision in Re Guy Kwok Hung Lam [2023] HKCFA 9 (Guy Lam CFA), which
decision endorsed the earlier Court of Appeal decision [2022] HKCA 1297 (Guy Lam CA). In
brief, the CFA judgment stated that, in an ordinary case where the underlying dispute of the
petition debt is subject to an exclusive jurisdiction clause, the courts should dismiss the
petition unless there are ‘countervailing factors’, such as the risk of the debtor’s insolvency
impacting third parties, the debtor’s reliance on disputes that border on the frivolous, or an
occurrence of an abuse of process. The approach of the CFA is consistent with the general
policy of the courts in Hong Kong in favour of holding parties to their contractual bargain
including jurisdictional agreements.
Relevantly, the Hon G Lam JA in Guy Lam CA found that the test previously applied by the
courts when determining an insolvency order (i.e. whether there is a bona fide dispute of the
debt on substantial grounds) was ultimately broadly similar and broadly equivalent to the
determination of a summary judgment application in a writ action (i.e. whether there is an
issue or question in dispute which ought to be tried), and that it would be “most unlikely to
result in different outcomes when applied to the same facts”. This observation mirrors the
reasoning in Salford Estates as to the analogous nature of summary judgment proceedings
and the Substantive Dispute Test. The Guy Lam CFA approach was later endorsed and
extended by the Hong Kong Court of Appeal to include arbitration agreements in Re
Simplicity & Vogue Retailing (HK) Co Ltd [2024] HKCA 299 and Re Shandong Chenming
Paper Holdings Ltd [2024] HKCA 352.
It is also worth noting that a few years earlier, in Re Asia Master Logistics Ltd [2020] 2
HKLRD 423, DHCJ William Wong SC considered the Substantive Dispute Test, sharing the
same view that the Court “makes no determination on the parties’ rights and obligations” in
insolvency applications, and rejected the Salford Estates approach as an ‘unprecedented
fetter on the Court’s discretion’. Nonetheless, Asia Master was essentially overruled by Guy
Lam CA and Guy Lam CFA. In particular, the Court of Appeal in Guy Lam CA expressly
disagreed with the view in Asia Master that there is no determination of merits in a winding-
up petition. In any event, Guy Lam CFA remains the leading authority in Hong Kong.
Comment
While judgments of the Privy Council are strictly speaking not binding precedent in Hong
Kong, they are traditionally treated as highly persuasive by the Hong Kong courts. However,
given that there appears to be no pending appeal(s) to the Court of Final Appeal as regards
the Court of Appeal’s judgments in Re Simplicity or Re Shandong Paper, Guy Lam remains
good law in Hong Kong on the subject for the foreseeable future, and further consideration
of the Privy Council’s judgment in Sian -v- Halimeda by the Hong Kong courts may have to
wait for another day.
It should also be noted that the scope of the exclusive jurisdiction clause in Guy Lam was
drafted broadly and encompassed “all legal proceedings arising out of or relating to” the
contract, and, as a result, the Court held that the subject bankruptcy proceedings fell within
the scope of “all legal proceedings”.
By contrast, this was not the case in Sian -v- Halimeda, where the parties were required to
refer “any claim, dispute or difference of whatever nature” to arbitration pursuant to the
arbitration agreement. The Privy Council considered the arbitration agreement in Sian -v-
Halimeda to have been drafted broadly to cover a wide range of “disputes”, but that it did
not have the effect of barring ancillary legal proceedings.
Furthermore, the Privy Council acknowledged later in the judgment that its conclusion may
be confined to a “generally worded” arbitration agreement or exclusive jurisdiction clause,
and different considerations may arise if the agreement or clause was framed in terms
which could potentially capture a liquidation application. This point was also considered
in Guy Lam CA by Hon Chow JA, who commented that the ‘true construction’ of the
relevant clause and its wording would be the first question for consideration as a matter of
principle. Indeed, DHCJ William Wong SC in Asia Master has gone as far as suggesting
that there is ‘nothing against public policy’ for a creditor to voluntarily agree to fetter its
rights to issue a winding up petition against a debtor company.
Despite the apparent diverging findings between the Privy Council’s judgment in Sian -v-
Halimeda and the CFA’s judgment in Guy Lam CFA, the CFA did make it clear that the
Court still retains a discretion to grant a bankruptcy order in circumstances where the
dispute “borders on the frivolous or abuse of process”. The Court of Appeal in Hong Kong in
Re Simplicity considered the company’s defence to be such a case (although the appeal
was dismissed on different grounds). This seems to suggest that the Hong Kong courts will
nevertheless have to consider, to some degree, the merits of a debtor’s defence in any
event, and whether, practically, the Guy Lam CFA approach results in an outcome which
would be materially different to an outcome under the Substantive Grounds Test remains to
be seen.
