Lasmos Limited v Southwest Pacific Bauxite (HK) Limited ¹

Before the topical Lasmos decision in March 2018, the general position, where a company faced with a winding-up petition wanted to have it struck out, was for the company to demonstrate that it had a bona fide dispute on substantial grounds in relation to the debt relied upon by the petitioner. 

In Lasmos, the Court of First Instance held that a petition should also be dismissed if:

1. the company disputes the debt relied on by the petitioner;
2. the contract under which the debt is alleged to arise contains an arbitration clause that covers any dispute relating to the debt; and
3. the company takes the steps required under the arbitration clause to commence the contractually mandated dispute resolution process (which might include preliminary stages such as mediation) and files an affirmation in accordance with Rule 32 of the Companies (Winding Up) Rules, Cap 32H, demonstrating this.

In exceptional cases, it may be appropriate to stay the petition. It was further suggested that the following circumstances may qualify as exceptional:

1. Where there was a risk of misappropriation of assets or some other matter which would normally justify the appointment of provisional liquidators; or
2. Where it is sought to engage the referral back provisions because of substantiated concerns there had been fraudulent preferences.

In 2019, the Court of Appeal considered the Lasmos approach in two judgments.

In But Ka Chon v Interactive Brokers LLC², there was an arbitration clause in the underlying agreement and upon service of a statutory demand, the debtor’s solicitors issued a letter to the petitioner’s solicitors asking if they had instructions to accept service of a Notice of Arbitration.

The debtor’s application to set aside the statutory demand was dismissed at first instance as the third requirement in the Lasmos case was not satisfied. In any case, the judge was also of the view that the debtor had no bona fide defence.

The debtor’s appeal to the Court of Appeal was dismissed. Although a letter had been sent by the debtor in relation to the service of the Notice of Arbitration, the debtor had neither followed up nor served any such Notice. Prior to issuance of the letter, the debtor took no steps to commence arbitration over a period of four years and thus it was not proper notice of an intention to arbitrate.

Although the Court of Appeal was not required to decide whether the Lasmos approach should be adopted in an application to set aside a statutory demand, it did express reservations on the Lasmos approach, which it said would substantially curtail the statutory right of a creditor to present a petition.

In a subsequent case, Sit Kwong Lam v Petrolimex Singapore Pte. Ltd³, the Court of Appeal dismissed the debtor’s appeal against a bankruptcy order.

It was found that the debt was not covered by an arbitration clause in view of the ambiguous wording which cross-referenced various agreements, so the Judge should not have exercised his discretion to stay or dismiss the bankruptcy petition. In any case, during the bankruptcy proceedings, the debtor was clearly aware of the Lasmos case but had made no mention of any steps that had been taken to commence the process of arbitration.

Again, this was not a situation where the Lasmos requirements had been met. However, to discourage debtors from making opportunistic attempts to invoke the Lasmos approach in the future, the Court of Appeal cited the But Ka Chon case and agreed that “it would make no sense to dismiss or stay an insolvency petition on the mere existence of an arbitration agreement when the debtor has no genuine intention to arbitrate”. 

Points to Note

In view of the Lasmos decision and the subsequent observations of the Court of Appeal, it may be worth considering, when entering into commercial contracts, whether or not to include an arbitration clause. In finance contracts, for example, a lender may not want to be put through the trouble of having to contest arbitration proceedings in the event of a default by a borrower. However, it is important to note that the mere existence of an arbitration agreement would not satisfy the Lasmos approach, so there must also be a genuine intention to arbitrate.

If there is no arbitration clause, then the pre-Lasmos position will still apply, namely that the winding-up petition would generally be dismissed if there is a bona fide defence on substantial grounds. However, as things stand, if there is an arbitration clause, then save in exceptional circumstances, the petition will generally be dismissed if the Lasmos requirements are satisfied.

如欲观看中文版本，请点撃这里。

1. [2018] HKCFI 426↩
2. [2019] HKCA 873↩
3. [2019] HKCA 1220↩