In a recent Court of First Instance decision in Re Shandong Chenming Paper Holdings Ltd [2023] HKCFI 2065 (Shandong Chenming), Harris J addressed the following issues which are important factors to be considered by creditors in strategising whether to opt for commencing winding-up proceedings against a debtor in recovering a debt, as well as by debtors in potentially raising cross-claims to defend a winding-up petition:

• whether the principle in Re Guy Kwok-Hung Lam v. Tor Asia Credit Master Fund LP [2023] HKCFA 9 (Guy Lam) applies to cross-claims just as it applies to disputed debts in the insolvency context; and
• whether the principle in Guy Lam applies to an arbitration clause just as it applies to an exclusive jurisdiction clause (EJC). 

Background

On 15 June 2017, Arjowiggins HKK 2 Limited (Petitioner) issued a petition seeking to wind up Shandong Chenming Paper Holdings Limited (Company) on the grounds of insolvency arising from non-payment of an arbitration award, which the Petitioner had been given leave to enforce as a judgment in Hong Kong. The dispute has a long history of going through multiple appeals, whereby the CFA handed down a decision on 14 June 2022 confirming that there is sufficient connection between the Company (a company incorporated in the Mainland with dual listing in Hong Kong and Shenzhen) and Hong Kong for the purpose of the court’s exercise of its discretionary jurisdiction to wind up the Company in Hong Kong. The petition was accordingly relisted before Harris J. 

On 25 October 2022, the Company issued a summons seeking the dismissal or adjournment of the petition issued by the Petitioner on the basis that the Company has a cross-claim which exceeds the judgment debt owed to the Petitioner under the petition and that the cross-claim is subject to an arbitration agreement and will be determined in a substantive hearing of an arbitration in May 2024. 

Upon considering the issues set out below and the long history of the matter, Harris J stayed the petition in view of the Company’s arbitrable cross-claim against the Petitioner. 

Whether the principle in Guy Lam applies to cross-claims just as it applies to disputed debts in the insolvency context 

In Guy Lam, the Court of Final Appeal held that the Hong Kong courts should exercise their discretion to decline the exercise of jurisdiction in bankruptcy and insolvency matters where the underlying dispute regarding the petition debt is the subject of an EJC, unless there are countervailing factors such as risk of insolvency affecting third parties and a dispute that borders on the frivolous or abuse of process. As a result, a creditor will generally not be able to bankrupt or wind up a debtor in Hong Kong if the debtor disputes the underlying debt which is subject to an EJC in favour of a foreign court, unless and until the underlying dispute has been determined in accordance with the parties’ agreed dispute resolution mechanism. In these circumstances, the court will not be required to determine whether the debtor has raised a bona fide dispute on substantial grounds in respect of the debt (see detailed discussion of Guy Lam in our earlier article here).

The court in Shandong Chenming did not face a disputed petition debt but an arbitrable cross-claim raised by the Company against the Petitioner which exceeded the petition debt. Generally, to justify restraining a winding-up petition from proceeding, a company may demonstrate that it has a cross-claim which is based on substantial grounds and exceeds the petition debt. 

Having referred to a number of commentaries and case authorities, Harris J considered that there was no distinction between disputed debts and disputed cross-claims (where they exceed the petition debt) when considering whether a defence to a winding-up petition has been established. This is relevant in determining whether Guy Lam should be read as limited to disputed claims. Harris J considered that this was not the case as the judgments of the Court of Final Appeal and Court of Appeal in Guy Lam demonstrate that claims and cross-claims were treated alike. Accordingly, the Guy Lam approach of considering the impact of an arbitration clause (as elaborated in the section below) on the court’s discretion to exercise jurisdiction to bankrupt or wind up a debtor also applies to cross-claims that are subject to an arbitration agreement and exceed the petition debt.

Whether principle in Guy Lam applies to arbitration clause just as it applies to EJC

Despite a contrary view expressed in recent jurisprudence on whether Guy Lam applies where an arbitration clause is involved¹, Harris J held that Guy Lam applies to not only an EJC but also an arbitration clause. His Lordship considered it is clear from the reasoning of the Court of Appeal and Court of Final Appeal decisions in Guy Lam that the same principles and approach apply to both an EJC and an arbitration clause, as the courts in Guy Lam drew on the decision in Re Southwest Pacific Bauxite (HK) Ltd [2018] 2 HKLRD 449 (Lasmos)² (which relates to the presence of an arbitration clause) and a number of overseas authorities dealing with arbitration clauses.

Commentary

This is a significant decision in confirming that disputed cross-claims will not be treated differently from disputed debts in the context of determining whether a winding-up petition should be dismissed or stayed in accordance with the approach in Guy Lam. 

It is interesting to observe the tension between the decisions in Shandong Chenming and Simplicity in relation to whether the same approach in Guy Lam should be taken to the application of an EJC and an arbitration clause. It remains to be seen whether this issue will be brought before and clarified by the appellate court. What is clear, however, is that one should be alive to the implications of the existence of an arbitration agreement in relation to disputed debts or disputed cross-claims on the court’s determination of whether to dismiss or stay a winding-up petition. As things stand, it appears the uncertainty and practical concern may essentially be whether there must also be a genuine intention to arbitrate by taking steps to commence the contractually mandated arbitration (the third condition under the Lasmos approach), in addition to an arbitrable claim or cross-claim.

1. See Linda Chan J’s view in Simplicity & Vogue Retailing (HK) Co., Limited [2023] HKCFI 1443 and Re NT Pharma International Co Ltd [2023] HKCFI 1623 (see detailed discussion of Simplicity in our earlier article here).↩
2. See our previous articles "Arbitration or winding-up: Debt collection in Hong Kong following Lasmos" here and "Winding-up proceedings: further challenge to Lasmos" here.↩