Following his decision on 10 August 2023 in Shandong Chenming to stay a winding up petition on the basis of an agreement by the parties to arbitrate, the Honourable Mr Justice Harris has, on 25 October 2023, granted the petitioner leave to appeal the decision.

Shandong Chenming is one of several recent Hong Kong cases dealing with the question of whether an agreement to arbitrate should always be given precedence over a winding up petition brought by a creditor (see Hogan Lovells alert Agree to disagree – does winding up or arbitration take precedence in insolvency?).

Harris J’s decision to stay the winding up petition brought by Arjowiggins in Shandong Chenming followed the reasoning in Guy Kwok Hung Lam [2022] HKCA 1297, in which the Court of Appeal held that a bankruptcy petition should be stayed where there is a widely-drafted exclusive jurisdiction clause agreed between the parties, to allow for the specified courts to determine whether a “dispute” exists between the parties, unless there are strong reasons not to do so (see Hogan Lovells alert Show some respect – Court of Appeal affirms primacy of exclusive jurisdiction clause in bankruptcy proceedings).

However, Harris J’s decision in Shandong Chenming was at odds with the recent decision of the Honourable Madam Justice Linda Chan in Simplicity & Vogue Retailing (HK) Co., Limited [2023] HKCFI 1443 (also currently under appeal and due to be heard on 29 February 2024), who held that the court has discretion to evaluate a company’s defence to a winding up petition before staying it in favour of an arbitration clause, and that there is “no proper basis to require the parties to refer their “dispute” to arbitration in the absence of any genuine “dispute” in respect of the debt”.

To determine this, Chan J held that the court will consider whether the requirements in Lasmos Limited v Southwest Pacific Bauxite (HK) Limited [2018] HKCFI 426 are met (see Hogan Lovells alert Winding-up Petition v Arbitration Clause: Hong Kong court dismisses winding-up petition in favour of arbitration clause). Deputy High Court Judge Le Pichon agreed with this approach in her recent decision Re Inversion Productions Ltd [2023] HKCFI 2400.

Time for clarity

Harris J said that Simplicity & Vogue Retailing (HK) Co., Limited (which he noted is under appeal) and Inversion Productions Ltd suggested that the reasoning in Guy Lam was not relevant to the present case; namely whether a dispute over a debt arising under a contract containing an arbitration clause should be determined by arbitration and a company is not required to show a bona fide defence on substantial grounds in order successfully to oppose a winding up petition.

In granting leave to appeal his decision in Shandong Chenming, Harris J noted “Although it seems to me clear that the reasoning in Guy Lam applies to arbitration clauses it is highly undesirable that there are conflicting first instance decisions. It is also desirable that the Court of Appeal has the opportunity to clarify the application in Hong Kong of the Lasmos approach…”

Both creditors and debtors will eagerly await the outcome of these cases in the Court of Appeal, which should provide welcome clarification about whether the Hong Kong courts will always defer to arbitration (even where unmeritorious), or whether they will be prepared to allow winding up proceedings where there is no legitimate defence that would justify recourse to arbitration.

Authored by Jonathan Leitch, Nigel Sharman, and Eleanor Winn.