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Insolvency and arbitration: a case from the Hong Kong Court of Appeal
The Hong Kong Court of Appeal will soon hear a landmark case that will have significant implications for the interplay between insolvency and arbitration in Hong Kong on February 29, 2024. The case involves a company that was ordered to be wound up by the lower court after failing to pay a debt that it claimed was subject to an arbitration clause. The company appealed the decision, arguing that the court should have respected the arbitration clause and referred the dispute to arbitration.
This case raises important questions about how arbitration clauses affect the statutory right of creditors to petition for the winding-up of insolvent companies. It also exposes the different approaches that the Hong Kong courts have taken in dealing with such situations.
The Lasmos approach
One of these approaches is the Lasmos approach, which is named after a case decided by the English Court of Appeal in 2016. The Lasmos approach suggests that a winding-up petition should generally be dismissed if: (i) the company disputes the debt relied on by the petitioner; (ii) the contract under which the debt arises contains an arbitration clause that covers any dispute relating to the debt; and (iii) the company takes steps required under the arbitration clause to commence arbitration.
The Lasmos approach is based on the principle of party autonomy and aims to avoid parallel proceedings and conflicting decisions. However, it has also been criticized for being inconsistent with the statutory framework and policy of insolvency law, as well as for undermining the finality and effectiveness of winding-up orders.
The Lasmos approach is inconsistent with the statutory framework and policy of insolvency law because it ignores the fact that winding-up petitions are not ordinary civil claims but rather statutory proceedings that serve a public interest in ensuring that insolvent companies are wound up for the benefit of all creditors. The Lasmos approach also undermines the finality and effectiveness of winding-up orders because it allows a company to escape winding-up by raising a disputed debt that is subject to an arbitration clause, even if the company has no genuine intention or ability to pay its debts. This could result in abuse of process and prejudice to other creditors who may have valid claims against the company.
The Guy Lam ruling
The Court of Appeal will have to decide whether to follow or reject the Lasmos approach in this case. It will also have to consider whether to follow the Court of Final Appeal's ruling in Re Guy Kwok-Hung Lam [2023] HKCFA 9, which held that exclusive jurisdiction clauses should be enforced in insolvency proceedings unless there are good reasons not to. The Court of Final Appeal did not address the issue of arbitration clauses in that case, but some judges and commentators have suggested that its reasoning could apply to arbitration clauses as well.
The Court of Final Appeal's ruling in Re Guy Kwok-Hung Lam [2023] HKCFA 9 was based on the principle of contractual estoppel, which means that parties who have agreed to an exclusive jurisdiction clause are bound by their agreement and cannot raise any inconsistent arguments in court. The Court of Final Appeal held that this principle applies in insolvency proceedings as well, unless there are countervailing factors such as the risk of insolvency affecting third parties or a dispute that borders on frivolity or abuse of process. The Court of Final Appeal also emphasized that its ruling did not affect the statutory right of creditors to petition for winding up but only required them to respect their contractual obligations.
Some judges and commentators have suggested that the reasoning of Re Guy Kwok-Hung Lam [2023] HKCFA 9 could apply to arbitration clauses as well because arbitration clauses are also based on party autonomy and contractual estoppel. However, others have argued that arbitration clauses are different from exclusive jurisdiction clauses because arbitration is a private and consensual mode of dispute resolution that does not involve any exercise of judicial power or public interest. Therefore, arbitration clauses should not be given effect in insolvency proceedings, which are statutory and public.
Implications
The outcome of this case will have significant implications for creditors and debtors alike, as well as for the development of insolvency and arbitration law in Hong Kong. It will also affect how arbitration law in Hong Kong is perceived and applied by other jurisdictions that face similar issues in balancing the interests of insolvency and arbitration. We will provide further updates on this case as it progresses.
Reference
- The article discusses an appeal that will be heard by the Hong Kong Court of Appeal on an insolvency and arbitration dispute.
- The article analyzes the main issues and implications of the decision, such as winding-up proceedings and the interaction between insolvency and arbitration
- The article showcases two approaches that the Courts in Hong Kong have recognized when dealing with such matters.
