On 23 April 2024, the Court of Appeal handed down its decision in Re Shandong Chenming Paper Holdings Ltd (2024) HKCA 352.
The decision confirms that Hong Kong Courts will stay a winding-up petition of a company pending determination of an arbitrable cross-claim.
Background
In 2016, Arjowiggins HKK 2 Ltd (“Petitioner”) filed a winding-up petition (“Petition”) against Shandong Chenming Paper Holdings Ltd (“Company”).
The Respondent is incorporated in Mainland China and listed on the Shenzhen Stock Exchange. The Petitioner and the Respondent had entered into a joint venture agreement. Disputes under this agreement led to multiple arbitration proceedings, with the Petitioner asserting that the Company failed to pay debts stemming from earlier arbitration awards.
The Petitioner presented the Petition on the ground that the Company was unable to pay the debts demanded. The Respondent was unsuccessful in obtaining an injunction to prevent the Petitioner from presenting the Petition.
Due to an ongoing third arbitration however, the Respondent applied to dismiss or adjourn the Petition due to its cross-claim against the Petition in that arbitration. Harris J ordered that the Petition be stayed pending determination of the third arbitration based on Re Guy Kwok-hung Lam [2023] HKCFA 9 (“Guy Lam”).
The Petitioner obtained leave to appeal Harris J’s decision.
Key Issues
The Guy Lam principle is that where a petition debt is disputed and the dispute is subject to an exclusive jurisdiction provision in favour of another forum, the petition should be stayed pending determination of the dispute in the agreed forum unless there are strong reasons to the contrary.
Unlike in Guy Lam, the present case concerned a cross-claim subject to an arbitration clause. Guy Lam did not cover a mere cross-claim that did not give rise to set-off.
The critical issue was therefore whether the Petitioner’s winding-up petition should be stayed pending the resolution of ongoing arbitration, particularly in light of a substantial cross-claim by the Respondent.
Analysis
The following is a summary of how disputed debts, set-offs and cross-claims in winding-up petitions are dealt with in Hong Kong where there is no express agreement on forum.
| Disputed Debts | Set-offs | Cross-claims |
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If the debt on which the petition is founded is itself disputed: The established rule of practice is to ask whether there is a bona fide dispute of the petition debt on substantial grounds. If there is, the petition is usually dismissed, leaving it to the petitioner to establish itself as a creditor by a judgment obtained in a civil action. |
If the company opposes the winding-up petition by relying on a claim that exceeds and constitutes a transaction set-off against the petition debt:
The claim is treated as a dispute of the petition debt itself. This is because a transaction set-off operates in complete or partial defeasance of the claim. |
If the company opposing the petition raises a mere cross-claim that cannot be set-off against the petition debt: Strictly speaking, such a cross-claim does not affect the petitioner’s standing to petition as a creditor, because the petition debt exists independently notwithstanding the existence of a cross-claim that overtops it. Nevertheless, it has been the settled approach of the courts in Hong Kong to treat such cross-claims in the same way as disputes of the petition debt. |
The position is that cross-claims are treated no differently from disputes as to the petitioning debt. The key question to ask in each case is therefore whether there is a bona fide dispute on substantial grounds in respect of the petition debt.
In Re Shandong Chenming Paper, the Court of Appeal found that:-
- The parties had agreed to resolve disputes via arbitration. It was thereforeagainst the parties’ agreement for the Court to determine whether there was any genuine or serious cross-claim, or one that is of substance.
- Where the parties agreed to have all the disputes under the agreement giving rise to the cross-claim determined in another forum, the public policy in holding parties to their agreements comes into play, just as it does in a disputed debt case.
- The Guy Lam approach should be extended to cross-claim situations like the present case.
Accordingly, the Petitioner’s appeal was dismissed.
Commentary
This judgment is most welcome – not only does this provide clarity for arbitrable cross-claim situations in winding up proceedings, it also reflects the Court’s commitment to upholding arbitration agreements and the integrity of contractual obligations. This could also serve as a protective measure for debtors against potentially opportunistic creditor actions.
By prioritizing arbitration, the Court seeks to reduce the burden on judicial resources and encourage parties to resolve disputes in the manner they originally agreed upon.
If you have any questions or need help with winding up proceedings, contact us today.