Hong Kong Court dismisses winding-up petition where disputed debt is to be arbitrated

In Lasmos Limited (“Petitioner”)  v Southwest Pacific Bauxite (HK) Limited (“Company”) [2018] HKCFI 426, the Court was asked to consider whether a winding-up petition based on a statutory demand should be dismissed in circumstances where the disputed debt is subject to an arbitration agreement.

Background

The Petitioner issued a petition to wind up the Company based on an unsatisfied statutory demand. The Petitioner alleged that the debt had arisen from a contract of supply of services to the Company. Whilst the Company did not suggest that nothing was payable (it had already paid US$100,000 for the services), it declined to pay the alleged debt asserting that the fees had not been agreed. The Company sought to dismiss the petition on the ground that there was a “bona fide dispute on substantial grounds” as to what further sums were payable. 

The Court’s ruling

The Court dismissed the winding-up petition stating that they should generally be dismissed when:

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 arbitration proceedings and files an affirmation demonstrating this.

The judge clarified that in exceptional circumstances, if a creditor can demonstrate a prima facie case for winding up and a risk of appropriation of assets, a petition could be issued before an arbitration had been concluded.

Commentary

Previously a company seeking to have a petition dismissed had to demonstrate that there was a “bona fide dispute on substantial grounds”, regardless of whether the relevant agreement that contained an arbitration clause.  Under the new approach, a company only has to dispute the alleged debt and commence arbitration proceedings in order to be able to have a winding up petition against them dismissed.

This case underlines Hong Kong’s pro-arbitration stance, ensuring that the Court does not interfere with parties’ choice to arbitrate disputes. Also, it prevents creditors from bypassing arbitration by using a winding up petition and applying pressure on the debtors to pay their debts immediately, a tactic often used by creditors in the past.