Back To Basics – Hong Kong Court Of Appeal Queries Approach To Winding-Up Petitions Where Arbitration Is Involved

The Hong Kong Court of Appeal has suggested that a previous Court decision may have overstepped the mark by suggesting that an arbitration clause in a client agreement should generally take precedence over a creditor's right to present a winding-up petition.

In But Ka Chon v Interactive Brokers LLC [2019] HKCA 873 (an otherwise fairly routine financial product misrepresentation case), Vice President of the Court of Appeal Madam Justice Kwan made obiter comments implying that the test previously set out by Harris J last year in Lasmos Limited v Southwest Pacific Bauxite (HK) Limited [2018] HKCFI 426, which followed recent English authority, appeared to be at odds with classical Hong Kong and Commonwealth authority whereby a winding-up petition may only be dismissed by establishing a bona fide defence on substantial grounds to the claim for the underlying debt.

Margin of error

But Ka Chon concerned an appeal against a judge's decision to dismiss the plaintiff's application to set aside the statutory demand issued by the defendant in the sum of almost HK$80 million. The plaintiff was an experienced trader whose Swiss Franc/Euro margin account with the defendant suffered significant losses upon the unpegging of the exchange rate.

The defendant started liquidating the position after the plaintiff failed to inject funds to resolve the deficit. The defendant issued a statutory demand for the sum owing on 23 November 2016 which was served on the plaintiff on 12 December 2016.

The plaintiff sought to set aside the demand, arguing in a counterclaim that the defendant had mishandled the account and also that the dispute should be referred to arbitration pursuant to a clause in the client agreement.

Old or new?

Before the Lasmos case, the position in Hong Kong had been that a winding-up petition based on the ground of insolvency would not be stayed to arbitration if the debt arises under an agreement which contains an arbitration clause. To defeat the petition, the debtor must first demonstrate that it has a "bona fide defence on substantial grounds to the claim for the underlying debt" (Re Sky Datamann (Hong Kong) Limited (unrep., HCCW 487/2001).

But recent authority in Singapore and England had taken a different approach, with the English Court of Appeal holding in Salford Estates (No 2) Ltd v Altomart Ltd (No 2) [2015] that a winding-up petition should be dismissed in favour of arbitration, saying "it would be anomalous, in the circumstances, for...