Can an Aribitration Clause Snipe An Winding-up Petition in Hong Kong?

Recently, the Hong Kong court in a new milestonde case Re: Simplicity & Vogue Retailing (HK) Co. Limited has considered the interplay impact between arbitration clauses and winding-up petitions. On 22 May 2023, the Hon. Linda Chan J (the Judge) made a winding-up order against Simplicity & Vogue Retailing (HK) Co. Limited and rejected the Company’s argument that the dispute over the underlying debt should be referred to arbitration. In so doing, the Judge considered the effect of the Court of Final Appeal (CFA) ruling in Re Guy Kwok Hung Lam [2023] HKCFA 9 (Re Guy Lam).

The Judge rejected the Arbitration Ground for the following reasons:

1. The ratio in Re Guy Lam only applied to EJCs, not arbitration clauses.
2. As far as arbitration clause was concerned, the court was guided by the principles stated in the Court of Appeal judgments in But Ka Chon v Interactive Brokers LLC [2019] 4 HKLRD 85 (where in determining whether to dismiss or stay a petition, the court considered not just whether a dispute had arisen but whether it was a bona fide dispute on substantial grounds) and Sit Kwong Lam v Petrolimex Singapore Pte Ltd [2019] 5 HKLRD 646.
3. The court, in deciding whether to exercise its discretion to dismiss or stay a petition where the parties had agreed to an arbitration clause, would also consider whether the requirements in Lasmos were satisfied.
4. Re Guy Lam should not be read as laying down any general rule that the court must dismiss or stay the winding-up petition if the agreement that gave rise to the petitioning debt contained an arbitration clause and there were no supporting creditors to the petition.
5. Where a company raised a substantive “defence” to the petitioning debt, the court should consider whether the “defence” could readily be shown to be wholly without merit and hence “bordered on frivolous or abuse of process”, rather than invariably require the parties to arbitrate their dispute.

It is therefore important that in a winding up petition, even if there is an arbitration agreement, the company, if intending to resist the winding up petition, should still show at least that it has a genuine defence which is not frivilous and abuse of process.