In the highly anticipated decision of Re Shandong Chenming Paper Holdings Ltd [2024] HKCA 352 (Chenming), the Court of Appeal (dismissing the Petitioner’s appeal) confirmed that the approach in Re Guy Kwok-hung Lam [2023] HKCFA 9 (Guy Lam) applies to arbitrable cross-claims, just as it applies to arbitrable disputed debts.
Key takeaways
In general, in order to resist a winding-up petition, a company must show a bona fide dispute on substantial grounds of the petitioning debt.
Nonetheless, according to Guy Lam, where the dispute is subject to an exclusive jurisdiction clause (EJC) (or arbitration clause, as now confirmed by the Court of Appeal in Re Simplicity & Vogue Retailing (HK) Co Ltd [2024] HKCA 299 handed down on the same day as Chenming), the court should ordinarily not determine this issue – instead, it should hold the parties to their contract and dismiss the petition, and leave the issue to be determined by the agreed forum.
In Chenming, the Court of Appeal went further to confirm that the Guy Lam approach applies not only to disputes over the validity of the petitioning debt – it also applies to disputes over the validity of any set-off or pure cross-claims (i.e., cross-claims that do not give rise to set-off).
In other words, a company may now seek to dismiss or stay a winding-up petition pending arbitration, so long as it has an arbitrable cross-claim which overtops the petition debt (even if such cross-claim does not constitute a set-off of any sort).
Disputed debts, set-offs and cross-claims in winding-up petitions
Giving the judgment of the Court, G Lam JA clarified the relationship between disputed debts, set-offs and cross-claims in the winding-up context. His Lordship held that a transaction set-off (or equitable set-off) against the petition debt is treated as a dispute of the petition debt itself. On the other hand, strictly speaking, a cross-claim (not amounting to such a set-off) does not affect the petitioner’s standing to petition as a creditor. Nevertheless, in the winding-up context, cross-claims are treated in the same way as disputes of the petition debt, and there is no difference in principle between the two situations; it also follows that the Guy Lam approach should equally apply to disputes over the bona fides of such cross-claims.
Whether Guy Lam applies to arbitrable cross-claims
In arriving at such conclusion, his Lordship examined a number of issues.
At the outset, the Court highlighted the general approach of the winding-up court to disputes over the validity of cross-claims – they are treated no differently from disputes as to the petitioning debt. The key question, at the end of the day, is whether (having regard to the entire relationship between the parties) the petitioner is a net creditor having an interest in having the debtor wound up; and there is no reason why a forum agreement is irrelevant to the resolution of such a question.
In particular, where the cross-claim is subject to an arbitration clause, the court’s determination of its merits (which G Lam JA described as being akin to a summary judgment determination) will be against the parties’ agreement. It follows that in cross-claim cases, the public policy in holding parties to their agreements comes into play, just as it does in a disputed debt case.
In response to the Petitioner’s arguments, the Court further clarified the following matters.
Firstly, in relation to the argument that it is not the petitioner asserting the cross-claim, the Court held that the arbitration agreement applies whichever party is the protagonist.
Secondly, as to the question whether a cross-claim can be set off against the petition debt, the Court recognised that the question of set-off itself should normally also be left to the agreed forum.
Thirdly, the Court was not persuaded by the Petitioner that applying Guy Lam to cross-claims will create a debt dodger’s charter, given Guy Lam’s built-in safety valve where the dispute “borders on the frivolous or abuse of process”.
Conclusion
The Court of Appeal’s latest decisions have done much to clarify the boundaries of the Court of Final Appeal’s decision in Guy Lam. Uncertainty surrounding the applicability of Guy Lam to arbitration cases and cross-claims has been authoritatively dispelled – a welcome development given the importance of certainty in the law.
It now remains to be seen whether or not the same approach would be taken by other common law jurisdictions – for example, the upcoming Privy Council decision in Sian Participation Corp (In Liquidation) v Halimeda International Ltd will likely touch on similar issues.
Mr Laurence Li SC, Mr Chow Ho Kiu and Mr Chee Ching Sik acted for the Petitioner.
Mr Victor Joffe SC, Mr Alexander Tang and Mr Jason Fee acted for the Respondent.
The full judgment is available at:
https://legalref.judiciary.hk/lrs/common/ju/ju_frame.jsp?DIS=159564
