The respondent company was incorporated in the PRC. In 2005, the petitioner (a Hong Kong company) and the company entered into a PRC-law governed joint venture agreement, which contained an arbitration clause providing for all disputes in connection with the agreement to be resolved by HKIAC arbitration in Hong Kong.

Disputes between the parties arose in 2012, leading the petitioner to commence an arbitration against the company in accordance with the joint venture agreement. The arbitral tribunal rendered an award in 2015, ordering the company to pay damages of CN¥167.86 million to the petitioner. After the company’s attempt to set aside the award in the Hong Kong court failed, the petitioner served a statutory demand on the company in 2016.

The company applied for an injunction to prevent the petitioner from presenting a petition to wind it up on the grounds that, inter alia, (a) there was no sufficient connection with Hong Kong, (b) there was no reasonable possibility that a winding up order would benefit the petitioner, and (c) the court was not able to exercise jurisdiction over one or more persons in the distribution of the company’s assets. This application went all the way to the Court of Final Appeal, where it was finally dismissed, resulting in the petitioner proceeding with its winding-up petition.

Subsequently in 2022, the company commenced another arbitration against the petitioner, seeking damages in relation to some funds transferred out of the joint venture company. The company said this amounted to a cross-claim against the petitioner in an amount exceeding the petition debt. In October 2022, the company applied to the Hong Kong court for the dismissal or adjournment of the winding-up proceedings pending the determination of the new arbitration on its cross-claim. The Hong Kong High Court granted the stay in 2023, with leave to appeal.

The Court of Final Appeal, in Re Guy Kwok-hung Lam, had earlier confirmed that where a winding up petition is based on a debt under a contract with an exclusive foreign jurisdiction clause, the court will tend to dismiss or stay the petition for the issue in dispute to be determined by the agreed forum. The Court of Appeal confirmed the Guy Lam approach also applies to arbitrable disputes in Re Simplicity & Vogue Retailing (HK) Co Ltd.

In the present case, the Court of Appeal considered the applicability of the Guy Lam  approach to disputed petition debts, set-off claims and cross-claims in the context of winding up petitions. In particular, while a cross-claim by the respondent company against the petitioner technically does not affect the petitioner’s standing to petition for winding up as a creditor since the petition debt exists independently of the cross-claim, the settled approach of the Hong Kong court is to treat such cross-claims in the same way as disputes to the petition debt. The key question is whether the petitioner is a net creditor having an interest in the winding up: if there is any set-off claim or cross-claim exceeding the petition debt, the set-off or cross-claim should first be determined at the agreed forum (whether that is a foreign court or arbitration), and the winding up proceedings should generally be dismissed or stayed.

In dismissing the petitioner’s appeal, the Court of Appeal was not persuaded by the petitioner’s argument that the Guy Lam  approach would create a “debt dodger’s charter” because of the “built-in safety valve that allows the [approach] to be displaced where the dispute ‘borders on the frivolous or abuse of process’”.

To achieve a stay or dismissal, a respondent company will need to adduce proper evidence to demonstrate that there is a bona fide dispute and a genuine intention to arbitrate (as opposed to a delay tactic). Timing will also be an important factor: the longer the respondent takes to commence arbitration, the less likely the court will find a genuine intention to arbitrate.

This decision helpfully clarifies that the Hong Kong court will stay or dismiss a winding up petition if there is a dispute that falls within the scope of an exclusive forum agreement, whether it has been raised by a dispute of the petition debt, a claim of set-off, or a cross-claim that does not give rise to set-off.

By comparison, in the BVI a creditor’s application for the appointment of liquidators will typically not attract an automatic stay just because there is an arbitration agreement between the applicant creditor and debtor company on the basis that the appointment of liquidators is viewed as a collective remedy undertaken for the benefit of all the debtor company’s creditors (and therefore not caught by the arbitration agreement). However, the BVI court will consider the existence of the arbitration agreement in the exercise of its discretion in deciding whether to appoint liquidators and whether the debtor disputes the debt on bona fide on substantial grounds. The Cayman courts will apply the same bona fide substantial ground test when a debtor company disputes the petition debt or the debtor company has a genuine cross-claim in deciding whether to stay the winding up petition pending arbitration.