Hong Kong - Can A Company Be Wound Up If The Relevant Contract Contains An Arbitration Clause?
Legal News & Analysis – Asia Pacific - Hong Kong – Insolvency & Restructuring
28 May, 2015
The Hong Kong court has jurisdiction to wind up any company registered in Hong Kong and require it to pay off its creditors. An unregistered company may also be wound up if (a) the company is dissolved, has ceased to carry on business, or is carrying on business only for the purpose of winding-up its affairs; (b) the company is unable to pay its debts; and (c) the court considers that it is “just and equitable” that the company is wound up. For a non-Hong Kong company to be wound up in Hong Kong, the provisions relating to an unregistered company must be met, and the company must have a sufficiently close connection with Hong Kong, which is shown by evidence that the company has some assets within the jurisdiction and one or more persons are concerned in the proper distribution of the assets.
Where a winding up petition is based on a company’s inability to pay a debt, it will be dismissed if the company can establish that the debt is genuinely disputed on substantial grounds. If this can be shown then the court will leave the dispute to be resolved by other means.
In the case of Re Jade Union Investment Ltd  HKEC 306, it was held that a winding up petition differs from an action between parties where the court is determining their respective rights and liabilities. The judge held that neither the existence of an arbitration clause in a contract between the parties nor the existence of an arbitration commenced pursuant to it, would of themselves establish that the debt is bona fide disputed on substantial grounds; the debtor would still have the burden of proving this. Therefore the winding up proceedings would not be automatically stayed.
This case was followed in Sinom (Hong Kong) Ltd  HKEC 1541 where the court was deciding whether to grant an injunction to restrain the presentation of a winding up petition. The court held that although an injunction will be granted to prevent a petition which it considers to be an abuse of process, such a course of action should be taken with great caution as a winding up petition is a right conferred by statute and there would need to be clear and persuasive grounds to restrain a would-be petitioner.
These cases show that the mere existence of an arbitration clause or arbitration proceedings between a debtor and a creditor will not necessarily mean that there is a genuine dispute in relation to the debt owed justifying the dismissal of a winding up petition. Instead, the court hearing the petition will still themselves consider whether there is a bona fide dispute regarding the debt.
Before presenting a winding up petition, a creditor must make a deposit (currently HKD 12,150) with the Official Receiver to cover their fees and expenses. The petition must then be presented in the prescribed form to the Registrar of the High Court, who will arrange the petition hearing, and served on the debtor company. Every petition must be accompanied by an affidavit and advertised before the hearing. If the petition is not opposed it will be determined by the Master at the first hearing; however, if it is opposed, as is likely with a debt subject to arbitration proceedings, the hearing will usually be adjourned to take place before the Companies Judge.
The sudden declaration of bankruptcy of OW Bunker in 2014 provided a stark reminder of just how quickly a company can fall into financial difficulties, regardless of its size. Given the speed with which such problems can arise, it is beneficial for creditors to have a good understanding of the options available to them to recover their debts. A winding up petition may be presented in relation to an unpaid debt and the Hong Kong court has held that an arbitration agreement or involvement in arbitration proceedings would not automatically preclude a creditor from pursuing this course of action.
For further information, please contact:
Matthew Lam, Partner, Clyde & Co