Hong Kong Arbitration Week Event – When Insolvency Strikes – When, Where and How to Arbitrate

Webinar Report by Andy Lau

Around 100 participants attended a recent webinar titled, “When insolvency strikes – when, where and how to arbitrate”, hosted by Lipman Karas on 20 October 2020, as part of HKIAC’s Hong Kong Arbitration Week 2020. Jason Karas (Lipman Karas) chaired the panel comprising the Hon. Mr Justice Harris (Judge of the High Court of Hong Kong), Dr William Wong SC (Des Voeux Chambers), Victor Dawes SC (Temple Chambers) and Emily Gillett (Lipman Karas).

In his opening remarks, Jason Karas noted that the COVID-19 pandemic has led to an increased number of insolvencies and difficult challenges lay ahead for the remainder of 2020 and 2021. The interaction of insolvency and arbitration is highly relevant as the courts balance policy considerations including the statutory rights of creditors, party autonomy to arbitrate and the desire to minimise fragmentation of proceedings.

Emily Gillett began the discussion by addressing the common misconception that insolvency disputes are not arbitrable. She highlighted the key concepts to be considered in relation to arbitrability of insolvency related disputes, which can arise at the beginning of an arbitration or at the point of enforcing an arbitral award. In broad terms, whilst some core insolvency claims are not arbitrable, courts internationally are expanding the scope of insolvency related claims that are arbitrable.

Mr Justice Harris noted that while the majority of cases involving winding up and arbitration are shareholder disputes and have less to do with creditors’ rights, there have been some significant developments in the Hong Kong jurisprudence in recent years, including Re Quiksilver Glorious Sun JV Ltd [2014] 4 HKLRD 759 and Lasmos Limited v Southwest Pacific Bauxite (HK) Limited [2018] HKCFI 426. He explained that the law in this area is evolving and whether an arbitration agreement can protect a debtor from a winding up petition ultimately depends on the specific facts. Having formulated what is now coined locally as the “Lasmos approach”, Harris J observed that precedence should be granted to the parties’ own contractual agreements.  He recognised that the interface between insolvency and arbitration is fluid and dynamic, which will continue to evolve to satisfy the demands of justice in each case, with existing mechanisms in place to deal with the risk of abuse of process. Jason Karas commented that in dealing with that interface, there is an opportunity for creative case management.

Dr William Wong SC discussed his decision, whilst sitting as a deputy judge, in Re Asia Master Logistics [2020] HKCFI 311, in which he endorsed the “traditional approach” (in contrast to the “Lasmos approach”), requiring an assessment of whether the alleged debt was bona fide disputed on substantial grounds before staying or dismissing a winding up petition in favour of arbitration. Dr Wong SC suggested that, in cases where arbitration and winding up meet, a common sense approach should be taken in the Court’s evaluation process. He queried whether there had been too great a focus on the various threshold labels used (i.e. genuine dispute or a prima facie dispute), in jurisdictions such as England and Singapore. Both Dr Wong SC and Harris J agreed that clear guidance from the Hong Kong Court of Appeal at some point would be welcome.

Victor Dawes SC also recognised that this was a developing area. He observed that the Court is cognisant of a party abusing the process by latching onto an arbitration clause to delay.  The threat of indemnity costs is a meaningful deterrent to prevent parties from attempting to delay an inevitable winding up process through inappropriate reliance on an arbitration clause.

Looking to the future of the interaction of insolvency law and arbitration in Hong Kong,  Dr Wong SC and Harris J discussed the Company and Insolvency Law Society’s proposal for the establishment of a specialised arbitration platform with a panel of specialist insolvency arbitrators, who would work  in constructive dialogue with the Companies’ Court. Such a platform would be a welcome development for Hong Kong and the Greater Bay Area. Victor Dawes SC agreed that the establishment of such a specialised arbitration platform is a significant opportunity for Hong Kong in the post COVID world. Together with recent developments in third party funding for arbitration, support from the Government and enthusiasm from the business sector, the outlook for Hong Kong is positive.

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