Winding-Up Applications and Arbitral Clauses – The English and Hong Kong Courts Diverge

Introduction

Should having an arbitration clause in an agreement prevent a party from being able to seek winding-up proceedings for an unpaid debt?

This is a question that has caused disagreement in various courts in recent years, as it touches on two competing areas of public policy. On the one hand, it is in the public interest that there be a relatively simple means by which an insolvent company can, without undue delay, be put into insolvency. On the other hand, it is similarly in the public interest that those who agree to resolve their disputes by arbitration should be held to that agreement without interference by the courts.

In July 2024, we reported in our Expert Insights on the significant Privy Council decision in Sian Participation Corp (In Liquidation) v Halimeda International Ltd [2024] UKPC 16 (Sian Participation).  In this case, the Privy Council ruled that winding-up proceedings should only be stayed or dismissed in favour of arbitration if the debt is genuinely disputed on substantial grounds.

Sian Participation overturned the leading English law authority of Salford Estates (No 2) Ltd v Altomart Ltd (No 2) [2014] EWCA Civ 1575 (Ch) (Salford Estates) which had previously ruled that winding-up proceedings should generally be stayed or dismissed if there is an arbitration clause, save for wholly exceptional circumstances.

In August 2024, after the Privy Council decision in Sian Participation, the Hong Kong Court of First Instance considered the same issue in Re Mega Gold Holdings Limited [2024] HKCFI 2286 (Re Mega Gold). For the reasons detailed below, the Hong Kong Court decided to follow Salford Estates despite it having been overturned by the Privy Council in Sian Participation.  

In this article, we examine the key differences between these jurisdictionally competing authorities and explain why the Hong Kong Court has diverged from the Privy Council on this issue.

English Approach

In Sian Participation, the defendant Sian Participation Corp (SPC) defaulted on a loan of $140 million, which was advanced by Halimeda International Ltd (Halimeda) under a facility agreement (the Agreement), and successfully petitioned for a liquidator to be appointed.

The Agreement included a widely drawn arbitration clause which referred “any claim, dispute or difference of whatever nature” to arbitration under the LCIA Rules. SPC claimed that the debt was disputed because it had a cross claim against Halimeda in other ongoing proceedings and that, as a result, the application should be stayed or dismissed in line with the decision in Salford Estates.

At first instance, a court in the British Virgin Islands held that SPC had failed to establish that the debt was genuinely disputed on substantial grounds and that, as a result, the debt was not sufficiently disputed to remove it from the class of unpaid debts sufficient to petition for a liquidator to be appointed.

On appeal, SPC argued that the application should have been stayed or dismissed regardless of the grounds of the dispute and that it should have been referred to arbitration under the terms of the arbitration clause in the Agreement.

The parties agreed that the appointment of liquidators was not an “action” within the meaning of section 18 of the BVI Arbitration Act 2013 and that, as a result, the Court could not automatically grant a stay of the application. The question therefore related to the Court’s application of its discretion to stay or dismiss the application.

The Privy Council followed the judgment in Jinpeng Group Ltd v Peak Hotels and Resorts Ltd [2025] ECSC J1208-4 and held that, in order for an application for the appointment of liquidators to be stayed or dismissed, the debtor must provide evidence that the debt is disputed on genuine and substantial grounds.  

The Privy Council’s reasoning was that the objective of arbitration legislation is to facilitate the fair and speedy resolution of substantive issues in dispute. Therefore, if there was no genuine and substantial dispute over a debt, the arbitration agreement would not be engaged and any arbitral proceedings would only cause unnecessary delay and expense.

Hong Kong Approach

In Re Mega Gold, a winding-up petition against Mega Gold Holdings Limited (MGHL) and a bankruptcy petition against the founder and CEO of MGHL (the Debtor) were heard together.

The petitions were presented on the basis of debts owed by MGHL and the Debtor to New Deal Trading Limited (the Petitioner), which arose from various agreements made between the Petitioner and MGHL under which the Debtor agreed to guarantee the performance of MGHL’s obligations.

MGHL and the Debtor asked the Court to stay the petitions in favour of arbitration on the grounds that each of the agreements under which the debts had arisen contained an arbitration clause covering the petitions and that there were no countervailing factors against the enforcement of the arbitration clauses.

The Court of First Instance addressed the Privy Council’s decision in Sian Participation but held that it would instead follow the Hong Kong approach established in Re Guy Kwok Hung Lam [2023] HKCFA 9 (Guy Lam) and Simplicity & Vogue Retailing (HK) Co. Limited [2024] HKCA 299 (Re Simplicity).

Under Guy Lam and Re Simplicity, if the agreement under which a debt arose is subject to an arbitration clause, the Court has the discretion to determine whether to stay or dismiss winding-up proceedings based on a “multi-factorial approach”.  The Hong Kong Courts will usually stay or dismiss a winding-up petition where the debt is disputed and the contract giving rise to the debt contains an arbitration clause that covers a dispute over the debt, unless there are “countervailing factors such as the risk of insolvency affecting third parties and a dispute that borders on the frivolous or abuse of process”.  This is essentially equivalent to the Salford Estates approach.

The Court of First Instance noted that the threshold to establish a claim or defence being “frivolous” or constituting an “abuse of process” is “a rather high threshold that one has to overcome” and is fact-specific. This will usually entail a party showing that the claim is “bound to fail”, and hence does not warrant a chance to be further investigated at trial.

The Hong Kong Court directed that, unless there is a plain and obvious case that the dispute is “frivolous” or amounts to an “abuse of process”, the Court should be more ready to decline to exercise its insolvency jurisdiction to determine the dispute, leaving it to be resolved by the agreed arbitration mechanism. This threshold is much higher than the threshold applied by Sian Participation, where a debt must be disputed on genuine and substantial grounds.

Conclusion

The key differences between the approach of the Privy Council and that of the Hong Kong Court of First Instance are:

• In England, where the agreement under which the debt had arisen contains an arbitration clause, any attempted winding-up proceedings of a debtor company will only be dismissed or stayed in favour of arbitration if there is a genuine dispute over the debt on substantial grounds.
• In contrast, the Hong Kong Court is clear that a “multi-factorial approach” will be taken in these circumstances and that, in practice, any attempted winding-up proceedings of a debtor company will be dismissed or stayed in favour of arbitration unless the dispute is either “frivolous” or an inexcusable abuse of process.

This evidences a different approach by the two courts to balancing the importance of upholding a private agreement between parties to arbitrate disputes against the public and commercial benefit of winding up companies which are unable to pay their debts without unnecessary cost and delay.

Interestingly, in Sian Participation, the Privy Council repeated with approval criticisms of Salford Estates made by a Hong Kong judge in Dayang (HK) Marine Shipping Co, Ltd [2020] HKCFI 311 (“Dayang”). In Dayang, the judge, William Wong SC, argued that Salford Estates should not be followed because: (1) the presentation of a winding-up petition is not a claim seeking the determination of any dispute about the debt, so it is not in breach of an agreement to have disputes determined by arbitration; (2) the process by which the Companies Court decides whether the petitioner has standing to present the petition is not analogous to summary judgment proceedings in a claim to enforce a debt by action; (3) the risk of an abusive petition (where there is a genuine dispute as to the debt) can be met by an order for indemnity costs; and (4) the Salford Estates approach imposes an unprecedented fetter upon the court’s discretion to wind up. The Hong Kong Court of First Instance did not refer to the judgment in Dayang in Re Mega Gold.

The Hong Kong Courts are known to be pro-arbitration, and the decision in Re Mega Gold certainly affirms that. If there is an arbitration clause, the Hong Kong Courts will strive to give effect to it unless there are exceptional countervailing circumstances. In contrast, the English Courts have prioritised the commercial benefit of winding up failing companies without unnecessary cost and delay. However, in Sian Participation, the Privy Council was also at pains to emphasise that the judgment was intended to be a pro-arbitration decision, as prospective creditors may now resist the inclusion of an arbitration clause in their contracts if they believe that such a clause will have the effect of reducing, slowing or increasing the cost of enforcing their remedies in the event of the insolvency of the debtor.

In light of the decision in Re Mega Gold, it will be interesting to see how other jurisdictions deal with these competing approaches.