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Arbitration may be restrained when the respondent company is already subject to winding up proceedings

by Ian Lo & Anderson Siu

In the recent judgment of China Evergrande Group (中國恆大集團) v Triumph ROC International Ltd [2023] CFI 2432, the Hong Kong Court of First Instance granted an order restraining the Defendant (“Triumph”) from taking any further step in the arbitration commenced by Triumph against the Plaintiff (“CEG”) pending final resolution of the winding-up proceedings which CEG was subject to.

Key Facts

In June 2022, a winding up petition by a third party was presented against CEG (the “Winding-Up Petition”) claiming HK$862.5 million which arose out of the said third party’s participation in the financing in relation to CEG and its subsidiaries (the “Group Financing“).  In light of CEG’s restructuring efforts, the Winding Up Petition was adjourned several times and was not wound up as at the date of the judgment.

In August 2022, Triumph commenced arbitration proceedings against CEG also for HK$862.5 million, arising from Triumph’s participation in the Group Financing (the “Arbitration Proceedings”).

Subsequently, CEG applied for an order restraining and staying the Arbitration Proceedings.  Triumph resisted CEG’s application by arguing that the Arbitration Proceedings were focused on determining CEG’s liability (but were not by themselves enforcement actions), and thus, the Arbitration Proceedings were incapable of jeopardizing the interests of CEG’s other creditors. Further, Triumph argued that it would be wrong for the Court to defeat its contractual right to resolve the dispute by way of arbitration.

Court’s Decision

Upon consideration of the relevant sections of the Cap. 32, the Court recognises that it has a broad discretion to restrain any “actions” or “proceedings” (which include arbitration proceedings) against a Hong Kong incorporated company in the period after the presentation of a winding up petition and before the making of a winding up order.

Such broad discretion is to be exercised in the relevant legislative context of:

  • Ensuring that the assets of a company are administered in an orderly way for the benefit of all its creditors as a class, and preventing particular creditors from gaining an advantage by bringing separate proceedings against the company so as to gain priority over others of their class;
  • Protecting and preserving the assets available to the company’s creditors as a whole, and avoiding unnecessary expenditure of assets by way of legal costs;
  • Preventing the issue and pursuit of proceedings to determine issues which can be properly determined in the winding-up;
  • Deterring creditors from too readily seeking to pursue their claims outside of statutory process; and
  • Avoiding further difficulties that may result where attempts by particular creditors to bypass or “short-circuit” that process spur other creditors to similar action.

In light of the importance of such concerns, the Court decided that the test should be whether there are “very exceptional circumstances” which might “justify the Court in refusing to accede” a stay application on the other actions and proceedings when winding-up proceedings are already underway. What are sufficiently exceptional circumstances will depend on the overall circumstances of a particular case, but the courts may assess the following factors:

  • The stage and status of the winding-up proceedings and any proposed scheme of arrangement;
  • The nature and stage of the other actions or proceedings against the company (“Outside Proceeding”); and
  • The relative costs and benefits / detriments in either staying or allowing the Outside Proceedings to continue in parallel with the primary winding-up or scheme proceedings.

Having considered the above factors, the Court finds that it is just and appropriate to restrain the Arbitration Proceedings pending further developments since:

  • CEG has been progressing “steadily” with its scheme of arrangement (the “Scheme”);
  • The Arbitration Proceedings will inevitably involve substantial legal costs, including the costs of a 5-day trial;
  • Triumph did not put forward any reasons and/or evidence that shows why the issues to be addressed in the Arbitration Proceedings could not be properly determined under the Scheme or in the winding-up; and
  • In fact, Triumph’s argument of its purportedly clear and simple entitlement to judgment in the Arbitration Proceedings backfired against itself, since the Court was of the view that this was all the more reason why Triumph’s claim should be dealt in the ordinary way along with other creditor claims.

Key Takeaways

This case highlights the Hong Kong courts’ determination to see winding-up proceedings as level-playing fields for all creditors once the winding-up process has been commenced.  It is thus important for companies’ creditors, who are contemplating the commencement of debt recovery proceedings (which are outside the statutory liquidation process) to pay extra consideration to this perspective.  In any event, a winding-up search is highly recommended prior to the commencement of debt recovery proceedings.  If possible, reach out to your legal advisors as early as possible for strategic discussions.

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