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Salford Estates and the effect of an arbitration agreement on a winding-up petition: the debate rumbles on in new Hong Kong judgment

Since the 2014 English decision in Salford Estates (No. 2) Limited v Altomart Limited, there has been debate about how common law courts should approach winding-up petitions based on debts arising under contracts containing arbitration agreements. In the recent judgment of Re Asia Master Logistics Limited, the Hong Kong court has added a forceful new perspective to this debate.

Salford Estates was significant in holding that, where a winding-up petition is founded on a debt arising under a contract containing an arbitration agreement, it should be stayed or dismissed if the debtor can show that the debt is merely “not admitted” or “disputed”. This contrasted with the traditional approach that, to defeat a petition, a debtor must demonstrate a bona fide and substantial dispute to the petitioning debt – regardless of whether an arbitration agreement applied. 

Following the 2018 decision in Lasmos Limited v Southwest Pacific Bauxite (HK) Limited, Hong Kong adopted (along with other prominent common law jurisdictions) an approach modelled on Salford Estates. Lasmos held that a petition should generally be dismissed if: (1) the debtor "disputes" the debt; (2) the dispute falls under an arbitration agreement; and (3) steps have been taken to commence arbitration.

Salford Estates and Lasmos sparked controversy and have been criticised for creating an anomaly applying to arbitration agreements that restricts creditors’ rights. This criticism has been particularly acute in Hong Kong, with judgments questioning Salford Estates and Lasmos. This criticism has now found its most forensic expression in Re Asia Master

Here, the petitioning debt arose under a charterparty containing an arbitration agreement. The debtor argued (amongst other things) that the petition should be dismissed, applying Lasmos. On the facts, the court, in winding-up the debtor, found that Lasmos did not apply as the debt was not disputed and no steps had been taken to commence arbitration.

Despite this, the court took the opportunity to analyse the rationale of what it called the “Salford-Lasmos Approach” and its disagreements with it. The court identified two broad themes: (1) a “contractual justification” of upholding parties’ agreements to arbitrate; and (2) a “comparative justification” of ensuring consistency with other common law jurisdictions. The court roundly rejected both, commenting:

  1. The “contractual justification” was misguided. Properly analysed, arbitration agreements impose an obligation on parties to have disputes determined or resolved by arbitration. However, as a court hearing a winding-up petition does not resolve or determine any disputes, a petitioning creditor is not in breach of its obligation to have disputes determined by arbitration.
  1. The comparative justification overstated the extent to which other courts had applied the Salford-Lasmos Approach.
  1. A key feature of the courts’ discretion to wind-up insolvent companies is its flexibility, and the Salford-Lasmos Approach is antithetical to that.

The court accordingly concluded that the Salford-Lasmos Approach is incorrect and effectively called for it to be overturned.

This is a forthright expression of the anti-Salford/Lasmos viewpoint gaining ground in Hong Kong and elsewhere. Although the analysis in Re Asia Master was obiter, and did not in fact overturn Lasmos, it appears inevitable that this issue will fall for resolution at appellate level soon. It will be interesting to see the path that the Hong Kong courts take when that happens, and its impact in other common law jurisdictions.

Salford Estates and the effect of an arbitration agreement on a winding-up petition: the debate rumbles on in new Hong Kong judgment