This is the first time the Hong Kong Court has had to consider the circumstances in which it should restrain winding-up proceedings in a similar common law jurisdiction (here, the Cayman Islands) in circumstances where the two jurisdictions have conflicting approaches as to how they deal with winding-up proceedings in favour of arbitration.

The underlying dispute arose from a Term Facility Agreement (TFA) containing an arbitration clause mandating resolution of disputes in Hong Kong: the creditor had served a statutory demand in the Cayman Islands for a debt allegedly owed under the TFA and other arrangements. The company disputed the debt was due.

The company applied to the Hong Kong Court to injunct presentation of a winding-up petition in Cayman arguing that it would be in breach of the TFA’s arbitration clause. The Hong Kong Court had to ascertain whether the Cayman Islands winding-up proceedings would have the effect of finally resolving the dispute regarding the Plaintiff’s indebtedness under the TFA.

In order to reach a determination, Mr Recorder William Wong SC considered (at [31]) that the starting point for the Court was to “[evaluate] the foreign proceedings on broader grounds, such as whether they are vexatious, oppressive, or inconsistent with principles of forum non conveniens. In such cases, the Court is mindful of international comity and adopts a more cautious and restrained approach”.  [emphasis added]. The Court’s reasoning in determining whether to grant anti-suit injunctive relief then continued as follows (at [38]):

“[The] Court’s focus here is on enforcing the arbitration agreement, not to prejudge or evaluate the merits of the underlying dispute. This approach ensures respect for the parties’ contractual choice to arbitrate and avoids undermining the arbitral process by prematurely addressing issues that are properly reserved for the arbitral tribunal.”  [emphasis added]

By considering the tension between the approach taken by the Hong Kong Court and that of the Cayman Islands, the Court held that the intended Cayman Islands winding-up proceedings did not breach the TFA, and even if it had, there were strong reasons not to grant the injunction.

In Re Lam Kwok Hung Guy  (Re Guy Lam), the Hong Kong Court (G Lam JA) specifically considered and rejected the principle that winding-up proceedings based on a disputed debt do not, in themselves, determine the dispute and therefore do not contravene a relevant arbitration clause.

Drawing an analogy between a winding-up proceeding and a summary judgment, G Lam JA explained that both processes can determine a dispute because both of them can give rise to an estoppel over the precise issues decided (subject to the usual conditions being satisfied). A proceeding which determines a dispute is a proceeding which is capable of giving rise to an estoppel.

Put simply, the Court held (at [64]) that: “[t]he starting point is that a pursuit of foreign proceedings in breach of an arbitration agreement would be liable to be restrained by an anti-suit injunction”  and since “the Plaintiff seeks a contractual anti-suit injunction by invoking the arbitration agreement … it has to establish a breach … by the Defendant. The burden is on the Plaintiff to show a “high probability of success” that the Defendant’s pursuit of the anticipated Cayman winding-up proceedings breaches [the arbitration clause of the TFA]”.

The Court then turned to the Judicial Committee of the Privy Council decision of Sian Participation Corp v Halimeda International  (which is binding in the Cayman Islands).

Under Cayman Islands law, the determination of a winding-up petition would not finally resolve the underlying dispute over the debt claimed: the Grand Court will only determine whether there is a bona fide  dispute on substantial grounds, not the substantive merits of the dispute itself. Resolution of the underlying dispute would be a matter for arbitration, in accordance with the contractually agreed format for dispute resolution.

The Court therefore had to determine whether the presentation of a Cayman Islands winding-up petition would be a breach of the arbitration clause of the TFA, meaning that the Cayman Islands winding-up proceedings would ultimately have the effect of finally resolving the dispute on the Plaintiff’s indebtedness under the TFA.

Based on the approach adopted in Cayman, relying on the decision in Sian, as the Cayman Islands winding-up proceedings would not finally resolve the underlying dispute, the creditor’s intended presentation of a Cayman Islands winding-up petition could not breach the arbitration clause in the TFA, and the Hong Kong Court therefore refused to injunct presentation of the petition in the Cayman Islands.

In summary, the Hong Kong Court will not grant an anti-suit injunction to restrain foreign insolvency proceedings where the approach adopted by the foreign Court will not finally resolve the underlying contractual dispute, as determined by the law of the foreign forum.

The Court also noted that even if the winding-up proceedings had fallen within the scope of the arbitration clause, there were strong reasons not to grant the injunction, having reference to public policy considerations in the Plaintiff’s home jurisdiction of the Cayman Islands and, in the Court’s view in this particular case, the hopelessness of the Plaintiff’s stated defence to the debt.

*Harneys do not practice the laws of Hong Kong.