Legal update: Privy Council’s decision Sian Participation Corp v. Halimeda International Ltd – Are we back to square one?  

This note updates a series of Tanner De Witt articles on the interaction between dispute resolution clauses and the Court’s insolvency jurisdiction. The previous articles are:

1. Legal Update: Arbitration Clauses and Insolvency Proceedings revisited
2. The Legacy of Re Guy Lam lives on
   
   

The update arises because of the widely reported Privy Council decision in Re Sian Participation Corp[1] that the English Court of Appeal’s decision in Salford Estates[2] was wrongly decided and should no longer be followed in England.

From a Hong Kong perspective, it is important to note that the Privy Council considered in its reasoning a number of Hong Kong decisions, including  Re Guy Lam[3], Lasmos[4], Re But Ka Chon[5] (in which Tanner De Witt acted for the creditor) and Re Asia Master Logistics.[6] Salford Estates was one of the key authorities relied upon by the debtors in those cases and was the basis on which the first of them (Lasmos) was made.

The procedural history and facts of Re Sian Participation need not be repeated in detail. It concerns a typical situation where a debtor argues (in reliance on Salford Estates) that because the underlying debt is simply “not admitted”, insolvency proceedings should be dismissed in favour of arbitration and/or in accordance with an exclusive jurisdiction clause favouring another jurisdiction. The Board of the Privy Council held that Salford Estates was wrong and that the correct test is whether “the debt is disputed on genuine and substantial grounds”[7] (i.e. the “Established Approach” as defined in the Re Guy Lam CFA decision and which was the approach followed in Hong Kong prior to the Lasmos decision).  The Board reasoned as follows:

• Insolvency proceedings do not offend the parties’ contractual bargain to arbitrate[8]. The contractual obligation conferred by arbitration agreements requires the parties to refer “disputes” to arbitration for resolution. Concurring with the Hong Kong decision in Re Asia Master Logistics, the Board concluded that insolvency proceedings do not seek to and do not, resolve or determine the petitioner’s claim to a sum of money and thus such proceedings do not offend the sanctity of contract. Further, in coming to this conclusion, the Board also relied on its previous decision in Re FamilyMart[9] which held that a “matter” which has been agreed to be referred to arbitration must be “a substantial issue that is legally relevant to a claim or a defence, or foreseeable defence, in the legal proceedings […]”[10].

• The general objectives of arbitration legislation are not offended[11]. A key underlying policy of insolvency proceedings is not to wind up/bankrupt a debtor if the debt is disputed on substantial grounds. Proceeding on this basis, to require a creditor to go through an arbitration where there is no genuine or substantial dispute as the prelude to seeking a liquidation/bankruptcy “just adds delay, trouble and expense for no good purpose. Party autonomy and pacta sunt servanda are not offended because seeking a liquidation is not something which the creditor has promised not to do”[12]. As to concerns raised in Salford Estates regarding the potential abuse of process in insolvency proceedings, the Board was satisfied that the Companies Court already has sufficient safeguards in place to avoid the improper use of the insolvency process[13].

• Salford Estates’ interpretation of the policy inherent in the Arbitration Act 1996 was wrong. The Court of Appeal in Salford Estates wrongly assumed that the legislative intent “went further into the prohibition of court proceedings than did section 9 itself [section 9 being a mandatory stay]”[14]. Consistent with (1) above, as insolvency proceedings do not resolve any dispute, and the legislative policy of the Arbitration Act 1996 therefore “stops short of [insolvency proceedings]”[15]. The importance of the policy underpinning the Arbitration Act 1996 was argued in Hong Kong in Re But Ka Chon. However, that aspect of the case was not given much consideration because the change in legislation in England relied upon in Salford Estates never occurred in Hong Kong. The Court of Appeal in Re But Ka Chon did, however, express a view that where the relevant contract contained an arbitration clause it had “reservations if the discretion under the insolvency legislation should be exercised only one way to substantially curtail the right of a creditor to present a petition”.

However, in Hong Kong we are not quite back to square one yet. The Board’s decision is not binding in Hong Kong and certainly at First Instance the court will be bound by the decisions of the higher courts to continue to apply the “Guy Lam principle” and the subsequent Court of Appeal decisions (i.e. Re Simplicity & Vogue and Re Shandong Chenming). However, it should not be forgotten that those latter two decisions the Court of Appeal did leave the door open for insolvency proceedings to continue even in the face of an arbitration clause “where the grounds for disputing the debt are obviously insubstantial”. Given the introduction of the “multifactorial” approach by the Court of Appeal in those cases, the Board’s decision may well be persuasive to place greater weight on the consideration of merits in the multifactorial approach.

Robin Darton and Tim Au

If you would like to discuss any of the matters raised in this article, please contact:

Robin Darton
Partner | E-mail

Tim Au
Partner | E-mail

The above is not intended to be relied on as legal advice and specific legal advice should be sought at all times in relation to the above.

[1] [2024] HKPC 16

[2] [2015] Ch 589

[3] (2023) 26 HKCFAR 119

[4] [2018] 2 HKLRD 449

[5] [2019] 4 HKLRD 85

[6] [2020] 2 HKLRD 423

[7] Re Sian Participation, §99

[8] Re Sian Participation, §§,88-89

[9] [2023] UKPC 33

[10] Re FamilyMart, §61

[11] Re Sian Participation, §92

[12] Re Sian Participation, §92

[13] Re Sian Participation, §97

[14] Re Sian Participation, §94

[15] Re Sian Participation, §94