In Hyalroute Communication Group Limited v. Industrial And Commercial Bank Of China (Asia) Limited (Hyalroute),[2025] HKCFI 2417. the Hong Kong Court of First Instance considered for the first time the question of whether it should restrain foreign winding-up proceedings in favour of arbitration.
Background
The interplay between arbitration and winding-up proceedings has recently attracted significant judicial attention in major common law jurisdictions (for more details, see our blog post). In particular, Hong Kong courts and English courts (as well as offshore jurisdictions like the Cayman Islands) have adopted divergent approaches in determining the circumstances in which a winding-up petition may be stayed in favour of arbitration:
- In Hong Kong, following the Court of Final Appeal decision in Re Lam Kwok Hung Guy, ex p Tor Asia Credit Master Fund LP (Guy Lam)[2023] HKCFA 9. and the Court of Appeal decisions in Re Simplicity & Vogue Retailing (HK) Co Ltd[2024] HKCA 299. and Re Shandong Chenming Paper Holdings Ltd,[2024] HKCA 352. winding-up petitions will generally be stayed in favour of arbitration, unless doing so would lead to a risk of prejudice to other creditors, or the alleged dispute as to the debt either “border[s] on the frivolous” without any genuine intention to arbitrate or is an abuse of process.
- By contrast, under English law, following Sian Participation Corp (in liq) v. Halimeda International Ltd (Sian Participation),[2024] UKPC 16. a generally worded arbitration agreement (or exclusive jurisdiction clause) will not automatically stay a winding-up petition unless the petition debt is shown to be “genuinely disputed on substantial grounds”. Sian Participation was subsequently adopted and followed by the Cayman court.
Application to Hyalroute
In Hyalroute, instead of applying to stay the winding-up petition before the Cayman court, the debtor company (Plaintiff) opted to apply to the Hong Kong court for an anti-suit injunction to restrain the creditor (Defendant) from presenting any winding-up petition against it in the Cayman Islands.
The Plaintiff alleged that the matter concerned disputes arising out of or in connection with a Term Facility Agreement (TFA), which contained an arbitration clause providing for a Hong Kong-seated arbitration. Hence, the Plaintiff argued that the Hong Kong court should grant an anti-suit injunction.
Decision
Recorder William Wong SC refused to grant the Plaintiff’s application.
The court held that commencing Cayman winding-up proceedings would not breach the arbitration agreement between the parties, as, under Cayman law, such proceedings would not have the effect of “finally resolving” the dispute within the meaning of the arbitration clause in question.
Interpretation of the Arbitration Clause
The arbitration clause provided for disputes to be referred to and “finally resolved” by arbitration at the Hong Kong International Arbitration Centre. The Recorder, relying heavily on those words, found that the arbitration clause imposes on the parties both (i) a positive obligation to have disputes within the scope of the clause finally resolved by arbitration, and (ii) a negative obligation precluding the parties from having disputes finally resolved in a non-contractual forum.
In the Recorder’s view, it would be a breach of the arbitration clause for a party to commence legal proceedings in a non-contractual forum. However, if such proceedings do not have the effect of finally resolving the dispute, then the negative obligation under the arbitration clause would not be infringed.
Based on the above, the Recorder noted that the Plaintiff must establish that, in addition to the dispute itself, the Cayman winding-up proceedings also fall within the ambit of the arbitration clause.
Legal Effect of Winding-Up Petition Under Cayman Law
The Recorder distilled the following Cayman law principles as to the legal effect of a winding-up petition in the Cayman Islands:
- Even where the petition debt (which is subject to an exclusive jurisdiction or arbitration agreement) is disputed, the court should still determine the threshold question as to the genuineness of the dispute before deciding whether to grant, dismiss, or stay the petition.
- A conceptual distinction exists between (i) the determination of the threshold question of whether there was a genuine dispute on substantial grounds; and (ii) the resolution of the substantive dispute. In undertaking the threshold inquiry in a petition, the court is not resolving or determining the substantive dispute.
- Therefore, even where the petition is granted, the court is not resolving the dispute in any substantive sense, but is only resolving the threshold question. As such, in resolving the threshold question in favour of the petitioner, the application of an exclusive jurisdiction or arbitration agreement becomes irrelevant.
On this basis, the court found that, as a matter of Cayman law, winding-up proceedings would not have the effect of finally resolving the substantive dispute concerning the Plaintiff’s indebtedness under the TFA, within the meaning of the arbitration clause, and therefore the Defendant was not in breach the arbitration clause by presenting a Cayman winding-up petition.
The court accordingly refused to grant the anti-suit injunction sought by the Plaintiff.
Key Takeaways
Hyalroute is the latest chapter in the developing area of law regarding the interplay between arbitration and winding-up proceedings. The Hyalroute decision seems to have followed a different approach from the principle in Guy Lam, where Hong Kong courts would stay winding-up proceedings in favour of arbitration unless there is an element of abuse, and leaves open the possibility that creditors faced with a debt governed by a Hong Kong arbitration clause may be able to proceed with insolvency proceedings in some foreign jurisdictions.
The interaction between arbitration and winding-up proceedings remains an evolving area of law with dynamic developments across various common law jurisdictions. It remains to be seen whether the Hyalroute decision will be revisited by the Court of Appeal, or applied in other courts.
ENDNOTES
1[2025] HKCFI 2417.
2[2023] HKCFA 9.
3[2024] HKCA 299.
4[2024] HKCA 352.
5[2024] UKPC 16.
