Hong Kong Court dismisses application to restrain foreign winding up proceedings in favour of Hong Kong arbitration

Synopsis

Hong Kong’s Court of First Instance (Recorder William Wong SC) considered an anti-suit injunction application by Hyalroute Communication Group Limited (“Hyalroute”) to restrain a creditor, Industrial and Commercial Bank of China (Asia) Limited (“ICBC Asia”) from presenting a winding-up petition in the Cayman Islands in favour of arbitration in Hong Kong on the ground that the matter concerns disputes arising out of or in connection with a Term Facility Agreement which contains an arbitration clause for such disputes.

As the Court observed, these proceedings appear to be the first case where the Hong Kong Court has to consider the circumstances in which it should restrain winding-up proceedings in a similar common law jurisdiction which may have adopted a different approach on how to deal with winding-up proceedings in favour of arbitration.

The Court held that commencing Cayman winding-up proceedings would not be in breach of the arbitration clause as such proceedings would not have the effect of finally resolving the dispute within the meaning of the arbitration clause, and therefore the anti-suit injunction application was dismissed.

Background

In July 2018, two subsidiaries of Hyalroute entered into a Term Facility Agreement (“TFA”) as borrowers, with ICBC Asia as lender and Hyalroute as guarantor.

In 2021, a military coup took place in Myanmar, leading to damage to the fibre optic infrastructure of one the borrowers, and severe currency controls requiring such borrower to hold all funds in local currency and seek government approval to convert them into US dollars and/or obtain special permission to repay foreign-incorporated lenders. These made it impossible for the borrowers to comply with the payment schedule under the TFA.

In recognition of the political and commercial risks of investing in Myanmar, in June 2018 (before the TFA was entered into), ICBA Asia entered into an insurance contract with the Multilateral Investment Guarantee Agency (“MIGA Insurance Contract”) as the named beneficiary with the premiums ultimately borne by Hyalroute and the borrowers. The MIGA Insurance Contract provided coverage for various specified risks including war and civil disturbance and restriction on transfer of currency.

The TFA provided that if Hyalroute made an application to ICBC Asia in relation to a covered risk, its obligations as a guarantor would be suspended for any default caused by the relevant covered risk. However, any suspension would cease upon (i) ICBC Asia’s rejection of the Covered Risk Application, or (ii) MIGA’s determination that it was not liable to compensate ICBC Asia.

In February 2021, Hyalroute made a Covered Risk Application to ICBC Asia. ICBA Asia proceeded to make several claims under the MIGA Insurance Contract and Hyalroute contended that its obligations as guarantor under the TFA would be suspended. 

However, on 22 and 27 November 2024, ICBC Asia served a Statutory Demand on Hyalroute and its registered agent demanding a sum of US$95,506,631.05, which comprised of the debts owed under the TFA and an interest rate swap arrangement. In response, Hyalroute applied for an anti-suit injunction to restrain ICBC Asia from presenting any winding-up petition against it in the Cayman Islands.

Court’s decision and reasoning

Hyalroute’s application for an anti-suit injunction was dismissed by the Court.

As the Court observed at the beginning of its Decision, the application arose against the context of the divergence between the Hong Kong Court of Final Appeal’s judgment in Re Guy Lam and the Privy Council’s judgment in Sian Participation, namely while under Hong Kong law winding-up proceedings will be stayed in favour of arbitration unless there is abuse, English law now requires the debtor to show there is a bona fide dispute on substantial grounds to justify the creditor going through arbitration.  

The arbitration in this case provides:

“Any dispute, controversy or claim arising in any way out of or in connection with this Agreement (including (i) any issue regarding contractual, pre-contractual or non-contractual rights, obligations or liabilities and (ii) any issues as to the existence, validity, breach or termination of this Agreement (a “Dispute”) shall be referred to and finally resolved by binding arbitration administered by the Hong Kong International Arbitration Centre (“HKIAC”)” (emphasis added) (the “Arbitration Clause”)

As Hyalroute seeks a contractual anti-suit injunction by invoking the Arbitration Clause, Recorder William Wong SC considered that the starting point is whether a pursuit of foreign proceedings would be in breach of the arbitration agreement such that the respondent would be liable to be restrained by an anti-suit injunction.  In relation to this, Hyalroute has to show a “high probability of success” that ICBC Asia’s pursuit of the anticipated Cayman winding-up proceedings breaches the Arbitration Clause.

Obligations under the Arbitration Clause and whether there is a breach

The Recorder considered that there are two obligations under the Arbitration Clause: (i) a positive obligation that disputes within the scope of the clause be finally resolved by arbitration, and (ii) a negative obligation that precludes the parties from having disputes finally resolved in a non-contractual forum, and properly construed, if a party commences legal proceedings that do not have the effect of finally resolving the disputes, then the negative obligation under the Arbitration Clause is not infringed and there would be no breach.

The Recorder agreed with ICBC Asia and held that the Cayman proceedings would only have the effect of “finally resolving the dispute” if the rulings or findings of the Cayman Court constitute res judicata and are capable of giving rise to an estoppel over the dispute.  Whilst the Arbitration Clause is governed by Hong Kong law, the answer to this question depends on what Cayman law says about the Cayman winding-up proceedings.

The Recorder considered a number of authorities and accepted the Privy Council’s judgment in Sian Participation that as a matter of BVI law and English law, a creditor's winding-up petition does not resolve or determine anything about the petition debt nor the petitioner’s claim to be owed money, such as the existence or amount of the debt, which is not an issue for resolution in those proceedings. The Recorder also considered that under Cayman law, a consistent line of authorities holds that even where the petition debt is disputed, the Court would determine only the threshold question of the genuineness of the dispute before deciding whether to grant, dismiss, or stay the winding-up petition, without resolving the substantive dispute or carrying out a summary judgment type analysis.

Therefore, the Recorder was of the view that upon a proper construction of the Arbitration Clause under Hong Kong law, winding-up proceedings in the Cayman Islands would not have the effect of finally resolving the dispute within the meaning of the Arbitration Clause, and bringing winding-up proceedings in the Cayman Islands would not amount to a breach of ICBC Asia’s negative obligation of not having the dispute finally resolved in a non-contractual forum.

Other reasons not to grant the injunction

While the Court considered that the above ground alone would warrant a dismissal of Hyalroute’s application, the Recorder also considered certain other grounds. He noted that the Court of Final Appeal in Re Guy Lam made clear that even if a dispute resolution clause applies to the insolvency proceedings before the Court, there is no automatic stay or dismissal, and the Court continues to take into account a range of considerations, even though a strong cause is needed to depart from such a clause. Notably, the merits of the defence may be so bad that they border on frivolous or amount to an abuse of process.

The Recorder considered that in this specific context, anti-suit injunctions and the Court’s own approach to staying insolvency proceedings should be treated alike. On the facts of the present case, he was of the view that Hyalroute’s defence was hopeless and frivolous, and it would be abusive for Hyalroute to rely on such a defence to prevent ICBC Asia from invoking the Cayman Court’s winding-up jurisdiction.

Observations

As mentioned above, Hong Kong winding-up proceedings are generally stayed in favour of arbitration unless there is evidence of abuse (Re Guy Lam) and this differs from the position under the English law as outlined in Sian Participation. The Hong Kong Court has also been generally “pro-arbitration”, giving effect to the parties’ pre-existing agreement to refer disputes to arbitration.

This decision has arguably taken a different route compared with the principles laid down in Re Guy Lam in that the Court, in this instance, takes a more “pro-creditor” approach.  The result of this decision is perhaps understandable as Hyalroute would likely face a higher hurdle to obtain an Order from the Cayman Court for a stay of winding-up proceedings, having regard to the principles laid down in Sian Participation. 

It remains to be seen whether the Hong Kong Court of Appeal (or even the Court of Final Appeal) will have the opportunity to further consider the issue.

In the meantime, litigants will need to bear in mind that upon a proper construction of the Arbitration Clause under Hong Kong law, winding-up proceedings in the Cayman Islands (and the BVI) would not have the effect of finally resolving the dispute within the meaning of the Arbitration Clause, and the Hong Kong Court will not restrain such proceedings.

This decision also serves as a reminder to parties that when drafting arbitration clauses, one may need to consider whether such a clause is drafted in sufficiently broad terms to prevent winding-up petitions (or similar applications) to be presented in an applicable offshore jurisdiction.