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Lasmos Ltd v Southwest Pacific Bauxite (Hk) Ltd

Judgment Cited authorities 13 Cited in 27 Precedent Map Related
Vincent
CourtCourt of First Instance (Hong Kong)
Judgment Date02 March 2018
Neutral Citation[2018] HKCFI 426
Citation[2018] 2 HKLRD 449
Subject MatterCompanies Winding-up Proceedings
Judgement NumberHCCW277/2017
HCCW277/2017 LASMOS LTD v. SOUTHWEST PACIFIC BAUXITE (HK) LTD

HCCW 277/2017
[2018] HKCFI 426

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING‑UP PROCEEDINGS NO 277 OF 2017

________________

IN THE MATTER of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32, sections 178(1)(a), 177(1)(d) and 177(1)(f)

and
IN THE MATTER of Southwest Pacific Bauxite (HK) Limited

________________

BETWEEN
LASMOS LIMITED Petitioner

and
SOUTHWEST PACIFIC BAUXITE (HK) LIMITED Respondent

________________

Before: Hon Harris J in Court

Date of Hearing: 18 January 2018

Date of Decision: 22 January 2018

Date of Reasons for Decision: 2 March 2018

_________________________________

R E A S O N S F O R D E C I S I O N

_________________________________

The application

1. On 27 October 2017 Lasmos Ltd (“Lasmos”), the Petitioner, issued a petition to wind up Southwest Pacific Bauxite (HK) Ltd, (“Company”) on the grounds of insolvency relying on a statutory demand dated 24 July 2017. The statutory demand sought payment of US$259,700.48 (“Debt”) said to arise under a management services agreement dated 24 July 2013 (“Agreement”). On 30 October 2017 the Company issued a summons to strike out the Petition. I heard the summons on 18 January 2018 and made an order on 22 January 2018 that the Petition be struck out. These are my reasons.

Background

2. The Company is a joint venture owned by a number of shareholders including Lasmos, which owns 32.5%. The relationship between the shareholders is governed by a shareholders agreement dated 24 July 2014. The Company’s purpose is to hold 75% of Solomon Bauxite Ltd (“SBL”). The other 25% is held by Lasmos. SBL’s main asset is the lease of a bauxite mine in the Solomon Islands. The Company’s board at the relevant times consisted of two directors representing Lasmos, Keith Douglas and Efstratis Kirmos, two directors representing another shareholder, Breakaway Private Equity, Bruce Hills and Stephen Bartrop, and Andrew White and Lawrence Chin representing respectively two other shareholders.

3. On 24 July 2013 as well signing the shareholders agreement Lasmos also signed the Agreement. Under the Agreement Mr Douglas was appointed Chairman of SBL and Mr Kirmos was appointed General Counsel. The Debt is said by Lasmos to represent the payment it is entitled to pursuant to the Agreement for the services provided by Mr Douglas and Mr Kirmos.

4. The Company has declined to pay the Debt on the grounds that the fees have not been agreed and in particular there has been no agreement as to the rate to be charged. The Company has not suggested that nothing is payable and it has already paid US$100,000. The Company’s initial position before me was that there was a “bona fide dispute on substantial grounds” as to what further sums were payable. The phrase in parentheses represents what a company faced with a winding-up petition generally has to demonstrate in order to have it struck out.[1] However, the Agreement contains in clauses 17.2 and 17.5 the following provision for arbitration:

“17.2 Notification of Dispute

A party claiming that a Dispute has arisen must notify each other party to the Dispute giving details of the Dispute.”

“17.5 Arbitration

If the Dispute is not settled by mediation within 10 Business Days of the start of the mediation process in clause 17.4, any party may by written notice to the other parties refer the dispute to arbitration. The arbitration will be conducted by a sole arbitrator in accordance with the Hong Kong International Arbitration Centre Administered Arbitration Rules in force at the date of this agreement. The decision of the arbitrator will be binding on the parties. Any arbitration proceedings must be held in Hong Kong and in English. The appointing authority for the purposes of the arbitration shall be the Hong Kong International Arbitration Centre which shall also administer the arbitration. The parties agree to waive any objection to the conduct of such arbitration on the grounds that a mediator was appointed in accordance with clause 17.4(a)(ii).”

5. A number of recent authorities in both England and Singapore have considered the impact the presence of an arbitration clause in an agreement giving rise to a debt relied on to support a winding-up petition, has on the exercise of the court’s discretion to make a winding-up order. I asked to be addressed on the authorities and whether Hong Kong law should develop in a similar manner. I consider this question in the next section of this decision.

The Hong Kong authorities

6. The first reported case in Hong Kong in which the court considered what, if any, relevance an agreement to arbitrate had on the determination of a winding-up petition is Hollmet AG v Meridian Success Metal Supplies Ltd.[2] Rogers J (as he then was) says this at 347B–H:

“… The procedure of winding up is to wind up an insolvent company. What the court is concerned to see is whether or not the company is insolvent. The basis upon which that may be presented, may be under s 178 or it may be on a different basis but at the end of the day, the court must consider whether the company is insolvent.

One then turns back to art 8(1), one sees that a winding up proceeding is not a matter which is the subject of an arbitration agreement, it is the underlying contract which is the subject of an arbitration agreement. It is common ground between the parties that in all other types of winding up cases when the court is faced with the question of whether a debt is owing, the test it applies is whether there is a bona fide dispute on substantial grounds.

If there is an agreement which provides that disputes should go to arbitration, until the court is satisfied that there is a dispute, it seems to me that it can still be said that money is due and owing under the contract. It is only once the dispute has arisen that the arbitration comes into being. So whether one looks upon the test, under s 177 as considering whether the company is a debtor or whether one applies the other approach and considers whether there is a bona fide dispute on substantial grounds, it seems to me that until it is properly established that there is a dispute, the debt would exist.

It is not sufficient in the Companies Court for a person merely to hold up his hand and say there is a dispute. He must establish that there is a bona fide dispute on substantial grounds. …

… If a company wishes to obtain a stay of winding up proceedings on the basis that the underlying debt upon which the statutory notice is founded is disputed, it must establish in the normal way that there is a bona fide dispute on substantial grounds. …”

7. The reasoning we find in these passages gives no weight to the agreement between the parties as to how any dispute between them is to be resolved. Although not expressly stated the thinking behind this approach focuses on what a creditor is doing when presenting a petition, namely, invoking a class right to have an insolvent company wound up. The creditor is not seeking an order that the company pay the debt that the creditor relies on as demonstrating that he has locus to present a petition and that the company is insolvent. I address this in more detail in later paragraphs.

8. A similar argument was advanced in 2002 before Yuen J (as she then was) in Re Sky Datamann (Hong Kong) Limited.[3] As Yuen J explains in [10] and [11], article 8(1) of the UNCITRAL Model Law which by virtue of section 6 of the Arbitration Ordinance, Cap 341, applied to domestic arbitrations and required a court before which an action is brought to refer a dispute to arbitration if one party so requests, does not apply to a winding-up petition because it does not come within the definition of “action”. Although the statutory arbitration scheme has changed since 2002 the relevant provisions[4] similarly do not include winding-up petitions. Although Yuen J goes on in her judgment to consider whether a bona fide dispute on substantial grounds had been demonstrated, and found that it had, in [12] of the judgment Yuen J states that an arbitration agreement is relevant to the exercise of the court’s wide discretion found in section 180(1) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance,Cap 32 (“CWUMP”), although, Yuen J does not discuss how it impacts on the decision making process:

“Accordingly, it is clear that the court is not obliged to strike out or stay a petition merely because the petitioner and the company had entered into a contract with an arbitration clause, or even if the company has commenced arbitration. It is a matter for the discretion of the court in each case. In exercising its discretion, the court will consider all relevant circumstances, including the financial position of the company, the existence of other creditors, and the position taken by them.”

9. In 2003 in Re Jade Union Investment Limited [5] it was argued, amongst other things, that the existence of an arbitration clause is a matter to which very great weight should be given when the court comes to exercise its discretion, and that the court should only consider the merits of a company’s defence to a debt in very limited circumstances, normally, where there is evidence of actual insolvency. Barma J (as he then was) rejected this argument in [18], [19] and [21] to [23] of his judgment:

“18. … A petition for the winding up of a company is quite different from an action between parties, in which the parties seek the court’s determination as to their respective rights and liabilities. By a winding up petition, a creditor invokes the court’s jurisdiction under the Companies Ordinance to wind up a company on one...

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    ...behalf of Lam that the Judge should have followed the approach of Harris J in Re Southwest Pacific Bauxite (HK) Ltd [2018] HKCFI 426; [2018] 2 HKLRD 449 (more commonly known as “Lasmos” after the petitioner’s name) and dismissed or stayed the bankruptcy petition, pending the resolution of t......
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