Arbitration is No Answer to Winding Up Petition for an Insolvent Company
In our article dated 9 March 2018, we discussed Harris J's decision in Lasmos v Southwest Pacific Bauxite (HK) Ltd, in which we acted for the company and successfully struck out a winding up petition in favour of an on-going arbitration. The decision changed the old law and brought Hong Kong law more into line with other common law jurisdictions.
More recently, the Court has clarified that arbitration is not the panacea to an insolvent company, in Re Hong Kong Sports Industrial Development Limited (formerly known as LeTV Sports Culture Develop (Hong Kong) Co., Limited) [2018] HKCFI 1309. If the company does not dispute the debt in full, the Court can still make a winding up order against it.
The LeTV case
We act for the Petitioners in the LeTV case. LeTV is a Hong Kong company which engaged in the business of video streaming of live sporting events and broadcasting of television channels. The petition was based on two debts of over US$32 million in total. This represents the unpaid balance of a debt of US$40.6 million, which LeTV admitted owing to the Petitioners in their previous settlement agreement.
In the meantime, there is an on-going arbitration in Singapore between the Petitioners and LeTV, which relates to the same debt in the winding up proceedings. However, LeTV did not actively participate in that arbitration, nor disputed the debt in either the arbitration or the winding up proceedings.
LeTV nevertheless applied to strike out the petition, on the ground that it was an abuse of process due to the on-going arbitration.
The Court's decision
Harris J granted a winding up order against LeTV at the first hearing before him. The company's objection based on the arbitration was rejected.
The major reason was that LeTV did not dispute a substantial portion of the debt, in the sum of US$12.905 million. Since there was no evidence which demonstrated a bona fide defence on substantial grounds to the claim for that sum, Harris J saw no justification for requiring the arbitration to be completed before allowing the Petitioners to wind up the company, on the basis of the substantial undisputed debt.
Comment
The LeTV decision has been welcomed by the creditors of the company. It reflects the Court's willingness to wind up insolvent companies, which are unable to repay significant undisputed debts. This echoes Harris J's seminal decision in Re Grand China Shipping (Hong Kong) Co Ltd [2013] 4 HKLRD 1.
The decision is also in line with Lasmos v Southwest Pacific Bauxite. It helpfully reminds the parties that, in order to successfully defend a winding up petition, the company must dispute the entire debt (paragraph 31 of Lasmos). If the company fails to dispute a debt (of at least HK$10,000, being the statutory limit) based on bona fide and substantial grounds, the Court is prepared to make a winding up order immediately. An on-going arbitration will not save the day for a struggling company which is unable to repay significant debts.
