Alert for creditors: Arbitration agreements may block Hong Kong winding-up
1. The CMS Law-Now article “Arbitration agreement does not prevent winding up petition” updated the position in England & Wales following the Privy Council decision in Sian Participation Corporation (In Liquidation) v Halimeda International Ltd [2024] UKPC 16 (“Sian”). This case restores the traditional approach that a creditor should ordinarily be entitled to a winding-up order (or the appointment of a liquidator) on the ground of insolvency, unless the debt is genuinely disputed on substantial grounds, irrespective of whether the debt is subject to an arbitration agreement or an exclusive jurisdiction clause.
2. As far as Hong Kong winding-up proceedings are concerned, the Hong Kong courts continue to adopt a pro-arbitration approach, and are more inclined to stay or dismiss winding-up petitions in favour of arbitration in the absence of countervailing factors. The Sian decision has not been followed by the Hong Kong courts. However, in a recent case, the Hong Kong court considered Sian and refused to grant an anti-suit injunction to restrain Cayman winding-up proceedings.
The Hong Kong position: Guy Lam and Re Simplicity
Guy Kwok-Hung Lam v Tor Asia Credit Master Fund LP [2023] HKCFA 9 (“Guy Lam”)
3. In this case, the Hong Kong Court of Final Appeal (the “HKCFA”) established that the approach of determining whether there is a "bona fide dispute on substantial grounds" is inapplicable where a foreign exclusive jurisdiction clause is involved. The Hong Kong courts will generally give effect to the parties’ agreed form of dispute resolution and decline to exercise their bankruptcy jurisdiction, in the absence of countervailing factors (such as the risk of affecting third parties, or where the defence borders on frivolous or abuse of process).[1]
Simplicity & Vogue Retailing (HK) Co., Limited [2024] HKCA 299 (“Re Simplicity”)
4. Subsequently, the Hong Kong Court of Appeal (the “HKCA”) held in Re Simplicity that the Guy Lam principles apply to arbitration clauses. In the absence of countervailing factors, the Hong Kong courts will generally uphold arbitration agreements, and stay or dismiss insolvency proceedings. The courts retain discretion to assume jurisdiction and determine relevant defences or claims when appropriate, based on a multi-factorial assessment of all the circumstances.[2]
Re Mega Gold, Re Inversion: Hong Kong’s position maintained after Sian
Re Mega Gold and Re Man Chun Sing Matthew [2024] HKCFI 2286 (“Re Mega Gold”)
5. The Hong Kong Court of First Instance (the “HKCFI”) addressed the case of Sian in its judgment in Re Mega Gold, but followed the principles established in Guy Lam and Re Simplicity.
6. This case involved a winding-up petition against Mega Gold Holdings Limited (the "Company") and a bankruptcy petition against its founder and CEO (the "Debtor").
7. The Petitioner held a put option and redemption right under certain agreements containing arbitration clauses. The Debtor had agreed to guarantee the performance of the Company's obligations. After the Company’s failure to pay a statutory demand, the Petitioner presented petitions. The Company and the Debtor sought to stay the petitions in favour of arbitration, disputing the alleged debt on the grounds that the Petitioner had waived or was estopped from exercising the put option/redemption right and that the Company did not have "legally available funds for distribution" under the agreements.
8. The HKCFI addressed Sian but ultimately concluded that it was bound by the rules of precedent to adhere to the Hong Kong approach established in Guy Lam and Re Simplicity.
9. In that regard, the Court considered two thresholds: The Court found that the defence was neither frivolous nor an abuse of process. There was no complete absence of corroborating written records or documentary evidence, and it was not plain and obvious that the factual account provided by the Company and Debtor was hopelessly unbelievable or bound to fail. The disputes on waiver/estoppel and the "no adequate legally available funds" defence were not frivolous or an abuse of process.
10. The Court held that the Company and Debtor had a genuine intention to arbitrate. The delay in filing the Notice of Arbitration was not so serious as to negate such intention.
11. The Court therefore declined to exercise insolvency jurisdiction to determine the dispute, leaving it to the agreed arbitration mechanism.[3]
Sun Entertainment Culture Limited v Inversion Productions Limited [2024] HKCA 884 (“Re Inversion”)
12. In this case, Sun Entertainment Culture Ltd ("Sun Entertainment") entered into a loan agreement with Inversion Productions Ltd ("Inversion Productions") for the production of the sci-fi film "Inversion." However, Inversion Productions failed to repay the loan, leading Sun Entertainment to present a winding up petition.
13. Inversion Productions argued that: (1) the loan agreement stipulated an effective interest rate exceeding 60%, rendering the loan unenforceable under section 24 of the Money Lenders Ordinance (MLO); and (2) the dispute was subject to arbitration as per the agreement.
14. The HKCFI found Inversion Productions’ defence frivolous, noting that the default interest rate was not included in the calculation of the effective interest rate. Consequently, a winding-up order was granted.
15. Inversion Production appealed the decision to the HKCA. Mr Justice G Lam JA applied the principles from Guy Lam and Re Simplicity, without making reference to Sian. The HKCA found that the defence based the MLO was frivolous, and upheld the winding-up order against Inversion Productions.[4]
Recent developments in the Cayman Islands
16. In Re NaaS Technology Inc [2025] CIGC (FSD) 28, the debtor company applied to the Grand Court of the Cayman Islands for, inter alia, an order to restrain the presentation of a winding-up petition on the ground that the debt was covered by an arbitration agreement which provides that any disputes shall be referred to arbitration in Hong Kong.
17. The Grand Court followed Sian and held that, even where there is an arbitration clause, the debtor company must demonstrate a genuine and substantial dispute regarding the debt.
Hyalroute v ICBC – HKCFI’s refusal to grant Anti-Suit Injunction to Restrain Cayman winding-up proceedings
18. On 1 August 2025, the HKCFI recently delivered a significant decision in Hyalroute Communication Group Limited v Industrial and Commercial Bank of China (Asia) Limited [2025] HKCFI 2417 (“Hyalroute v ICBC”), addressing the interplay between arbitration agreements and foreign winding-up proceedings. The case centered on whether the Hong Kong courts should grant an anti-suit injunction to restrain a creditor from presenting a winding-up petition in the Cayman Islands, given the existence of a broad arbitration clause in the parties’ Term Facility Agreement.
19. The HKCFI ultimately refused to grant the injunction, providing important guidance on the construction of arbitration clauses, the relevance of foreign law, and the limits of contractual anti-suit relief in the context of cross-border insolvency.
Brief Facts
20. The Plaintiff, Hyalroute Communication Group Limited, is a Cayman Islands-incorporated company that guaranteed a loan under a Term Facility Agreement (“TFA”) governed by Hong Kong law, with a broad arbitration clause mandating disputes be resolved by arbitration in Hong Kong. The Defendant, Industrial and Commercial Bank of China (Asia) Limited, served a statutory demand in the Cayman Islands for a debt exceeding US$95 million, comprising sums allegedly due under the TFA and a related interest rate swap. The Plaintiff, denied liability and asserted that its obligations were suspended due to political turmoil in Myanmar and related insurance arrangements.
21. As a result of such divergence in legal approaches between the Guy Lam-Re Simplicity approach in Hong Kong and the Sian approach in the Privy Council, instead of applying to stay intended winding-up proceedings in the Cayman Islands, the Plaintiff sought an anti-suit injunction from the Hong Kong Court to restrain the Defendant from presenting a winding-up petition in the Cayman Islands, arguing that such proceedings would breach the arbitration agreement.
22. Clause 43.1 of the TFA provides that “[a]ny dispute, controversy or claim arising in any way out of or in connection with [the TFA] … shall be referred to and finally resolved by binding arbitration …”.
Issue
23. The case turned on whether the Defendant’s intended presentation of a Cayman winding-up petition would be in breach of its obligation under Clause 43.1. In this regard, the HKCFI had to ascertain whether the Cayman winding-up proceedings would have the effect of “finally resolving” the dispute on the Plaintiff’s indebtedness under the TFA within the meaning of Clause 43.1.
Rulings of the HKCFI
24. The HKCFI undertook a detailed analysis of various legal principles and found as follows:
- Scope and Construction of the Arbitration Clause: The HKCFI emphasized that whether foreign winding-up proceedings breach an arbitration agreement depends on the proper construction of the clause. The TFA’s arbitration clause required disputes to be “finally resolved” by arbitration. The HKCFI held that this language incorporates the concepts of res judicata and estoppel, meaning that only proceedings capable of finally determining the parties’ rights and obligations would fall within the negative obligation not to litigate elsewhere.
- Relevance of Foreign Law: The HKCFI clarified that, while the arbitration agreement is governed by Hong Kong law, the effect of foreign proceedings (here, Cayman winding-up proceedings) must be assessed by reference to the law of the foreign jurisdiction. The Court cannot give more conclusive force to a foreign judgment than the foreign court itself would.
- Nature of Cayman Winding-Up Proceedings: Drawing on Cayman and Privy Council authorities including Sian, the HKCFI found that Cayman winding-up proceedings do not finally resolve the underlying dispute. Instead, the Cayman court only determines whether there is a bona fide dispute on substantial grounds as a threshold issue, without adjudicating the substantive merits of the debt. As such, the presentation of a winding-up petition in the Cayman Islands does not breach the arbitration agreement.
25. The HKCFI also went on to state that, even if the proceedings had fallen within the arbitration clause, it found no strong reasons to grant an injunction, because the HKCFI is firmly of the view that the Plaintiff’s defence to the substantive claim is hopeless and frivolous.
26. On the above grounds, the HKCFI dismissed the Plaintiff’s application for an anti-suit injunction and ordered costs against the Plaintiff.[5]
Implications of the case
27. This decision underscores the critical importance of carefully drafting arbitration clauses in commercial agreements. The HKCFI’s analysis highlights that specific language used, especially terms such as “finally resolved”, can have far-reaching legal implications. These implications include determining the scope of disputes that must be referred to arbitration and clarifying whether certain proceedings, such as foreign winding-up proceedings, fall within the ambit of the arbitration agreement.
28. The judgment demonstrates that the construction of dispute resolution clauses is not a mere formality; rather, the exact wording can dictate whether parties are contractually obliged to arbitrate particular disputes or whether they may pursue alternative remedies in other jurisdictions. For instance, the inclusion or omission of language addressing the finality of dispute resolution, or specifying the types of proceedings covered, can be decisive in whether an anti-suit injunction will be granted to restrain foreign proceedings.
Key Takeaways
29. It was notable that the HKCFI adopted the Sian approach in analysing the effect of Cayman winding-up proceedings when determining whether to grant an anti-suit injunction. However, as far as Hong Kong winding-up proceedings are concerned, the position remains as stated in Guy Lam and Re Simplicity, i.e. to uphold arbitration agreements and stay or dismiss insolvency proceedings in the absence of countervailing factors.
30. Parties should pay meticulous attention when drafting arbitration clauses to ensure that the clause accurately reflects their intentions regarding the resolution of disputes. This includes considering the potential interaction between arbitration and winding-up proceedings.
31. For potential creditors, it is crucial to understand the implications before agreeing to include an arbitration clause into a contract. Such a clause may become an obstacle to winding-up proceedings in Hong Kong. Even if a debtor has no bona fide defence on substantial grounds, the claim must be referred to arbitration. This means that creditors have to incur unnecessary time and costs.
32. The parties may consider expressly stating whether winding up proceedings are to be included or excluded from the scope of the arbitration agreement. It could avoid unintended consequences and ensure that the parties’ chosen dispute resolution mechanism is being upheld. Creditors may consider including a carve-out provision in the arbitration clause to allow the creditor to commence insolvency proceedings against the debtor, or a provision which stipulates that arbitration is at the creditor's option. The effectiveness of such provisions is yet to be confirmed by the Hong Kong courts. However, since the rationale behind the Guy Lam-Re Simplicity approach is to give effect to the parties’ agreement, it is expected that the courts should be more inclined to exercise their insolvency jurisdiction if such provisions are included.
[1] legalref.judiciary.hk/lrs/common/ju/ju_frame.jsp?DIS=152321&currpage=T
[2] legalref.judiciary.hk/lrs/common/ju/ju_frame.jsp?DIS=159561&currpage=T
[3] legalref.judiciary.hk/lrs/common/ju/ju_frame.jsp?DIS=162369&currpage=T
[4] legalref.judiciary.hk/lrs/common/ju/ju_frame.jsp?DIS=162926&currpage=T
[5] legalref.judiciary.hk/lrs/common/search/search_result_detail_frame.jsp?DIS=171040&QS=%2B%7C%28HCCT%2C155%2F2024%29&TP=JU
