RE SHANDONG CHENMING PAPER HOLDINGS LTD

HCCW 175/2017

[2023] HKCFI 2065

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 175 OF 2017

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D E C I S I O N

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Introduction

1.  Shandong Chenming Paper Holdings Limited (“Company”) issued on 25 October 2022 a summons seeking the dismissal or adjournment of the Petition issued by Arjowiggins HKK 2 Limited (“Petitioner”) on 15 June 2017 seeking the winding up of the Company on the grounds of insolvency arising from non-payment of an arbitration award, which the Petitioner had been given leave to enforce as a judgment in Hong Kong. The dispute between the parties has a long history, which initially involved a challenge to the court’s discretionary jurisdiction to wind up the Company on the grounds that there is insufficient connection between the Company, which is incorporated in the Mainland, and Hong Kong, although it has a dual A share listing on the Main Boards of both the Hong Kong and the Shenzhen Stock Exchanges. The Company’s appeal of my original decision was dismissed by the Court of Final Appeal (“CFA”) on 14 June 2022. As a consequence the Petition was relisted before me.

2.  The Company commenced an arbitration against the Petitioner on 20 June 2022 (“2^nd Arbitration”) advancing claims under the same agreement as had given rise to the arbitration, which resulted in the award that it relies on to prove insolvency in the Petition. The substantive hearing of the 2^nd Arbitration will be heard in May 2024.

3.  When the Petition came on before me on 19 April 2023 the Company’s principal opposition was that it had advanced a cross-claim by way of the 2^nd Arbitration in excess of the debt established by the 1^st Arbitration award and that the cross-claim should be determined in the 2^nd Arbitration; it was not necessary for it to demonstrate a bona fide defence on substantial grounds. The Parties agreed that as the CFA was to hear the appeal in Guy Lam[1] on 2 March 2023, the relevance of which I explain later, and that it would be likely that the result of the appeal would have a bearing on the Company’s principle ground of opposition the hearing should be adjourned until after the CFA handed down its judgment. The CFA dismissed the appeal on 4 May 2023, which is also the date of the judgment.

The Guy Lam Decision

4.  The Petitioner and the Company agree that although Guy Lam concerned whether a bankruptcy petition should be dismissed or stayed because the petition debt was disputed and the debtor had raised a cross-claim[2] which was the subject of an exclusive jurisdiction clause (“EJC”), rather than an arbitration clause, it is clear from the reasoning of both the Court of Appeal (“CA”) and the CFA, which drew on my decision in Re Southwest Pacific Bauxite (HK) Ltd (“Lasmos”)[3] and a number of overseas authorities dealing with arbitration clauses, that both Courts were of the view that the same principles and approach applied to both an EJC and an arbitration clause[4].

5.  In [94] French NPJ explains “The question for determination by this Court is concerned with the discretion to decline jurisdiction in a bankruptcy petition where the underlying dispute about the petition debt is the subject of a EJC”. French NPJ (with whom the other members of the CFA agreed) concluded [107] that the majority in the CA was correct in its approach and that [105] it is clear that the “Established Approach”, namely, that a debtor is required to demonstrate a bona fide defence on substantial grounds in order to defeat a petition, is not appropriate where an EJC is involved “And in the ordinary case of an EJC, absent countervailing factors such as the risk of insolvency affecting third parties and a dispute that borders on the frivolous or abuse of process, the petitioner and the debtor ought to be held to their contract”. I would add that the same is true in my view in the ordinary case of an arbitration clause.

Cross-Claims

6.  What is in dispute before me is whether the same principle applies if the debtor relies, as in the present case, on a cross-claim. The Petitioner says not and that what French NPJ describes as the “Established Approach” should be adopted. I shall start my explanation for disagreeing by explaining the principles, which the Companies Court applies in determining whether or not a petition should be dismissed or stayed because the debtor asserts that it has a cross-claim. These are summarised in [11]–[12] of Kwan J’s (as she then was) in Re Sinom (Hong Kong) Ltd[5]:

“11. As with a petition where there is a bona fide dispute of the debt on substantial grounds (a disputed debt petition), where the company has a genuine and serious cross-claim against the petitioner greater than or equal to the petitioner’s debt (a cross-claim petition), such a petition may be restrained from proceeding (Re Pan Interiors Ltd [2005] EWHC 3241, paras.34–39). It is an abuse of the process of the court to make a statutory demand or present a winding-up petition based on a claim to which there is a triable defence (Re Company [1992] 1 WLR 351). A cross-claim petition is regarded in the same way (Southern Cross Group Plc v Deka Immobilien Investment GmbH [2005] BPIR 1010, paras.29–30; Re Pan Interiors Ltd, para.35).

12. To successfully resist a cross-claim petition, the company has the onus of establishing that its cross-claim is genuine, serious and of substance. There must be supporting relevant details to demonstrate that the cross-claim is based on substantial ground. The test is very much the same as the test for a disputed debt petition for deciding whether a debt is disputed in good faith and on substantial grounds (Applications to Wind Up Companies (2^nd ed., 2008) paras.6.10.7.2 and 6.10.7.3 and the cases there cited).”

7.  Mr Joffe took me to various passages in the 4^th edition of French on Applications to Wind-up Companies to demonstrate how, if at all, these general principles apply in circumstances such as the present in which the Petitioner’s debt is established by a judgment. In [7.543]–[7.544] the authors explain:

“7.543 If the petitioner’s debt is a judgment debt, preventing the petition proceeding because of the company’s cross-claim might be seen as equivalent to staying execution of the petitioner’s judgment. However, a stay of execution of a judgment against a company does not prevent the judgment creditor petitioning for the winding up of the company, because the petition is not an execution of the judgment,[6] and dismissal of a winding-up petition based on a judgment debt does not prevent execution of the judgment. So stay of execution of the petitioner’s judgment against the company and preventing the winding-up petition proceeding are different matters. In Ng Tai Tuan v Chng Gim Huat Pte Ltd[7] the petition was stayed even though the court which had given judgment on the petitioner’s debt had refused a stay of execution.

7.544 In Marchands Associates LLP v Thompson Partnership LLP[8] Peter Gibson LJ said:

‘It matters not that the debt is one for which summary judgment would have been obtained or on which execution could be levied notwithstanding the cross-claim. A winding-up order has more serious consequences and the Companies Court is entitled to adopt a different approach.’[9]”

8.  In short, it makes no difference to the application of these principles. What is relevant is whether it can be demonstrated that a cross-claim is based on substantial grounds and exceeds the debt. Mr Li submitted, when arguing that the Guy Lam decision did not apply to cross-claims, that a distinction could be drawn between a contractual set-off and a cross-claim. It seems to me clear that such a distinction is irrelevant to a winding-up petition for the reasons explained in [7.546] and [7.570] of French:

“7.546 The fact that the petitioner’s claim is autonomous, so that it must be paid regardless of a dispute or cross-claim, which must be dealt with in separate proceedings (pay now, argue later), is not a special circumstance which would justify a petition proceeding despite a cross-claim against the petitioner. This applies, for example, where the petitioner’s claim is for freight or for an unpaid cheque or bill of exchange.[10] So the principle of autonomy, which requires a court hearing a claim for payment of a negotiable instrument not to consider a cross-claim or defence, apart from a defence concerning the validity of the instrument,[11] does not apply to a winding-up petition based on non-payment of the instrument.

…

7.570 The English practice of treating cross-claim petitions in the same way as disputed-debt petitions recognizes that the effect of both a dispute about the existence of the petitioner’s debt and a cross-claim equal to or greater than the petitioner’s debt is to question whether the company must pay anything to the petitioner and so whether the petitioner has any interest in having the company wound up, beyond the hope that it might cause the company to abandon its dispute or cross-claim. This similarity between cross-claim and disputed-debt petitions is more significant than the difference in standing to petition.[12] In Malayan Plant (Pte) Ltd v Moscow Narodny Bank Ltd[13] Lord Edmund-Davies said, ‘There is no distinction in principle between a cross-claim of substance (such as in Re LHF Wools Ltd[14]) and a serious dispute regarding the indebtedness imputed against a company’. The distinction between a cross-claim against the petitioner and a dispute about the petitioner’s debt was described by Hoffmann J in Re R A Foulds Ltd[15] as ‘somewhat technical’. His Lordship said that ‘on the face of it it is hard to see the difference between a disputed debt and a dispute which consists of alleging that by virtue of a set-off nothing is in fact owing’.[16]”

9.  A more detailed analysis, reaching the same conclusion, is to be found in [26]–[32] of Morgan J’s decision in In re Victory House General Partner Ltd[17]:

“26. The next matter I need to deal with is the legal test which I should apply to the present application. Mr Chivers relies upon a number of well-known authorities which are principally concerned with the court’s reaction to petitions based upon disputed debts. Where a debt is bona fide disputed on substantial grounds the normal response of the court is to treat the petition as inappropriate, as being an abuse of the process and as being one the court should dismiss, leaving the alleged creditor to pursue the alleged debt in the other ways available to it.

27. This, of course, is not a case of a disputed debt. There is a judgment debt and it can be enforced immediately. However, Mr Chivers draws attention to In re Bayoil SA [1999] 1 WLR 147, which deals with a case not involving a disputed debt but involving a cross-claim by the company, the subject of the petition or the intended petition, where the amount of the cross-claim exceeds the petition debt. The headnote to In re Bayoil SA recites the essential facts. The petitioner claimed for freight. The established law is there is no defence of set-off available in relation to a claim to freight. The claim went to arbitration and the arbitrators made an award in favour of the petitioner. The petitioner then presented a petition on the basis of the sum determined by the arbitration award. The company applied for the petition to be dismissed or stayed on the ground that it had a genuine and serious counterclaim in an amount which exceeded the petition debt. It was a matter of detail in that case, which the company put forward to advance its case, that it had not been able to litigate that counterclaim. Later cases discussing In re Bayoil SA make it clear that the ability, or inability, to litigate the counterclaim is not of the essence of the principle in this case. So I put that on one side.

28. The whole point in the Court of Appeal was to consider whether the established rule about disputed debts applied to disputed cross-claims also (where they exceed the petition debt). In the end the Court of Appeal held that the rule was essentially the same, although the Court of Appeal held that there could be exceptional circumstances where it would be appropriate to allow a petition to go forward even where there was a disputed cross-claim exceeding the petition debt. Nourse LJ, who gave the first judgment, did discuss the question of special circumstances. He did so because counsel for the petitioner had submitted that the interim award, being final and unappealable, determining the liability of the company for freight, amounted to a special circumstance. Nourse LJ said, at p155E-G, that the fact of an interim award in favour of the petitioner was not a special circumstance. In the course of his reasoning he used this sentence: ‘The ability of a petitioning creditor to levy execution against the company does not entitle him to have it wound up.’ That reference to levying execution appears to me to suggest that Nourse LJ had in mind a case where a petitioning creditor had a judgment which could be executed but, none the less, that did not equate to an entitlement to wind up the company, the subject of the judgment debt. Ward LJ agreed with Nourse LJ. He made some comments on a case where it is appropriate to have a stay of execution and a case where it is inappropriate to petition. Those comments are at p156G-H. I do not find them as clear as the comments made by Nourse LJ but nor do I find them in any way undermining the conclusion I am about to reach.

29. Mr Chivers says that In re Bayoil SA applies in the present case. There is a judgment debt. It can be executed but that is not a special circumstance (see Nourse LJ) and the general test, absent special circumstances, is that a petition should be dismissed if there is a cross-claim put forward bona fide on substantial grounds in an amount which exceeds the petition debt.

30. Mr Shaw QC, who appears for the petitioner, does not agree with that reading of In re Bayoil SA. He points out that the case was one of an arbitration award not a judgment of a court in this jurisdiction. He draws my attention to an earlier decision, In re Douglas Griggs Engineering Ltd [1963] Ch 19. On the facts of that case there was a judgment debt against the respondent to the petition. The respondent to the petition had a claim, actually in third party proceedings and other litigation, but a claim none the less, against the petitioner, and the respondent company asserted that the petition should not go forward until that third party claim had been determined and the ultimate state of the indebtedness between the parties was thereby established. The headnote in the report reads as follows, at p20:

‘The petitioning creditor, having obtained a judgment and being possessed of all the remedies of a judgment creditor, was prima facie entitled to a winding up order against the respondent company and that prima facie right was not to be displaced merely by showing that the respondent company had a disputed claim against the petitioning creditor which was the subject of litigation in other proceedings.’

The headnote is based on a passage in the judgment of Pennycuick J, at p 23. In that passage the judge referred to another line of authority based on the decision of In re Amalgamated Properties of Rhodesia (1913) Ltd [1917] 2 Ch 115, where Sargant J, and then the Court of Appeal, discussed the approach the court should take where there was a judgment debt, a petition based on the judgment debt but an appeal against the judgment which was pending. Another example of a case involving an appeal in similar circumstances which I was shown was the unreported decision of Neuberger J in James v Silver Fund Investment.Com Ltd (unreported) 15 November 2001. That was a case, like the Rhodesia case, of an appeal against a judicial determination. It was not a case of a bona fide cross-claim on substantial grounds being advanced.

31. My view is that the approach in In re Douglas Griggs Engineering Ltd can no longer stand with the decision of the Court of Appeal in In re Bayoil SA. That is consistent with one textbook I was shown, namely French, Applications to Wind Up Companies, 3^rd ed (2015), paras 7.634-7.635. I consider that I ought to apply the decision of the Court of Appeal, as I have interpreted it, to the facts of this case.

32. I therefore have to ask whether the nascent cross-claim, the claim in restitution which Mr Chivers has explained to me, is a bona fide cross-claim on substantial grounds…”

10.  As a general principle of insolvency law there is no distinction between a claim and cross-claim when considering whether a defence to a winding-up petition has been established. It seems to me that this is clearly relevant when determining whether Guy Lam should be read as limited to claims.

11.  This issue has been considered by the Singapore CA in AnAn Group (Singapore) Pte Ltd v VTB Bank (Public Joint Stock Co)[18]. The court concluded in [56] of the judgment of Steven Chong JA delivering the judgment of the court:

“In our judgment, when a court is faced with either a disputed debt or a cross-claim that is subject to an arbitration agreement, the prima facie standard should apply, such that the winding-up proceedings will be stayed or dismissed as long as (a) there is a valid arbitration agreement between the parties; and (b) the dispute falls within the scope of the arbitration agreement, provided that the dispute is not being raised by the debtor in abuse of the court’s process.”

12.  This follows from the holding in [59], which is consistent with the principles that I have explained, that in Singapore law that there is no basis for applying a different standard of review to cross-claims on the one hand, and disputed claims on the other, and reference is made to the court’s decision in Pacific Recreation that the tests for both situations must necessarily mirror each other. Mr Li argued that AnAn is wrong and that the conclusion was unreasoned dicta. It seems to me that the decision is clearly reasoned, as demonstrated by [15] and [59] of the judgment, and is consistent with established principle.

Guy Lam

13.  It is against this background that I consider whether the reasoning of the judgment of the CFA in Guy Lam can be read as limited to disputed debts. It is apparent from the judgment that the court understood the dispute between the Appellant and the Respondent not to be limited to whether the debt was disputed on substantial and bona fide grounds. In a number of paragraphs it is stated that the dispute raised by the Respondent concerned both defences to the debt and cross-claims: see [30], [33] and [51]. There is nothing at all in the judgment to suggest that the court thought a defence and a cross-claim engaged different principles or considerations and should be treated differently. This is unsurprising as there is nothing in the judgment to suggest that the Appellant had argued that there was a material distinction and the CA had expressly considered the Respondent’s cross-claim.

14.  In [15] of the CA’s judgment Lam JA explains Mr Lam’s opposition to the petition:

“In his affirmation filed in the bankruptcy proceedings on 3 September 2020, Lam raised five grounds in opposition to the petition: (1) Tor was fully secured as a creditor and as such cannot petition for Lam’s bankruptcy; (2) there was no extant event of default under the Agreement because of Tor’s waiver or an estoppel against Tor; (3) because of the Exclusive Jurisdiction Clause, Tor should first sue in the courts of New York to establish Lam’s liability; (4) Tor had breached the provisions of the Money Lenders Ordinance (Cap.163) and the Agreement was not therefore enforceable against Lam; and (5) Lam had raised a cross-claim against Tor in the Texas proceedings for damages exceeding the amount of Tor’s petition debt.”

15.  In [58] Lam JA refers to AnAn and expressly refers to its holding that “where the court is faced with either a disputed debt or a cross claim that is subject to an arbitration agreement, winding up proceedings in the court should be stayed or dismissed as long as (a) there is a valid arbitration agreement between the parties; and (b) the dispute falls within the scope of the arbitration agreement, provided that dispute is not been raised by the debtor in abuse of the court’s process” [emphasis added]. I think it reasonable to assume that Lam JA was alive to the distinction between a disputed debt and a cross-claim. In [64] again there is reference to the cross-claims.

16.  It is clear from [22], [30], [33], [51] of French NPJ’s decision that the CFA was aware that one of the grounds of opposition to the Petition was an alleged counterclaim. In [72] French NPJ makes reference to AnAn, which as I have explained discusses whether or not there is a material distinction between a claim and a cross-claim. I find it difficult to read the CFA’s decision as not being intended to extend to cross-claims. Mr Li’s argument invites me to conclude that neither the CA nor the CFA dealt with the defence of a cross-claim despite the fact that one was expressly relied on. In my view both judgments must be read as reflecting an understanding that, as I have demonstrated in [5]–[9], there is no difference of approach to disputed debts and cross-claims generally and, that as the Singapore Court of Appeal state, as a consequence when considering the impact of an arbitration clause there is no distinction to be drawn between them. It follows that in my view the CFA’s decision must be read as applying to cross-claims.

17.  As I have already mentioned the arbitration is fixed to be heard in May of next year. Although the Petitioner asserts that there is no merit in the cross-claim and complains that it is being advanced years after it obtained the judgment on which the Petition is founded, the Petitioner does not go so far as to suggest that the present case is sufficiently obviously an abuse as to bring it within that rare category in which the court will consider rejecting the debtor’s opposition despite the existence of an arbitration clause—it not being in dispute that merits and delay are not of themselves capable of bringing a case within that category.

18.  Before considering whether the Petition should be dismissed or stayed there is one further matter on which I would comment. It seems to me clear that most obvious reading of both the judgment of the majority of the CA and the CFA is that the “Lasmos” approach applies to arbitrations just as it has been expressly found to apply to EJCs (this is not in dispute) and that, secondly, the judgment applies to disputed debts and cross-claims. The argument that was advanced before me invites the Court of First Instance to scrutinise the CA’s and CFA’s judgments and find a lacuna; effectively finding that the CA and the CFA both overlooked the fact that the case involved a disputed debt and a cross-claim and failed to consider whether a different approach applied to each. In my view such an approach to interpreting and applying appellate decisions by the Court of First Instance is unhelpful and inappropriate. Clarity and certainty in the law is important. The Court of First Instance should not, as I have been invited to do, strain to find ambiguities in an appellate judgement and formulate qualifications to what the appellate court has found.

Conclusion and Disposition

19.  The Company has a dual listing on the Hong Kong and Shenzhen Main Boards. Normally, I would dismiss the Petition particularly as the Company is listed and solvent. However, given the long and torrid history of this matter, in my view it is appropriate to stay the Petition rather than dismiss it and preserve the current date on which a winding up would be treated as having commenced, namely, the date of presentation of the Petition in case circumstances make it relevant in the future. I make a costs order nisi that the Petitioner pay the Company’s costs of the Company’s summons dated 21 October 2022 with a certificate for two counsel such costs to be taxed if not agreed.

20.  I allow the Petitioner’s summons to restore the Petition, but make a costs order nisi that the costs be paid by the Petitioner with a certificate for one counsel, such costs to be taxed if not agreed.