Unravelling the Tangle of Arbitration-Insolvency Proceedings: The Hong Kong Court of Appeal Provides Clarity

Litigation & Dispute Resolution partner Raymond Yang, senior associate Johnson Ng, and associate Emily Chen discuss two recent cases in Hong Kong which represent a significant development in clarifying the applicability of the "Guy Lam Approach" to winding-up proceedings involving arbitration clauses.

The "Guy Lam Approach" refers to the leading authority Guy Kwok-Hung Lam v. Tor Asia Credit Master Fund LP [2023] HKCFA 9, which held that in the absence of countervailing factors such as a risk of insolvency affecting third parties or a dispute bordering on frivolous or abuse of process, a bankruptcy petition is liable for dismissal if the underlying debt is subject to an exclusive jurisdiction clause. The Guy Lam Approach provides an alternative escape route for the debtor to defeat a bankruptcy petition without the need to demonstrate a bona fide dispute on substantial grounds.

In the two recent cases, the Courts have demonstrated a nuanced and balanced approach when exercising their jurisdiction over winding-up proceedings in cases involving arbitration agreements. On the one hand, the Courts have shown deference to the dispute resolution mechanisms contractually agreed upon by the parties, particularly in deferring disputes to arbitration when there is an arbitration agreement in place. This preserves the autonomy and finality of the arbitration process.

On the other hand, the Courts have retained a degree of flexibility to intervene when necessary to do justice. They have built in safeguards, including countervailing factors such as "whether the dispute is frivolous or an abuse of process" to guide their decision-making. If the answer is in the affirmative, the Court may then exercise its jurisdiction over the dispute.