Introduction

In a recent decision, the Hong Kong Court examined the interplay between arbitration agreements and cross-border insolvency proceedings.

This decision highlights the divergence between Hong Kong’s pro-arbitration stance, whereby winding-up proceeding will be stayed in favour of arbitration unless there is abuse (see Re Guy Kwok Hung Lam (2023) 26 HKCFAR 129) and the creditor-friendly approach in the UK and other common law jurisdictions, whereby the debtor is required to show the usual bona fide dispute on substantial grounds to compel arbitration (see Sian Participation Corp (In Liquidation) v Halimeda International Ltd [2024] UKPC 16).

Facts

Hyalroute Communication Group Limited (“Hyalroute”), a company incorporated in the Cayman Islands, applied to the Hong Kong Courts for an anti-suit injunction to restrain a creditor, Industrial and Commercial Bank of China (Asia) Limited (the “Bank”), from presenting any winding-up petition against it in the Cayman Islands.

The dispute arose from a Term Facility Agreement (“TFA”), under which Hyalroute guaranteed a US$100 million loan to its subsidiaries. A 2021 military coup in Myanmar disrupted one subsidiary’s operations, which hindered the subsidiaries’ repayments under the TFA.  To mitigate risks, the Bank secured a MIGA Insurance, which covered war and currency restrictions, with premiums paid by Hyalroute and its subsidiaries.  Under the TFA, Hyalroute may make a Covered Risk Application to suspend its guarantee obligations.  Hyalroute claimed that it had made such application in February 2021 and its liabilities were suspended as a result.  Despite this, the Bank served a statutory demand pursuant to the Cayman law.  Hyalroute argued that the dispute fell within the TFA’s arbitration clause, which mandates 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 …” at the HKIAC.

Analysis

It is well-established that foreign proceedings in breach of a valid and binding arbitration agreement or exclusive jurisdiction clause will be ordinarily restrained unless strong reasons to the contrary are shown by the defendant (Giorgio Armani SpA v Elan Clothes Co Ltd [2019] 2 HKLRD 313).  Contractual anti-suit injunctions, as sought in this case, focus on enforcing the parties’ agreement to arbitrate. In non-contractual anti-suit injunctions, where no contractual breach is involved, the focus would then be shifted to whether the foreign proceedings are vexatious, oppressive, or inconsistent with the principles of forum non conveniens.

The arbitration clause in the TFA imposes (1) a positive obligation on the parties to have disputes within the scope of the clause (i.e. dispute, controversy or claim arising in any way out of or in connection with the TFA) finally resolved by arbitration; and (2) a negative obligation on the parties to preclude them from having disputes finally resolved in a non-contractual forum.

The critical issue is, whether the Cayman winding-up proceedings would have the effect of finally resolving the dispute on Hyalroute’s indebtedness, thereby breaching the arbitration clause.  The concept of “final resolution” of a dispute means that the process is capable of giving rise to an estoppel in relation to the precise issues decided.

The Bank contended that in considering this issue, the Court should consider Cayman law; and under Cayman law, winding-up proceedings do not resolve the substantive debt dispute.  Therefore, the Bank’s intended presentation of the Cayman winding-up petition would not breach the TFA.

In contrast, Hyalroute argued that as Hong Kong law is the governing law under the TFA, Hong Kong law should take precedence over Cayman law regardless of the position under Cayman law; and under Hong Kong law (Re Guy Lam), winding-up proceedings determine parties’ rights and obligations, which could have the effect of “finally resolving”. Therefore, the Bank’s intended winding-up proceedings in the Cayman Islands would be in breach of the TFA.

The Hong Kong Court decided that the Bank’s contention is correct and accord with common and commercial sense.  Lacking expert evidence on Cayman law, the Hong Kong Court directly considered the relevant materials on Cayman law and applied its own knowledge and reasoning of the common law to analyse the position.  The Hong Kong Court found that under Cayman law, the Cayman Court in winding-up proceedings only determine the threshold question of whether a debt is bona fide disputed on substantial grounds, but not the substantive dispute itself. Thus, such proceedings do not “finally resolve” the dispute within the meaning of the arbitration clause. The Bank’s intended presentation of a Cayman winding-up petition would not amount to any breach of the TFA.

Additionally, the defence relied by Hyalroute about the suspension of its guarantee obligations under the TFA were found to be frivolous and abusive. There was no finding that any formal Covered Risk Application was made, and there were only informal discussions.  The MIGA insurance policy was also terminated in 2022 due to unpaid premiums, hence there could not be any suspension of guarantee obligations.

As such, the Hong Kong Court dismissed Hyalroute’s application for an anti-suit injunction, as there was no breach of the arbitration agreement, and Hyalroute failed to demonstrate any strong reasons for granting the injunction.

Key Takeaways

The Hyalroute decision offers critical insights for navigating arbitration and insolvency in cross-border contexts:

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