Another obiter judgment, what is the status of the “Lasmos” approach now?19May2020
On 12 September 2019, we discussed the importance of the Court of Appeal’s judgment in But Ka Chon v Interactive Brokers LLC (“But Ka Chon”). In But Ka Chon, the Court of Appeal made obiter observations moderating the Lasmos approach in that a debtor would not be able to simply deny a claim (based on a contract containing an arbitration clause) to stay or dismiss winding up proceedings. The debtor would still have to show that there is a bona fide dispute regarding the debt. Notwithstanding that the Court of Appeal’s comment on the Lasmos approach was obiter, the approach has been adopted by Deputy High Court Judge William Wong SC (“DHCJ Wong”) in Dayang (HK) Marine Shipping., Limited v Asia Master Logistics Limited (“Dayang”).
Based on the facts in Dayang, DHCJ Wong held that the respondent company was not able to engage the Lasmos approach to dismiss the winding up proceedings “even if” it applied. Despite this, DHCJ Wong helpfully analysed thoroughly the jurisprudence regarding the rationale for the Lasmos approach in case His Lordship was wrong as to its application.
In his “analytical journey”, DHCJ Wong identified the “Contractual Justification” and “Comparative Justification” as being the potential driving forces that could justify the Lasmos approach. He rejected the “Contractual Justification” in that the engagement of the Court’s winding up jurisdiction does not interfere with a contractual obligation to resolve a dispute by arbitration. This is because the Court does not, when dealing with a winding up petition, “determine or resolve” a dispute. DHCJ Wong helpfully drew our attention to the decision of the High Court of Australia in Tanning Research Laboratories v O’Brien. In that case, the Australian Court held that a liquidator could be bound by an arbitration clause between the debtor-company and the creditor-petitioner when it comes to adjudicating the creditors’ proof of debt is based on general law. On this basis, the High Court referred a dispute in respect of the liquidator’s rejection of the proof of debt to arbitration. Although this proposition has not been tested in Hong Kong, DHCJ Wong contended that if it is adopted, it could “put an end” to the argument that the parties’ contractual rights would be frustrated unless the Lasmos approach was followed.
As to the “Comparative Justification”, DHCJ Wong concluded that the Lasmos approach (based on the English Court of Appeal’s decision in Salford) is far from being settled after analysing thoroughly subsequent cases in England and Singapore. However, roughly one month after Dayang was handed down, the Court of Appeal in Singapore delivered its judgment in AnAn Group (Singapore) v VTB Bank (Public Joint Stock Company) on 7 April 2020 which appears to have confirmed the Lasmos approach in Singapore, reversing the first instance decision which had been referred to in Dayang. The Singapore Court of Appeal held that winding up proceedings will be dismissed or stayed if: (i) there is a valid arbitration agreement between the parties; and (ii) the dispute falls within the arbitration agreement, provided the debtor’s dispute is not an abuse of the court’s process. It was emphasised that under this “prima facie standard of review”, the court will not consider the merits of the dispute. This approach aims to give effect to the principle of party autonomy in agreeing to an arbitration clause but not to permit debtors to abuse the process of the Court. There are potential issues with this approach as:
- The Court of Appeal provided a non-exhaustive list of examples as to what may amount to “abuse of the court’s process” and emphasised that the “abuse of process control mechanism cannot be used as a gateway for parties to introduce arguments on the merits of the underlying dispute, when such arguments are plainly irrelevant under the prima facie standard”. However, it is difficult to see how this would work in practice as it is unlikely that an analysis as to what amounts to an abuse of process could be completely devoid of at least some analysis of the merits of the dispute raised.
- To alleviate such concerns, the Singapore Court of Appeal recognised that a debtor-company may try to “prima facie standard of review” to forestall winding-up proceedings. As such, if the “prima facie standard of review” is met, the Court could grant a stay of the winding up proceedings (instead of an outright dismissal) if the creditor-petitioner is able to demonstrate legitimate concerns about the solvency of the debtor-company and that the debtor-company raises no triable issue. This would give the creditor-petitioner liberty to apply to lift the stay and proceed with the winding-up proceedings if, for example, the debtor-company does not actually commence arbitration or takes active steps to stifle the arbitration. This could safeguard the commencement date of the winding-up proceedings which would be important to potential transaction avoidance proceedings. The problem with this middle ground approach is that the creditor-petitioner, when attempting to establish that there is no triable issue, would inevitably be required to invite the court to consider the merits of the “dispute”. This directly contradicts with the justification to adopt the “prima facie standard of review” in the first place.
Notwithstanding the Singapore Court of Appeal’s judgment, there is certainly a question mark as to how the VTB Bank case would be applied in the future and particularly whether or not its application could actually avoid any analysis of the merits of the dispute raised. As such, in our view, the position adopted by DHCJ Wong remains correct in dismissing the “Comparative Justification”.
Overall, DHCJ Wong concluded that there is no reason to “put an unprecedented fetter on the Court’s hitherto flexible discretion to make a winding-up order”. This echoes Kwan VP’s comment at paragraph 63 in But Ka Chon that the effect of Lasmos was a “substantial curtailment” of one’s ability to present a winding up petition. DHCJ Wong’s view as to the current state of the law in Hong Kong is as follows:
“First, where a debtor-company intends to dispute the existence of a debt, he must show that there is a bona fide dispute on substantial grounds. It should not suffice for the debtor-company to merely deny the debt. This test would apply in all cases whether or not the debt had arisen from a contract incorporating an arbitration clause.
Secondly, the existence of an arbitration agreement should be regarded as irrelevant to the exercise of discretion.
Thirdly, the fact that arbitration proceedings have commenced or would be commenced may be relevant evidence that there is a bona fide dispute. However, this alone would not be sufficient to prove the existence of a bona fide dispute on substantial grounds.
Fourthly, where the creditor-petitioner petitions in circumstances where it knows there to be a bona fide dispute over the debt on substantial grounds, it runs the risk of being liable to pay the debtor-petitioner’s costs on an indemnity basis. It would also be at risk of liability under the tort of malicious prosecution.”
We agree with DHCJ Wong’s conclusion that a debtor-company should be required to show that there is a bona fide dispute on substantial grounds before a winding up petition is dismissed. The position in Lasmos and VTB Bank potentially gives a debtor-company too much power to stifle a genuine petition for no sufficiently good reason at the risk of prejudicing creditors in general.
Although DHCJ Wong’s comments regarding the Lasmos approach are obiter (likewise with the Court of Appeal’s judgment in But Ka Chon), it is a comprehensive analysis of the Lasmos approach which will no doubt be relied upon when this important issue is eventually dealt with by the Court of Appeal.
Robin Darton and Tim Au
The above is not intended to be relied on as legal advice and specific legal advice should be sought at all times in relation to the above.
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  HKCA 873
 The approach is helpfully summarised at paragraph 62 of the But Ka Chon case.
  HKCFI 311
 Dayang, §52
 Dayang, §136
 (1990) 169 CLR 332
 Dayang, §78
  SGCA 33
 Dayang, §99
 Dayang, §136
 This must be a reference to “debtor-company”