Following our previous article in August 2020 (Is an arbitration clause a trump card against winding-up petitions?), the Court of First Instance recently had another chance to determine the legal effect of an arbitration agreement governing the underlying debt on a winding-up petition in Re Hongkong Bai Yuan International Business Co., Limited (HCCW 219/2021).

The petitioner in Re Hongkong Bai Yuan International Business Co., Limited sought a winding up against Hongkong Bai Yuan International Business Co., Limited (the “Company“) on the ground of insolvency by reason of the Company’s failure to comply with a statutory demand regarding outstanding cargo price payable by the Company to the petitioner under a sales contract concluded between the parties. The Sales Contract provided, amongst other terms, that all disputes under the contract were to be referred to CIETAC for arbitration. One of the grounds under which the Company sought dismissal of the petition is that there is a “prima facie” dispute on the debt that the case shall be referred to arbitration.

Rather than urging the court to adopt either the traditional approach (i.e. debtor company may only apply to dismiss or stay a winding-up petition if it can show there is a bona fide dispute on substantial grounds) or the Lasmos approach (i.e. winding-up petition should generally be dismissed if (a) the debtor disputes the debt, (b) the dispute is covered by the arbitration clause, and (c) the debtor company has taken step to commence arbitration), counsel for the Company submitted that the court should instead adopt the Singapore approach expounded in AnAn Group (Singapore) Pte Ltd v VTB Bank (Public Joint Stock Company) [2020] SGCA 33, §§60-74 and the English approach in Salford Estates (No.2) v Altomart Ltd (No.2) [2015] 1 Ch 589, such that the court should dismiss a petition if the court finds there is a “prima facie” dispute on the debt.

Linda Chan J held that it serves no purpose to distinguish the linguistic difference between a prima facie standard (adopted by Singapore and English courts) and a bona fide dispute on substantial grounds standard (adopted by Hong Kong court) as the real test is whether the debtor could demonstrate that there is “a genuine dispute on the debt which requires determination of a tribunal“. In addition to approving the traditional approach, the judge further provided that the courts in exercising its discretion to wind up a company should “give considerable weight to the fact that there is an arbitration agreement between the parties and other relevant circumstances“.

While the debate between the advocates of the traditional approach and the Lasmos approach will continue until decisions from appellate courts are handed down, it is now becoming clearer that the Court of First Instance is generally in favour of Kwan VP’s obiter comments in But Ka Chon v Interactive Brokers LLC [2019] 4 HKLRD 85 and the traditional approach is to be preferred. Although arbitration agreements are not to be treated as a “trump card” under the traditional approach, the existence of an arbitration agreement is now expected to be an important factor weighing against winding-up.

For details, the full judgment can be found here.

The Arbitration and Legal Practitioners Legislation (Outcome Related Fee Structures for Arbitration) (Amendment) Bill 2022 (the “Bill“) was gazetted on 25 March 2022. The Bill seeks to allow the use of outcome related fee structures (“ORFS“) for arbitration by lawyers in the following three forms of agreements:

• conditional fee agreement (“CFA“), which refers to an agreement under which the lawyer agrees to be paid a success fee for the matter only in the event of a successful outcome for the client in the matter;
• damages-based agreement (“DBA“), which refers to an agreement under which the lawyer agrees to be paid only in the event the client obtains a financial benefit in the matter (“DBA payment“). The DBA payment is calculated by reference to the financial benefit that is obtained by the client in the matter; or
• hybrid damages-based agreement (“Hybrid DBA“), which refers to an agreement under which the lawyer agrees to be paid (a) the DBA payment in the event the client obtains a financial benefit in the matter, and (b) in any event a fee (usually calculated at a discount) for the legal services rendered by the lawyer for the client during the course of the matter.

The Bill proposes to introduce a new Part 10B into the Arbitration Ordinance (Cap. 609) to remove the prohibition on ORFS for arbitration. It is also proposed that section 64 of the Legal Practitioners Ordinance (Cap. 159) be amended to enable the validity of ORFS agreements for arbitration. The legislation will bring Hong Kong’s legal fees position into line with other major arbitral seats.

The full text of the Bill is available here.

In light of the 5^th wave of the COVID-19 pandemic in Hong Kong, the Government has recently gazetted the Employment (Amendment) Bill 2022 (the “Bill“), which seeks to amend the Employment Ordinance (Cap. 57, the “EO“) to prevent potential employment disputes which may arise when COVID-19 control measures are implemented.

One of the key objectives of the Bill is to clarify the definition of a statutory sickness day.  The amended definition of “sickness day” includes a day on which an employee is absent from work by reason of his/her compliance of a requirement under the Prevention and Control of Disease Ordinance (Cap. 599) which restricts his/her movement, namely a compulsory testing, isolation or quarantine order (a “Cap. 599 Order“; an employee subject to the Cap. 599 Orders is referred to as an “Affected Employee“).  Accordingly, section 33 of the EO is amended to provide that any Affected Employee is entitled to sickness allowance where the Affected Employee:

1. is able to present a hard copy or electronic document issued by a Government officer that shows the name of the Affected Employee, the type of the Cap. 599 Order imposed on the Affected Employee, and the commencement and expiry dates of the period for the Cap. 599 Order;
2. is absent from work for 4 or more consecutive days due to the Cap. 599 Order imposed on the Affected Employee; and
3. is not subject to the Cap. 599 Order due to his/her own serious and wilful misconduct.

Further, the proposed section 32KA of the EO provides that an Affected Employee’s absence from work due to his/her compliance with a Cap. 599 Order will not be a valid reason for dismissal or variation of the terms of his/her employment contract.  However, under the new section 32KB, an employee who fails to comply with a legitimate vaccination request by the employer (which must fulfil all the requirements set out in the proposed Schedule 12) will be regarded as being incapable of performing work for the purpose of his/her employment, which does constitute a valid reason for the employer to dismiss the employee or vary the terms of his/her employment contract.

The Bill, which can be accessed here, was tabled to the Legislative Council on 16 March 2022.  It is worth noting that there is a sunset clause which provides for the repeal of the above proposed amendments when the COVID-19 pandemic is under control and is no longer a matter of public health concern.

On 11 February 2022, we published an article discussing a judgment of the Court of First Instance (CFI) (See Tam Sze Leung & Ors v Commissioner of Police [2021] HKCFI 3118).  In that judgment, after holding that the longstanding practice of the Commissioner of Police to issue “Letters of No Consent” (LNC) was unconstitutional, the Court postponed the granting of relief.

On 23 March 2022, the CFI granted relief in its decision [2022] HKCFI 772, in which the LNCs and the LNC Regime as operated by the Commissioner of Police were declared “ultra vires sections 25 and 25A of Organised and Serious Crimes Ordinance (Cap 455) and incompatible with articles 6 and 105 of the Basic Law“.  In other words, the current position in law is that an LNC is unconstitutional, and as such the Police may not use it as a tool to “administratively” freeze a bank account which is suspected to hold proceeds of crime.

Although Tam Sze Leung is a first instance decision, and the Commissioner of Police may lodge an appeal against the decision in the near future, until we have a higher court decision ruling to the contrary, victims (in particular, those of cyber fraud) should give serious consideration to applying for an injunction to minimise the risk of dissipation of the stolen funds.

In our previous article dated 27 January 2022, we reported on the enforcement action of Hong Kong’s Securities and Futures Commission (SFC) against Zhonghui International Futures Company Limited for breaching know-your-client, anti-money laundering and counter-terrorist financing (AML/CFT) requirements.  On 16 Mar 2022, the SFC once again reprimanded and imposed a substantial fine (HK$5.4 million) on two licenced corporations, i.e. Emperor Securities Limited (ESL) and Emperor Futures Limited (EFL), for their AML/CFT breaches.  Each of ESL and EFL is licensed under the Securities and Futures Ordinance to carry on Type 1 (dealing in securities) and Type 4 (advising on securities) regulated activities, and Type 2 (dealing in futures contracts) and Type 5 (advising on futures contracts) regulated activities, respectively.

The SFC found that ESL and EFL failed to implement adequate and effective policies and procedures to mitigate the risks of money laundering and terrorist financing associated with a total of 732 and 32 third-party fund transfers, respectively, involving funds of approximately HK$1.05 billion and HK$17.6 million respectively. The breaches of ESL and EFL include approving relevant transfers without adequate explanations or verifying documents, despite presence of red flags.

The imposition of this substantial disciplinary sanction is another example of the SFC sending a “strong deterrent message” to the market to guard against AML/CFT failures. For further information, please visit the SFC’s website here.