The court in China Europe International Business School v Chengwei Evergeen Capital LP [2021] HKCFI 3513 found that the substance of the disputes fell within the arbitration agreements and rejected the petitioner's argument that the issues in the petition affected third parties who were not parties to the arbitration agreements.
The petitioner, China Europe International Business School (China Europe), was established in 1984 as a non-profit making joint venture under an agreement made between the PRC government and the European Commission.
In 2006, China Europe intended to launch a publishing business in the mainland to cater to the growing needs of business executives for state-of-the-art management concepts and skills. The parties entered into a memorandum of understanding to set up a joint venture company that was followed by a suite of agreements dated 3 May 2007 between China Europe, the Joint Venture (JV) company and the first to third respondents (R1-R3), which were companies incorporated in the Cayman Islands. The agreements all contained an identical or substantially similar arbitration clause.
China Europe sought to wind up the 7th respondent in the action, CEIBS Publishing Group Ltd (the company) on the just and equitable ground under section 177(1)(f) of the Companies (Winding Up and Miscellaneous Provisions) ordinance, claiming that the company was in effect a quasi-partnership between China Europe and R1-R3 which had acted in breach of the agreements and the "common understandings" regarding share ownership and control that were said to exist between the parties.
The company applied for an order to stay the petition claiming that the substance of the disputes in the petition fell within the ambit of the arbitration agreements.
Applicable principles
The Court of First Instance observed that Hong Kong was a pro-arbitration jurisdiction and added that in most legal systems, arbitration clauses in corporate or partnership documents are valid and enforceable. Although winding-up proceedings do not fall within the scope of section 20 of the Arbitration Ordinance on the basis they are not an action, the court had inherent jurisdiction to grant a stay on a petition presented on the just and equitable ground in favour of arbitration.
Whilst it was correct that in general, a company should not take an active role in a dispute between shareholders, the court did not have to take a "blinkered approach" and reject any application made by the company in a petition on the just and equitable ground. It was also not correct to say that the company had no interest in the petition.
The court was of the view that the substance of the disputes in the petition fell within the scope of the arbitration agreements for several reasons.
Until the incorporation of the company, there was no prior relationship or dealings between the petitioner and R1-R3 which was necessary for the court to find there was "something more" beyond what the shareholders had agreed in the 2007 agreements.
The point was fundamental because "in considering a petition on the just and equitable or unfair prejudice ground, the starting point is that shareholders are required to act in accordance with the contractual bargains, and the burden is on the petitioner to satisfy the court that there is 'something more' beyond what the parties agreed to in contract".
In the court's view, the arbitration agreements were wide enough to cover the disputes over the existence and effect of the common understandings regarding share ownership and control as they were plainly disputes "relating to" the agreements. It followed that the disputes should be determined in arbitration unless the plaintiff could discharge the burden of satisfying the court as to why it should be allowed to pursue the petition.
In this regard, the court dismissed the plaintiff's claims that the issues in the petition affected third parties who were not parties to the arbitration agreements and rejected the idea that a stay would necessitate further costs and expenses and lead to duplication of resources. The court also rejected claims that the sole arbitrator was not qualified to hear the dispute.
Key takeaways
- The decision is not the first time a Hong Kong court has stayed a petition to wind up a solvent company under the just and equitable ground.
- That occurred in Re Quiksilver Glorious Sun JV Ltd [2014] 4 HKLRD 759, which was cited in China Europe, and in which the court observed that winding-up proceedings were not an "action". However, the Quiksilver case marked the first time a Hong Kong court stayed a petition to wind up a solvent company so that an underlying shareholder joint venture dispute arising from a China joint venture could be resolved in accordance with an arbitration agreement between the shareholders.
- Where petitions are presented on other grounds than on the just and equitable ground, the Hong Kong court may use its discretion to refuse an application for a stay.
- The general pro-arbitration stance of the Hong Kong courts means that the courts will generally try to ensure that the parties' contractual bargain will be realised where the parties have clearly opted for arbitration as their preferred means of dispute resolution.
Read about other key decisions in the past year in our Arbitration Highlights in the Year of the Tiger
Authored by James Kwan, Tim Hill, and Nigel Sharman.
