Drawing a line in the sand… how far do the courts go in invoking an arbitration clause?

20 September 2019

The recently reported case of Re Dickson Valora Group (Holdings) Co Ltd [2019] 3 HKLRD 210 is of jurisprudential importance. It sets the proper limits to (a) striking out an unfair prejudice petition on the ground of lack of locus standi and, more importantly, (b) arbitration clauses in shareholders’ agreements.

Background

The Petitioner and the Respondents were both shareholders of Dickson Valora Group (Holdings) Co Ltd (the “Company”), which was formed for the purpose of pursuing a business opportunity, which entailed building a shopping mall and hotel complex in Mainland China. The parties entered into a shareholders’ agreement with the following arbitration clause:

“Any dispute, controversy or claim arising out of or relating to this Agreement, or the breach, termination or invalidity thereof, shall be settled by arbitration under the Hong Kong International Centre Administered Arbitration Rules in force at the date of this Agreement (the “Arbitration Rules”)…” (the “Arbitration Clause”).

On 5 November 2012, the Respondents passed a written resolution to make a call on the unpaid shares and for forfeiture of the shares in case of non-payment, relying on certain provisions in the articles.  It was the Petitioner’s case that its shares had been fully paid, so it did not pay any of the instalments demanded. As a result, the Petitioner’s 275,000 shares in the Company were forfeited and cancelled.

On 4 December 2017, the Petitioner issued a petition for unfair prejudice complaining about, inter alia, the forfeiture of shares (the “Petition”). In May 2018, the Respondents took out a summons to (i) strike out the Petition on the ground that the Petitioner was not a member of the Company; and (ii) stay the Petition in favour of arbitration relying on the Arbitration Clause.

Both of the Respondents’ applications were dismissed.

Locus Standi of the Petitioner

The court held that despite the fact that the Petitioner was not registered as a member of the Company when the Petition was presented, it still had locus standi to present the Petition.

The forfeiture of shares is the very conduct complained of by the Petitioner as unfairly prejudicial in the Petition. The learned judge considered it to be “highly unattractive” to contend that the Petitioner should be denied standing to complain about conduct which deprived it of its membership in the Company, on the ground that it is not a member. Whether Petitioner's shares were validly and properly forfeited should be allowed to be dealt with in the Petition.

As such, the strike-out application was dismissed.

This decision reinforces existing Hong Kong jurisprudence derived from Re Ratonal Industrial Ltd (unrep, HCCW 1193/2002, 20 March 2003); Alipour v Ary [1997] 1 WLR 534; Re Kenly (HK) Ltd (unrep, HCCW 964/2002, 2 January 2003); and Re Mak Shing Yue Tong Commemorative Association Ltd [2005] 4 HKLRD 328, §§52‑65.

Limits to the Arbitration Clause

Moreover, despite the breadth of the Arbitration Clause, the court further held that the Respondents had not shown, even on a prima facie basis, that the matter or substance of the dispute in the Petition fell within the ambit of the Arbitration Clause.

In reaching this decision, the learned judge acknowledged the fundamental differences between company law and contract law. He observed that there were various rights and obligations associated with membership of a company that existed independently of any shareholders’ agreement.  There can be various types of disputes between shareholders on questions upon which their shareholders’ agreement, as such, makes no provision at all. 

Indeed, the Arbitration Clause applies to disputes arising out of or relating to the shareholders’ agreement or the breach, termination or invalidity thereof, and not arising out of or relating to any affairs of the Company. The complaint is based on a breach of the articles and of the fiduciary duty of directors, on which the shareholders’ agreement makes no provision. These are governed by ordinary company law and does not fall within the scope of the Arbitration Clause.  

Accordingly, arbitration clauses in shareholders’ agreements do not necessarily encompass disputes arising out of breach of the Company’s articles. The stay application was therefore also dismissed.

Key Takeaways

 This decision brings Hong Kong’s jurisprudence in line with that of other common law jurisdictions, including Australia (ACD Tridon Inc v Tridon Australia Pty Ltd [2002] NSWSC 896), Canada (Robotunits Pty Ltd v Mennel [2015] VSC 268), and Singapore (BTY v BUA [2018] SGHC 213).

 This case is a timely reminder that arbitration clauses are not invariably invocable, despite the Court’s generous approach in their interpretation. In the context of shareholders’ disputes, arbitration clauses in shareholders’ agreements may not necessarily encompass disputes arising out of the Company’s articles of association and/or breach of directors’ duties.

The counsel teams involved in this case were:-

Anson Wong SC, Alan Kwong, and Michael Ng for the Petitioner

    

Rachel Lam SC, Terrance Tai, and Jasmine Cheung for the Respondents

    

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