Interactive Brokers LLC (“IB”) was an online broker-dealer providing a platform for online trading. Mr. But Ka Chon (“Mr. But”) was an experienced trader.


In July 2012, Mr. But visited the website of IB and entered into a customer agreement dated 18 July 2012 (the “Customer Agreement”) by which he opened an online portfolio margin account with IB (the “Account”) and later signed an Acknowledgment by Customers.


Mr. But traded in Euro/Swiss Franc (“CHF”) futures. However, the Swiss National Bank unexpectedly cancelled its policy on 15 January 2015. As a result, the equity in the Account was insufficient to satisfy Maintenance Margin. Mr. But did not deposit any funds into the Account to resolve the margin deficit.


On 23 November 2016, IB issued a statutory demand to Mr. But for $79,334,912.39 being the deficit in the Account and interest at margin interest rates. It was served on him on 12 December 2016.


It is noted that Clause 33 of the Customer Agreement contains a Mandatory Arbitration Clause on any and all disputes between the parties arising out of the Customer Agreement.


On 13 January 2017, Mr. But took out an application to set aside the statutory demand. On 4 December 2018, Deputy High Court Judge Yee (the “Judge”) dismissed Mr. But’s application. Mr. But appealed the decision.


Grounds of appeal

Two broad grounds were replied on to challenge the decision below.

  1. The judge’s evaluation of the evidence on the misrepresentation claim (the “Misrepresentation Claim”); and
  2. The judge should have exercised the residual discretion on the ground that the dispute should go to arbitration and the approach in Lasmos Ltd v Southweest Pacific Bauxite (HK) Ltd [2018] 2 HKLRD 449 (“Lasmos”) should be adopted (the “ArbitrationClaim”).


Misrepresentation Claim

Mr. But alleged that IB made misrepresentations relating to its risk management policies or obligations on its website. He had relied on such misrepresentations to enter into the Customer Agreement and they turned out to be false.


The CA agreed with the Judge’s view that this claim was thoroughly bad and has no merit. Mr. But failed to show that he has a bona fide defence by way of misrepresentation with credible and cogent evidence to the claim of IB in respect of the debt, and his cross-claim based on misrepresentation is equally illusory.


Arbitration Claim


Mr. But relied on the arbitration clause in the Customer Agreement that the parties’ dispute should be arbitrated and the arbitration clause provides a ground for the court to exercise its residual discretion to set aside the statutory demand.


In Lasmos, it was held that a petition to wind up a company on insolvency grounds should “generally be dismissed” save in “exceptional” or “wholly exceptional” circumstances, upon satisfaction of these three requirements:

  1. if the petitioning debt is not admitted (it is settled law that this is regarded as a dispute sufficient for the purpose of arbitration, without regard to the quality of the dispute or substantive merits);
  2. the dispute is covered by an arbitration clause; and
  3. the alleged debtor has taken steps to commence arbitration.


The effect of the Lasmos approach is that the company is entitled to have the petition dismissed without having to show that the petitioning debt is bona fide disputed on substantial grounds. Where there is an arbitration clause, it is sufficient to show that the debt is “disputed” and for that it is sufficient to show the debt is not admitted.


However, the Judge found the Lasmos approach to be inapplicable because there was no genuine dispute to be arbitrated, it follows that the arbitration clause should have no relevance and it was unnecessary to comment on the soundness of the reasons supporting the Lasmos approach.


Even if the Judge is wrong about this and the Lasmos approach should be taken, he found that Mr. But’s application should still be refused for want of the fulfilment of the third requirement in Lasmos, in that Mr. But had not taken any steps to commence the arbitration. Further, the Judge did not accept that Mr. But has any genuine intention to commence arbitration.


The CA agreed with the Judge’s view that the third requirement of Lasmos has not been complied with and it would make no sense to dismiss or stay an insolvency petition on the mere existence of an arbitration agreement when the debtor has no genuine intention to arbitrate.


As such, the CA ruled that the appeal to be dismissed.


Obiter dicta


In view of the above conclusion, the CA viewed that it is not necessary to decide whether the approach in Lasmos should be adopted in an application to set aside a statutory demand. Instead, the CA made the following observation on an obiter basis:


  1. An insolvency petition is not covered by Section 20 of the Arbitration Ordinance (Cap.609), hence there is no automatic, mandatory or non-discretionary stay in favour of arbitration agreement.


  1. Having found no automatic, mandatory or non-discretionary stay under the arbitration legislation, prior to Lasmos, the courts consider that there is a discretionary power to be exercised under the insolvency legislation whether to dismiss or stay a petition where the alleged debt arises out of a transaction containing an arbitration agreement.


  1. In Lasmos, the discretion should be exercised only in one way: the petition should “generally be dismissed” save in “exceptional” or “wholly exceptional” circumstances, upon satisfaction of the three requirements mentioned above. However, a statutory right is conferred on a creditor to petition for bankruptcy or winding up on the ground of insolvency. It is contrary to public policy to preclude or fetter the exercise of this statutory right. Even though the Lasmos approach may not be regarded as totally precluding a creditor from invoking the insolvency jurisdiction of the court, it is a substantial curtailment of his statutory right.


  1. The justification for the Lasmos approach is to bring insolvency proceedings in line with the approach in an ordinary writ action. However, insolvency proceedings are not the means of enforcing a contract, that the petitioner invokes a class remedy available to all of the creditors, that there is no adjudication as to the parties’ respective rights and liabilities as between themselves.


  1. Having said that, the CA acknowledged that considerable weight should be given to the factor of arbitration in the exercise of the discretion. However, it is suggested that if a company wishes to obtain a stay of winding-up proceedings on the basis that the underlying debt which is founded is disputed, it must establish in the normal way that there is a bona fide dispute on substantial grounds.


{Prepared by Sheryl Shing, Trainee Solicitor}