Shanghai Implements Integration of Commercial Arbitration and Mediation Mechanisms into Corporate Restructuring and Bankruptcy

On December 17, the signing ceremony of the "Memorandum on Establishing an Out-of-Court Restructuring Collaboration and Mechanism for Connecting Bankruptcy-Related Disputes with Arbitration" (hereinafter referred to as the "Memorandum") and the symposium on optimizing the business environment through the rule of law was successfully held at the Shanghai International Dispute Resolution Center. The event was co-hosted by the Shanghai International Trade Promotion Committee and the Shanghai Third Intermediate People's Court, and organized by the Shanghai International Economic and Trade Arbitration Commission (Shanghai International Arbitration Center) and the Shanghai Foreign Trade and Economic Cooperation Arbitration International Commercial Mediation Center.

In the current context of the urgent need for restructuring of large and small businesses in bankruptcy and the significant increase in bankruptcy-related disputes, the establishment of an out-of-court restructuring mechanism and the promotion of the connection between litigation and arbitration for bankruptcy-related disputes are crucial. The active introduction of alternative dispute resolution mechanisms such as arbitration and mediation not only aligns with the World Bank’s B-Ready assessment system requirements for the compliance of bankruptcy procedures but also represents an important practice and response to the concept of bankruptcy prevention and risk mitigation. The signing of the "Memorandum" and the holding of the symposium will further promote the connection between litigation and arbitration in bankruptcy-related disputes, effectively utilizing the institutional roles of both the judiciary and arbitration, as well as the legal service functions. This will create a diversified resolution pattern for bankruptcy-related disputes, improve the efficiency and quality of bankruptcy case handling, and continuously enhance the internationalization, rule of law, and convenience of Shanghai’s business environment, injecting new vitality into the high-quality economic development of Shanghai and the entire country.

First Review of the Draft "Regulations on the Establishment of the Beijing International Commercial Arbitration Center"

On the morning of November 28, the 13th meeting of the 16th Standing Committee of the Beijing Municipal People’s Congress conducted the first review of the "Regulations on the Establishment of the Beijing International Commercial Arbitration Center" (Draft), aiming to promote Beijing as a preferred destination for international commercial dispute resolution through the rule of law. The legislative proposal targets the creation of a professional, international, and convenient international commercial arbitration center. It includes several institutional designs to foster world-class arbitration institutions, align with international practices such as the "seat of arbitration" and "temporary arbitration," and encourage the opening up of arbitration services to foreign parties, all with the goal of enhancing Beijing’s arbitration brand.

An open, inclusive, and efficient international approach is one of the key factors in attracting both domestic and international parties, as well as arbitration professionals, to choose Beijing as their preferred location for dispute resolution. To this end, the draft legislation formalizes measures such as facilitating immigration, work, and residence for foreign personnel, thereby providing more convenient services for arbitration professionals. In order to further align with international arbitration practices, the legislation also explores innovations in arbitration mechanisms. The draft clarifies the concept of the "seat of arbitration," explores the "temporary arbitration" system, and aligns with the relevant arbitration indicators in the World Bank’s business environment maturity assessment system, aiming to enhance the international competitiveness of Beijing’s arbitration services.

Hong Kong International Arbitration Centre Beijing Representative Office Officially Established

The Hong Kong International Arbitration Centre (HKIAC) is pleased to announce that its Beijing Representative Office has officially completed its registration procedures, becoming the first overseas arbitration institution to establish a representative office in Beijing. The unveiling ceremony took place at 3:00 PM on December 16, 2024, at the China World Hotel in Beijing. This historic moment not only marks another significant milestone in HKIAC’s development but also highlights Beijing’s openness and inclusivity in the internationalization of the arbitration sector.

By establishing a representative office in Beijing, HKIAC will leverage its extensive experience in the mainland and the unique advantages under the "One Country, Two Systems" framework. Following the establishment of its Shanghai representative office, HKIAC will further advance its strategic presence in China, including offering professional training, supporting the development of legal professionals, and enhancing cooperation and communication with local arbitration institutions, professional associations, and other key stakeholders in the arbitration industry. In line with relevant legal regulations, the Beijing Representative Office will also provide court facilities and other necessary services for cases managed by HKIAC. As the prominence of the Beijing International Commercial Arbitration Center continues to grow, HKIAC looks forward to utilizing its Beijing office to bring together global arbitration experts and jointly promote the prosperity and development of the international arbitration industry.

Beijing Fourth Intermediate People’s Court:

The Issuance of the Audit Report Constituted a New Fact, and the Arbitration Award Did Not Constitute a Repetitive Arbitration

Legal Basis:

"Arbitration Law of the People's Republic of China"

Article 58

Where the parties concerned can provide evidence disproving the arbitration award in any of the following circumstances, they may request a cancellation of the arbitration award by an intermediate People's Court at the place where the arbitration commission is located:

(1) there was no arbitration agreement;

(2) items for arbitration were not within the scope of the arbitration agreement or were those upon which the arbitration commission had no right to arbitrate;

(3) the establishment of the arbitration tribunal or arbitration procedures are in contravention of legal proceedings;

(4) the evidence upon which the arbitration award is made was counterfeit;

(5) the other party has concealed evidence to the degree that fairness has been affected;

(6) arbitrators have accepted bribes, resorted to deception for personal gain or perverted the course of justice by the award.

Where the People's Court has formed a collegiate bench and has examined and verified that the award was made under one of the aforesaid situations, it shall order the cancellation of the award.

Where the People's Court decides that it should make a ruling to the effect that there has been a violation of the public interest, it shall order the cancellation of the award.

"Provisions of the Supreme People's Court on Several Issues Concerning the Handling of Cases of Enforcement of Arbitration Awards by People's Courts"
Article 20

If, after the application filed by a party for revocation of an arbitration award to the people's court is rejected, the party applies for non-enforcement of the arbitration award for the same matter in the enforcement procedures, the people's court shall not support it. If, after the application filed by a party for non-enforcement of an arbitration award to the people's court is rejected, the party applies for revocation of the arbitration award for the same matter, the people's court shall not support it.

Case Description：

On March 31, 2021, the Sucheng District People’s Court of a certain city in Jiangsu Province issued Civil Judgment (2019) Su 1302 Min Chu 3725 (hereinafter referred to as the "Judgment 3725"), ruling that Company 1 must repay Company 2 RMB 33.51 million in shareholder loans. The case was a shareholder derivative lawsuit initiated by Liu, who represented Company 2 and demanded that Company 1 repay the shareholder loan. The court supported Liu's claim and ruled in favor of repayment.

On September 10, 2021, the Intermediate People's Court of a certain city in Jiangsu Province issued Civil Judgment (2021) Su 13 Min Zhong 1829, overturning the first-instance judgment. The appellate court found that the debt claimed by Liu had significant defects and that there was insufficient evidence to support the claim, ultimately dismissing the lawsuit.

In 2024, Company 2 initiated an arbitration case before the China International Economic and Trade Arbitration Commission (CIETAC) based on its Investment Agreement and Supplemental Agreement with Company 1, requesting repayment of the same RMB 33.51 million shareholder loan plus interest. This arbitration request bore a high degree of similarity to the 2019 Judgment 3725 case.

On June 27, 2024, CIETAC issued Arbitration Award [2024] CIETAC Jing Cai Zi No. 1787, ordering Company 1 to repay Company 2 RMB 31,383,916, along with interest of RMB 5,226,075.84 up to September 15, 2021, among other payments.

Company 1 then applied to annul the arbitration award, citing the following reasons:

Repetitive Arbitration:

Company 1 argued that Award 1787 involved the same dispute as Judgment 3725, where the issue of the RMB 33.51 million loan had already been litigated and decided. Therefore, CIETAC's re-examination of the same dispute violated the principle prohibiting repetitive arbitration.

Jurisdictional Challenge:

Company 1 contended that CIETAC lacked jurisdiction because Company 2 did not raise an arbitration jurisdiction objection in the previous litigation. Since Company 2 had already opted for litigation, it should not be permitted to pursue arbitration for the same dispute.

Audit Report and Setoff Issue:

Company 1 claimed that the arbitral tribunal failed to consider the findings of a judicial audit report, which confirmed that Company 1 had valid setoff claims against Company 2. By ignoring the setoff issue, the tribunal rendered an unfair award that exacerbated Company 1’s financial burden.

Public Interest Concern:

Company 1 argued that enforcing the arbitration award would severely impact its operations. As a large hospital bearing significant public health responsibilities, enforcing the award could lead to financial distress, thereby harming the public interest. The court should therefore consider its social responsibility and prevent enforcement that would disrupt the hospital’s normal operations.

Court's View:

The court dismissed Company 1’s annulment request, providing the following reasons:

Repetitive Arbitration:

Although both cases involved the RMB 33.51 million claim, the second-instance judgment of Judgment 3725 had already dismissed Liu's lawsuit. Additionally, the arbitration proceedings introduced new facts through an audit report, thereby distinguishing the arbitration from the previous litigation. Therefore, the arbitration did not constitute repetitive arbitration.

Jurisdictional Challenge:

Under Article 6 of CIETAC's Arbitration Rules, Company 1 failed to submit a written jurisdictional objection before the hearing and participated in substantive arguments. This was deemed a waiver of the right to challenge CIETAC's jurisdiction.

Audit Report and Setoff Issue:

The court held that Company 1’s objection regarding the tribunal’s handling of the audit report was essentially a disagreement over the arbitral tribunal’s evaluation of evidence, which fell within the tribunal’s discretionary power. Such a challenge does not constitute a valid ground for annulment.

Public Interest Concern:

The court found that the arbitration concerned a private contractual dispute and that Company 1’s public interest argument had already been rejected in prior court proceedings. Therefore, the claim was unfounded.

Ultimately, the court ruled to dismiss Company 1's annulment application pursuant to Article 58 of the Arbitration Law and Article 20 of the Supreme People's Court's Provisions on Arbitration Award Enforcement Cases.

Singapore High Court:

Failure to Comply with Court's "Unless Order" 【1】Leads to Revocation of Enforcement of North Sea International Arbitration Award

Case Description：

Wuhu Company (hereinafter referred to as the "Applicant") entered into a guarantee agreement in 2019 with Shandong Company (hereinafter referred to as the "Shandong Company") and European Topsoho S.àr.l. (hereinafter referred to as the "ETS"). Under the agreement, ETS pledged its shares in Luxembourg-registered company SMCP SA (hereinafter referred to as the "SMCP") to the Applicant as collateral for Shandong Company's debt to the Applicant. However, ETS did not inform the Applicant and pledged some of the SMCP shares to other creditors to secure bonds it issued. In 2021, due to bond default, the bondholders' trustee GLAS SAS (London Branch) acquired ownership of the pledged shares. Upon discovering the double pledge, the Applicant requested the transfer of the remaining SMCP shares from ETS to itself.

GLAS SAS subsequently filed a lawsuit in the UK courts and obtained a summary judgment on October 17, 2022, declaring itself a creditor of ETS. Additionally, GLAS SAS contested the share transfer on the grounds of fraudulent conveyance under section 423 of the Insolvency Act 1986 (Chapter 45), which led to the case being heard by the UK High Court (Case: GLAS SAS (London Branch) v European Topsoho SARL and others [2024] EWHC 83 (Comm)). In October 2021, GLAS SAS submitted a bankruptcy petition to the Luxembourg courts, and in February 2023, ETS was declared bankrupt, with a bankruptcy trustee appointed to take over and investigate ETS's affairs.

The Applicant initiated arbitration on November 18, 2022, to confirm its priority claim over the remaining shares. The arbitration clause in the guarantee agreement stipulated that disputes should be submitted to the Jining Arbitration Commission for arbitration. However, the arbitration ultimately took place at North Sea International Arbitration Court, and the arbitral tribunal held a closed-door hearing on December 30, 2022, and issued an award on January 10, 2023, granting the Applicant a priority claim over the remaining shares.

In 2023, the Applicant applied to the Singapore High Court for the recognition and enforcement of the arbitral award. Initially, the enforcement was granted, but ETS objected and sought to have the enforcement order revoked. ETS's objections focused on several key points:

a. Invalidity of the Arbitration Agreement: ETS argued that the arbitration agreement should specify the Jining Arbitration Commission, but the Applicant claimed that it was amended to designate North Sea International Arbitration Court through a memorandum, which ETS did not approve. Additionally, the legitimacy and existence of North Sea International Arbitration Court were disputed.

b. Fairness and Procedural Issues: ETS contended that it was not sufficiently informed about the initiation of the arbitration and did not effectively participate in the proceedings.

c. Fraud and the Existence of a Fictional Arbitration Institution: ETS argued that North Sea International Arbitration Court was a fictional institution, and the award was thus fraudulent.

d. Violation of Public Policy: ETS asserted that enforcing the arbitration award would result in an unfair outcome, violating public policy in Singapore.

The court instructed the Applicant to provide relevant documents related to the arbitration process, including communications and arbitration institution records. The Applicant failed to fully comply with this document submission requirement, leading the court to issue an "unless" order, requiring the Applicant to fully comply within a specified period or face the revocation of the enforcement request.

Court's View：

The Singapore High Court found that the Applicant had clearly violated the court's order by failing to submit documents as required. Specifically, the Applicant failed to adequately explain the loss of WeChat communication records and did not clarify whether attempts were made to recover the missing records from other relevant parties. The court noted that the documents provided by the Applicant were incomplete, and the Applicant had not fully complied with its document submission obligations. The court emphasized that the severity of the procedural default led to the conclusion that the Applicant's actions demonstrated willful disregard for the court's order.

Regarding the failure to comply with the document submission requirement, the court decided to enforce the "unless" order, revoking the Applicant’s enforcement request. The court held that the "pro-enforcement" principle under the New York Convention did not preclude sanctions for procedural violations, and the Convention did not limit the court’s authority in procedural matters. Furthermore, the court pointed out that the Applicant's non-compliance hindered ETS's ability to mount an effective defense, leading to an unfair hearing.

Although procedural issues might typically be overlooked, the court emphasized that whether the arbitration award itself violated public policy still required further examination. In this case, as the Applicant failed to provide critical evidence, the court found that the Applicant had not sufficiently demonstrated that the award did not violate public policy. Therefore, the Singapore High Court ruled to revoke the Applicant’s request for the recognition and enforcement of the award issued by North Sea International Arbitration Court.

【1】A peremptory, or “unless”, order has been described as one of the most powerful tools in the court’s arsenal to ensure compliance with its orders and maintain procedural discipline. Its premise is simple: a party is ordered to do an act, and “unless” the order is complied with and the act done as ordered, a prescribed adverse consequence is to automatically follow. It is no surprise, therefore, that the unless order has been referred to as an “order of last resort”and represents a party’s “last chance to put his case in order”