Hong Kong’s Court of Final Appeal gives primacy to a foreign exclusive jurisdiction clause over insolvency jurisdiction in landmark case

On 4 May 2023, the Court of Final Appeal (CFA) delivered a landmark judgment in Guy Kwok-Hung Lam (Respondent) -v- Tor Asia Credit Master Fund LP (Appellant) Final Appeal No.13 of 2022 (on appeal from CACV No. 393 of 2021 [2023 HKCFA 9) (“Re Guy Kwok-Hung Lam”).

The judgment found a significant issue in the approach of the Hong Kong court to a bankruptcy petition. It concerned a case where parties had agreed to submit to the exclusive jurisdiction of a specified foreign court for the purposes of legal proceedings arising from and relating to their agreement. An exclusive jurisdiction clause (EJC) specifies that only the courts of a particular jurisdiction should deal with any disputes arising out of a contract.

Agreeing with the approach adopted by the majority of the Court of Appeal (CA), the CFA held that in an ordinary case where the underlying dispute of the petition debt was subject to an exclusive jurisdiction clause, the court should dismiss the petition unless there were countervailing factors. For example, the risk of the debtor’s insolvency impacting third parties, the debtor’s reliance on a frivolous defence or an abuse of process. Accordingly, the CFA unanimously dismissed the appeal.

Context of the case

CP Global Inc, the borrower and holding company of a group of companies providing aged care services in Mainland China, entered into a Credit and Guaranty Agreement (for a term loan totalling US$29,500,000) with Tor Asia Credit Master Fund LP (the creditor).

Guy Kwok-Hung Lam (the debtor) gave a personal guarantee in the agreement for the full payment of all amounts due from CP Global. The agreement included an EJC under which the parties agreed that the laws of the State of New York would govern the agreement. It also outlined that the parties submitted to the exclusive jurisdiction of the courts of New York ‘for the purposes of all legal proceedings arising out of or relating to this Loan Agreement or the other Loan Documents or the transactions contemplated hereby or thereby’.

Subsequently, the creditor alleged that CP Global defaulted in repaying the loans and the debtor failed to perform his payment obligations under the personal guarantee. The creditor issued the ordinance and subsequently presented a bankruptcy petition against the debtor in Hong Kong based on an alleged debt of $48,597,644.

Additionally, the debtor commenced legal proceedings against the creditor in New York for, among other things, a declaration that there had been no event of default under the agreement that had not been waived by the creditor.

Decision of the Court of First Instance (CFI)

On 21 July 2021, the Honourable Madam Justice Linda Chan held that “while generally the court would give effect to the contractual bargain reached between the parties, it does not take away or fetter  the jurisdiction of the court to determine whether the company should be wound up if the creditor has the locus to present the petition.”

She rejected all grounds of opposition by the debtor and concluded that he had failed to show that there was a bona fide dispute on substantial grounds in respect of the petition debt. Accordingly, Her Ladyship made a bankruptcy order against the debtor.

Decision of the Court of Appeal (CA)

The debtor appealed to the CA and on 30 August 2022, with the Honourable Mr Justice Godfrey Lam giving the principal judgment, the CA overturned the CFI’s decision, set aside the bankruptcy order and dismissed the petition.

His Lordship analysed common law authorities on the topic of staying ordinary actions with EJCs. His analysis also applied to the impact of arbitration clauses on winding up petitions. It considered whether the approach used in ordinary actions should be applied to winding up and bankruptcy proceedings. He concluded that “In sum, I do not consider that there is an established body of common law authorities showing a ‘settled understanding of the law’ in support of the creditor’s position”.

The Honourable Mr Justice Chow agreed with the outcome but did not consider that an EJC should be given conclusive or near conclusive weight in exercising the court’s discretion. He was of the view that the list of relevant factors could not be exhaustively stated. However, ultimately, His Lordship agreed that the creditor’s petition was caught by the EJC and concurred that the petition should have been dismissed by the CFI.

Decision of the Court of Final Appeal (CFA)

The creditor appealed to the CFA and asked it to follow the ‘Established Approach’. This is where a petitioner is entitled to a bankruptcy or winding up order if the petition debt is not subject to a bona fide dispute. It also means that the debtor must show that the debt is disputed on substantial grounds.

Further, the creditor submitted that the approach of the majority in the CA undermined the insolvency regime and its underlying legislative approach. As a result, the creditor emphasised a ‘strong public interest in an orderly system of fairness to all creditors which benefits the public as a whole’. The creditor then argued that the inherent jurisdiction of the court should not be developed to cut across the statutory scheme.

The debtor drew on two cases that dealt with arbitration clauses, Re Southwest Pacific Bauxite (HK) Ltd [2018] 2 HKLRD 449 (‘Lasmos’’) and the Singapore Court of Appeal decision in AnAn Group (Singapore) Pte Ltd -v- VLB Bank (Public Joint Stock Co) [2020] 1 SLR 1158. Relying on these, the debtor argued that determining the locus comes before deciding whether the court should have the power to issue a winding up or bankruptcy order in the first place. In other words, public policy considerations only come into play at the latter stage.

The debtor suggested that the court can still consider insolvency considerations in deciding whether there is a ‘strong cause’ such as cases where the debtor may be ‘massively insolvent quite apart for the disputed petition debt’. Moreover, the ‘strong cause’ approach is flexible to deal with debtors who did not have any genuine intention to dispute the debt and is underpinned by notions of the party autonomy and coherence of the law.

The CFA unanimously dismissed the creditor’s appeal and endorsed the CA’s majority approach.

In a judgment by Mr Justice French NPJ, the CFA clarified that the court’s authority in bankruptcy cases is given by the law. The court’s jurisdiction is not influenced by parties’ contractual agreements. However, an agreement for an exclusive jurisdiction clause will be considered when deciding whether the court should defer to the agreed forum or exercise its discretion.

In determining if the court should decline jurisdiction, the CFA suggested that the exercise of discretion is multi-factorial. Other than the ‘strong cause’ approach, the court should also consider the range of considerations relevant to its discretion. This includes the importance of contractual autonomy and public policy reasons regarding the bankruptcy regime.

The CFA then held that the effect of the EJC should be upheld when there are no countervailing factors, such as the risk of the debtor’s insolvency impacting third parties, the debtor’s reliance on a frivolous defence or an occurrence of an abuse of process. It is apparent that when a foreign EJC is involved, the ‘Established Approach’ contended by the appellant is inappropriate.

Overall, the CFA underscored that in cases where a petition is initiated by one creditor against another and there is no indication of a broader group of creditors being endangered, the significance of the public policy underlying bankruptcy jurisdiction is reduced.

Does the CFA judgment apply to arbitration clauses?

In the subsequent recent case Simplicity & Vogue Retailing (HK) CO., Limited [2023] HKCFI 1443, the CFI made a winding up order against the debtor company. It considered whether the approach in Re Guy Kwok-Hung Lam applied to petition debts involving an arbitration clause with no supporting creditors to the petition.

The Honourable Madam Linda Chan (also the CFI judge in Re Guy Kwok-Hung Lam) clarified that the CFA judgment in Re Guy Kwok-Hung Lam applies to an EJC but not an arbitration clause.

Adopting a restrictive approach, Her Ladyship held that the CFA’s decision in Re Guy Kwok-Hung Lam did not establish a general rule that “if the agreement which gave rise to the petitioning debt contains an arbitration clause and there are no supporting creditors to the petition, the court must dismiss or stay winding up petition”.

She clarified that, as far as arbitration clauses are concerned, the approach of the Companies Court continues to be guided by the principles stated in the CA’s judgments in But Ka Chon and Sit Kwong Lam -v- Petrolimex Singapore Pte Ltd [2019] 5 HKLRD 646.

When considering whether to exercise its discretion to dismiss or stay a petition where the parties have agreed to an arbitration clause, the court will consider whether the requirements in Lasmos are satisfied. In other words, the court will generally dismiss a petition, except in exceptional cases, where the debtor disputes the debt relied on by the petitioning creditor. The court will also generally dismiss a petition where the contract in respect of the alleged debt contains an arbitration clause that covers the dispute relating to the debt. This is also applicable when the debtor has taken necessary steps under the arbitration clause to commence the contractually mandated dispute resolution process.

Implications of the case

The CFA judgment in Re Guy Kwok-Hung Lam confirms the court’s approach on the effect of an EJC in similar contexts of insolvency proceedings. This is particularly applicable where only one creditor is concerned, and the matter can be categorised as a ‘one-on-one commercial dispute’. Simply, where there are no other countervailing factors, such as evidence of a creditor community at risk or an occurrence of an abuse of process, the parties would be expected to be held to their contract and to have the underlying dispute determined in the agreed forum.

There will inevitably always be an element of uncertainty where a creditor may not know how the debtor intends to challenge the petition debt. It is therefore important for a creditor to undertake a realistic ‘best possible’ assessment of the claim against the debtor. This should include any potential defences to the claim before deciding whether to commence insolvency proceedings in Hong Kong.

The current position is that the existence of an EJC will likely have a significant bearing on whether the Hong Kong Court will exercise its jurisdiction in insolvency matters. If the Hong Kong Court does refuse to exercise jurisdiction to hear the insolvency proceedings as a result of an EJC (or an arbitration clause), this will result in significant delays. It will also create wasted costs for the creditor as the parties will then be required to litigate their dispute as to the underlying debt in the agreed foreign forum (or arbitration proceedings in the case of an arbitration clause).

Creditors therefore need to be mindful of the potential implications of an EJC on the exercise of jurisdiction by the Hong Kong Court in insolvency matters. Creditors should also give careful consideration and thought at the outset as to whether to include an EJC in their agreements. For example, it may be beneficial to consider including another form of dispute resolution mechanism. These could be a non-exclusive jurisdiction clause or an asymmetric/hybrid jurisdiction clause to allow greater flexibility or certainty, in terms of future recovery/enforcement options.

It remains to be seen how the Hong Kong Court will exercise its discretion under the CFA’s multi-factorial approach. This will be of particular interest where there is evidence of wider creditor community risk and the public policy considerations cannot be overlooked. In such a scenario, the court may well allow the insolvency proceedings to proceed notwithstanding the existence of a binding foreign court EJC.

This article was first published in Hong Kong Lawyer, September 2023