Introduction

In the latest judgment handed down by the Hong Kong Court of Final Appeal in Re Guy Kwok-Hung Lam [2023] HKCFA 9, the Court of Final Appeal clarified the approach to winding up and bankruptcy petitions where the agreement from which the disputed petition debt arose contains an exclusive jurisdiction clause (“EJC”).

Facts

In 2017, the Appellant entered into a credit and guaranty agreement (the “Credit Agreement”) with CP Global Inc (the “Company”) and the Respondent, under which the Appellant advanced term loans to the Company. The Respondent personally guaranteed the payment of all amounts owed by the Company to the Appellant. The Credit Agreement contained an EJC in favour of the New York courts in relation to all proceedings arising out of or in relation to the Credit Agreement.

In 2020, considering that an event of default had occurred under the Credit Agreement, the Appellant demanded payment of the outstanding principal and interest under the Credit Agreement from the Respondent. As the Respondent failed to meet the Appellant’s demand, the Appellant commenced bankruptcy proceedings against the Respondent in Hong Kong. On the other hand, the Respondent commenced proceedings in New York, seeking a declaration that there was no event of default under the Credit Agreement.

One of the main grounds for the Respondent’s opposition to the bankruptcy petition in Hong Kong is that the Appellant was required by the EJC to litigate its disputes with the Respondent in the New York courts before coming to Hong Kong to invoke the bankruptcy regime.

Court of First Instance decision

The Respondent was adjudged bankrupt by the Honourable Linda Chan J in July 2021.  Her Ladyship considered that the parties’ agreement to an arbitration clause or an EJC is only a factor which would be taken into account by the Court when considering a winding up or bankruptcy petition. Until the debtor could demonstrate a bona fide dispute on substantial grounds, there would be no proper basis to contend that there was a dispute which must be litigated in the agreed court. Her Ladyship concluded that there was no bona fide dispute on the facts of the case.

Court of Appeal decision

The Court of Appeal allowed the appeal by the Respondent and set aside the bankruptcy order. The Honourable G Lam JA, who delivered the majority judgment, noted that a petitioner seeking a winding up or bankruptcy order on the basis that there is no bona fide dispute of the debt on substantial grounds is to that extent seeking a determination of the dispute by the court. Even if the class remedy (i.e. the winding up or bankruptcy order) was only available in Hong Kong, it would not follow that the anterior question relating the debt relied upon for the petition should not be determined through the agreed dispute resolution mechanism. The policy of the law requires parties to abide by their contract.

His Lordship thus rejected the approach that an EJC should be treated simply as a factor to be taken into account. His Lordship took the view that the petition should not be allowed to proceed pending the determination of the dispute in the agreed forum in the absence of strong reasons. The petition should be dismissed as there was no such strong reason on the facts.

Court of Final Appeal decision

The Court of Final Appeal dismissed the appeal by the Appellant and upheld the approach adopted by the majority of the Court of Appeal. The key principles are highlighted as follows:

1.       The Court of First Instance’s jurisdiction in a bankruptcy matter is conferred by the Bankruptcy Ordinance (Cap. 6) and is not amenable to exclusion by contract.

2.       Parties’ agreement to refer their disputes to a foreign court only informed the Court’s discretion to decline to exercise its jurisdiction but did not oust its jurisdiction.

3.       Whilst the determination of whether the debt is bona fide disputed on substantial grounds is an element of the jurisdiction conferred on the Court, it is a threshold question, which leaves room for the exercise of the Court’s discretion to decline to exercise the jurisdiction to determine that question.

4.       The Court might exercise its discretion to decline jurisdiction where the issue of forum non conveniens was raised or where the dispute was covered by an arbitration agreement or an EJC.

5.       An EJC brings into consideration the public policy interest in holding parties to their agreement.

6.       The significance of the public policy of the legislative scheme for bankruptcy jurisdiction is much diminished where the petition is brought by one creditor against another and there is no evidence of a creditor community at risk.

7.       Where the underlying dispute of the petition debt was subject to an EJC, the court should dismiss the petition unless there were countervailing factors, such as the risk of the debtor’s insolvency impacting third parties, debtor’s reliance on a frivolous defence or an occurrence of an abuse of process.

Takeaway

It is now clear that if a disputed debt arose from an agreement subject to a broadly drafted EJC, the remedy of winding up or bankruptcy will unlikely be available before the resolution of the contractual dispute by the agreed mechanism.

As such, parties to existing contracts with an EJC or arbitration clause should carefully consider the enforcement strategy of their contractual rights. More importantly, before entering into contracts, parties should pay attention to the dispute resolution clause as it has a significant impact on the remedies available and ease of enforcement in the event of contractual defaults.

 

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.

Published by ONC Lawyers © 2023