Will the Court make a bankruptcy order when the dispute over the petition debt is subject to an exclusive jurisdiction clause outside Hong Kong?
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 |