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Hong Kong’s Court of Final Appeal provides clarity in landmark judgment giving primacy to an exclusive jurisdiction clause over insolvency proceedings

By May 17, 2023 No Comments
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Hong Kong’s Court of Final Appeal provides clarity in landmark judgment giving primacy to an exclusive jurisdiction clause over insolvency proceedings

Hill Dickinson’s Hong Kong Commercial and Insolvency Disputes team acted for the successful respondent 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).

On 4 May 2023, the Court of Final Appeal (the highest appellate court in Hong Kong) (the “CFA”) delivered a landmark judgment with findings on, among other things, the important issue of the proper approach of the Hong Kong court to a bankruptcy petition where the parties had agreed to submit to the exclusive jurisdiction of a specified foreign court for the purposes of legal proceedings arising out of or relating to their agreement.

Agreeing with the approach adopted by the majority of the Court of Appeal (the “CA”), the CFA held that in an ordinary case where the underlying dispute of the petition debt was subject to an exclusive jurisdiction clause (“EJC”), the court should dismiss the petition unless there were 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. Accordingly, the court unanimously dismissed the appeal.

Appellant’s Contentions

The Appellant contended for the “Established Approach”, namely that a petitioner is ordinarily entitled to a bankruptcy or winding up order if the petition debt is not subject to a bona fide dispute. The Appellant submitted that if EJCs are given presumptive weight, it will erode the insolvency regime and undermine the “strong public interest in an orderly system of fairness to all creditors which benefits the public as a whole”.

 

The Appellant characterised the Bankruptcy Ordinance as the “existing calibrated balance between parties’ autonomy and the insolvency regime”, and argued that the inherent jurisdiction of the court should not be developed to cut across the statutory scheme.

 

Respondent’s Contentions

Relying on 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, both of which dealt with arbitration clauses, the Respondent submitted that the question of locus is anterior to the question of whether the court should exercise its jurisdiction to make 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 Respondent further suggested that courts may take into account insolvency considerations by adopting the “strong cause” approach, e.g. in cases in which the debtor may be “massively insolvent quite apart from the dispute petition”. The “strong cause” approach is sufficiently flexible to deal with debtors who did not have any genuine intention to dispute the debt, at the same time, able to underpin parties’ autonomy and maintain coherence of the law.

 

The CFA’s Reasoning

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

The CFA clarified that the jurisdiction of the Hong Kong Court to entertain and determine bankruptcy petitions is conferred by the Bankruptcy Ordinance (Cap 6). The Court’s jurisdiction is not affected and cannot be excluded by contract. Parties may agree between themselves not to invoke the jurisdiction of the court. Parties may agree to refer their disputes to a foreign court but this does not affect the jurisdiction of the court. Nevertheless, the fact that parties have agreed to an EJC will be highly relevant as to whether the court should exercise its discretion in declining jurisdiction in favour of the agreed foreign forum.

In determining whether the court should decline jurisdiction, the CFA suggested that the exercise of discretion is multi-factorial. Other than the “strong cause” approach, courts should also consider the range of considerations relevant to its discretion, including but not limited to the importance of contractual autonomy and public policy reasons of 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. The CFA emphasized that in cases where the petition is brought by one creditor against another party and there is no evidence of a “creditor community at risk”, the significance of the public policy of the legislative scheme for bankruptcy jurisdiction becomes much diminished.

Takeaways

This decision confirms the court’s approach on the effect of an EJC in the context of insolvency proceedings where only one creditor is concerned, and the matter can be categorised as a ‘one-on-one commercial dispute’. In other words, 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. Going forward, parties should therefore pay particular attention to the inclusion of an EJC to a contract as such clause will likely have significant influence on the Hong Kong Court’s discretion as to whether to exercise its jurisdiction in insolvency matters. Creditors should review and adapt as appropriate their security documents to take account of this decision to maximise their prospects of recovery following a payment default.   

It remains to be seen how the court will exercise its discretion under the multi-factorial approach where there is evidence that the wider creditor community is at risk and public policy considerations cannot be overlooked, as opposed to holding parties to their contract in an ordinary case where there is an EJC. In such a scenario, the court may well allow the insolvency proceedings to proceed notwithstanding the existence of a binding foreign court EJC.    

Bryan O’Hare (partner), Pui Yip Leung (associate), Wing Lui (trainee) and Rachel Yeung (paralegal) represented the successful bankrupt debtor together with counsel team, Rachel Lam SC, Terrence Tai and Clara Wong (all from Des Voeux Chambers).

A link to the judgment here.