Landmark judgment from Hong Kong Court of Appeal on the effect of exclusive jurisdiction clauses in insolvency proceedings

By August 31, 2022 No Comments
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Landmark judgment from Hong Kong Court of Appeal on the effect of exclusive jurisdiction clauses in insolvency proceedings



The Hong Kong commercial and insolvency disputes team acted for the successful appellant in Guy Kwok-Hung Lam -v- Tor Asia Credit Master Fund LP CACV 393/2021 [2022] HKCA 1297.


On 30 August 2022, the Court of Appeal delivered a judgment dismissing a bankruptcy petition against the bankrupt debtor (the appellant) on the basis there was a ‘dispute’ between the petitioning creditor and the bankrupt debtor which should be first determined in accordance with the parties’ agreement in an exclusive jurisdiction clause in the related loan agreement, which provided that the agreement would be governed by New York law and conferred exclusive jurisdiction on the New York and US courts for the purpose of “all legal proceedings arising out of or relating to the [agreement] …or the transaction contemplated hereby”.


The judgment has given important guidance and certainty on what was previously an unsettled area of the law and which the Court of Appeal described as “in a state of flux”.


At the first instance hearing below, the Judge held that “there is a settled understanding of the law that an exclusive jurisdiction clause does not prevent a winding up or bankruptcy petition from being presented in an appropriate jurisdiction.”


One of the key issues for the Court of Appeal was whether the Judge at first instance should have dismissed or stayed the petition (based on a statutory demand claiming a debt of over US$48 million arising from an alleged event of default) because the petition debt was disputed and the bankrupt debtor had raised a substantial cross-claim (seeking damages and other relief based on breach of fiduciary duty, breach of the covenant of good faith and fair dealing and conspiracy to defraud in circumstances where the petitioning creditor effectively seized the substantial assets of the bankrupt debtor’s business in the US through an alleged ‘loan to own’ fraudulent scheme).


The appellant argued that both the dispute and the cross-claim were subject to the exclusive jurisdiction clause and he had already commenced an action in New York to seek a determination of those claims. Further, the first instance Judge should have followed the approach of Mr Justice Harris in Re Southwest Pacific Bauxite (HK) Ltd [2018] HKFI  426 (commonly known as the “Lasmos” approach) and dismissed or stayed the bankruptcy petition pending the resolution of the dispute in question in the New York proceedings. Further, the Lasmos approach which applies to arbitration clauses should be extended by the Court to include exclusive jurisdiction clauses.


The petitioning creditor argued that the Lasmos approach should not be extended to an exclusive jurisdiction clause and the Lasmos approach is itself unsound in the arbitration context where it was developed.


The Court of Appeal judgment (which runs to 62 pages) includes a detailed review of relevant authorities in Hong Kong, the United Kingdom, Singapore, Malaysia, Australia and the British Virgin Islands and contains findings on various issues including:


  • The approach to stay of ordinary actions based on exclusive jurisdiction clause
  • The effect of arbitration clauses on winding-up petitions;
  • Whether the exclusive jurisdiction clause was engaged in this case
  • Whether the approach in ordinary actions should be applied to winding up and bankruptcy proceedings
  • Whether there is a ‘dispute’ to be resolved in the agreed forum
  • Whether there would be a fetter of a creditor’s statutory right to petition for bankruptcy or winding-up on the ground of insolvency
  • The effect of exclusive jurisdiction clauses on insolvency proceedings


In delivering the leading judgment, the Honourable G Lam JA held, amongst other things, that a petition seeking a winding up or bankruptcy order on the basis of a disputed debt under such an exclusive jurisdiction clause would fall within “legal proceedings arising out of or relating to the agreement”. Importantly, His Lordship held that it is not correct to say that on the hearing of a winding up petition there will definitely not be any determination of the dispute. Further, where the Court finds against the company, concluding that its defences do not raise any bona fide disputes on substantial grounds, there is no reason why that should not be regarded as a determination of the dispute which may give rise to an estoppel in relation to the issues decided. In other words, the petition would in effect be a ‘summary judgment’ type procedure whereby the court would be invited to resolve whether there is a dispute.


His Lordship further held that “Thus analysed, there are in my opinion cogent reasons for adopting the same approach to an exclusive jurisdiction clause in winding up and bankruptcy petitions as in ordinary actions” and that “The law is in a state of flux and in my respectful opinion the approach herein proposed represents a step in its coherent development.


His Lordship has made it clear that, even in the context of insolvency proceedings, the Court will expect the parties to seek a determination of their dispute in accordance with the parties’ agreement on jurisdiction and a petition will not be allowed to proceed unless there are ‘strong reasons’ before the determination of that dispute in the agreed exclusive forum.   


Practically, this will have significant ramifications for creditors seeking to recover debts through security enforcement including commencing insolvency proceedings in a jurisdiction outside the agreed forum stated in an exclusive jurisdiction clause.  Creditors will need to carefully review their security including the scope of any exclusive jurisdiction clause and consider what enforcement action is available to recover their debt.    


Bryan O’Hare (Partner) and Pui Yip Leung (Associate) from Hill Dickinson Hong Kong represented the successful bankrupt debtor (appellant) together with Rachel Lam SC and Terrence Tai (both from Des Voeux Chambers).   


The Court of Appeal judgment can be found at https://legalref.judiciary.hk/lrs/common/search/search_result_detail_frame.jsp?DIS=146843&QS=%2B%7C%28CACV393%2F2021%29&TP=JU.