Hong Kong: Landmark Court Decision Confirming Effect of Exclusive Jurisdiction Clauses on Insolvency Proceedings

Hong Kong’s Court of Final Appeal (CFA) recently handed down its judgment in the case of Guy Kwok-Hung Lam v Tor Asia Credit Master Fund LP [2023] HKCFA 9, upholding the Court of Appeal's earlier decision that a creditor's bankruptcy petition presented in Hong Kong should not be allowed to proceed where the petitioned debt is disputed and arises from an agreement with an exclusive jurisdiction clause (EJC) in favour of a foreign court.

Not only has this case reached the highest court in Hong Kong, it is also the first reasoned judgment in Hong Kong which addresses the effect of an EJC on insolvency proceedings.

Background

The background facts of this case are set out in our previous Legal Update . In short, Mr Lam was the guarantor of certain loans granted by Tor Asia Credit Master Fund LP (Tor Asia) to a company wholly owned by him. The Credit and Guaranty Agreement between the parties (the Agreement) was governed by New York law and contained an EJC providing that certain courts in New York would have exclusive jurisdiction for all legal proceedings arising out of or relating to the Agreement.

Tor Asia then commenced bankruptcy proceedings against Mr Lam in Hong Kong. Such proceedings were opposed by Mr Lam on the basis that there was no event of default, the petitioning debt was disputed, and the dispute was subject to the EJC in favour of the New York courts.

The Court of First Instance (CFI) originally granted the bankruptcy order against Mr Lam on the basis that it could not be demonstrated that there was any bona fide dispute of the petition debt on substantial grounds. Mr Lam appealed.

In 2022, the Court of Appeal allowed Mr Lam's appeal and dismissed Tor Asia's bankruptcy petition – upholding the effect of the foreign EJC and holding that the court should exercise its discretion to stay an action brought in breach of an EJC, unless there is a strong cause for not doing so. 

CFA Decision

In this final appeal, Tor Asia contended for the “established approach” adopted by the CFI judge; 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. Tor Asia further argued that:- 

1. the insolvency regime, by nature, has a “strong public dimension”, which strongly militates against the approach adopted by the Court of Appeal;
2. different considerations should apply to insolvency proceedings than private legal actions;
3. the efficacy of the domestic insolvency regime would be undermined if an EJC could be invoked to submit that no argument could be heard on the debt or on the issue of the court's locus because parties agreed to have their disputes adjudicated elsewhere;
4. therefore, to give presumptive weight to EJCs would erode the insolvency regime.

On the other hand, Mr Lam contended for the "strong cause" approach adopted by the Court of Appeal; namely that a court should exercise its discretion to stay an action brought in breach of an EJC unless there is strong cause for not doing so.

Underpinning this approach was the notion of contractual autonomy. Mr Lam further argued that the “strong cause” approach does not undermine the public policy considerations that inform the insolvency regime, and that the court should endorse an approach to EJCs that was consistent across ordinary actions and insolvency proceedings.

He also contended that the question of locus precedes the question of whether the court should exercise its jurisdiction in making a bankruptcy or winding up order. The issue of public policy only comes into play if the court is satisfied it has locus to determine the proceedings, and when the court exercises its discretion whether to make a winding up or bankruptcy order.

After considering the arguments in the round, the CFA unanimously decided that: 

1. The jurisdiction of the CFI in bankruptcy matters is conferred by the Bankruptcy Ordinance and cannot be excluded by contract. The parties, however, are free to refer their disputes to a foreign court and to agree not to invoke the jurisdiction of the Hong Kong court. This does not affect the jurisdiction of the CFI in bankruptcy matters and instead informs the CFI of its discretion to decline to exercise its jurisdiction in favour of the agreed forum.
2. In bankruptcy proceedings, the petitioner must prove the debt. The determinations by the CFI of whether it is satisfied with the proof of the debt, whether there is a bona fide dispute about the debt on substantial grounds, and whether it should grant, dismiss or stay the bankruptcy petition, are all part of the CFI's exercise of its bankruptcy jurisdiction. 
3. In particular, whether the debt is bona fide disputed on substantial grounds is a threshold question. It is this threshold character of a dispute about indebtedness that gives room for the CFI to exercise its discretion to decline jurisdiction to determine that question, and it is at this point that the public policy interest – in holding parties to their agreement to have their disputes determined in another forum – comes into play.
4. The “established approach” is not appropriate where an EJC is involved. In an ordinary case of an EJC, absent any countervailing factors such as the risk of insolvency affecting third parties and a dispute that is frivolous or an abuse of process, the parties ought to be held to their contract, i.e. the EJC.
5. The CFA did not address in length the "strong cause" approach and only held that whilst a "strong cause" test is indicative, it should not obscure the range of considerations relevant to the court's discretion.
6. In this case, the CFI, in granting the petition, undertook the equivalent of a summary judgment determination and assumed the jurisdiction to decide a question which the parties had agreed would be determined in another forum (i.e. in the New York courts). The CFA noted that it was possible for Tor Asia to sue on the debt in New York and apply there for summary judgment. While this may have delayed proceedings in Hong Kong, the absence of other creditors in this case indicated that the public interest was unlikely to be negatively affected.

Comment

This CFA ruling confirms that the Hong Kong courts, in the absence of any public interest issues, will respect the parties’ contractual autonomy regarding EJCs in insolvency proceedings.

In practice, this means that a creditor pursuing a debt which is subject to an EJC will generally not be able to successfully obtain a bankruptcy or winding up order against a debtor in Hong Kong if the debt is disputed.

Parties should therefore be aware of the impact of EJCs when entering into such agreement, and be prepared to have to litigate any dispute about the underlying debt in the agreed foreign forum before commencing insolvency proceedings in Hong Kong.

It should also be noted that the CFA left open the question of whether the EJC in this case required the creditor to undertake bankruptcy proceedings in New York. This issue was not pressed by the parties and on this point the CFA noted that larger considerations of public policy were involved.