Where a creditor’s bankruptcy petition is presented in Hong Kong, should it be allowed to proceed if the petition debt, which the debtor disputes, arises from an agreement which contains an exclusive jurisdiction clause in favour of a foreign court?
Previously, the law in this field was “in a state of flux”. In the latest landmark decision in Re Guy Kwok-hung Lam [2022] HKCA 1297, the Court of Appeal provided much-needed clarity and authoritative guidance on this difficult yet important issue. In short, the majority of the Court of Appeal held that where the debt on which a winding-up or bankruptcy petition is based is disputed and the dispute is subject to an exclusive jurisdiction clause in favour of a foreign court, the petition should not be allowed to proceed, in the absence of strong reasons, pending the determination of the dispute in the agreed forum (§86).
Three points in the leading judgment handed down by G Lam JA (with whom Barma JA agreed) are worth highlighting:
First, an exclusive jurisdiction clause can be engaged by a bankruptcy or winding-up petition based on a disputed debt arising out of an agreement containing such a clause. This is because the hearing of such a petition may well entail a determination of that dispute which would engage the negative aspect of an exclusive jurisdiction clause, namely the promise not to seek judicial determination in another forum on the rights and obligations of one or both parties under the agreement containing the exclusive jurisdiction clause.
Second, as to the effect of an exclusive jurisdiction clause on insolvency petitions, there are cogent reasons for applying the court’s approach to a stay in ordinary actions – that there should be a stay in the absence of strong reasons to the contrary, the lack of merits not being such a reason, as parties should be held to their bargains. It would also be an anomaly if a party bound by an exclusive jurisdiction clause could present a petition but cannot expect to proceed with an ordinary action. This approach does not raise any public policy concerns as to the curtailment of a creditor’s statutory right to present a petition either, for the reasons set out in Re Asia Master Logistics Ltd [2020] 2 HKLRD 423.
Third, it is incorrect to suggest that there is no “dispute” to be referred to the foreign court in accordance with an exclusive jurisdiction clause where the debtor has no genuine defence. The very point of an exclusive jurisdiction clause is to ask the court, not being the parties’ chosen forum, to refrain from embarking upon a review of the merits of the dispute in the first place. There is a “dispute” so long as a party’s claim is not admitted by the other party.
On the other hand, Chow JA had reservations with the majority’s approach which, in his Lordship’s views, “disregard[s] the well-recognised distinction between an action on a debt and a bankruptcy/winding-up petition based on a debt, as well as the wider public interest considerations pertaining to a bankruptcy/winding-up petition” (§111). Nonetheless, his Lordship agreed that the bankruptcy petition presented against the Debtor should be dismissed in this case: the exclusive jurisdiction clause in question, when properly construed, was engaged. The dispute ought therefore to be first determined in the agreed exclusive forum.
Conclusion
This case underscores the importance of an exclusive jurisdiction clause in an agreement. In particular, a party who wishes to present an insolvency petition on the strength of a disputed debt which arises out of an agreement containing an exclusive jurisdiction clause in favour of a foreign court may now find it more difficult to persuade the Hong Kong court to hear the petition unless there are strong reasons for doing so.
Would the result be different if the parties agreed to an arbitration clause instead of an exclusive jurisdiction clause? Whilst certain parallels can be drawn between exclusive jurisdiction clauses and arbitration clauses, the Court of Appeal stopped short of deciding the correctness of Re Southwest Pacific Bauxite (HK) Ltd [2018] 2 HKLRD 449 (more commonly known as “Lasmos”), where the court laid down the approach to insolvency petitions presented in the face of arbitration clauses. Only time will tell whether the courts in Hong Kong will continue to apply the approach in Lasmos.
José-Antonio Maurellet SC and Nick Luxton appeared for the Petitioner.
Rachel Lam SC and Terrence Tai appeared for the successful Debtor on appeal.
John Hui and Tommy Cheung appeared for the Debtor at the first hearing.
Clara Wong authored this article.
