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Insolvency Petitions: Exclusive Jurisdiction Clauses and Arbitration Clauses – A tale of two clauses

22 Jul 2021

The interplay between an arbitration clause and a creditor’s winding up petition is a vexed question which has given rise to a string of cases, including Lasmos Ltd v Southwest Pacific Bauxite (HK) Ltd [2018] 2 HKLRD 449, Re Asia Master Logistics Ltd [2020] 2 HKLRD 423 and But Ka Chon v Interactive Brokers LLC [2019] 4 HKLRD 873. While the latter two cases doubted the ratio of Lasmos that an arbitration clause governing the petition debt should generally lead to a dismissal of the petition, the Lasmos case remains the law of Hong Kong at the time of this Article.

In Re Guy Kwok-Hung Lam [2021] HKCFI 2135, the Court faced a slightly different question: How does the existence of an exclusive jurisdiction clause (“EJC”) in favour of a foreign jurisdiction affect the Court’s exercise of its bankruptcy jurisdiction? Notably, the Court found that none of the defences raised by the debtor discloses any bona fide dispute. However, the debtor argued that in order to respect freedom of contract between the parties, even where the debtor has no arguable defence to the creditor’s claim, the creditor must establish liability in the jurisdiction stipulated by the EJC before petitioning for bankruptcy.

The Court rejected the debtor’s argument. In particular four matters are noteworthy.

First, Linda Chan J accepted the creditor’s submission (at §47) that there is a fairly settled view in the Commonwealth authorities (including English, New South Wales and BVI cases) that an EJC does not per se prevent a winding up petition from being presented in an appropriate jurisdiction.

Second, her Ladyship explained that the reason why the EJC does not have this effect is because the Court is concerned with the locus of the creditor when determining whether there is a bona fide dispute in respect of the debt founding the petition (at §48). Her Ladyship held (citing Re Peveril Gold Mines [1898] 1 Ch 122) that the jurisdiction to wind up a company is conferred by statute as a statutory condition annexed to the incorporation of the company, and hence cannot be fettered by an EJC (at §47). The Court further noted that unless the debtor is able to demonstrate a bona fide dispute on substantial grounds, there is no proper basis for the debtor to contend that there is a dispute which must be litigated in accordance with the contractually agreed forum (at §49).

Third, whilst setting out counsel’s arguments that the Lasmos approach should not be extended to EJCs (referred to as “the 2nd point”) and that the Lasmos case is unsound on its own terms (referred to as “the 3rd point”), it was not necessary for the Court to deal with these submissions and the cases that doubted Lasmos. The Court appeared to have distinguished EJCs from arbitration clauses and refrained from resolving the issue of whether the Lasmos approach is correctly decided.

Finally and significantly, although the Court was only faced with an EJC rather than an arbitration,  her Ladyship’s reasoning could arguably be said to apply to an arbitration clause. The reasoning would be in line with Court of Appeal’s analysis in But Ka Chon that the winding up jurisdiction cannot be fettered by contract.

In the course of the analysis, her Ladyship also referred to arbitration clauses where she said that “the fact that the parties have agreed 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/bankruptcy petition” (at §49). However, unlike Re Asia Master and But Ka Chon where the point did not arise for determination, her Ladyship’s determination forms the ratio of Re Guy Kwok-Hung Lam in relation to EJCs. The upshot is that the law as it currently stands would potentially apply different approaches to arbitration clauses and EJCs – the issue of whether Lasmos is good law remains a live issue to be resolved on another occasion.

Brian Fan authored this article.

José-Antonio Maurellet SC appeared for the Petitioner.

John Hui and Tommy Cheung appeared for the Debtor at the first hearing.