On 30 August 2022, the Court of Appeal handed down its judgment for the case of Re Guy Kwok-Hung Lam [2022] HKCA 1297, allowing the appeal and reversing the lower court decision dated 21 July 2021.  In doing so, the Court of Appeal upheld the effect of an exclusive jurisdiction clause and dismissed the bankruptcy petition on the basis that there is a dispute which ought to be determined first in accordance with the jurisdiction agreement.

At the heart of the case was a credit agreement under which the respondent petitioner advanced various term loans to a company called CP Global Inc. with the appellant as personal guarantor.  The agreement contained an exclusive jurisdiction clause in favour of New York for all legal proceedings arising out of or relating to the agreement.  Upon the default of the loans, the respondent, among other things, presented a petition to the Hong Kong court seeking a bankruptcy order against the appellant.  Linda Chan J granted the bankruptcy order and the appellant appealed.  The issue before the Court of Appeal was therefore whether the bankruptcy order should be set aside in light of the exclusive jurisdiction clause.

In the leading judgment by G Lam JA (with whom Barma JA agrees), it was held that the same approach as in the stay of ordinary actions based on exclusive jurisdiction clause should apply to winding up or bankruptcy proceedings.  The exclusive jurisdiction clause should ordinarily be given effect unless there are strong reasons to the contrary.  A winding up or bankruptcy petition should not be allowed to proceed if the underlying debt is disputed and the parties are bound by the clause.  In particular:

• As to whether the underlying debt is disputed, G Lam JA rejected the argument that there is no dispute if there is no bona fide defence, instead finding that the court should not embark upon a review of the merits in the first place.
• As to strong reasons to the contrary, while it was not possible nor desirable to define them, it was suggested that reasons may include, among others, where the debtor is incontestably and massively insolvent apart from the disputed debt, where there may be other creditors seeking winding up which are not subject to jurisdiction agreement, or where the assets may be in jeopardy.

While Chow JA agreed that the appeal should be allowed, his Lordship expressed reservation as to whether the approach in the stay of ordinary actions should be applied to winding up and bankruptcy proceedings, taking into account the well-recognised distinction and the wider public interest considerations pertaining to a bankruptcy/winding up petition.  His Lordship is also not prepared to accept that the Lasmos approach (which concerns the effect of arbitration clauses on winding up and bankruptcy petitions and its correctness is yet to be directly ruled on) should be extended and applied to exclusive jurisdiction clause context.  Chow JA found that the appeal should be allowed on a narrower basis that the lower court judge adopted a wrong approach in exercising of her discretion by allowing the petition to proceed unless it can be shown that there is a bona fide dispute of the debt on substantial grounds.

While this case concerns an exclusive jurisdiction clause in bankruptcy proceedings, the leading judgment contained a detailed analysis on the effect of arbitration clauses on winding up petitions, including the Lasmos approach and the argument on the fettering of statutory rights.  As suggested by the judgment itself, the law in this area is in a state of flux: this decision represents a step in its coherent development and can be expected to be applied in a wider context.

For further details, the full judgment can be found here.

The rise in cyber fraud and cybercrime featuring cryptocurrencies, like Bitcoin or Ether, has resulted in an increasing number of legal issues which require the Courts around the world to demonstrate a good understanding of technology and willingness to embrace technology.

Guidance on technical aspects of cryptocurrency

A recent notable case is Yan Yu Ying v Leung Wing Hei [2022] HKCFI 1660, where the Hong Kong court, among other things, granted a proprietary injunction over the Bitcoins which are the subject of a civil dispute. It is worth noting that in the decision dated 7 June 2022, the Court explained (in very understandable terms) the features of Bitcoin, the digital keys, their storage in cryptocurrency wallets, the differentiation between a “hot” cryptocurrency wallet and a “cold” cryptocurrency wallet, etc. An example of a hot cryptocurrency wallet is an account in a web-based cryptocurrency exchange, while an example of a cold cryptocurrency wallet is a hardware wallet which is not connected to the Internet. In this case, the dispute relates to a cold cryptocurrency wallet which can receive and send Bitcoin.

This explanation of technical terminologies in the judgment would likely be a helpful guidance for the courts and legal practitioners when dealing with disputes involving cryptocurrencies in the future.

Alternative Service on anonymous defendants

Another development to watch is that cryptocurrency fraud has become more common. Courts in some jurisdictions have adopted technology to address the difficulties of serving court documents on defendants involved in cryptocurrency fraud, particularly where the identities and addresses of the defendants are not known.

In the United States, in a case about alleged theft of cryptocurrency, the Supreme Court of the State of New York on 2 June 2022 authorised the plaintiff to serve the court’s order and other court papers upon the person(s) controlling a cryptocurrency wallet address via “airdrop” of a non-fungible token (NFT airdrop) (the “Service Token“) on the Ethereum blockchain to that wallet address. Airdrops involve the distribution of tokens to wallets, and have been used for marketing or promotion purposes. In this case, the Service Token contains a hyperlink to a website where the order and other legal papers for service can be accessed. (see LCX AG v. John Doe Nos. 1-25 (Dkt.No.,154644/2022) (N.Y. Supreme, Ct., NY County))

In the United Kingdom, it has been reported that on 24 June 2022, the High Court of England and Wales also granted an order permitting service of court proceedings by way of NFT airdrop in the case of D’Aloia v Binance Holdings & Others [2022] EWHC 1723 (Ch).

Victims of cryptocurrency fraud will be pleased to know that the courts in some jurisdictions have adopted and embraced technology by allowing alternative service of court documents using blockchain technology. When the right case comes, the Hong Kong court will consider whether blockchain technology (e.g. NFT airdrop) can be adopted for service of court documents.

This news article provides updates to our news article published on 31 January 2022, where we noted that the Competition Commission had commenced an enforcement action in the Competition Tribunal against five parties, comprising of three hotel operators, a travel services provider and a managing director of the travel services provider, alleging that the respondents were part of a travel services sector price-fixing cartel, and we noted that three of the respondents had elected to cooperate (“Settling Respondents“).

On 15 July 2022, the Tribunal granted orders to dispose of the proceedings between the Commission and the Settling Respondents by consent. The orders were granted based on the joint applications made by the Commission and the Settling Respondents. In the applications, the Settling Respondents admitted liability for contravening the First Conduct Rule of the Competition Ordinance or for being involved in the price-fixing cartel.

The Settling Respondents were: 1) Gray Line Tours of Hong Kong Limited (“Gray Line”); 2) Tak How Investment Limited (“Tak How”), owner and operator of InterContinental Grand Stanford Hong Kong; and 3) Mr. Wu Siu-Ieng, Michael, Managing Director of Gray Line (“Mr. Wu”). The Tribunal ordered Gray Line and Tak How to pay pecuniary penalties of HK$4,177,000 and HK$1,600,000 respectively, which reflected a 25% and 20% discount from their respective levels of recommended pecuniary penalty for their cooperation with the Commission, and ordered both to pay the Commission’s investigation and litigation costs. The Tribunal also ordered that Mr. Wu be disqualified from acting as a director in any company for three years. The enforcement action against the two hotel operators that did not elect to resolve the proceedings by consent continues.

The reduced pecuniary penalties that Gray Line and Tak How were ordered to pay reflect the benefits for undertakings to cooperate with the Commission pursuant to its “Cooperation and Settlement Policy for Undertakings Engaged in Cartel Conduct” (“Cooperation Policy“). The case with the Settling Respondents is significant as it is the first case where the Commission obtained an order from the Tribunal resolving an enforcement action pursuant to the Cooperation Policy.

For further information, the Commission’s guidelines and policy documents can be found here.

On 2 June 2022 the Court of Appeal handed down its judgment on the Competition Commission’s (“Commission“) appeal against pecuniary penalties imposed by the Competition Tribunal (“Tribunal“) against certain respondents.

One of the issues raised on appeal was whether the Tribunal erred discounting the pecuniary penalties imposed on certain respondents that did not directly engage in anti-competitive conduct. The respondents in question were construction and engineering contractor companies that had subcontracted the works on two public housing estates and let their Housing Authority licences to subcontractors who in turn were found to have entered into price-fixing and market sharing agreements in breach of the First Conduct Rule of the Competition Ordinance (Cap. 619) (“Ordinance“).

At first instance the Tribunal discounted the pecuniary penalties imposed on these respondents by one-third on the grounds that:

1. the pecuniary penalty was sought only against the respondents and not the respondents together with their subcontractors;
2. it would not be right or safe to assume that the respondents would be able to recoup all or part of the pecuniary penalty imposed from their subcontractors; and
3. the pecuniary penalty imposed should reflect the role of the respondents as only part of their respective undertakings.

The Commission sought to set aside this discount on the basis that the Tribunal had erred on principle and taken irrelevant factors into account (or had failed to take account of relevant factors). The Commission contended that the pecuniary penalty must be specific to the undertaking and the undertaking’s contravention of the Ordinance, not to the natural or legal persons constituting the undertaking and/or their role within the undertaking.  Rather, each respondent along with their respective subcontractors formed a single economic unit or undertaking, and each undertaking as a whole infringed the First Conduct Rule.

The Court of Appeal held that it would be wrong in principle to reduce the penalty to reflect the extent of the respondents’ role as part of the undertaking. Where an undertaking contravenes the Ordinance, it is for the undertaking to answer for that infringement, and in this case the respondents and their subcontractors were to be jointly and severally liable for the infringement. Joint and several liability follows when an undertaking constituted by a number of natural and legal entities engage in anti-competitive conduct and facilitates the effective enforcement of the Ordinance. The Court of Appeal accepted that it would be highly onerous for the Commission to name all the entities within an undertaking in enforcement proceedings before the Tribunal in order to avoid any discount to the penalty.

The Court of Appeal allowed the Commission’s appeal, setting aside the one-third reduction and restoring the amount of pecuniary penalties to be paid by the respondents in full.

In The Joint Provisional Liquidators of Seahawk China Dynamic Fund [2022] HKCFI 1994, Harris J granted recognition of and assistance to the provisional liquidators of Seahawk China Dynamic Fund, a solvent entity, and at the same time took the opportunity to inform the banks and other organisations that provisional liquidators are able to exercise the more conventional powers of a company’s agent in Hong Kong which are expressly provided for in the order of their appointment.

This case involves a Cayman-incorporated company (“Company“) which is solvent and in provisional liquidation in the Cayman Islands. The joint provisional liquidators (“JPLs”) were appointed by the Cayman Court.

The JPLs have been trying to take possession of the Company’s assets in Hong Kong, which, expectedly, required the JPLs to obtain a local recognition order.

There were 2 issues before the Court:-

1. whether the court should provide recognition of and assistance to the liquidators of a solvent company; and
2. in light of Harris J’s decision in Global Brands Group Holding Limited (in liquidation) [2022] HKCFI 1789 (which provided that the Hong Kong courts should only recognise a collective insolvency process taking place in a company’s centre of main interests (“COMI”), subject to exceptions – see our earlier article), whether the JPLs’ application should still be granted given that the Company’s COMI is not in the Cayman Islands.

In response to the first issue, the Court held that common law principles of recognition and assistance had no application to liquidators of a solvent company. Instead, the principles of conflict of laws which are independent of those of cross-border insolvency should be engaged, and as a matter of private international law, if a foreign court of a company’s place of incorporation has made an order appointing a liquidator (as in this case), the liquidator will be able to act as the agent of the company with the powers which the liquidator has as a consequence of his appointment.

In response to the second issue, the Court held that while the COMI considerations discussed in the Global Brands case still stand, they would not be relevant if the liquidator of a solvent company was merely seeking an order confirming that he had particular powers by virtue of his appointment in the company’s place of incorporation, as in this case. Harris J also explained that if the foreign liquidation was a solvent liquidation, it would not fall within the principle of modified universalism in the first place, and would be more akin to a ‘private arrangement’ as opposed to a collective insolvency proceeding.

In a message to the banks and “sophisticated organisations”, Harris J reminded them of what he said in his earlier cases, A Co v B [2014] 4 HKLRD 374 and Capital Asia LP v DBS Bank (Hong Kong) Ltd [2016] HKEC 2377, that it should not be necessary for foreign liquidators, whether it be of a solvent or insolvent company, to obtain a local court order in order to access the company books and records.  (For solvent companies, the liquidators’ ability to do so could stem from the powers given to them in the company’s place of incorporation where the order of appointment was made.)  If banks insist that the foreign liquidators obtain a local court order to exercise in Hong Kong no more than the conventional powers of a company’s agent, then they face the risk of an adverse costs order, if made a party to the application.

It is not entirely clear though from Harris J’s judgment in the latest Seahawk case whether it is still necessary for foreign liquidators to obtain a local court order to deal with the company’s assets in Hong Kong.  It would appear that it remains necessary to do so, at least for an insolvent liquidation.