Court of Appeal upholds exclusive jurisdiction clause in favour of foreign jurisdiction in bankruptcy proceedings

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.

6 September 2022
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