Further to our news update, on 4 May 2023, the Court of Final Appeal handed down its judgment in Re Guy Kwok-Hung Lam [2023] HKCFA 9, affirming the earlier decision of the Court of Appeal to dismiss a bankruptcy petition in light of an exclusive jurisdiction clause. In so doing, the Court of Final Appeal put an end to the longstanding debate on the effectiveness of an exclusive jurisdiction clause in bankruptcy context.

In the judgment by Mr Justice French NPJ (with whom Cheung CJ, Mr Justice Ribeiro PJ, Mr Justice Fok PJ, and Mr Justice Lam PJ agree), it was held that the “established approach” (i.e. a petitioner will ordinarily be entitled to a bankruptcy/winding up order if the petition debt is not subject to a bona fide dispute on substantial grounds) is not appropriate where an exclusive jurisdiction clause is involved.  Where the underlying dispute of the petition debt is subject to an exclusive jurisdiction clause, the court should generally dismiss the petition and hold the parties to their contract, unless there are countervailing factors, such as the risk of insolvency affecting third parties, a frivolous defence, or an abuse of process.

In so finding, the Court of Final Appeal noted that the jurisdiction of the Courts in bankruptcy matters is conferred by statute and is not amenable to exclusion by contract. However, the parties’ agreement to refer their disputes to a foreign court is relevant to the court’s exercise of its discretion to decline jurisdiction. Furthermore, the determination of whether there is a bona fide dispute on substantial grounds, while being a necessary element of the court’s jurisdiction, is a threshold question. It is at that stage that public policy consideration comes into play and the court will adopt a multi-factorial approach. Where a bankruptcy petition is brought by one creditor against another and there is no evidence of a creditor community at risk, the significance of public policy of the legislative scheme for bankruptcy jurisdiction is much diminished.

While the Court of Final Appeal makes clear that its findings do not cover the case where an exclusive jurisdiction clause requires bankruptcy proceedings to be instituted in a foreign court, this decision will likely have far-reaching impact not only in bankruptcy proceedings but also on the treatment of arbitration clauses in bankruptcy or insolvency context.

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