In Re Guy Kwok-Hung Lam v. Tor Asia Credit Master Fund LP [2023] HKCFA 9, the Court of Final Appeal (CFA) handed down a decision in an appeal concerning the appropriate exercise, by the Court of First Instance (CFI), of the discretion to decline the exercise of jurisdiction in bankruptcy and insolvency matters on forum grounds, specifically, where the underlying dispute regarding the petition debt is the subject of an exclusive jurisdiction clause (EJC).

Background

The appeal arose out of a bankruptcy order in respect of an alleged debt under a credit agreement which contained an EJC providing for disputes arising out of or in connection with the credit agreement to be resolved in the courts of New York. The respondent disputed the alleged debt and raised a cross-claim, and contended that the appellant was required by the EJC to litigate the disputes in the New York courts before invoking the bankruptcy regime in Hong Kong.

Legal issues and procedural history

The key question for determination by the CFA was whether the CFI should decline to exercise the jurisdiction to entertain and determine the subject bankruptcy petition, where the debt was disputed and the parties to the underlying agreement had agreed to submit to the exclusive jurisdiction of a foreign court.

In the CFI, the first instance judge considered that an EJC did not prevent the court from considering the issue of whether a creditor had locus to present a bankruptcy petition, if the petition debt was not subject to a bona fide dispute (the Established Approach). The fact that parties might have agreed to an EJC or an arbitration clause was only one factor that a court would take into account when considering the petition. The first instance judge considered that there was no bona fide dispute on substantial grounds in respect of the debt and made the bankruptcy order.

On appeal, the Court of Appeal (CA) set aside the bankruptcy order. The majority of the CA held that a petition should not be allowed to proceed if the petition debt is disputed and the dispute is subject to an EJC in favour of a foreign forum, in the absence of strong reasons, pending the determination of the dispute in the agreed forum (the Strong Cause Approach). In adopting the Strong Cause Approach, the majority considered English and Hong Kong authorities in related contexts including anti-suit injunctions and EJCs in favour of arbitration. The majority did not consider that a “strong cause” in favour of allowing the petition – such as actions by other creditors seeking a winding-up or bankruptcy, or public policy concerns arising from the alleged curtailment of a creditor’s rights – existed in the case. The minority of the CA agreed with the outcome, but did not consider that an EJC should be given conclusive or near conclusive weight in the exercise of the court’s discretion.

The CFA’s ruling

The CFA unanimously dismissed the appeal and held that:

• The jurisdiction conferred on the CFI in bankruptcy pursuant to the Bankruptcy Ordinance was not amenable to exclusion by contract. However, an agreement by the parties to an EJC would affect the CFI’s exercise of discretion to decline to exercise its jurisdiction.
• When an EJC is involved, the Established Approach is not appropriate. The determination of whether there was a bona fide dispute of the debt was a threshold question, leaving room for the exercise of discretion by the court to decline to exercise its jurisdiction.
• Instead, the court would need to take an essentially “multi-factorial approach” in considering the exercise of its discretion:
  • The policy underpinning the legislative scheme of the court’s bankruptcy/insolvency jurisdiction is still present.
  • Various other aspects of public policy would need to be considered, including the need to hold parties to their agreements and the possibility that a debtor may mount a completely frivolous defence amounting to abuse of process.
  • The public policy of the legislative scheme for bankruptcy jurisdiction is significantly diminished where a petition is brought by just one creditor against a debtor and there is no evidence that a broader creditor community is at risk.  On the other hand, the more obviously insubstantial the grounds for disputing the debt, the more the public policy of the legislative scheme for bankruptcy jurisdiction comes into prominence.
  • Absent countervailing factors such as risk of insolvency affecting third parties and a dispute that borders on the frivolous or abuse of process, the petitioner and the debtor should be held to their contract to resolve the dispute in accordance with the EJC.
• In this case, the judge at first instance, in granting the petition, had undertaken the equivalent of a summary judgment determination, assuming the jurisdiction to decide a question which the parties had agreed would be determined in another forum. It was possible for the Appellant to sue on the debt in New York and to apply there for summary judgment. While this would likely have a delaying effect on the timing of any consequential bankruptcy proceedings in Hong Kong, the absence of other pursuing creditors suggested that the public interest was unlikely to be adversely affected by such a delay.

Commentary

The CFA’s decision demonstrates that, in exercising the discretion to exercise jurisdiction to bankrupt or wind up a debtor, the Hong Kong court will respect party autonomy concerning EJC in the absence of countervailing public policy factors. Accordingly, a creditor will generally not be able to bankrupt/wind up a debtor in Hong Kong if the debtor disputes the underlying debt which is subject to an EJC in favour of a foreign court, unless and until the underlying dispute has been determined in accordance with the parties’ agreed dispute resolution mechanism.

The CFA leaves open the possibility of proceeding with bankruptcy or insolvency in Hong Kong despite the existence of an EJC in favour of a foreign court in the situation that the dispute of the debt is frivolous amounting to abuse of process. It would be interesting to see any future cases that would fit into this scenario but the threshold for finding a frivolous defence or abuse of process is generally high. From a creditor’s perspective, once an EJC in favour of a foreign court is involved, there are risks associated with presenting a bankruptcy or insolvency petition in Hong Kong as the creditor may not be able to fully anticipate how a debtor may dispute a debt and whether the grounds for disputing the debt would be considered as frivolous. It is therefore advisable to be prudent to avoid the bankruptcy and insolvency route in Hong Kong in the case of an EJC in favour of a foreign court.

Commercial parties should carefully consider the implications of putting in place EJCs in contracts, which will have a significant impact on the Hong Kong court’s exercise of its bankruptcy and insolvency jurisdiction, should the need to recover a debt arise.

Julian Ng, one of the Litigation team trainees, is one of the authors.