Arbitration
Issues between exclusive jurisdiction clause and insolvency proceedings in Hong Kong Courts settled
Guy Kwok-Hung Lam v Tor Asia Credit Master Fund LP [2023] HKCFA 9
Effect of an exclusive jurisdiction clause (“EJC”) on bankruptcy proceedings – Where a creditor’s bankruptcy petition is presented in Hong Kong, should it be allowed to proceed if the petition debt, which the debtor disputes, arises from an agreement which contains an EJC in favour of a foreign court? Does the same apply to an arbitration clause?
Fact
The case concerned a bankruptcy order against the Respondent, Mr. Lam, a Hong Kong resident and the founder of CP China Group, which provided aged care services. CP Global Inc (“CP Global”), a Cayman company, was the holding company of the CP China Group.
Tor Asia Credit Master (the “Petitioner”), CP Global, Mr. Lam and others entered into a credit and guaranty agreement (the “Agreement”) whereby the Petitioner lent US$29.5 million (the “Loans”) to CP Global, and Mr. Lam personally guaranteed the full payment of the Loans as primary obligor. The petition debt arose from the Agreement.
The Agreement contained an EJC in favour of the courts of New York “for the purposes of all legal proceedings arising out of or relating to this [Agreement] or the other [loan documents] or the transactions contemplated hereby or thereby”.
The Agreement was amended three times to extend the maturity of the Loans, with each of the amended agreements incorporating the EJC in full.
Subsequently, CP Global had difficulties in making payments and defaulted in payments. Negotiations between the parties failed, and the Petitioner presented a bankruptcy petition in Hong Kong against Mr. Lam for the unpaid debts under the Agreement. Mr. Lam took out proceedings in New York, seeking a declaration that his obligations under the Agreement were invalid.
(i) Court of First Instance
The Court of First Instance held that the Respondent had failed to show that there was a bona fide dispute on substantial grounds in respect of the debt and a bankruptcy order was granted.
The CFI also held that the EJC was not a bar to the creditor’s bankruptcy petition as none of the defences raised by the debtor disclosed any bona fide dispute. Further, Linda Chan J held that a contractual agreement between the parties does not fetter the jurisdiction of the Court to determine whether the company should be wound up, as the jurisdiction of the Court to wind up a company is conferred by statute.
(ii) Court of Appeal – Guy Kwok-Hung Lam v Tor Asia Credit Master Fund LP [2022] HKCA 1297
Mr. Lam appealed against the bankruptcy order on the sole ground that the petition should have been dismissed or stayed because the petition debt was disputed, and that Mr. Lam had raised a cross claim, which was subject to the EJC and in respect of which proceedings had commenced in New York.
The CA overturned the CFI decision and dismissed the petition on the basis of the EJC.
Further, it held that, where the debt on which a winding up or bankruptcy petition is based is disputed and the parties are bound by an EJC in favour of a foreign forum, the petition should not be allowed to proceed pending the determination of the dispute in the agreed forum, unless strong reasons can be shown.
Ruling
(i) Court of Final Appeal – Guy Kwok-Hung Lam v Tor Asia Credit Master Fund LP [2023] HKCFA 9
The Court of Final Appeal considered the effect of EJCs in insolvency proceedings. On 4 May 2023, the CFA handed down its decision in the case and endorsed the CA’s finding that the court should respect the effect of an EJC in bankruptcy proceedings, just as it does in ordinary actions.
(ii) The CFA held that in an ordinary case where the underlying dispute of the petition debt was subject to an EJC, the Court should dismiss the petition unless there are countervailing factors, such as the risk of the debtor’s insolvency impacting third parties, the debtor’s reliance on disputes that border on the frivolous, or an occurrence of an abuse of process.
(iii) In so holding, the CFA noted that public policy considerations behind the bankruptcy regime carry less weight when the petition is brought only by one creditor with no evidence of the creditor community at risk. In essence, the appellant could have sued on the debt and applied for summary judgment in New York. The absence of other creditors pursuing the Respondent is an indicator that the public interest is unlikely to be adversely affected by such a delay.
Comments
(i) A creditor who wishes to present a bankruptcy (or winding up) petition of a disputed debt that arises out of an agreement containing a foreign EJC will find it more difficult to persuade the Hong Kong courts to hear the petition unless there are strong reasons for doing so.
(ii) This decision reflects the importance attached by the Courts to party autonomy and bargains freely struck between them.
(iii) Caution should be exercised in considering the scope of any EJC and in issuing proceedings in the correct forum in line with the parties’ agreement to save time and effort.
(iv) The is a welcome decision as it gives more certainty to the treatment of arbitration clauses in the context of winding-up and bankruptcy petitions as well. In these circumstances, the courts will likely stay/dismiss these proceedings should an arbitration clause be present, similar to the mandatory stay of other court proceedings where an arbitration clause is present. This position would be in line with Singapore and English decisions, such as AnAn Group (Singapore) Pte Ltd and Salford Estates.