HK Court of Final Appeal Dismissed a Bankruptcy Petition

In Guy Kwok-Hung Lam v Tor Asia Credit Master Fund LP [2023] HKCFA 9 (“Re Guy Lam“), the Court of Final Appeal (“CFA“) upheld that an exclusive jurisdiction clause (“EJC”) is vastly pertinent in determining whether the Hong Kong Court should exercise its insolvency jurisdiction. Where a petitioning debt is disputed and subject to an EJC favouring a foreign court, free of countervailing factors, the Hong Kong Court has discretion to decline jurisdiction and dismiss the petition.

Case Fact

The debtor, Guy Kwok-Hung Lam (“Lam”), is a Hong Kong resident who operates a business of aged care services in Mainland China. The petitioner, Tor Asia Credit Master Fund LP (the “Petitioner”), advanced a term loan to a company controlled by Lam pursuant to an agreement (the “Agreement”) which Lam acted as a guarantor.

The Agreement was governed by New York Laws, and contains an EJC that “all legal proceedings arising out of or relating to” the Agreement should be submitted to the exclusive jurisdiction of New York Courts.

Lam subsequently applied for loans under the US Government’s Paycheck Protection Program, which the Petitioner was alerted and took steps to recover the loan. Among other actions, the Petitioner filed a bankruptcy petition against Lam in Hong Kong.

Lower Court’s Rulings

Lam argued that the EJC should apply and as such the Hong Kong court should refrain from hearing the bankruptcy petition. The Court of First Instance (“CFI”) granted a bankruptcy order against Lam, and held that the EJC would not prevent a winding up or bankruptcy petition from being presented in an appropriate jurisdiction, and Lam failed to show that there was bona fide dispute on substantial ground in respect of the petition debt.

When the case went to the Court of Appeal, although it is confirmed that the court has the jurisdiction to hear such actions (i.e. bankruptcy and winding up petitions), the court also has the discretion to not hear such actions and refer the disputes to a foreign court. When deciding whether to exercise such discretion, lack of merits for the defence was not a reason that the court considers.

In the present case, although seeking an order for the winding up or bankruptcy of a party is not itself within the scope of the EJC, a disputed debt under the Agreement falls within the scope of the EJC and thus such issue shall be resolved before New York Courts, as agreed by the parties in the Agreement.

As such, the court ruled against the Petitioner that unless and until the parties have resolved the underlying dispute in New York, the winding up or bankruptcy petition should not be presented in Hong Kong.

CFA’s Holdings

The Petitioner then appealed to the CFA, which was unanimously dismissed.

The CFA clarified that the CFI’s statutory bankruptcy jurisdiction cannot be excluded by contract. Whilst an EJC informs the CFI’s discretion to decline exercising its jurisdiction, it does not oust its jurisdiction from the outset.

Whether the debt is bona fide disputed on substantial grounds is a threshold question which might be engaged when the court decides whether to exercise its bankruptcy jurisdiction. However, this is not an appropriate question in the presence of an EJC. If the CFI proceeds with the petition and rules on the threshold question, it will have assumed jurisdiction on a dispute which the parties have otherwise agreed for another forum to determine.

The CFA concluded that unless the Petitioner can show any countervailing factors, such as the risk of Lam’s insolvency affecting third parties, or Lam’s reliance on disputes that border on the frivolous or abuse of process, the Petitioner and Lam should be held to their contract and the court would dismiss the petition accordingly.

In the meantime, the doors for the Petitioner to sue and seek summary judgment in New York remained open. In this instance, the petition was brought by only one creditor with no evidence of other creditors being at risk, the concern of public interests (i.e. other potential creditors’ interests) carried less weight when the court exercised its discretion.

Key Takeaways

The CFA landmark decision in Re Guy Lam illustrates the significance of having a well-drafted dispute resolution clause(s).

During pre-contractual negotiations and drafting, the fact that the Hong Kong Court holds parties’ contractual autonomy in high regard provides all the more reason for parties to carve proper jurisdiction, governing law and disputes resolution clauses to safeguard their commercial interests. Instead of an EJC, creditors may consider applying an asymmetric jurisdiction clause in their agreements – a clause which allows the creditors to commence proceedings at their choice while limiting the lenders to only start an action in one agreed jurisdiction. This will leave the lenders considerable latitude to bring proceedings in a different jurisdiction, whereas debtors will be restricted from suing in one specific jurisdiction. It may also mitigate risks of debtors impeding insolvency proceedings in reliance of an EJC.

Upon entry into commercial agreements, parties should be mindful of the nature and effects of an EJC favouring a foreign court. They would normally be expected to comply with what was agreed, that is, to bring any disputes over the underlying debt in the agreed forum first, before commencing insolvency proceedings in Hong Kong.

Lenders may also consider engaging legal professionals to draft and/or review their loan agreements to avoid risking their petition being dismissed by the Hong Kong Court.

1200 675 Ince & Co
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