Effect of exclusive jurisdiction clauses in insolvency proceedings
In a much-anticipated decision, Hong Kong’s Court of Final Appeal (HKCFA) has ruled on the effect of an exclusive jurisdiction clause (EJC) on bankruptcy, and by extension winding up, petitions. The decision marks an important turning point in Hong Kong’s insolvency law and, potentially, the common law world beyond.
In Re Guy Kwok-Hung Lam, the alleged debtor guaranteed a loan agreement between the petitioner (as lender) and a third-party borrower. The agreement contained an EJC in favour of the New York courts. Following an alleged default under the agreement, the petitioner presented a bankruptcy petition against the alleged debtor in Hong Kong. The alleged debtor denied being in default and disputed the debt.
The first instance court granted the petition. In doing so, it applied the "established approach" followed in Hong Kong and other common law jurisdictions. That casts EJCs as merely one factor for courts to consider when exercising their insolvency jurisdiction. The fundamental question is whether the debt is disputed on bona fide substantial grounds. If not, the EJC is not engaged, and the debtor will normally be wound up.
The court held that the alleged debtor had no substantial dispute and therefore granted a bankruptcy order. The Court of Appeal overturned this decision. Its judgment was in turn appealed to the HKCFA. In a unanimous judgment, the HKCFA has now confirmed the correct approach, setting Hong Kong’s insolvency regime on a new path. The HKCFA rejected the "established approach" and ruled:
- Whilst EJCs cannot oust the courts’ statutory insolvency jurisdiction, they are a weighty consideration when deciding whether to exercise that jurisdiction.
- The existence of a substantial dispute is a threshold question whose character gives the courtroom to decline exercising jurisdiction.
- In such cases, EJCs will be highly influential in the court’s decision-making. As will the policy interest in upholding parties’ contracts, especially where granting a petition will amount to a summary determination of alleged disputes despite the parties’ contractual decision to refer such disputes to another forum.
- Traditional concern for orderly insolvency processes is also relevant, albeit its prominence may be affected by factors such as the actual substance of an alleged dispute or the (non-)existence of other creditors.
- Whilst EJCs will not always require petitions to be stayed or dismissed, the courts should normally do so absent strong countervailing factors (eg risk of insolvency affecting third parties or frivolous disputes).
The decision brings insolvency proceedings into line with ordinary writ actions and disputes subject to arbitration agreements. Whilst for now it has presumably settled this issue in Hong Kong, it is no doubt a judgment which alleged debtors may invoke before other common law courts (including potentially the BVI and Cayman Islands). It will be interesting to see if this new approach finds favour in those courts.