The appellant in the appeal was an exempted limited partnership formed and registered in the Cayman Islands. The respondent was Mr. Guy Kwok-Hung Lam (林國雄), a Hong Kong solicitor and founder of two groups of companies providing senior care services on the Chinese mainland and in the United States, CP China and CP U.S. through various cross-shareholdings involving a Cayman Islands-incorporated group company, CP Global Inc.

The dispute concerned a credit and guarantee agreement that was entered into between, amongst others, the appellant, Lam and CP Global for term loans in the sum of US$29.5 million with Lam providing a personal guarantee and security for the loans.

Following a default, the judge in the Court of First Instance (CFI) held that the respondent had failed to show there was a bona fide dispute on substantial grounds in respect of the debt and made a bankruptcy order.

The respondent appealed, arguing that the alleged debt should be determined by a New York court under an exclusive jurisdiction clause (EJC) in the agreement. The Court of Appeal agreed, setting aside the orders made by the CFI judge and dismissing the petition on the basis of the EJC (see Hogan Lovells alert Show some respect – Court of Appeal affirms primacy of exclusive jurisdiction clause in bankruptcy proceedings).

Court of Appeal

The Court of Appeal’s dismissal of the petition employed two different lines of reasoning. 

The majority, as expressed in the judgment of the Honourable Mr. Justice Godfrey Lam, took note of the position set out in Re Southwest Pacific Bauxite (HK) Ltd [2018] HKCFI 426 (the Lasmos case), that a winding up petition should be dismissed if it can be shown that there is a prima facie dispute that ought to be referred to arbitration under the agreement between the parties.

Lam J said a similar approach should be adopted in winding up and bankruptcy petitions. In the words of the CFA judgment, Lam JA "rejected the argument that there were public policy concerns arising from the alleged curtailment of creditors' rights" and that there was "no strong reason to allow the petition to proceed."

For the minority, the Honourable Mr. Justice Anderson Chow JA arrived at the same conclusion from an alternative angle. "His Lordship did not consider that an EJC should be given conclusive or near conclusive weight in the exercise of the court's discretion" but agreed that the appellant's petition "was caught by the EJC".

Court of Final Appeal

Before the CFA, the appellant submitted that in insolvency proceedings, different considerations were in play from those informing the upholding of EJCs in private actions. The law also "requires as a general principle, that parties cannot contract out of insolvency legislation" and that "to give presumptive weight to EJCs was to erode the insolvency regime".

The CFA noted that what was at issue was the jurisdiction of the CFI in bankruptcy matters, which was "not amenable to exclusion by contract". However, subject to certain statutory constraints, the CFI could decline to exercise its jurisdiction in favour of another forum.

The determination of whether a debt is bona fide disputed on substantial grounds was a "threshold question" which left room for the exercise of the court's discretion "to decline to exercise the jurisdiction to determine that question".

It was at that stage that the public policy interest in holding parties to their agreements came into play. Where, as here, the CFI had "undertaken the equivalent of a summary judgment determination, it (had) assumed the jurisdiction to decide a question which the parties had agreed would be determined in another forum".

The significance of the public policy of the legislative scheme for bankruptcy jurisdiction was "much diminished where the petition is brought by one creditor against another and there is no evidence of a creditor community at risk". It would always be possible for the appellant to sue on the debt in New York and to apply there for summary judgment. The absence of other creditors pursuing the respondent was an indicator that the public interest would unlikely be adversely affected by the delay incurred.

The CFA held that the petitioner and the debtor should be held to their contract and on that basis, dismissed the appeal. The majority view of the Court of Appeal was the correct one in the view of the CFA.

Key takeaways

Creditors should take careful note of this decision when developing their enforcement strategies. Now the Hong Kong courts have affirmed the primacy of EJCs in bankruptcy proceedings, much time and effort can be saved by issuing proceedings in line with the parties' agreement, especially where it concerns forum.

Authored by Jonathan Leitch and Nigel Sharman.