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The much anticipated judgment of the Court of Final Appeal of Hong Kong ('CFA') in Guy Kwok-Hung Lam v Tor Asia Credit Master Fund LP was handed down on May 4, 2023[[1]]. This judgment has settled conflicting decisions of the lower courts on the question of whether a creditor can invoke the bankruptcy/winding-up jurisdiction of the Hong Kong Court to recover a debt in circumstances where:
- the underlying contract out of which the debt arises includes an exclusive jurisdiction clause ('EJC') or an arbitration clause;
- the creditor has not obtained a foreign judgment or arbitral award on the debt; and
- the debtor disputes the debt.
Prior to the CFA judgment, the ‘established approach’ of the Hong Kong companies court when considering whether to dismiss a winding-up/bankruptcy petition in such circumstances was to apply the same test as that in cases where there was no EJC or arbitration clause. In other words, whether there was a bona fide dispute on substantial ground in respect of the debt, with the existence of an arbitration clause or an EJC being only one factor considered by the court in the application of this test.[[2]]
In 2018, however, the companies court adopted an alternative approach in the context of arbitration clauses by suggesting that a petition should generally be dismissed if the debtor has taken steps to initiate the contractually mandated dispute resolution process (the ‘Lasmos approach’).[[1]]
Although the Lasmos approach was applauded by some for respecting party autonomy in their choice of dispute resolution forum, it was implicitly criticised in obiter remarks of Kwan VP of the Court of Appeal who pointed out that ‘as an insolvency petition is not covered by the article 8(1) of the Model Law, there is no automatic, mandatory or non-discretionary stay under that provision’ and that the Lasmos approach 'substantially curtails [a creditor's] statutory right to petition for bankruptcy or winding-up on the ground of insolvency.' [[2]]
The recent CFA judgment has put an end to these conflicting approaches by concluding that the established approach is not appropriate when the underlying contract out of which the debt arises includes an EJC and that ‘absent countervailing factors such as the risk of insolvency affecting third parties or a dispute that borders on the frivolous or abuse of process, the petitioner and the debtor should be held to their contract.'[[1]]
Conclusion
In light of the CFA judgment, absent the above countervailing factors, creditors seeking to recover a debt through insolvency proceedings in the Hong Kong courts in circumstances where the underlying contract out of which the debt arises includes an EJC or an arbitration clause would be advised to obtain a judgment/award in the agreed forum for dispute resolution before filing a bankruptcy or winding-up petition in the Hong Kong courts.
Parties considering entering into contracts with Hong Kong companies/residents that include an EJC or an arbitration clause would also be advised to include "carve-outs" that allow them to utilize the bankruptcy/winding-up jurisdiction of the Hong Kong court to recover simple debts.
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