INSIGHTS

In Lam v Tor Asia Credit Master Fund LP [2022] HKCA 1297, the Court of Appeal revisited, in the context of an application to set aside a bankruptcy order where the underlying contract contained an exclusive jurisdiction clause, the interrelationship between exclusive jurisdiction clauses and bankruptcy/winding up petitions.  In so doing, the CA offered some further thoughts on the relationship between arbitration clauses and winding up proceedings, an issue which has come before the HK courts a number of times in recent years but which remains in a state of flux since the decision in Re Southwest Pacific Bauxite (HK) Ltd [2018] HKCFI 426 (the Lasmos case).

To recap, the High Court in Lasmos, departing from previous authority, held that a winding-up petition would generally be dismissed if:

  • A company disputes the debt relied on by the petitioner;
  • The contract under which the debt is alleged to arise contains an arbitration clause that covers the any dispute relating to the debt; and
  • The company takes the steps required under the arbitration clause to commence the contractually mandated dispute resolution process (which might include preliminary stages such as mediation) and files an affirmation in accordance with r.32 of the Companies (Winding-Up) Rules, Cap 32H, demonstrating this.

Facts

The dispute arose out of loans totaling US$29.5m, advanced by Tor to a company controlled by Lam, and which Lam guaranteed.  The loan agreement was governed by New York law and the parties agreed to submit to the exclusive jurisdiction of New York (the Exclusive Jurisdiction Clause).  The loan agreement was amended three times, each of which reaffirmed the Exclusive Jurisdiction Clause.  Lam’s US-based company applied for additional financing and for refinancing of the loans from Tor from a US-based bank, actions which Tor was aware of and who appears to have agreed to extend the original loans, at least initially.  Following the onset of Covid, Lam applied for and obtained a loan from the US Government, which Lam transferred to a bank account of his China-based company.  Tor viewed this as creating risk to the security provided for the original loans and commenced immediate enforcement action, including the appointment of receivers over the securities held.

Amongst other actions, Tor issued a statutory demand against Lam under the Bankruptcy Ordinance, served on Lam on 20 May 2020 in Hong Kong.  Shortly before that, on 7 May 2020, Lam commenced proceedings in Texas seeking declarations that there was no event of default by Lam and various other relief.  Lam also joined to the proceedings his employee responsible for running the US business, alleging breach of fiduciary duties and conspiracy between that individual and Tor.  Shortly thereafter, Tor filed an application to dismiss the Texas proceedings on various bases, one of which was that the proceedings were brought in breach of the Exclusive Jurisdiction Clause.  Tor presented a bankruptcy petition against Lam in Hong Kong in respect of the unsecured part of the debt, and at a directions hearing in respect of the bankruptcy petition, Lam undertook and did commence proceedings against Tor in New York.

First Instance – Linda Chan J

At first instance, Chan J concluded that Lam had failed to show that there was a bona fide dispute on substantial grounds in respect of the petition debt resulting in a bankruptcy order.  Chan J considered the following main points (bold terms are the authors):

  • There was a “settled understanding of the law” that an exclusive jurisdiction clause did not prevent a winding up or bankruptcy petition from being presented in an appropriate jurisdiction (Settled Understanding Point).
  • Whilst generally the court would give effect to the contractual bargain of the parties, that did not take away or fetter the jurisdiction of the court to determine whether a company should be wound up if the creditor has locus to present the petition (Fetter of Court Point).
  • A creditor has locus to present a winding up or bankruptcy petition if there is no bona fide dispute on substantial grounds in respect of the debt and an exclusive jurisdiction clause does not prevent the court from considering whether the creditor has locus (Locus Point).
  • It would be “a pointless exercise” to require the creditor first to obtain an award or judgment in the agreed forum when there is no real dispute on the debt (Pointless Exercise Point).
  • An exclusive jurisdiction clause is only a factor to be taken into account when considering a winding up or bankruptcy petition (Exclusive Jurisdiction Factor Point).
  • Similarly, an arbitration clause is only a factor to be taken into account when considering a winding up or bankruptcy petition (Arbitration Factor Point).

Each of these points was dealt with in the context of the CA’s decision to set aside the bankruptcy order made at first instance on the basis that the same approach should be taken to an exclusive jurisdiction clause in winding up and bankruptcy petitions as in ordinary actions.

Of interest to arbitration practitioners is how the CA considered the authorities dealing with the existence of an arbitration agreement in winding up actions, and whether this signals a potential convergence in approach such that, in future, a court faced with a winding up petition to recover a debt under an agreement containing an arbitration agreement will start from a position of upholding the parties’ agreed method of dispute resolution, absent strong reasons to do so.

The Court of Appeal

The CA summarised Lam’s position in the following terms [24]:

“the Judge should have followed the approach of Harris J in … “Lasmos” … and dismissed or stayed the bankruptcy petition, pending the resolution of the dispute in question in the New York proceedings.  They submit that the Judge’s reasoning that unless and until the debtor can demonstrate a bona fide dispute on substantial ground in respect of the debt, there is no proper basis to contend that there is a dispute for litigation in the agreed forum, is erroneous and irreconcilable with the courts’ approach to applications for stay of an action based on an exclusive jurisdiction clause or arbitration clause.  It is incorrect to say it is pointless to require litigation in the contractual forum just because the Judge did not consider there was a substantial dispute.  The Judge should not have embarked upon that inquiry in the first place, contrary to the parties’ choice of forum.  It is submitted that the same approach should be applied to exclusive jurisdiction clauses and arbitration clauses in this context, and that the Lasmos approach (which concerned an arbitration clause) is sound and should be adopted.”

In the Respondent’s Notice, Tor raised additional grounds – including that the Lasmos approach should not be extended to an exclusive jurisdiction clause and that the approach was in any event unsound in the arbitration context where it was developed.  By the time of the hearing, Tor submitted that it was unnecessary to resolve the question of the proper approach in cases of arbitration clauses but, despite this, the CA did refer to a number of cases where this issue arose and offered some thoughts.

The Court of Appeal noted the following:

  • The applicable principles where a court is asked to stay an action that has been brought in Hong Kong despite an exclusive jurisdiction clause in favour of a foreign court, are those set out in The El Amria [1981] 2 Lloyd’s Rep 119, 123-124 (applying The Eleftheria [1970] P 94).  According to those principles, the court is not bound but has a discretion whether to stay an action brought in breach of an agreement to refer disputes to a foreign court; but that discretion should be exercised by granting a stay unless strong cause for not doing so is shown.
  • What amounts to strong cause cannot and has not been defined, but a line of cases in England at one stage suggested that the strength of the parties’ respective cases was a relevant factor and that a stay might be refused where the defendant had no arguable defence.  Lam JA quoted Clarke J from Standard Chartered Bank v Pakistan National Shipping Corporation [1995] 2 Lloyd’s Rep 365:

“It appears to me that in a case where a defendant has no arguable defence on liability and quantum that would be a strong reason to refuse a stay because, as I said in the Adria Services Y.U. case, there would be no real issues between the parties which should be tried either here or elsewhere.”

  • But the Courts have also emphasised that parties should be held to their bargain on how their disputes are to be resolved.  In Aggeliki Charis Compania Maritima SA v Pagnan SpA, The Angelic Grace [1995] 1 Lloyd’s Rep 87, referring to the power to grant an anti-suit injunction, Millett LJ said (at p 96, in a passage approved by the Court of Final Appeal in Compania Sud Americana De Vapores SA v Hin-Pro International Logistics Ltd (2016) 19 HKCFAR 586, §57):

“In my judgment, the time has come to lay aside the ritual incantation that this is a jurisdiction which should only be exercised sparingly and with great caution. …  [I]n my judgment there is no good reason for diffidence in granting an injunction to restrain foreign proceedings on the clear and simple ground that the defendant has promised not to bring them.”

  • The general approach to both stay of domestic proceedings and restraint of foreign proceedings was discussed in the House of Lords’ decision in Donohue v Armco Inc & others [2001] UKHL 64, another case on anti-suit injunction, which has been described as heralding a “turning of the tide” and “new dawn”.  That decision emphasised again the general rule of law requiring parties to adhere to their agreements on where their disputes should be resolved; subsequent decisions confirmed this general approach: Euromark Ltd v Smash Enterprises Pty Ltd [2013] EWHC 1627 (QB); Deltatre SpA v Hong Kong Sports Industrial Development Ltd [2018] HKCFI 1942; [2018] 4 HKLRD 478

Approaching the matter on the basis of the general principles under Hong Kong law, Lam JA noted the following:

  • A party seeking an order for the winding up or bankruptcy of a party to an agreement, viewed in isolation, may not by itself necessarily be a proceeding within the scope of the Exclusive Jurisdiction Clause, but a petition for such an order on the basis of a disputed indebtedness under the Agreement does fall within legal proceedings arising out of or relating to the Agreement [65].
  • For a petitioner to seek a winding up order on the basis that there is no bona fide dispute of the debt on substantial grounds is, to that extent, seeking a determination of the dispute by the court which could, for example, found an estoppel confirming the existence of a debt [70].
  • Citing Harris J in Lasmos at §27: [78]

“There is a material difference between establishing: (a) that the petitioner is a member of the class; and (b) that the class remedy of a winding-up order should be granted.  The former issue does not concern considerations relevant to the class generally and there is in my view no reason in principle why the fact that what is sought is a class remedy should be relevant to the method by which it is determined whether or not a debt is owed.”

Lam JA noted that although winding up is class remedy which depends on the solvency of the company and the views of the class of unsecured creditors, there is an anterior question whether the petitioner is a member of that class.  In support, Lam JA noted the following statement from Re International Tin Council [1987] Ch 419:

“There is much to be said for the view that, in deciding whether or not the company should be wound up, the court is engaged in a new process of adjudication, separate and different from any that may previously have been involved in establishing the petitioning creditor’s debt.”

  • Lam JA concluded [82-83]:

“Thus analysed, there are in my opinion cogent reasons for adopting the same approach to an exclusive jurisdiction clause in winding up and bankruptcy petitions as in ordinary actions.  First, it is a strong policy of the law to require parties to abide by their contracts.  Pacta sunt servanda…  An exclusive jurisdiction agreement is an important agreement between the parties as to how and where their differences are to be resolved.  Prima facie they should be held to that agreement.  An action brought in breach of it will ordinarily be stopped unless there are strong reasons otherwise…  Where an exclusive jurisdiction agreement is being breached by the prosecution of insolvency proceedings in Hong Kong, as is in my view the case here, prima facie the agreement should likewise be enforced.  As pointed out in Salford Estates, it would be “anomalous” for the insolvency court to conduct a summary judgment type determination of liability for the debt relied upon, when the petitioner has agreed that any such dispute is exclusively to be resolved in some other agreed forum.” (emphasis added)

Further: [84]

“It would also be an anomaly that a party bound by an exclusive jurisdiction clause in favour of a foreign forum cannot expect to proceed with an ordinary action in Hong Kong for his claim, but can resort to the more draconian measure of presenting a petition here for winding up or bankruptcy on the basis of the claimed debt and expect the court to deal with it in the usual way by determining whether the other party has raised any bona fide dispute of the debt on substantial grounds.  This would not only undermine the policy of the law embodied in the rule for ordinary actions but also inevitably encourage parties, “as a standard tactic”, to bypass the exclusive jurisdiction clause by presenting a winding up or bankruptcy petition…”

Lam JA systematically dealt with and disagreed with virtually all of the points raised by Tor at first instance.  Thus, Lam JA disagreed with Chan J in respect of the “Settled Understanding Point”, the “Fetter of Court Point”, the “Locus Point”, and the “Pointless Exercise Point”.  Nor did Lam JA consider any merit in the point that a court should simply take into account an exclusive jurisdiction clause or an arbitration clause when considering a winding up or bankruptcy petition, points which Chow JA agreed with.

Settled Understanding Point

At first instance, Chan J noted that she was inclined to agree with Tor’s submission that there was a settled understanding of the law that an exclusive jurisdiction clause did not prevent a winding up or bankruptcy petition from being presented in an appropriate jurisdiction.  Noting that there was no reasoned decision on the point in Hong Kong, Lam JA disagreed with Chan J, and after a review of authorities from England, Australia and the British Virgin Islands, held [104]:

“In sum, I do not consider that there is an established body of common law authorities showing a “settled understanding of the law” in support of Tor’s position.  The law is in a state of flux and in my respectful opinion the approach herein proposed represents a step in its coherent development.”

The CA concluded [105]:

“For the reasons given above and having had the benefit of much fuller argument and review of the law than available to the Judge, I consider that there is a dispute which ought to be determined first in accordance with the parties’ jurisdiction agreement.  Tor’s petition should not be allowed to proceed, in the absence of strong reasons, before the determination of that dispute in the agreed exclusive forum.  Tor has not advanced any reason to the contrary.  Nor has Tor shown any reason why the petition should be stayed, with all the drastic consequences for Lam, rather than dismissed.  There is no evidence of any creditor willing to be substituted as petitioner.  That being the case, in the absence of any special cause, the petition should in my view be dismissed rather than stayed, for it is generally not desirable to have insolvency petitions adjourned or stayed for lengthy periods.”

Chow JA expressed “some reservations” in applying the court’s approach to the stay of an ordinary action based on an exclusive jurisdiction clause to winding up and bankruptcy proceedings, stating that while he could see the force of the argument in doing so, such an approach would effectively disregard the well-recognised distinction between an action on a debt and a bankruptcy/winding up petition based on a debt [111].  Chow JA did not, however, take the issue any further, stating instead that the present case could be disposed on a narrower basis.

Fetter of Court Point

At first instance, Chan J considered that whilst generally the court would give effect to the contractual bargain of the parties, that did not take away or fetter the jurisdiction of the court to determine whether a company should be wound up if the creditor has locus to present the petition.

This is a common argument, raised many times in the past: that adopting an approach analogous to Salford Estates and Lasmos would amount to a fetter on or a substantial curtailment of a creditor’s statutory right to petition for bankruptcy or winding up on the ground of insolvency.

Lam JA considered the analysis in Dayang (HK) Marine Shipping Co Ltd v Asia Master Logistics Ltd; Re Asia Master Logistics Ltd [2020] HKCFI 311 compelling – that creditors’ rights are creatures of contract, not creatures of statute, and that there is no reason why a creditor’s voluntary surrender of rights to petition for winding up should be held unenforceable for being contrary to public policy.  Lam JA added that the Hong Kong courts regularly accept undertakings by creditors not to petition for winding up, without any policy concerns.

Further, in light of the courts’ readiness to stay contributories’ petitions for winding up on the just and equitable ground or for relief against unfair prejudice for the underlying dispute to be resolved pursuant to an arbitration agreement, a fortiori no public policy concerns arise in dealing with a creditor’s petition in the same way [93-94].

Locus Point / Pointless Exercise Point

At first instance, Chan J considered that a creditor had locus to present a winding up or bankruptcy petition if there was no bona fide dispute on substantial grounds in respect of the debt and an exclusive jurisdiction clause did not prevent the court from considering whether the creditor has locus; further, that unless and until the company/debtor was able to demonstrate to the Court that there was a bona fide dispute on substantial ground in respect of the debt, there was no proper basis for the company to contend that there was a dispute which must be litigated in accordance with the contractually agreed forum.  These observations are tied to a similar concept – that it would be “a pointless exercise” to require the creditor first to obtain an award or judgment in the agreed forum when there is no real dispute on the debt.

Lam JA paid some deference to these arguments, stating that:

“One can of course understand that a tribunal that has come to the view that there is no merit in the debtor’s defences at all would be reluctant to “let him off the hook” on the basis of an arbitration or exclusive jurisdiction clause”,

but went on to state [90], that the point of the exclusive jurisdiction clause was that the court should not embark upon a review of the merits of the dispute in the first place referring, in support, to a number of reasons for this, including:

  • In agreeing to an exclusive jurisdiction clause, the parties are contemplating the scenario where claims and disputes have arisen.  It ought to be foreseeable to them that disputes may arise in different ways.  The strong cause that needs to be shown to justify not staying proceedings brought in breach of an exclusive jurisdiction clause does not include such foreseeable factors.
  • Unless one construes the exclusive jurisdiction clause to apply only to more arguable disputes, it would be illogical to say that the plaintiff may bring legal proceedings in Hong Kong if the defendant has a weak case, but must go to a foreign court in accordance with the exclusive jurisdiction clause if the defendant’s case is more substantial.
  • For the court to venture into the merits and decide whether there is an arguable defence before giving effect to the exclusive jurisdiction clause is to do precisely what the parties have agreed should be done by the foreign court.  It would also be presumptuous for the court to take on that task, especially if the substantive governing law is the law of the chosen foreign jurisdiction.
  • In a stay application based on ordinary forum non conveniens principles, the court does not normally determine whether there are triable issues raised by the defendant before determining his application for a stay, even if the plaintiff has issued a cross-summons for summary judgment.  It would be very odd if a defendant who had the additional benefit of an exclusive jurisdiction clause should be in a worse position.

Exclusive Jurisdiction Factor Point

At first instance, Chan J accepted that the existence of an exclusive jurisdiction clause (or an arbitration clause – see below) was a factor which should be taken into account by the court when considering a winding-up/bankruptcy petition.

Lam JA noted that simply stating that an exclusive jurisdiction clause is a factor to be taken into account is likely to give rise to uncertainty and conflicting approaches, since if the court simply determines whether the petition debt is bona fide disputed on substantial grounds, an exclusive jurisdiction clause would hardly be given any relevance, for that is the exercise the court would in any event engage in without the clause.  Chow JA agreed, stating that Chan J’s approach “would effectively render the exclusive jurisdiction clause immaterial or irrelevant” [113].  Lam JA’s approach is succinctly summarised [86]:

“Under the statutes the court has a discretionary power whether to make a winding up or bankruptcy order.  The presence of an exclusive jurisdiction agreement between the parties in favour of another forum does not mean that the court is bound to stay or dismiss the petition.  But, adopting the same approach as in ordinary actions, such an agreement should ordinarily be given effect unless there are strong reasons to the contrary.  It follows that where the debt on which a winding up or bankruptcy petition is based is disputed and the parties are bound by an exclusive jurisdiction clause in favour of another forum precluding the determination of that dispute by the Hong Kong court, the petition should not be allowed to proceed, in the absence of strong reasons, pending the determination of the dispute in the agreed forum.”

Commentary

Exclusive Jurisdiction Clause

The upshot of Lam JA’s judgment is that courts should require parties to abide by their contracts and that where parties have agreed to have their disputes resolved in a particular jurisdiction, that agreement should be upheld absent strong reasons to do so.   Prima facie, the same result should ensue where an exclusive jurisdiction agreement is breached by the prosecution of insolvency proceedings in Hong Kong.  It is worth noting that the first reason cited for adopting this approach was the “strong policy of the law to require parties to abide by their contracts.  Pacta sunt servanda.”

While the CA did not articulate what “strong reasons” might be, the CA noted that courts retained the flexibility to deal with a case as circumstances required where, for example, a dismissal or stay of the petition would result in depriving a petitioner of a real remedy or otherwise result in injustice.  Various examples were provided: where the debtor was incontestably and massively insolvent or a menace to commercial society; where there were other creditors seeking a winding up whose debts were not subject to any jurisdiction agreement, or where assets were in jeopardy or a need to investigate potential wrongdoing.

The reference to the “draconian measure” of presenting a winding up petition and, in doing so, by-passing the exclusive jurisdiction clause as a “standard tactic” might suggest that a party presenting a petition in the face of a debt arising from an agreement containing an exclusive jurisdiction clause now faces an uphill battle in convincing the court to by-pass the exclusive jurisdiction clause.  At a practical level, the approach adopted by Lam JA will likely present practitioners with the challenge of ensuring that detailed and sufficient reasons are provided at the petition stage sufficient to convince a court that “strong reasons” exist to ignore the existence of an exclusive jurisdiction clause by, for example, presenting evidence that establish deprivation of a real remedy or otherwise result in injustice.

Plausibly, one can extrapolate from Lam JA’s judgment that a party presenting a petition for a debt arising from an agreement containing an exclusive jurisdiction clause faces a very difficult task in convincing the court to by-pass the express agreement to have their dispute resolved in the chosen jurisdiction where the dispute is essentially a one-to-one dispute, that is, a dispute not involving any other party or any additional class of creditors.  Noting the rejection by both Lam and Chow JA of the “bona fide dispute on substantial grounds” argument (see Lam JA [85]; Chow JA [113-114]), and the rejection of one of the primary arguments used in support of the insolvency regime – not fettering the court’s jurisdiction – it is arguably difficult to easily conceive of “strong reasons” why the expressly agreed jurisdiction clause should not be given effect where the evidence indicates solely a dispute between two parties.  In that situation, giving effect to the parties’ express agreement to have their dispute resolved in their chosen jurisdiction is likely to triumph, more so where the governing law of the underlying agreement is not Hong Kong.  Simply providing expert evidence in respect of foreign law may not be sufficient.

Arbitration Clause

At first instance, Chan J noted that the existence of an arbitration clause was a factor to be taken into account when considering a winding up or bankruptcy petition.

Lam JA did not offer a concluded view as to whether the Lasmos approach (or even a modified Lasmos approach) should be adopted; on the facts of the case, and in light of Tor abandoning the point, it was not necessary to do so.  Chow JA also noted that since the present case did not concern an arbitration clause, it was unnecessary to rule definitively on the correctness of Lasmos.  It is probably safe to assume that an argument along the lines that an an arbitration clause was merely a factor to be taken into account when considering a winding up or bankruptcy petition is likely to suffer a similar fate to an exclusive jurisdiction clause – that such an argument gives rise to uncertainty and conflicting approaches (Lam JA) or render the arbitration agreement “immaterial or irrelevant” (Chow JA).

Lam JA’s reasonably detailed review of the Lasmos approach deserves some attention, as the analysis may provide useful guidance to practitioners in future cases.  Lam JA noted the following:

  • The authorities between 1997 and 2014, where the courts took the view that notwithstanding the existence of an arbitration clause in the relevant agreement, a winding up order would normally be made unless the company could show that the debt was bona fide disputed on substantial grounds.  Reference was made to Hollmet AG & another v Meridian Success Metal Supplies Ltd [1997] HKLRD 828, [1997] 4 HKC 343; Re Sky Datamann (Hong Kong) Limited (HCCW 487/2001; 29 January 2002); Re Jade Union Investment Limited (HCCW 400/2003; 5 March 2004); and Re Southern Materials Holding (H.K.) Co Ltd (HCCW 281/2007; 13 February 2008), all of which were considered in detail by Harris J in Lasmos.
  • That in both Hollmet and Sky Datamann, the companies actually demonstrated a bona fide dispute of the debt and therefore what the court said in relation to the arbitration clause was obiter; further, that neither judgments went so far as to suggest that the existence of an arbitration agreement was irrelevant.
  • The English decisions in Jubilee International Inc v Farlin Timbers Pte Ltd [2006] BPIR 765, where the court adjourned a winding up petition to allow an arbitration to proceed pursuant to the arbitration agreement between the parties in circumstances where, on the evidence, the court found that there was actually a bona fide dispute of the debt, and Russant Ltd v Traxys Far East Ltd [2013] EWHC 4083 (Comm), where the court considered that the creditor’s claim in that case fell within section 9 of the (UK) Arbitration Act 1996 which required a mandatory stay, but also expressed the view that even if the stay was not mandatory, it should be granted in the court’s discretion because “the arbitration agreement bites…The Policy is clear that disputes should be decided in the forum which they have chosen.
  • The English Court of Appeal’s decision in Salford Estates, in respect of which Lam JA stated [53]:

“Salford Estates has been held in England to have laid down a binding approach.  Once it is accepted that the petition debt is alleged to arise under an agreement that contains a binding arbitration clause and the debt is disputed or not admitted, this approach precludes, save in wholly exceptionally circumstances, an inquiry by the Companies court as to whether the debt is disputed in good faith on substantial grounds: Telnic Ltd v Knipp Medien Und Kommunikation GmbH [2020] EWHC 2075 (Ch) at §§26-27, per Vos C.”

  • The Singapore Court of Appeal’s decision in AnAn Group (Singapore) Pte Ltd v VTB Bank (Public Joint Stock Co) [2020] 1 SLR 1158, where it was held, adopting the Salford Estates approach, that where the court is faced with either a disputed debt or a cross-claim that is subject to an arbitration agreement, winding up proceedings in the court should be stayed or dismissed as long as (a) there is a valid arbitration agreement between the parties; and (b) the dispute falls within the scope of the arbitration agreement, provided that dispute is not been raised by the debtor in abuse of the court’s process.  Lam JA also referred to the Malaysian decision in Awangsa Bina Sdn Bhd v Mayland Avenue Sdn Bhd (WA-28NCC-1146-12/20018), §§25-28, where the court largely adopted the approach in Salford Estates.
  • The Lasmos decision and the subsequent decisions considering Lasmos (But Ka Chon v Interactive Brokers LLC [2019] HKCA 873; [2019] 4 HKLRD 85; Sit Kwong Lam v Petrolimex Singapore Pte Ltd [2019] HKCA 1220; [2019] 5 HKLRD 646; Dayang (HK) Marine Shipping Co Ltd v Asia Master Logistics Ltd; Re Asia Master Logistics Ltd [2020] HKCFI 311.
  • Three decisions in Hong Kong which, in contracts containing arbitration agreements, the court adopted the conventional test of bona fide dispute on substantial grounds in insolvency petitions (Re Hongkong Bai Yuan International Business Co Ltd [2022] HKCFI 960; DCKD & another v JPWL [2022] HKCFI 1059; Re Pan Sutong & Re Proman International Ltd [2022] HKCFI 1450).

Underpinning much of the discussion in respect of arbitration agreements is the basic concept of consent, put another way, party autonomy in deciding how disputes are to be resolved as expressed in the agreement. 

Interestingly, in what might be viewed as signaling a change of approach in future cases, test developed by Lam JA in respect of exclusive jurisdiction clauses could be framed to apply equally to a case where a petition is brought to recover a debt under an agreement containing an arbitration clause.  Thus,

  • In respect of the “Settled Understanding Point”, Lam JA referred to Re Fair Cheerful Ltd; IS Investment Fund Segregated Portfolio Co v Fair Cheerful Ltd (BVIHC (COM) 2020/0034; 16 July 2020), where the contract in question provided for disputes to be resolved by arbitration in Hong Kong.  The creditor, without having served a statutory demand, applied to the BVI court for the appointment of a liquidator over the company.  In the exercise of its discretion, the court considered that it should not decide whether there was a genuine and substantial dispute in respect of the debt, stating:

“the Court needs to look at the reality of the matter.  In the current case, there are no supporting creditors.  There is no evidence of trade creditors, indeed no evidence of any other creditors at all.  It is in truth a one-on-one commercial dispute.  It would be wrong to characterise the applicant as selflessly acting on behalf of a body of creditors.  There is every reason to hold the applicant to the bargain it struck with the respondent, namely that disputes would be referred to the HKIAC.  One of the main reasons for businessmen agreeing to arbitrate is confidentiality.  Whether the respondent here has a viable defence or not is something which the parties agreed should not be resolved in the public forum of a court.”

  • The “Fetter of Court Point” is arguably of less significance in the context of an arbitration agreement since there already exists a mechanism under the Arbitration Ordinance to stay proceedings brought in breach of such arbitration agreement, albeit this does not provide a complete answer to this point since it does not deal head on with Chow JA’s concern that adopting Lam JA’s approach “would effectively disregard the well-recognised distinction between an action on a debt and a bankruptcy/winding-up petition based on a debt“, a point dealt with by Yuen J in Sky Dataman in the context of Article 8 of the Model Law. This issue will no doubt be revisited in future cases and it may be that the answer lies in the distinction explained by Harris J in Lasmos that although winding up is a class remedy, there is an anterior question whether the petitioner is a member of that class and, as Lam JA explained, that would not be inconsistent with recognising and giving effect to the dispute resolution mechanism agreed to by the parties before proceeding with an insolvency petition.
  • The “Pointless Exercise Point” is equally applicable in the context of an arbitration agreement – the parties have agreed to arbitration as the mechanism for resolution of disputes and for the court to venture into the merits and decide whether there is an arguable defence (or bona fide dispute) before giving effect to the arbitration agreement is to do precisely what the parties have agreed should be done by an arbitral tribunal.

It is also worth noting that in concluding that there were “cogent reasons for adopting the same approach to an exclusive jurisdiction clause in winding up and bankruptcy petitions as in ordinary actions”, Lam JA referred (i) to the “strong policy of the law to require parties to abide by their contracts” and that “prima facie they should be held to that agreement”; and (ii) “where an exclusive jurisdiction agreement is being breached by the prosecution of insolvency proceedings in Hong Kong, as is in my view the case here, prima facie the agreement should …  be enforced”; those statements that were immediately followed by a reference to Salford Estates:

“As pointed out in Salford Estates, it would be “anomalous” for the insolvency court to conduct a summary judgment type determination of liability for the debt relied upon, when the petitioner has agreed that any such dispute is exclusively to be resolved in some other agreed forum.”

Analysed thus, there seems to be no reason in principle why the approach taken by Lam JA in respect of exclusive jurisdiction clauses cannot similarly be adopted in the context of a winding up petition brought to recover a debt under a contract containing an arbitration agreement (perhaps conclusively so in the context of a one-to-one dispute).  The test would essentially be identical – the parties’ agreement should be upheld whether in respect of a foreign forum, as would be the case under an exclusive jurisdiction clause, or by way of arbitration pursuant to the terms of an arbitration agreement, unless there were strong reasons for departing from that prima facie approach.

Chow JA, in a separate judgment, appears to have been troubled by the interplay of, on the one hand, a policy favouring upholding the parties’ contractual bargain and, on the other, well-known statutory mechanisms providing for the presentation of petitions.  While expressing some reservations with Lam JA’s approach in respect of exclusive jurisdiction clauses, it appears that Chow JA was not so troubled in relation to arbitration agreements. 

Picking up on Lam JA’s reference to the “strong policy of the law to require parties to abide by their contracts”,  Chow JA stated [110] (emphasis added):

“…although there is some prima facie attractiveness in applying a uniform approach to both an arbitration clause and an exclusive jurisdiction clause as they both represent the parties’ contractual bargain, there can be no doubt that the modern approach to stay of legal proceedings (whether ordinary actions or winding-up/bankruptcy proceedings) in favour of arbitration is heavily influenced by the legislative policy of promotion of arbitration as an alternative dispute resolution mechanism.  The same consideration is lacking in the case of staying local proceedings in favour of foreign proceedings.  Moreover, a stronger case can be made for upholding the parties’ contractual bargain that disputes falling within the scope of an arbitration clause should be resolved by arbitration, having regard to the underlying rationale for the parties’ agreement to use arbitration as their dispute resolution mechanism, including considerations of speed, confidentiality and choice of arbitrators.   I am not convinced that there are sufficient imperatives for a wholesale adoption of the Lasmos approach (assuming its correctness) to the situation involving an exclusive jurisdiction clause.  Whether a modified Lasmos approach would be appropriate is something which can be left for future consideration.” (emphasis added)

Chow JA’s emphasis on “the legislative policy of promotion of arbitration as an alternative dispute resolution mechanism” and to a “stronger case” for upholding party autonomy having regard to the underlying rationale for the parties’ agreement to use arbitration as their dispute resolution mechanism, may be taken as implicit support for adopting a Lasmos (or modified Lasmos) approach where a court is faced with a winding up petition for a debt arising under an agreement containing an arbitration agreement.

It is only a matter of time before the higher courts in HK are called upon to rule definitively on the approach to be taken in respect of arbitration agreements in the winding up context. Whether that ends up being the Salford Estates approach, the Lasmos approach (as is, or modified), or the same or similar approach adopted in respect of exclusive jurisdiction clauses, what is tolerably clear from this judgment is that the emphasis is towards an approach that favours party autonomy.