Exclusive Jurisdiction Clauses and Insolvency

The Court of Final Appeal gives its ruling on the proper approach to the treatment of a bankruptcy petition where the underlying debt is subject to an exclusive jurisdiction clause (“EJC”): Re Guy Kwok-Hung Lam [2023] HKCFA 9 

While the ruling confirms that an EJC would typically favour the dismissal of a petition, the reasoning suggests there are still battles to be lost and won.

The salient facts

The creditor entered into a credit agreement with a corporate borrower for the aggregate amount of US$29.5 million in July 2017.  Various securities were provided for the loans.  The debtor was named as personal guarantor as a primary obligor for repayment in full of all amounts due and owed.  The credit agreement contained an EJC in favour of the State of New York.

On 20 May 2020, the creditor served a statutory demand on the debtor requiring him to pay US$41,297,644.93 being the outstanding principal and interest accrued up to 14 April 2020 less the value of a security by way of equitable mortgage. 

The demand was not met and the creditor presented the bankruptcy petition on 15 June 2020.

On 14 April 2021, while the petition was pending, the debtor commenced proceedings in New York claiming a declaration that there had been no event of default under the credit agreement and sought consequential relief including damages.

The debate in the courts below

At first instance, the learned judge made the usual bankruptcy order.  Insofar as the impact of an EJC to the treatment of the petition was concerned, the judge held that the fact parties had agreed to an arbitration clause or EJC was only a matter which could be taken into account by the court when considering a winding up or bankruptcy petition.  In so ruling, the court confirmed that the correct approach was to evaluate whether a debtor can demonstrate by sufficiently precise factual evidence that there is a bona fide dispute on substantial ground in respect of the debt.  On a careful and comprehensive analysis of the facts, the judge held that there was none.

The Court of Appeal disagreed and set aside the bankruptcy order.  The majority reviewed the common law approach towards EJCs generally, including those arising from the context of anti-suit injunctions.  Those authorities confirm that the discretion to stay should be exercised to give effect to the EJC unless strong cause for not doing so is shown.  The majority also considered the similar but not identical treatment of ordering a stay in favour of arbitration.

The majority concluded that an EJC operated as an agreement not to present a bankruptcy petition unless and until the underlying dispute had been determined in the agreed forum.  In this respect a petitioner seeking a winding up or bankruptcy order on the basis that there is no bona fide dispute on the debt on substantial grounds is to that extent seeking a determination of the dispute by the court.  Although winding up or bankruptcy engages class remedy, the question whether the petitioner is a member of that class is an anterior question that would have to be determined.  Even if the class remedy was only available in Hong Kong, it does not follow that the determination should not proceed through the agreed dispute resolution mechanism.  The net result is that the petition should not proceed in the absence of strong reasons.

The minority agreed with the outcome but did not consider that an EJC should be given conclusive or near conclusive weight. 

Towards a multi-factorial approach

In a reasoned judgment given by the Hon. Mr Justice French NPJ, the Court of Final Appeal unanimously dismissed the appeal and endorsed the majority approach in the Court of Appeal. 

The issue on appeal did not concern the jurisdiction of the court to order bankruptcy as that authority was conferred upon by statute and is not amenable to exclusion by contract [85].  The agreement to refer disputes to a foreign court inform the court’s discretion to decline to exercise its jurisdiction to order bankruptcy [85].  The question for determination by the Court is concerned with the discretion to decline jurisdiction in a bankruptcy petition where the underlying dispute about the petition debt is the subject of an EJC [94].

The treatment of EJC in the context of forum conveniens challenge is to enforce the EJC unless strong reasons not to do so is shown [92-93]. 

The determination of whether the debt is bona fide disputed on substantial grounds is an element of the jurisdiction conferred on the court but it is only a threshold question.  If the debt is disputed then the engagement of the bankruptcy process is on hold [98].  The threshold character of a dispute about indebtedness leaves room for the exercise of discretion to decline to exercise jurisdiction [100].

In the ordinary case of an EJC, absent countervailing factors such as the risk of insolvency affecting third parties and a dispute that borders on the frivolous or abuse of process, the petitioner and the debtor ought to be held to their contract [105].

In exercising its discretion, the public policy interest in holding parties to their agreements comes into pay.  It is not the only consideration.  The approach is, as canvassed above, multi-factorial [104]:

• the more obviously insubstantial the grounds for disputing the debt, the more the public policy interest in holding parties to their agreement comes into prominence [101];

• but where the court has undertaken the equivalent of a summary judgment determination, it has assumed the jurisdiction to decide a question which the parties had agreed would be determined in another forum [102];

• the significance of the public policy of the legislative scheme for bankruptcy jurisdiction is much diminished where the petition is brought one creditor against another and there is no evidence of creditor community at risk. Where that factor exists, it may be evidenced by another creditor presenting a petition [102; 103].

Battles for another day?

The Court cautioned its observations do not cover the case where an EJC requires bankruptcy proceedings undertaken by a petitioner against a debtor in a foreign court.  Any question of discretion to decline to entertain the petition on that basis would involve larger considerations of public policy against the private contract of the parties [106].  That may, the Court cautioned, be a case for another day.

The multi-factorial approach means that the outcome may be different where a debtor is heavily insolvent with demands from multiple creditors.  Although in such a scenario it would be rare that every loan agreement is subject to an EJC, it is still possible.  In those circumstances, the court may arrive at a different conclusion and find that there is a strong reason not to enforce the EJC and make a winding up or bankruptcy order. 

For now, lenders should revaluate the benefits of EJC or arbitration clauses in their standard facility agreements.



Richard Yip

One of the strongest junior barristers around, his stand-out qualities include an excellent handle on the detail, an insightful legal mind, and sound commercial sense.” Legal 500 Asia-Pacific 2021, Commercial Disputes – Leading Junior (Tier 1)

Richard has a broad civil practice with a focus on shareholder disputes, commercial litigation, financial regulation, competition law and personal injuries. He joined Denis Chang’s Chambers in 2011. Prior to joining the bar, Richard was a corporate finance solicitor at Herbert Smith Freehills.

He represented four respondents in the second case before the Hong Kong Competition Tribunal, where the economic efficiency defence was raised for the very first time in Hong Kong. He was also involved in a number of substantial shareholder disputes, including Acropolis Ltd v W&Q Investment Ltd, 2018 HKCA 379 (appeal against interlocutory injunction concerning the EGM voting results of a listed company) and Waddington Ltd v Chan Chun Hoo Thomas, HCA 3291/2003 (trial of a double derivative action).
Richard is also actively involved in the community and academia. He is a part-time lecturer at the University of Hong Kong.

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Samantha Lau

Samantha graduated from the University of Hong Kong with double first-class degrees in law and government, before attending Harvard Law School for postgraduate studies, where she graduated with a top prize for her essay on equality law. She later served as a judicial assistant of the Court of Final Appeal of Hong Kong, before being awarded the Hong Kong Bar Scholarship. She is also called to the Bar in New York.

Samantha accepts instructions in all areas of Chambers’ practice. She has a wide civil practice with an emphasis on civil and commercial litigation, as well as international arbitration. She has experience in arbitration before SIAC, LCIA and HKIAC.

Samantha is able to provide legal advice and conduct hearings in English, Mandarin and Cantonese.

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Keith Cheung

Keith joined Chambers in 2020 following his pupillage with Mr Derek Chan SC, Mr Martin Wong, Mr Randy Shek and Mr Richard Yip.

Prior to joining the Bar, Keith qualified as a solicitor with a major international law firm in Hong Kong. In that role he has advised clients on transactional, advisory and contentious matters. These matters cover, in particular, issues in corporate governance, shareholder rights and remedies, commercial contracts, insolvency, arbitration, contentious and advisory trusts and intellectual property. Since joining the Bar, Keith has continued to develop his practice in these and other areas.

Keith has received awards from international and domestic mooting competitions. In particular, he was the first Hong Kong recipient of the Best Speaker Award from the Essex Court Chambers-Singapore Academy of Law International Mooting Competition (a competition for practitioners). During his studies, he has also received awards for trial advocacy.

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This article was first published on 4 May 2023