Re Guy Kwok-hung Lam

CACV 393/2021

[2022] HKCA 1297

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 393 OF 2021

(ON APPEAL FROM HCB NO 4115 OF 2020)

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Before:  Hon Barma, G Lam and Chow JJA in Court

Date of Written Submissions:  4 & 29 March, 4 April 2022

Date of Judgment: 30 August 2022

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J U D G M E N T

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Hon Barma JA:

1.I agree with the judgment of G Lam JA.

Hon G Lam JA:

Background

2.This is an appeal against a bankruptcy order. It raises the question whether a creditor’s bankruptcy petition presented in Hong Kong should be allowed to proceed where the petition debt, which the debtor disputes, arises from an agreement containing an exclusive jurisdiction clause in favour of a foreign court.

Factual background

3.The relevant facts may be stated as follows. The petitioner, and respondent to this appeal, Tor Asia Credit Master Fund LP (“Tor”), is an exempted limited partnership registered under the laws of the Cayman Islands.  The appellant, Mr Guy Kwok-Hung Lam (“Lam”), is a Hong Kong resident and the founder of two groups of companies, both of which are named “CP” and engaged in the business of aged care services.  The first is a group of companies headed by CP Global Inc (“CP Global”), a Cayman Islands company, and provide aged care services in Mainland China (“CP China Group”).  Lam was the sole shareholder and director of CP Global.  The second is a group of companies engaged in the business of providing aged care services in the United States (“CP US Group”).  The CP US Group is headed by CP Holdings LLC (“CP Holdings”), a Nevada company, in which Lam holds an 85% interest, through Pacrim Capital International Inc (“Pacrim”), a Panamanian company beneficially owned by Lam.  The CP US Group had been managed principally by Mr Andrew Oksner (“Oksner”) from the group’s offices in Dallas, Texas, whom Lam recruited in 2015 to help develop the business.

4.By a Credit and Guaranty Agreement dated 11 July 2017 entered into between, among others, Tor, CP Global, and Lam (“Agreement”), Tor agreed to advance term loans in the aggregate amount of US$29.5 million to CP Global (“Loans”), and Lam agreed to guarantee, as primary obligor, the full payment of all amounts due from CP Global without any demand or notice.  Securities provided for the Loans included an equitable mortgage over Lam’s shareholding in CP Global, a charge executed by CP Global over most of its assets, and security granted by CP Holdings and some of its subsidiaries over the equity interests they owned in the companies within the CP US Group.

5.Clause 12.16 of the Agreement is the choice of law and jurisdiction clause.  In contrast to the other provisions, it is printed in capital letters, presumably for emphasis.  For ease of reading it is set out in ordinary case as follows:

“ (a) This Agreement and the other Loan Documents and the rights and obligations of the parties hereto and thereto shall be construed in accordance with and governed by the laws of the State of New York.

(b) Each party hereto hereby submits to the exclusive jurisdiction of the United States District Court for the Southern District of New York and of the Supreme Court of the State of New York sitting in New York County (including its Appellate Division), and of any other appellate court in the State of New York, for the purposes of all legal proceedings arising out of or relating to this Loan Agreement or the other Loan Documents or the transactions contemplated hereby or thereby; provided that any suit seeking enforcement against any Collateral or other Property may be brought, at the option of Lender if in the courts of any jurisdiction where such Property is located to the extent such courts have jurisdiction over the relevant Loan Party or over such Collateral or other Property.  Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any objection that it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum.”

I shall refer to clause 12.16(b) as the “Exclusive Jurisdiction Clause”.

6.There have been three amendments of the Agreement.  The first two were made in July and December 2017.  The third was made on 22 June 2019 (“Third Amendment Agreement”), after the occurrence of certain events of default including CP Global’s failure to pay interest due on 31 December 2018 and on 29 March 2019.  By the Third Amendment Agreement, additional security was provided to Tor, who agreed to waive the specified events of default and extend the maturity of the Loans from 12 July 2019 to 31 December 2019.  Each of the three amendment agreements contained a clause (which was again printed in capital letters) re-affirming the Exclusive Jurisdiction Clause in the following terms:

“ This Agreement, and the rights and obligations of the parties hereunder, shall be governed by and construed and interpreted in accordance with the laws of the State of New York. The terms of section 12.16(b) of the Existing Credit Agreement are incorporated herein by reference, mutatis mutandis, and the parties hereto agree to such terms.”

7.In around November 2019, Lam began taking steps to obtain additional financing for the business and for refinancing the Loans. With the knowledge of Tor, Oksner approached and negotiated with Bank Leumi USA, a US bank headquartered in Florida.  By 20 December 2019, as indicated in the non-binding term sheet of that date, Bank Leumi was prepared to proceed with discussions for a loan of US$22 million to Pacrim.  Tor was supportive of a refinancing generally, but was concerned to protect its own interest in any refinancing arrangement which might require the release or subordination of its existing security.

8.The Loans were not repaid at the end of 2019. Negotiations with Bank Leumi continued in the first quarter of 2020.  Tor was kept informed, and was asked to extend its facility to 30 June 2021, to waive existing defaults and to defer interest, on the basis that funding of no less than US$18.65 million would be realised from the Bank Leumi loan.  In due course the terms with Bank Leumi were finalised, and drafts of the loan documentation were circulated for comments at the end of March.  According to Lam, he was given to understand that Tor had agreed to the extension of the facility, the deferral of interest and waiver of defaults, on the basis of which he proceeded with finalising the Bank Leumi financing.  Tor denies this, and says there was ongoing disagreement as to how much of the proposed Bank Leumi loan would be made available to Tor, and that any variations or waivers would have to be done formally in writing.

9.Meanwhile, Covid-19 became a pandemic and infections in the US soared in the course of March 2020.  In early April 2020, Lam decided to apply for loans under the US Government’s Paycheck Protection Program (“PPP”).  On about 13 April, a PPP loan of US$1 million was obtained by a company within the CP US Group and part of the funds was transferred to a bank account of the CP China Group.  Tor viewed this as a development leading to the reduction of cash and increase in debt in the CP US Group, which would create risks to Tor’s security and jeopardise the viability of the Bank Leumi loan, causing significant concern particularly because CP US Group was in aged care services which might be adversely affected by Covid-19. As a result, Tor decided to commence immediate enforcement action in relation to the Loans.

10.On 15 April 2020, Tor appointed two individuals from the firm FTI as receivers and managers over, inter alia, Lam’s shareholding in, and the assets of, CP Global, and replaced Lam with an FTI entity as CP Global’s director, using documents pre-signed by Lam as part of the loan documentation.  Tor also replaced the managers or directors of certain members of the CP US Group with an appointee from FTI.  On the same date, Tor issued a statutory demand against Lam made under the Bankruptcy Ordinance.  This demand was subsequently replaced by another one dated 12 May 2020 which was personally served on Lam on 20 May 2020 in Hong Kong.

11.On 7 May 2020, Lam commenced proceedings in Dallas, Texas (“Texas proceedings”) against Tor, seeking various declarations including that there was no event of default under the Agreement that had not been waived by Tor and that Tor was not entitled to replace the managers and directors of the companies in the CP US Group, and an injunction to restrain Tor from taking any action in violation of its contractual duties under the Agreement.  Lam amended his claim on 21 May 2020, joining Oksner as an additional defendant and claiming there were breaches of fiduciary duty on his part and a conspiracy between him and Tor.  In broad terms, the allegation is that Oksner conspired with Tor to maximise Tor’s advantage and to seize the assets of the two CP groups at an undervalue, by delaying the closing of the Bank Leumi loan, by informing Tor that a PPP loan had been applied for and the loan funds had arrived so that Tor could seize control of the bank accounts with the benefit of those funds, and by providing confidential information to Tor related to the CP groups’ strategies on dealing with Tor. On 6 July 2020, Tor filed an application in the Texas proceedings to dismiss Lam’s claim.  One of the grounds relied upon is that Lam had commenced the Texas proceedings in breach of the Exclusive Jurisdiction Clause.

12.On 1 June 2020, Lam commenced proceedings in the Grand Court of the Cayman Islands, on his own behalf and also in the name of CP Global, against Tor and the two receivers of Lam’s shareholding in, and of the assets of, CP Global, seeking declarations that the appointment of the receivers was invalid.  These proceedings were, however, discontinued at Lam’s own request on 22 October 2020.

13.In Hong Kong, following the statutory demand dated 12 May 2020, Tor presented a bankruptcy petition against Lam on 15 June 2020 based on a debt in the aggregate sum of US$48,597,644.93, comprising outstanding principal of US$48,057,003.64 and accrued interest of US$540,641.29 for the period between 31 March and 14 April 2020.  An estimated value of US$7,300,000 was ascribed to the security in the form of the equitable mortgage over Lam’s shareholding in CP Global.  The petition was not made in respect of the secured part of the debt.

14.It is averred in the petition that CP Global was required to repay the Loans on 31 December 2019 but failed to do so, that pursuant to the Agreement Lam had guaranteed the payment of the debts of CP Global, that following the Event of Default on 31 December 2019, he had failed to pay the guaranteed obligations when due, that he is indebted to Tor in the aforesaid amounts, and that the statutory demand served on him had neither been complied with nor set aside.

15.In his affirmation filed in the bankruptcy proceedings on 3 September 2020, Lam raised five grounds in opposition to the petition: (1) Tor was fully secured as a creditor and as such cannot petition for Lam’s bankruptcy; (2) there was no extant event of default under the Agreement because of Tor’s waiver or an estoppel against Tor; (3) because of the Exclusive Jurisdiction Clause, Tor should first sue in the courts of New York to establish Lam’s liability; (4) Tor had breached the provisions of the Money Lenders Ordinance (Cap 163) and the Agreement was not therefore enforceable against Lam; and (5) Lam had raised a cross-claim against Tor in the Texas proceedings for damages exceeding the amount of Tor’s petition debt.

16.Following an undertaking given at a directions hearing of the bankruptcy petition on 18 March 2021 to commence proceedings in New York in respect of disputes arising out of or relating to the Agreement, on 14 April 2021 Lam commenced proceedings against Tor in the Supreme Court of the State of New York (“New York proceedings”).  In those proceedings he complains that he was not given notice of any event of default prior to the enforcement actions taken by Tor, and alleges that no extant default could be relied on by Tor because of waiver or estoppel.  He contends that Tor took the enforcement actions in bad faith and conspired with one or more of the groups’ employees to facilitate the wrongful takeover of the groups in violation of their fiduciary duties.  By way of relief Lam seeks, inter alia, declarations that his obligations under the Agreement are invalid, that no event of default exists that has not been waived, and that Tor is not entitled to replace the existing managers and directors of members of the CP US Group; an injunction to prevent Tor from taking any action in violation of its contractual duties under the Agreement; and damages for breach of the covenant of good faith and fair dealing.

The statutory bankruptcy regime

17.Under the Bankruptcy Ordinance (Cap 6), a creditor’s petition for bankruptcy has to be based on the ground that the petition debt is one which the debtor appears either to be unable to pay or to have no reasonable prospect of being able to pay: section 6(2)(c).  For a debt which is immediately payable (and which is not a judgment debt), this requirement is satisfied if and only if the statutory demand served by the creditor on the debtor has been neither complied with nor set aside: section 6A(1).  Under the Bankruptcy Rules (Cap 6A), the court may set aside a statutory demand where, inter alia, the debt is disputed on grounds which appear to the court to be substantial (rule 48(5)(b)), or where the court is satisfied, on other grounds, that the demand ought to be set aside (rule 48(5)(d)).

18.Section 5(3) confers on the court a general power to dismiss or stay a bankruptcy petition in these terms:

“ The court has a general power, if it appears to it appropriate to do so on the grounds that there has been a contravention of rules or for any other reason, to dismiss a bankruptcy petition or to stay such a petition and, where it stays such a petition, it may do so on such terms and conditions as it thinks fit.”

19.Section 9(3) also provides that at the hearing of the petition, if the court considers that “for other sufficient cause” no order ought to be made on the petition, the court may dismiss it.  Section 9(5) provides that where the debtor denies the debt, the court may, instead of dismissing the petition, stay all proceedings on it to allow the question relating to the debt to be tried.  Section 104 confers a power on the court “at any time, for sufficient reason” to stay the proceedings under a bankruptcy petition, “either altogether or for a limited time, on such terms and subject to such conditions as the court may think just.”

20.It is well established that the power to make a bankruptcy order will only be exercised in clear cases.  The general rule of practice in bankruptcy, as in winding up, is to ask whether there is a bona fide dispute of the petition debt on substantial grounds.  If there is, the petition is usually dismissed, leaving it to the petitioner to establish himself as a creditor by a judgment obtained in a civil action.  The test may be slightly different in formulation from that for summary judgment in a writ action under Order 14 rule 3 of the Rules of the High Court (Cap 4A) (which is whether “there is an issue or question in dispute which ought to be tried” or, in short, a “triable issue”), but the two are broadly similar or broadly equivalent and most unlikely to result in different outcomes when applied to the same facts.  See Re Leung Cherng Jiunn [2016] 1 HKLRD 850, §§20-29.

The judgment below

21.In the hearing of the petition below, Lam acted in person.  Although the court had before it a skeleton argument from his counsel[1] for a previous hearing, that document only dealt briefly with the point about the jurisdiction agreement.  In her judgment dated 21 July 2021[2] (“Judgment”), Linda Chan J (“Judge”) stated that, in relation to the Exclusive Jurisdiction Clause, she was inclined to agree with the first point made on behalf of Tor, which was that there is a settled understanding of the law that an exclusive jurisdiction clause does not prevent a winding up or bankruptcy petition from being presented in an appropriate jurisdiction.  Whilst generally the court would give effect to the contractual bargain of the parties, it does 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.  Liability to be wound up by the court is part of the conditions of incorporation.  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.  An arbitration clause or an exclusive jurisdiction clause is only a factor to be taken into account when considering a winding up or bankruptcy petition.  An exclusive jurisdiction clause does not prevent the court from considering whether the creditor has locus to present the petition, because “unless and until the company/debtor is able to demonstrate to the Court that there is a bona fide dispute on substantial ground in respect of the debt, there is no proper basis for the company to contend that there is a dispute which must be litigated in accordance with the contractually agreed forum”.  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.[3]

22.The Judge then went on to deal with and reject the other grounds of opposition.  She concluded that Lam had failed to show that there was a bona fide dispute on substantial ground in respect of the petition debt.  A bankruptcy order was made accordingly.[4]

The appeal

23.In his appeal against the bankruptcy order, the only ground Lam has raised is that the Judge should have dismissed or stayed the petition because the petition debt is disputed and Lam has raised a cross-claim.  Both the dispute and the cross-claim are subject to the Exclusive Jurisdiction Clause, and Lam has already commenced an action in New York to seek that determination.

24.On this appeal, Ms Rachel Lam SC and Mr Terrence Tai, who did not appear below, contend on behalf of Lam that the Judge should have followed the approach of Harris J in Re Southwest Pacific Bauxite (HK) Ltd [2018] HKCFI 426; [2018] 2 HKLRD 449 (more commonly known as “Lasmos” after the petitioner’s name) 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.  The authorities referred to by the Judge as evincing a settled practice otherwise predated Salford Estates (No 2) Ltd v Altomart Ltd (No 2) [2015] Ch 589 which heralded a different approach.

25.Tor has filed a respondent’s notice raising two additional or alternative grounds, namely: (1) the Lasmos approach should not be extended to an exclusive jurisdiction clause; and (2) the Lasmos approach is itself unsound in the arbitration context where it was developed.

26.Mr Jose Maurellet SC and Mr Nick Luxton, appearing for Tor, submit that it is fairly settled in English and Commonwealth authorities that an exclusive jurisdiction clause does not provide an answer to a winding up petition.  The question for the court remains whether the debt is bona fide disputed on substantial grounds.  The Exclusive Jurisdiction Clause here provides for the New York courts to have exclusive jurisdiction in respect of all “legal proceedings”.  But a petition is not a legal proceeding brought on a cause of action between the parties; rather it triggers a collective statutory mechanism for the benefit of all creditors.  In a winding up or bankruptcy petition, the court does not adjudicate upon the substantive rights between the parties; there exists the possibility that the liquidator or trustee in bankruptcy may reject the claim of the petitioning creditor.  A barely-worded exclusive jurisdiction clause cannot carry the same effect as a clause that specifically purports to preclude the creditor from petitioning for winding up or bankruptcy.  Curtailing a creditor’s statutory right to present a winding up petition by contract is against public policy.  The court should be cautious in “cross-fertilising” the Lasmos approach to exclusive jurisdiction clauses.  There has been criticism of the Lasmos approach expressed in Hong Kong cases and its status must be in doubt.  They submit, however, that it is unnecessary to resolve the question of the proper approach in cases of arbitration clauses.  In other words, they do not pursue the second ground raised in the respondent’s notice.  Accordingly I do not deal with this question, although it is necessary to refer to the related cases for the purposes of the discussion below.

27.In contrast to the position below, therefore, not only is the argument now focused on the Exclusive Jurisdiction Clause, uncluttered by the other grounds, we have also had the benefit of adversarial submissions from leading counsel on both sides as well as a wider review of the authorities – advantages not enjoyed by the Judge.  To approach the question before the court in the proper legal context, I propose first to set out the state of the law in relation to the effect of exclusive jurisdiction clauses on ordinary actions and the effect of arbitration clauses on winding up petitions.

The approach to stay of ordinary actions based on exclusive jurisdiction clause

28.Where the 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, there is no dispute that the applicable principles 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: The Pioneer Container [1994] 2 AC 324 at 347E-G; Noble Power Investments Ltd v Nissei Stomach Tokyo Co Ltd [2008] 5 HKLRD 631, §37; Joseph Ghossoub v Team Y&R Holdings Hong Kong Ltd (CACV 6/2017, 21 July 2017), §§42-43.  It has also been said that the reasons for departing from the general rule stem from factors not contemplated by the parties at the time of the contract and do not include factors of convenience that were foreseeable (save in exceptional circumstances involving the interests of justice): Noble Power Investments Ltd, at §36 per Ma CJHC and at §71 per Stone J (with both of whom Tang VP agreed); Antec International Ltd v Biosafety USA Inc [2006] EWHC 47 (Comm) at §7(iii) per Gloster J.

29.What amounts to strong cause in this context 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.  The reason for taking this stance, it was said, was that the defendant should not be regarded as genuinely desirous of a trial in the agreed forum or that there was no real dispute to be referred to that forum: see The Vishva Prabha [1979] 2 Lloyd’s Rep 286; The Atlantic Song [1983] 2 Lloyd’s Rep 394; The Frank Pais [1986] 1 Lloyd’s Rep 529; and Standard Chartered Bank v Pakistan National Shipping Corporation [1995] 2 Lloyd’s Rep 365, 378; surveyed in the Singapore Court of Appeal’s decision in Vinmar Overseas (Singapore) Pte Ltd v PTT International Trading Pte Ltd [2018] 2 SLR 1271 at §§74-83.  Thus, for example, in Standard Chartered Bank, Clarke J said:

“ 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.”

30.At around the same time, however, in a closely related area of the law, the courts began to give emphatic application to the principle 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.”

31.A few years later, 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”[5] and “new dawn”.[6]  That decision emphasised again the general rule of law requiring parties to adhere to their agreements on where their disputes should be resolved.  Lord Bingham, giving the leading speech, said:

“ 24. If contracting parties agree to give a particular court exclusive jurisdiction to rule on claims between those parties, and a claim falling within the scope of the agreement is made in proceedings in a forum other than that which the parties have agreed, the English court will ordinarily exercise its discretion (whether by granting a stay of proceedings in England, or by restraining the prosecution of proceedings in the non-contractual forum abroad, or by such other procedural order as is appropriate in the circumstances) to secure compliance with the contractual bargain, unless the party suing in the non-contractual forum (the burden being on him) can show strong reasons for suing in that forum. I use the word ‘ordinarily’ to recognise that where an exercise of discretion is called for there can be no absolute or inflexible rule governing that exercise, and also that a party may lose his claim to equitable relief by dilatoriness or other unconscionable conduct. But the general rule is clear: where parties have bound themselves by an exclusive jurisdiction clause effect should ordinarily be given to that obligation in the absence of strong reasons for departing from it. …

25. Where the dispute is between two contracting parties, A and B, and A sues B in a non-contractual forum, and A’s claims fall within the scope of the exclusive jurisdiction clause in their contract, and the interests of other parties are not involved, effect will in all probability be given to the clause. …”

32.Following this approach, it appears that the view that lack of merits can be a reason for not giving effect to an exclusive jurisdiction clause has been quietly dropped.  In Euromark Ltd v Smash Enterprises Pty Ltd [2013] EWHC 1627 (QB), the parties’ contract contained a clause conferring exclusive jurisdiction on the Australian courts. The claimant instituted proceedings in England and sought leave to serve the claim form on the defendant in Australia, arguing that there were strong reasons for allowing them to bring proceedings in England despite the exclusive jurisdiction clause.  In relation to the substantive merits, after observing that the claimant’s case appeared strong, Coulson J continued at §35:

“ However, I ask rhetorically, where does that generally favourable impression on the merits get the claimant on this application? Even if one concludes that the claimant is very likely to win on liability at trial, the issue still remains as to where that trial should take place. There is no basis in law for concluding that a strong case should be heard in England, whilst a more arguable case should be heard in Australia. That would be absurd. Ultimately, for the reasons I have given, it seems to me that the strength of the claimant’s claim on liability is either not a relevant consideration for the purpose of this application or, if it is, it remains a matter of very little significance.”

33.The Standard Chartered Bank line of cases were not cited in Euromark,[7] and Euromark has since been applied in England in CH Offshore Ltd v PDV Marina SA & others [2015] EWHC 595 (Comm) at §64.

34.In Hong Kong, the passage in Standard Chartered Bank quoted in §29 above was approved in Bayer Polymers Co Ltd v Industrial and Commercial Bank of China, Hong Kong Branch [2000] 1 HKC 805, but that was simply a case of an application for stay on forum non conveniens grounds in the absence of any jurisdiction agreement between the parties.  Applying the approach reflected in that passage, Stone J refused a stay, on the ground, inter alia, that the defendant had failed to show any arguable defence.

35.In contrast, Hyundai Engineering & Construction Co Ltd v UBAF (Hong Kong) Ltd (HCA 175/2012, 25 September 2013), did involve an exclusive jurisdiction clause, which required any dispute to be “settled exclusively” by the courts in Luoyang, Henan Province.  The party opposing a stay of the Hong Kong action relied on the fact that the other side had not even provided the court with an outline of its defence. DHCJ Lok,rejecting that argument and applying Euromark, stated that “the Hong Kong court cannot just proceed to hear the claim in defiance of the exclusive jurisdiction clause simply because the claimant has a strong claim”,[8] and granted a stay of the proceedings.

36.Hyundai may in turn be contrasted with the decision in Xu Ziming v Ruifeng Petroleum Chemical Holdings Ltd (HCA 450/2013, 27 August 2014 & 29 October 2014), where DHCJ Wilson Chan, applying the passage in Standard Chartered Bank, rejected a stay application based on an exclusive jurisdiction clause on the ground, inter alia, that the defendant had failed to raise triable issues.  There was however no discussion of either Euromark or Hyundai, which were apparently not cited to the court.

37.In the same vein, in Madison Communications Pte Ltd v Le Ecosystem Technology India Pte Ltd [2017] 5 HKLRD 284, DHCJ William Wong SC took the view that the lack of a credible defence is itself a ground for refusing to stay an action brought in breach of an exclusive jurisdiction clause.  With respect this view does not take the matter further since it was obiter, because the court had concluded that the clause did not apply to the defendant in question.[9]  Neither Euromark nor Hyundai appears to have been cited to the court.  The passage in Hong Kong Civil Procedure 2017 relied on by the judge was itself based on The Frank Pais and Standard Chartered Bank, which had been overtaken by Euromark, and on two Singaporean cases,[10] which have since been overruled by the Singapore Court of Appeal.[11]

38.The question was considered in detail by Master Benny Lo in Deltatre SpA v Hong Kong Sports Industrial Development Ltd [2018] HKCFI 1942; [2018] 4 HKLRD 478, who, after a review of the authorities, decided that the approach in Euromark should be adopted, and stayed the action before him on the basis of an exclusive jurisdiction clause in favour of the courts in Torino, Italy.  His reasons included, inter alia, that the lack of a credible defence is not in itself such an unforeseeable, overwhelming or exceptional matter as to constitute a strong cause, and that there is a strong policy in favour of upholding contractual bargains including jurisdictional agreements.[12]  He considered that the approach in Euromark strikes the correct balance between the policy of upholding the parties’ own jurisdiction agreements while retaining a discretion for exceptional cases.[13]

39.In Lo Ka Lee Kelly (t/a Leader Packing (HK) Co) v Spiriant Asia Pacific Ltd [2021] HKDC 787; [2021] 3 HKLRD 461, Judge H Au-Yeung adopted the same approach.  He considered that the fact that the defendant had failed to identify a defence, just as where the defence put forward had little merit, does not amount to a strong cause for not staying the action which had been brought in Hong Kong in breach of an exclusive jurisdiction clause.[14]

40.In Shanghai Gopher Asset Management Co Ltd v China Base Group Ltd [2021] HKCFI 3216, DHCJ Le Pichon agreed with the view expressed in Deltatre that the Euromark approach strikes the correct balance and that the lack of a credible defence per se cannot be said to be an unforeseeable factor at the time of the contract.[15]

41.In Singapore, where the question of whether an action should be stayed on the basis of an exclusive jurisdiction clause also depends on whether there is “strong cause” to refuse a stay, the Singapore Court of Appeal decided in 2018, departing from its previous decisions,[16] that the merits of the defence are irrelevant to this question, although a stay may be refused where the applicant is acting abusively in applying for the stay or where granting a stay may amount to a denial of justice: Vinmar, §§111-113, 128-134.

42.In its submissions Tor does not dispute that Euromark and Deltatre set out the proper approach to an application for stay of an action.  It contends that this approach is concerned with preventing a party from submitting disputes over substantive rights between the parties for adjudication in a forum other than the contractually agreed forum, and is not applicable in a winding up or bankruptcy petition, which triggers a collective statutory mechanism instead. I shall deal with this argument below.

The effect of arbitration clauses on winding up petitions

43.Lam’s argument in this case relies on the principles applicable where a winding up petition has been presented on the basis of a contractual claim which is subject to an arbitration agreement.  This area of law has generated a divergence of judicial opinion.

44.It has been said[17] that the “traditional approach” is that in order for a winding up petition presented against it to be stayed or dismissed, the company is required to demonstrate a bona fide dispute of the petition debt on substantial grounds notwithstanding the existence of an arbitration clause.  Whilst there seem to be no relevant authorities prior to 1997, it would not be surprising if that approach was the position taken by the Hong Kong courts prior to early 1990s, and even afterwards in cases with a domestic arbitration clause.  This is because, prior to the enactment of legislation giving effect to Art 8 of the UNCITRAL Model Law, the courts’ approach in ordinary actions was that proceedings would only be stayed, and the relevant dispute referred to arbitration, if a substantial defence to the claim existed, giving rise to a genuine dispute.  But the proper approach under Art 8 is different: a dispute exists unless there is a clear and unequivocal admission not only of liability but also of quantum: Tommy C P Sze & Co v Li & Fung (Trading) Ltd & others [2003] 1 HKC 418, at §§50-51.

45.Nevertheless, in a series of four decisions between 1997 and 2014, the Court of First Instance has been understood to have taken the view that notwithstanding the existence of an arbitration clause in the relevant agreement, the court will proceed with the petition in the usual case and, generally, make a winding up order, unless the company shows that the debt in question is bona fide disputed on substantial grounds: see 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).  These four cases were considered in detail by Harris J in Lasmos at §§6-10, and I shall not lengthen this judgment by narrating all their facts and conclusions again.  Suffice it to refer, for instance, to Jade Union where Barma J said:

“ 19. … the court, in exercising its winding up jurisdiction, in cases such as this, where the company asserts that the debt on which the petition is founded is disputed, is concerned first to determine whether or not the petitioner is to be regarded as a creditor of the company so that it is entitled to present the petition. This it does by considering whether or not the debt is bona fide disputed on substantial grounds. Neither the existence of an arbitration clause in a contract between the petitioner and the company, nor the existence of an arbitration commenced pursuant to it, of themselves demonstrate that the debt is in fact bona fide disputed on substantial grounds. It remains necessary for the company to discharge its burden of establishing this, by placing before the court the evidence from which the court can see that such a dispute exists. …

21.    … If, having considered the evidence, the court concludes that there is no bona fide dispute of substance in relation to the debt relied upon by the petitioner, I see no good reason why the existence of an arbitration clause should be regarded nonetheless as somehow relevant to the court’s exercise of its discretion as to whether or not to make a winding up order.  There being, in the view of the court, no dispute of substance, the mechanism by which the parties may have resolved to resolve any disputes between themselves is neither here nor there.  Moreover, the question of whether or not there is a dispute of substance would appear to be one which logically arises prior to the point at which the court is called upon to exercise its discretion as to whether or not to make a winding up order.”

46.However, it seems to me that, quite apart from the fact 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, the judgments in those two cases do not actually go so far as to suggest that the existence of an arbitration agreement is irrelevant. Thus in Hollmet, Rogers J said:[18]

“ It is not sufficient in the Companies Court for a person merely to hold up his hand and say there is a dispute. He must establish that there is a bona fide dispute on substantial grounds. Of course, once arbitration proceedings have been commenced, the matter is different because then it may be said that there is not a debt owing. Hence the significance of the commencement of the arbitration proceedings which took place earlier this week.

What approach the court should take when a summons is taken out as it was in this case for a stay of proceedings must, it seems to me, to be this. If a company wishes to obtain a stay of winding up proceedings on the basis that the underlying debt upon which the Statutory Notice is founded is disputed, it must establish in the normal way that there is a bona fide dispute on substantial grounds. If it has not satisfied the Court as to the bona fides and substantial nature of its claim it can only expect a short adjournment to enable it to commence the arbitration and then, if sufficient evidence to establish a genuine dispute is still absent it can expect to have to give an undertaking to proceed with the arbitration with all due dispatch. It cannot simply put up its hands and say: ‘You, the Court, have no jurisdiction because of my contract’. That is not what the contract says, and the Companies Court is entitled to be satisfied that there is a proper dispute.” (emphasis added)

47.It seems to me that Rogers J clearly envisaged that a winding up petition may well be stayed by the court, pending arbitration, subject to an appropriate undertaking, even though the company has not by evidence demonstrated to the court a bona fide dispute of the debt on substantial grounds.

48.Like Hollmet, in Sky Datamann Yuen J was faced with a submission that the court had no discretion and had to grant a mandatory stay of the petition by virtue of the Arbitration Ordinance.[19] She rejected that argument, holding that a winding up petition is not an “action” within the meaning of Art 8 of the Model Law, and that:

“ it is clear that the court is not obliged to strike out or stay a petition merely because the petitioner and the company had entered into a contract with an arbitration clause, or even if the company has commenced arbitration. It is a matter for the discretion of the court in each case. In exercising its discretion, the court will consider all relevant circumstances, including the financial position of the company, the existence of other creditors, and the position taken by them.”

For my part, I do not think Yuen J should be taken to have suggested that the parties’ prior agreement on their chosen dispute resolution mechanism is irrelevant to the exercise of that discretion.

49.I shall come to the reasoning in Jade Union later.  As for Southern Materials, it was a case where the company eventually did not oppose the winding up petition, so that there was no decision required on the effect of the arbitration clause, which in any event only existed in relation to two of the four debts relied upon.

50.In England, in Jubilee International Inc v Farlin Timbers Pte Ltd [2006] BPIR 765, Jarvis QC, sitting as a deputy judge of the High Court, adjourned a winding up petition to allow an arbitration to proceed pursuant to the arbitration agreement between the parties.  Whilst on the evidence the court found that there was actually a bona fide dispute of the debt, the deputy judge said:

“ 29. It seems to me that if I were to adopt the view to meet the standard as to be expected in summary proceedings, then I would have had to have had a mass of evidence dealing with the circumstances in which this vessel came to sink on 24 July.

30. It seems to me that that would be enabling Farlin, by adopting this course, to follow, in effect, a summary judgment procedure in circumstances where it had contractually agreed to assume arbitration.

31. Such a course was disapproved of by the majority of the Court of Appeal in Halki Shipping Corporation v Sopex Oils Ltd [1998] 1 WLR 726. The judgment of Henry LJ makes it quite plain that the mere fact that there is a refusal to pay in relation to a matter which is subject to an arbitration clause means there is a dispute and the court cannot, where there is such an arbitration clause, seek to resolve whether or not there is a dispute.

32. In effect, by bringing this petition in this way, what Farlin are doing is inviting the court to resolve that issue. …”

51.Similarly, in Rusant Ltd v Traxys Far East Ltd [2013] EWHC 4083 (Comm), Warren J 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:

“ 19. … The Companies Court should exercise its discretion to reject the petition and leave the debt to be established in the forum which the parties have agreed is the appropriate place. …

20. … even in a clear case for summary judgment, the arbitration agreement bites in an ordinary action applying the Halki Shipping approach.  The policy is clear that disputes between parties should be decided in the forum which they have chosen.  For the Companies Court to decide that there is no bona fide defence requires it to adjudicate on the claim or the dispute.”

52.The question went to the Court of Appeal in England in Salford Estates (No 2) Ltd v Altomart Ltd (No 2) [2015] Ch 589.  There a winding up petition had been dismissed by the first instance judge on the ground that the dispute whether certain sums were due from the lessee-company to the lessor-petitioner should be referred to arbitration in accordance with the arbitration clause in the lease.  On appeal the English Court of Appeal upheld the decision.  Sir Terence Etherton C, giving the main judgment, expressed his reasons as follows:

“ 39. … Section 122(1) of the 1986 [Insolvency] Act confers on the court a discretionary power to wind up a company. It is entirely appropriate that the court should, save in wholly exceptional circumstances which I presently find difficult to envisage, exercise its discretion consistently with the legislative policy embodied in the 1996 Act. This was the alternative analysis of Warren J in the Rusant case, at para 19.

40. Henry and Swinton Thomas LJJ considered in Halki Shipping Corpn v Sopex Oils Ltd [1998] 1 WLR 726 that the intention of the legislature in enacting the 1996 Act was to exclude the court’s jurisdiction to give summary judgment, which had not previously been excluded under the Arbitration Act 1975. It would be anomalous, in the circumstances, for the Companies’ Court to conduct a summary judgment type analysis of liability for an unadmitted debt, on which a winding up petition is grounded, when the creditor has agreed to refer any dispute relating to the debt to arbitration. Exercise of the discretion otherwise than consistently with the policy underlying the 1996 Act would inevitably encourage parties to an arbitration agreement – as a standard tactic – to by-pass the arbitration agreement and the 1996 Act by presenting a winding up petition. The way would be left open to one party, through the draconian threat of liquidation, to apply pressure on the alleged debtor to pay up immediately or face the burden, often at short notice on an application to restrain presentation or advertisement of a winding up petition, of satisfying the Companies Court that the debt is bona fide disputed on substantial grounds. That would be entirely contrary to the parties’ agreement as to the proper forum for the resolution of such an issue and to the legislative policy of the 1996 Act.

41.    There is no doubt that the debt mentioned in the Petition falls within the very wide terms of the arbitration clause in the Lease.  The debt is not admitted.  In accordance with the decision in Halki Shipping, that is sufficient to constitute a dispute within the 1996 Act, irrespective of the substantive merits of any defence, and, were there proceedings on foot to recover the debt, to trigger the automatic stay provision in section 9(1) of the 1996 Act.  For the reasons I have given, I consider that, as a matter of the exercise of the court’s discretion under section 122(1)(f) of the 1986 Act, it was right for the court either to dismiss or to stay the Petition so as to compel the parties to resolve their dispute over the debt by their chosen method of dispute resolution rather than require the court to investigate whether or not the debt is bona fide disputed on substantial grounds.”

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.

54.In Hong Kong, in Lasmos, Harris J, after a careful analysis of the competing approaches, decided that:[20]

“ (1) if a company disputes the debt relied on by the petitioner;

(2) the contract under which the debt is alleged to arise contains an arbitration clause that covers any dispute relating to the debt; and

(3) 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 Rule 32 of the Companies (Winding Up) Rules, Cap 32H, demonstrating this;

the petition should generally be dismissed.”

55.In But Ka Chon v Interactive Brokers LLC [2019] HKCA 873; [2019] 4 HKLRD 85, a broker served a statutory demand on a client in respect of the deficit in the client’s trading account.  The client complained that the broker had improperly liquidated his account and therefore disputed the debt, but he also applied to the court under the Bankruptcy Rules (Cap 6A) for an order to set aside the statutory demand on the ground, inter alia, that the dispute should be referred to arbitration in accordance with the arbitration clause in the customer agreement.  Both DHCJ Kent Yee and, on appeal, this court[21] held that the client’s application should be dismissed, on the ground that irrespective of whether the Lasmos approach was to be applied, he had not satisfied the third requirement in Lasmos.  Nevertheless, on an obiter basis, Kwan VP made a number of observations on the Lasmos approach,[22] which may be summarised as follows:

(1)  A petition, whether for winding up or bankruptcy, does not come within the wording of Art 8 of the Model Law, so that there is no mandatory stay under that provision.

(2)  There is a discretionary power under the insolvency legislation whether to dismiss or stay a petition where the alleged debt arises out of a transaction containing an arbitration agreement.

(3)  Lasmos, following Salford Estates, decided that the discretion should be exercised in only one way, with slightly different formulations.  Such an approach is a substantial curtailment of a creditor’s statutory right to petition for bankruptcy or winding up.  The statutory jurisdiction to wind up a company is satisfied once the creditor applies on the basis of a debt that is not disputed on genuine and substantial grounds.  Her Ladyship had reservations whether the discretion should be exercised only in one way, substantially curtailing the right of a creditor to present a petition.

(4)  Her Ladyship acknowledged that considerable weight should be given to the factor of arbitration in the exercise of the discretion.  It is right to heed the words of caution in Salford Estates that exercise of the discretion otherwise than consistently with the policy underlying the arbitration legislation would encourage parties to bypass the arbitration agreement by presenting a winding up petition.  She also acknowledged that it may well be that before Lasmos, insufficient weight had been given to the arbitration factor.

(5)  The court is not powerless to deal with a creditor’s tactic seeking to apply improper pressure on the alleged debtor. Nor should the discretion be invariably exercised in favour of making a winding up or bankruptcy order where the court is satisfied there is no bona fide dispute on substantial grounds.  Examples of the way in which the discretion may be exercised may be found in Hollmet and Jinpeng Group Ltd v Peak Hotels and Resorts Ltd (BVI HCMAP 2014/0025 and 2015/0003, 8 December 2015, Eastern Caribbean Court of Appeal).

56.The argument was raised again in Sit Kwong Lam v Petrolimex Singapore Pte Ltd [2019] HKCA 1220; [2019] 5 HKLRD 646, but it was found that the debt in question was not subject to any arbitration agreement, and so there was no need to address the Lasmos approach.  In view of the debtor’s submission challenging the third requirement in Lasmos, however, Kwan VP, giving the judgment of the Court of Appeal,[23] said that it was a “sensible requirement” in order to demonstrate to the court that the debtor has a genuine intention to object and could hardly be considered onerous.

57.The question very soon returned to the court. In Dayang (HK) Marine Shipping Co Ltd v Asia Master Logistics Ltd; Re Asia Master Logistics Ltd [2020] HKCFI 311; [2020] 2 HKLRD 423, the petitioner sought the winding up of a company on the basis of unpaid charter hire.  The company did not dispute it owed the hire but alleged it had a cross-claim for damages for damage done to the cargo during unloading which it was not yet able to quantify, and opposed the petition on the ground that the charterparty contained a clause in favour of arbitration in Hong Kong.  DHCJ William Wong SC examined the evidence and concluded that the company had not raised a bona fide cross-claim on substantial grounds.[24]  He further took the view that the company did not have any genuine intention to resolve the dispute by arbitration and that the third requirement in Lasmos was not satisfied.[25] He nevertheless went on to express his views as to why the approach in Lasmos or Salford should not be adopted.  He also disagreed with Kwan VP’s observations in But Ka Chon in that he considered it unnecessary to give more weight to the arbitration factor and that the existence of the arbitration agreement is irrelevant.[26]  I shall deal some of his reasons below.

58.In AnAn Group (Singapore) Pte Ltd v VTB Bank (Public Joint Stock Co) [2020] 1 SLR 1158, the Singapore Court of Appeal, largely adopting the approach in Salford Estates, held 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.[27]

59.In Malaysia, the High Court has also followed Salford Estates and Lasmos in dismissing a winding up petition on the ground that the respondent had shown the existence of a prima facie dispute which ought to be referred to arbitration under the agreement between the parties: Awangsa Bina Sdn Bhd v Mayland Avenue Sdn Bhd (WA-28NCC-1146-12/20018), §§25-28.

60.More recently, in Re Hongkong Bai Yuan International Business Co Ltd [2022] HKCFI 960, the company which faced a winding up petition submitted that the court should adopt the approach in Salford Estates and AnAn Group.  Linda Chan J considered that irrespective of whether one describes the threshold as a prima facie standard or a bona fide dispute on substantial grounds, it is incumbent on the debtor to demonstrate “a genuine dispute on the debt which requires determination of a tribunal” despite the existence of an arbitration clause applicable to the dispute.[28] It has become clear that this is not regarded as in any way different from the conventional test of bona fide dispute on substantial grounds in insolvency petitions.  Thus in DCKD & another v JPWL [2022] HKCFI 1059 and Re Pan Sutong & Re Proman International Ltd [2022] HKCFI 1450, Linda Chan J, applying the same approach, said in the latter case that “the court would only require the parties to resolve the dispute through arbitration if there is a ‘genuine dispute’ or ‘bona fide dispute on substantial grounds’ in respect of the debt”.[29]  In all three cases, her Ladyship held there was no such dispute, after an examination of the merits.

Is the Exclusive Jurisdiction Clause engaged in this case?

61.I deal first with the question whether the Exclusive Jurisdiction Clause is engaged in the present case.  By that clause, each of the parties, including Tor and Lam, submits to the exclusive jurisdiction of the relevant US or New York courts for the purposes of all legal proceedings arising out of or relating to the Agreement or the other loan documents or the transactions contemplated thereby.

62.The construction of the Exclusive Jurisdiction Clause and indeed of the Agreement generally is governed by New York law as the governing law of the contract.  In the absence of evidence of New York law, I approach the matter on the basis of the general principles under Hong Kong law.

63.As with exclusive jurisdiction clauses generally, the clause in this case has both positive and negative aspects.  The parties affirmatively agree that they submit to the exclusive jurisdiction of the specified forum for the purposes of all legal proceedings arising out of or relating to the Agreement or the other loan documents or the transactions contemplated thereby.  The “silent concomitant”[30] is that neither party will bring such legal proceedings in any other forum.  This proscription is engaged, in my view, where one of the parties seeks a judicial determination in another forum on the rights or obligations of one or both of them under the Agreement.

64.Here, there is a dispute between Tor and Lam as to whether Lam is indebted to Tor under the Agreement as alleged.  Lam argues that there was no relevant event of default because Tor had waived reliance or was estopped from relying on the matters in question.  There are allegations that Tor deliberately blocked the refinancing from Bank Leumi so as to result in default by CP Global, with a view to seizing the collaterals at an undervalue, and allegations that Tor had conspired with Oksner for him to act against the interests of the CP US Group and to serve those of Tor.  Tor asks the Hong Kong court dealing with the bankruptcy petition to determine that dispute, and to decide that the various defences and cross-claims raised by Lam have no substance and are to be ignored.  That, it seems to me, would plainly be a judicial determination as to the parties’ rights and obligations under the Agreement, and falls within the wording and intendment of the Exclusive Jurisdiction Clause.  Moreover, it would be a summary determination based on affidavits alone without the process of discovery that may take place if the dispute is resolved in the New York proceedings.

65.Whilst seeking an order for the winding up or bankruptcy of a party to the Agreement, viewed in isolation, may not by itself necessarily be a proceeding within the scope of the Exclusive Jurisdiction Clause, a petition for such an order on the basis of a disputed indebtedness under the Agreement does, in my opinion, fall within legal proceedings arising out of or relating to the Agreement.  In this context, the negative aspect of the Exclusive Jurisdiction Clause operates as an agreement not to present a bankruptcy petition unless and until the underlying dispute has been determined in the agreed forum: see Fulham Football Club (1987) Ltd v Richards [2012] Ch 333, §83.  This is different in nature from the “non-petition” clauses referred to in Asia Master at §120(5)-(6).

66.Relying on Lu Yongliang v Bank of China Ltd, Dongguan Branch & another [2021] HKCA 1048; [2021] 6 HKC 46, Tor submits that its petition is not a legal proceeding brought on a cause of action between the parties.  That was a case where a lender had sued and obtained judgment in the Mainland for repayment of a loan against the borrower and the guarantor.  The lender subsequently served a statutory demand for repayment of the loan on the guarantor in Hong Kong, without relying on the Mainland judgment.  The point discussed, obiter, was whether, having regard to the Mainland judgment already obtained, bankruptcy proceedings based on the guarantee would constitute “proceedings … on a cause of action in respect of which a judgment has been given … in proceedings between the same parties” and thus be barred by section 5 of the Foreign Judgments (Restriction on Recognition and Enforcement) Ordinance (Cap 46).  The Court of Appeal[31] held that they would not.  In my opinion this provides no assistance to Tor.  The purpose of section 5 is to prevent duplicated proceedings in Hong Kong.  The context is quite the opposite to the present case: in compliance with the exclusive jurisdiction clause in the loan documentation, the lender there had first obtained judgment in the Mainland, before initiating bankruptcy proceedings in Hong Kong.  If Tor had obtained judgment against Lam in New York, then Lu Yongliang would be relevant in showing that section 5 did not preclude Tor from bringing bankruptcy proceedings in Hong Kong.  The fact that the court, citing Jade Union §18 (quoted above), held that the bankruptcy petition was not “proceedings … on a cause of action” does not mean that Tor’s petition here is not a legal proceeding relating to the Agreement that engages the Exclusive Jurisdiction Clause.

67.Tor further submits that in a winding up or bankruptcy petition the court does not adjudicate upon the substantive rights between the parties.  Support for this proposition is drawn principally from Asia Master.  In that case, DHCJ William Wong SC considered that the presentation of a winding up petition does not result in the determination of any dispute between the petitioner and the respondent, and therefore does not result in any breach of the petitioner’s obligations under the arbitration clause, and does not cause any concern over protecting contractual bargains.[32]  With great respect, I am unable to agree.

68.First, in my opinion it is not correct to say that on the hearing of a winding up petition there will definitely not be any determination of the dispute.  The extent to which the court investigates the question whether or not the debt is disputed in good faith on substantial grounds is a matter of discretion.  The cases cited by the learned deputy judge in support of his conclusion[33] are all concerned with the situation where the court rejected the petition.  In that scenario there is of course no real determination of the dispute: the court will simply have found that there is a real dispute.  But where the court finds against the company, concluding that its defences do not raise any bona fide disputes on substantial grounds, there is no reason why that should not be regarded as a determination of the dispute: see Brinds Ltd & others v Offshore Oil N L & others (1986) 2 BCC 98916.  As Warren J said in Rusant Ltd, supra, at §20: “For the Companies Court to decide that there is no bona fide defence requires it to adjudicate on … the dispute.”[34]  In Jubilee International, supra, the court said the petition was “in effect, a summary judgment procedure” whereby the court was invited to resolve whether there was a dispute.  The court in Salford Estates described the exercise as a “summary judgment type analysis of liability for an unadmitted debt”.[35]  See also Fieldfisher LLP v Pennyfeathers Ltd [2016] BCC 697, §§25-27.

69.Secondly, it is true that even in that event, unlike an ordinary action, there will not be a monetary judgment into which the debt merges.  But there is no reason in principle why that determination cannot, like a decision granting summary judgment,[36] give rise to an estoppel in relation to the precise issues decided, if the usual conditions are satisfied.  The learned deputy judge referred to several authorities that show that a liquidator is not bound by, and may go behind, a judgment against the company, in his adjudication of a proof of debt.[37]  But this is a special power available to liquidators and trustees in bankruptcy, usually exercisable where there is a possibility of fraud, collusion, or miscarriage of justice. This power is available with regard not only to a determination of a debt on the petition, but generally to all judgments against the company or bankrupt: see Trustee in Bankruptcy of Lo Siu Fai Louis v Toohey [2005] 4 HKC 51 at §13; Ex parte Kibble (1875) LR 10 Ch App 373, 376;  In re Van Laun[1907] 1 KB 155, 163; [1907] 2 KB 23, 30.  Plainly it cannot sensibly be suggested that because of the existence of this power, no judgment against a company or a person, who is subsequently wound up or bankrupted, may be regarded as having determined a dispute.

70.Indeed, it has been held in New Zealand that a decision of the court upholding a statutory demand (which preceded the liquidation proceedings) did create an estoppel confirming the existence of the debt in question: Levin v Ikiua [2010] 1 NZLR 400, §§55-71.[38]  In Australia, it has been held that in adjudicating on a proof of the petition debt, a liquidator is bound by the estoppel arising from the determination on the petition in favour of the petitioner: Direct Acceptance Investments Pty Ltd v Blackwell (1995) 17 ACSR 89, 92 and Direct Acceptance Investments Pty Ltd v Blackwell (No 2) (1995) 13 ACLC 1251, 1253.  Young J put the matter in this way in the latter decision:

“ Unless there is fraud or collusion, in my view, where there has been a contested hearing which has determined that the person now putting forward a proof of debt is a creditor for the claim which that person makes, and on the basis of that determination the liquidator is appointed, the liquidator cannot deny the validity of the claim.”

It is unnecessary for us to decide whether this accurately describes the approach that should be adopted in Hong Kong in relation to the adjudication of proofs of debt.  The point for present purposes is simply that 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 to seek a determination of the dispute by the court.

71.Further, it should be noted that the deputy judge’s reasoning that the arbitration agreement is not engaged because it is for the liquidator to determine the dispute when it comes to the adjudication of proofs has been criticised by the Singapore Court of Appeal in AnAn Group at §79 as follows:

“ Problems of undercutting the parties’ pre-dispute bargain will be amplified if the court directs, on the basis that no triable issues are demonstrated by the alleged debtor, that the debtor be wound up. The judge in Dayang … considered that this would not affect the parties’ agreement to arbitrate, as the court would not, in so deciding, have determined the matter, since the liquidator would be the final arbiter of the dispute vis-a-vis the disputed debt (Dayang at [71]–[72] and [76]). But, the practical implication of this is that the court would then offload the decision-making function, which properly belongs to the arbitral tribunal, onto the liquidator, for determination via the proof of debt process. That the dispute is to be decided by the liquidator and not the court misses the point altogether. In either event, the dispute will not be decided by the parties’ agreed method of dispute resolution, ie, arbitration. This plainly raises the same problem of undermining the parties’ agreement.”

72.Tor also places reliance on what Barma J said in Jade Union at §18:

“ … A petition for the winding up of a company is quite different from an action between parties, in which the parties seek the court’s determination as to their respective rights and liabilities. By a winding up petition, a creditor invokes the court’s jurisdiction under the Companies Ordinance to wind up a company on one or more of the grounds set out in section 177(1) of that Ordinance. In doing so, it exercises a class right available to all of the company’s creditors. If a winding up order is made, the creditor will not necessarily have established any right to be paid, or to be admitted to proof in respect of, any particular amount. This is because it will not necessarily have obtained any adjudication from the court of its right to recover any particular amount from the company. It will still be obliged to submit a proof of debt, along with other creditors of the company, and following the adjudication of its proof by the liquidator, it will rank pari passu with all other creditors of the same class for a dividend to be paid out of the assets of the company.”

73.After the company is put into liquidation, the petitioning creditor must of course, like other creditors, lodge a proof of debt, but it is significant to note that the learned judge was careful to include the word “necessarily” in the above passage.  In winding up the company, the court may not have actually adjudicated upon the petition debt; all that it may often have done is to determine that, in spite of the company’s defences, the petitioner is a creditor for at least the threshold amount.  I do not think that Barma J intended to say that such a decision will not involve the determination of the disputes raised by the defences.  In any event I would with great respect disagree with that proposition, for the reasons given in this judgment.

Should the approach in ordinary actions be applied to winding up and bankruptcy proceedings?

74.I turn to the question of the effect of the Exclusive Jurisdiction Clause on the bankruptcy petition, and in particular whether the approach in ordinary actions as set out in The Pioneer Container, Donohue v Armco Inc and Noble Power and developed in Euromark, Hyundai, Deltatre, Lo Ka Lee Kelly and Shanghai Gopher should be applied.

75.It is often said that insolvency petitions are not proceedings to enforce a debt.  A petition results not in a judgment for the payment of money, but in an order for bankruptcy or winding up.  That process is class remedy, a statutory mechanism with the result that the debtor’s assets become subject to a statutory trust for the benefit of the creditors pari passu.  For a Hong Kong debtor, the High Court here is an appropriate, and often the only appropriate, forum for bringing a bankruptcy or winding up petition.  On a petition, the Hong Kong court is concerned to see whether or not the debtor is insolvent.

76.None of this is in dispute, but it is not inconsistent with recognising and giving effect to the dispute resolution mechanism agreed to by the parties before proceeding with an insolvency petition.  In one sense, such proceedings are not proceedings for enforcement of a debt, in that they do not result in any order for the payment of the debt.  But this does not mean they are not, in another sense, proceedings by which the petitioner seeks to recover his debt.  As explained by Harris J in Lasmos:

“ 12. … A petitioner is seeking to recover a debt. He does not do so by suing for a judgment, he does so by invoking the court’s insolvency jurisdiction, which will allow him to prove for the debt in a liquidation. …

25. … a creditor issues a petition for the purpose of recovering his debt, not out of some altruistic concern for the creditors of the company generally. The creditor does so because he believes (or for present purposes must reasonably be assumed to do so) this to be the most efficacious method of obtaining payment. Although one can find in the Hong Kong authorities including Hollmet statements that winding‑up proceedings are not a means of enforcing a debt this does not alter the purpose for which a petitioner issues a petition, namely, to recover payment of his debt, albeit through the collective insolvency regime that is engaged when a winding‑up order is made. In my view there is a material distinction between the purpose for which a creditor presents a petition and the interests of the general class of unsecured creditors, who have an interest in a potential winding up. This is illustrated by the impact the presentation of a petition has on limitation periods. It is well established that presentation of a petition stops time running in respect of debts relied on by a petitioner, but not other creditors. As Judge Paul Baker QC explains in the following passage in In re Cases of Taffs Well Ltd:

‘ … A petitioning creditor does not petition for the general good but rather in the hope of recovering his own debt or part of it. …’ ” (footnotes omitted)

77.Beyond this general difference in emphasis, there are two aspects that are analytically important for present purposes. First, although a principal question on a winding up petition is the solvency of the company since a company may be wound up if it is unable to pay its debts, there is a separate question whether the petitioner is a creditor because “until the creditor is established as a creditor he is not entitled to present the petition and has no locus standi in the Companies Court”. The established approach of the court is to reject a petition founded on a debt which is disputed in good faith and on substantial grounds: Mann v Goldstein [1968] 1 WLR 1091, 1099A; Stonegate Securities v Gregory [1980] 1 Ch 576, 580; Perak Pioneer Ltd v Carrian Holdings Ltd (CACV 110/1984; 18 July 1984); Bicoastal Corporation v Shinwa Co Ltd [1994] 1 HKLR 65, 67 (CA).

78.In other words, 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.  As Harris J said in Lasmos at §27:

“ 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.”

79.The same distinction was emphasised in Re International Tin Council [1987] Ch 419, where an arbitral award had already been obtained against the Council and the question arose whether a petition by the award-creditor for its winding up was “a proceeding in respect of the enforcement of an arbitration award” permitted by the Order in Council recognising the body.  Millett J said (at p 455G):

“ 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.”

80.In the same vein, the Singapore Court of Appeal stated in AnAn Group (at §71):

“ … when a dispute arises in relation to a debt that is subject to an arbitration agreement (as opposed to a claim which arises under the insolvency regime), the policy concerns of the insolvency regime are strictly not engaged. It is only when the debt is established to be due and owing to the creditor by way of arbitration, and that debt remains unsatisfied, that it can be said that the company is insolvent, such that the collective interest of the insolvent company’s creditors becomes a relevant consideration. In other words, the arbitration of the dispute vis-a-vis the debt is a necessary precondition to bringing the insolvency regime into the equation. There is thus strictly speaking no conflict of policy interests between the two regimes under such circumstances. This is especially so in a case such as the present appeal where there is only a single disputed claim against the debtor-company which is subject to arbitration.”

81.Secondly, let it be assumed that the class remedy, in the form of a winding up order, is available only in the Hong Kong court.[39]  Even so, it does not follow that the anterior question relating to the debt relied on for the petition, including whether or not the debt is disputed in good faith on substantial grounds, may not or should not be determined through the agreed dispute resolution mechanism.  In relation to contributories’ petitions for winding up and petitions for relief from unfairly prejudicial conduct of the affairs of a company,[40] it is well established that the fact that the relief itself can only be granted by the court provides no reason for the underlying dispute not to be determined by arbitration in accordance with the agreement of the parties.  In Re Quiksilver Glorious Sun JV Ltd [2014] 4 HKLRD 759, which concerned a contributory’s petition for winding up a company on the just and equitable ground, Harris J held, applying the English Court of Appeal’s decision in Fulham Football Club (1987) Ltd v Richards, that the petition should be stayed to allow the underlying dispute between the shareholders to be determined in accordance with the arbitration clause contained in their shareholders agreement.  See also: Re CEIBS Publishing Group Ltd [2021] HKCFI 3513; Bridgehouse (Bradford No 2) Limited v BAE Systems Plc [2020] EWCA Civ 759; Tomolugen Holdings Ltd v Silica Investors Ltd [2015] SGCA 57; WDR Delaware Corporation v Hydrox Holdings Pty Ltd [2016] FCA 1164.

82.In shareholders’ petitions, this approach may not be appropriate where there are issues so inextricably bound up with the question of remedies lying within the exclusive province of the court that it makes no sense to refer the former to another tribunal, or there may be numerous complaints forming one continuing narrative of which only some fall within the dispute resolution clause.[41] The position with creditors’ petitions is likely to be neater: the question whether the disputed debt is owed can readily be resolved as a discrete issue in the agreed forum under the governing law of the parties’ relationship without impinging on the separate question whether the company should in the discretion of the Hong Kong court be wound up under Hong Kong insolvency law principles.

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: see Noble Power at §67.  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.  Even where a stay is refused for strong cause shown, the breach may found a claim for damages.[42] 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.

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; see in the context of arbitration clauses: Salford Estates, §40; But Ka Chon, §70; AnAn Group, §§61-63, 72-74.

85.It seems to me 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.  As evidenced by the approach adopted in the more recent cases on arbitration clauses (§60 above), 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.  As to the concern for the creditors’ statutory right to present an insolvency petition, in my respectful opinion it is a matter primarily within a party’s autonomy and, as explained in §§92-94 below, the proposed approach is not precluded by public policy.

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.  As in the case of ordinary actions, it is neither possible nor desirable to define what may constitute strong reasons.  One can conceive of cases where the debtor may be incontestably and massively insolvent quite apart from the disputed petition debt, or it may for other reasons be a menace to commercial society if allowed to continue to trade, or there may be other creditors seeking a winding up whose debts are not subject to any jurisdiction agreement, or the assets may be in jeopardy, or there may be a need to investigate potential wrongdoings, or the effect of a dismissal or stay of the petition would be to deprive the petitioner of a real remedy or would otherwise result in injustice.  Under this approach the court retains flexibility to deal with the case as the circumstances require, taking into account other powers of the court that may become relevant, such as the power to allow the petitioner to be substituted by other creditors[43] and the power to appoint a provisional liquidator[44] or interim trustee.[45]

87.In the present case, the Agreement confers exclusive jurisdiction on the New York and US courts. The Agreement is governed by New York law.  The Exclusive Jurisdiction Clause, which was freely entered into, was emphasised by the parties in capital letters in the Agreement and specifically re-affirmed (again in capital letters) in each of the amendment agreements.  The clause is engaged by the disputes raised in the bankruptcy proceedings, as discussed above.  There is no suggestion of any insolvency on Lam’s part other than in respect of Tor’s claim, and no other creditor has taken part in the bankruptcy proceedings, so that the petition involves in reality a fight between Tor and Lam.  Tor has itself relied on the Exclusive Jurisdiction Clause in trying to put a stop to the Texas proceedings brought by Lam.  Tor’s affidavit below stated that the matters raised by Lam in disputing the indebtedness (including at least the matters relating to the waiver argument) fell within the Exclusive Jurisdiction Clause.[46]  Pursuant to the clause Lam had commenced the New York proceedings which were extant at the time of the Judgment below and are apparently still afoot.  For the reasons given herein Tor should in my judgment be held to its agreement, and the bankruptcy petition dismissed or stayed, unless Tor demonstrates strong reasons to the contrary, which it has not.  Whether the petition should be stayed or dismissed is dealt with at the end of this judgment.

88.I shall in addition explain below why I do not, with great respect, agree with several reasons relied upon by the Judge or advanced by Tor in support of the Judgment below.

Whether there is a dispute to be resolved in the agreed forum

89.One of the points that have been made is that where there is no genuine defence, there is no dispute to be referred to the foreign court.  As the Judge put it:[47]

“ unless and until the company/debtor is able to demonstrate to the Court that there is a bona fide dispute on substantial ground in respect of the debt, there is no proper basis for the company to contend that there is a dispute which must be litigated in accordance with the contractually agreed forum. Putting it in another way, it would be a pointless exercise to require the creditor to first obtain an award or a judgment from the agreed forum when there is no real dispute on the debt.”

90.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.  The point of the clause, however, is that the court should not embark upon a review of the merits of the dispute in the first place, as in the proper approach for stay of an ordinary action on the ground of an exclusive jurisdiction clause discussed above.  The reasons, most of which apply equally in the context of insolvency petitions, may be summarised as follows:

(1)  The ordinary meaning of “dispute”, where the agreement in question requires litigation of any dispute to be brought in a specified foreign court, is that there is a dispute when one party’s claim is not admitted by the other party: Hayter v Nelson and Home Insurance Co [1990] 2 Lloyd’s Rep 265, 268; Vinmar, §124.

(2)  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, and that while some disputes may be evenly balanced, others may be one-sided.  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: see Deltatre, §§83-84; Lo Ka Lee Kelly, §37; Shanghai Gopher, §54.

(3)  Unless one construes the exclusive jurisdiction clause to apply only to more arguable disputes, which is usually not the natural and proper meaning of the agreement, 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: Euromark, §35.

(4)  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.

(5)  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 (as in the present case): see AnAn Group, §78.  As stated in Briggs, Civil Jurisdiction and Judgments (7^th ed) at §22.25 (in the context of staying proceedings based on forum non conveniens):

“ Another court may apply a different conflicts rule, or may admit different evidence, or may position the burden of proof differently; or may for a variety of proper reasons conclude that the defendant has an arguable or a good defence. In any such case it is undesirable for an English court to conclude that its assessment of who will win at trial is the only one; the outcome may well be affected by the decision where the case is to be fought. To conclude that, because the claimant is going to win, there is no issue as to where the natural forum might be is to put the cart before the horse, which is not generally a good idea.”

(6)  The same may be said with regard to the statement that it would be “pointless” to require the creditor to obtain a judgment in the agreed forum when there is no real dispute on the debt. Whether there is a debt is a matter that the parties have agreed, for reasons which appeal to them, should be resolved by their chosen forum.

(7)  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 stay, even if the plaintiff has issued a cross-summons for summary judgment: Hanil Bank & others v Societe Generale & others [1993] 1 HKLR 308, 317-318.  It would be very odd if a defendant who had the additional benefit of an exclusive jurisdiction clause should be in a worse position: Vinmar, §§107-108.

91.In my opinion, therefore, the “no real dispute” argument is not a valid reason against adopting the approach adumbrated above.

Fettering statutory right

92.Tor has argued that adopting an approach analogous to the Salford Estates and Lasmos approach 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: But Ka Chon §63-67; Re Sit Kwong Lam [2019] 2 HKLRD 924, §§22-27.  In her Judgment the Judge also said that the contract between the parties “does 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.”[48]  As discussed above, however, an exclusive jurisdiction clause does not necessarily preclude the court from determining the application for an order for winding up or bankruptcy as opposed to the question whether the petitioner has the requisite locus by being owed the disputed debt.

93.On the question whether the public policy against fettering a statutory right is called into play, I find with respect the analysis by DHCJ William Wong SC in Asia Master, at §118-127, compelling.  In summary, he pointed out that creditors’ rights are creatures of contract, not creatures of statute.  Drawing from a number of English, Canadian and Singaporean decisions, he considered 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.  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.  The case of Re Greater Beijing Region Expressways Ltd [1999] 3 HKLRD 862, referred to in both But Ka Chon and Re Sit Kwong Lam and relied on by Tor, was concerned with a provision in a shareholders’ agreement that purported to bind all present and future shareholders and thus acquired an elevated status akin to a regulation in the articles of the company.  It was not authority for the proposition that any personal contractual obligations assumed by a person limiting the exercise of his rights to present a winding up or bankruptcy petition will be unenforceable as being a fetter on statutory rights.

94.In my opinion, there are no public policy concerns in relation to the curtailment of creditors’ rights against adopting the approach set out above.

Case law on the effect of exclusive jurisdiction clauses on insolvency proceedings

95.I turn to the authorities on the question.  The first point to note is that there is no reasoned decision on the point in Hong Kong.  In her Judgment, the Judge said she was inclined to agree with Tor’s submission that there is a settled understanding of the law that an exclusive jurisdiction clause does not prevent a winding up or bankruptcy petition from being presented in an appropriate jurisdiction.  In support of this contention Tor had cited French, Applications to Wind Up Companies (4^th ed), §7.637, which states:

“ The fact that a creditor petitioner and the company sought to be wound up have agreed that a court outside England and Wales is to have exclusive jurisdiction to decide disputes about the debt on which the petition is based does not preclude the English court from deciding whether there is a dispute about the debt sufficient to prevent the winding-up petition proceeding.”

96.Two English cases are cited in this passage: BST Properties Ltd v Reorg-Apport Penzugyi RT [2001] EWCA Civ 1997 and Citigate Dewe Rogerson Ltd v Artaban Public Affairs Sprl [2009] EWHC 1689 (Ch).

97.In BST Properties, the company sought to strike out a winding up petition in England on the ground that its contract with the petitioner contained a provision “stipulating the exclusive competence” of the court in Hungary.  The application was dismissed at first instance, but Chadwick LJ gave leave to appeal, saying that in the light of that clause he found it impossible to say there was no real prospect of success.[49]  On the appeal itself, however, the point was dismissed in short order.  Jonathan Parker LJ, with whom Dyson LJ agreed, simply said:

“ … whether or not proceedings raising a dispute as to the effect of the loan agreement could be stayed on the basis of clause 18, that does not in my judgment affect the question which was facing the Companies Court, namely whether the petition debt is bona fide disputed on substantial grounds.”

It should moreover be noted that the company was not legally represented and there was no real argument advanced on the point.  The decision was given ex tempore on 13 December 2001, the day when the House of Lords gave its decision in Donohue v Armco Inc, and well before Salford Estates, Lasmos, and AnAn Group.  For all these reasons and with great respect, I am unable to place much weight on this authority.

98.In Citigate Dewe, a creditor brought proceedings in Belgium against the company claiming the payment of outstanding invoices under an agreement.  The agreement was expressed to be governed by Belgian law; and “any dispute relating to it was to be subject to the jurisdiction of the Belgian courts”.[50] After the creditor served a statutory demand on it, the company applied to the English court for an order to restrain the presentation of any winding up petition founded on that demand.  Reliance is placed by Tor on §35 of the judgment of HH Judge Hodge QC which read as follows:

“ … I have already decided that the appropriate, and only appropriate, forum for winding-up proceedings in relation to the company is the Companies Court in this jurisdiction. In those circumstances, it does not seem to me that it can constitute an abuse of the process, absent any bona fide dispute as to the validity of the invoices, for the respondent to invoke the winding-up jurisdiction of the Companies Court here. I simply cannot see that it is an abuse of the process for the respondent, if otherwise entitled, to invoke the class remedy inherent in the jurisdiction to wind-up a company registered in England and Wales.”

99.It should be noted that there was no discussion in the judgment as to whether the clause in question was an exclusive jurisdiction clause, and the answer is not apparent from the description in the judgment.  Nor was there any argument based on an exclusive jurisdiction clause.  What was argued instead was: (1) the Companies Court was obliged under Council Regulation (EC) 44/2001 to decline jurisdiction; (2) any winding up petition would, by reason of the existence of proceedings in Belgium relating to the same debts, amount to an abuse of process; and (3) the debts in question were bona fide disputed on substantial grounds.[51]  I do not therefore think that assistance can be derived from that decision on the present question.

100.In the British Virgin Islands, in Sparkasse Bregenz Bank AG and in the Matter of Associated Capital Corp (BVI Civil Appeal No. 10 of 2002), there was an exclusive jurisdiction agreement in favour of the courts in Austria.  The judge found that there was a genuine and substantial dispute over the debt and dismissed the winding up petition brought in the BVI against the company.  The question relevant here did not therefore arise in that case. On appeal, the Court of Appeal said that it was the judge’s duty to determine whether there was a genuine and substantial dispute in respect of the debt, but also said that “a winding up order should not be made where the company is claiming that it has a genuine and substantial dispute with the creditor to the extent or in excess of the alleged debt, and that dispute is to be determined by another Court or tribunal”.

101.In De Wet v Vascon Trading Ltd (BVIHCV (COM) 2011/0129, 6 December 2011), relied upon by Tor, a company opposed a creditor’s application for the appointment of liquidators on the ground that the contract between the parties contained an arbitration clause. Bannister J, departing from a previous decision of his own[52] which, he said, misinterpreted Sparkasse Bregenz Bank, and following the English case of BST Properties, held that the court must first decide on the evidence before it whether there is a dispute at all, and that if the evidence discloses no ground at all for challenging the debt, then it is irrelevant that there may be an exclusive jurisdiction or arbitration agreement.[53]

102.That decision may be contrasted with that of Jack J in Re Fair Cheerful Ltd; IS Investment Fund Segregated Portfolio Co v Fair Cheerful Ltd (BVIHC (COM) 2020/0034; 16 July 2020). There 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 his discretion,[54] Jack J considered that he should not decide whether there was a genuine and substantial dispute in respect of the debt, stating:[55]

“ 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.”

103.Tor has also referred to the Australian case of Re International Materials & Technologies Pty Ltd [2014] NSWSC 168, which was an application by a company to set aside a creditor’s statutory demand served on it.[56] There the jurisdiction clause was asymmetrical: it only obliged the company to bring any action relating to the agreement in the courts of Michigan, United States.  It did not avail the company because it did not constrain the other party from instituting proceedings anywhere.  Furthermore, the clause regulated where actions could be brought and, as such, had no relevance to the service of a statutory demand, which was an “extra-curial step” and neither a proceeding nor an action.[57]  In contrast, where actual proceedings have been brought upon a statutory demand, it has been said that the International Arbitration Act 1974 (Cth) would operate to stay them: SMEC International Pty Ltd v CEMS Engineering Inc [2001] NSWSC 459, §36.

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.

Conclusion and disposition

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: AnAn Group, §§103-113; Salford Estates, §42.

106.Accordingly, I would allow this appeal, set aside the orders made by the Judge, and dismiss Tor’s petition.  I would make an order nisi that Tor do pay Lam’s costs of the appeal and that there be no order as to costs below.

Hon Chow JA:

107.I have the benefit of reading in draft the judgment of G Lam JA, with whom Barma JA agrees.  I agree that the present appeal should be allowed, but for different reasons, which I shall state briefly.  I gratefully adopt the factual background in G Lam JA’s judgment, and also the expressions and abbreviations as defined in the judgment.

108.Ms Rachel Lam SC’s principal argument in support of the appeal is that the Lasmos approach concerning the effect of arbitration clauses on winding-up and bankruptcy petitions should be extended and applied to the situation involving an exclusive jurisdiction clause.  It is not, I understand, the judgment of G Lam JA that the approach advocated by Ms Lam should be followed.  Instead, His Lordship is of the view that the court’s approach to stay of an ordinary action based on an exclusive jurisdiction clause should be adopted and applied to winding-up and bankruptcy proceedings as well.

109.For my part, I am not prepared to accept the approach advocated by Ms Lam, for two reasons.  First, the Court of Appeal (constituted by Kwan VP and Cheung and Chu JJA) has twice recently declined to rule on the correctness of the Lasmos approach because it was not necessary to do so on the facts of those cases (see But Ka Chon v Interactive Brokers LLC [2019] 4 HKLRD 85, at §§57-73, and Sit Kwong Lam v Petrolimex Singapore Pte Ltd [2019] 5 HKLRD 646, at §§33-39).  Acceptance of Ms Lam’s submission would necessarily involve an endorsement of the Lasmos approach.  Since the present case does not concern any arbitration clause, it is not necessary to rule definitively on the correctness of the Lasmos approach, and it would not be appropriate to do so in the circumstances.

110.Second, 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.

111.In respect of the approach favoured by G Lam JA, viz, adopting and applying the court’s approach to stay of an ordinary action based on an exclusive jurisdiction clause to winding-up and bankruptcy proceedings, I also have some reservations.  I can see the force of the argument in favour of adopting a uniform approach in the two situations mentioned by His Lordship at §§74-86 of his judgment.  Nevertheless, 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, as well as the wider public interest considerations pertaining to a bankruptcy/winding-up petition (see Hollmet AG v Meridian Success Metal Supplies Ltd [1997] 4 HKC 343, at 347 per Rogers J (as he then was); Re Sky Datamann (Hong Kong) Limited, HCCW 487/2001, at §§7-12 per Yuen J (as she then was); Re Jade Union Investment Limited, HCCW 400/2003, at §§16-18 per Barma J (as he then was); Re Sit Kwong Lam (Debtor) [2019] 2 HKLRD 924, at §§21-27 per Ng J; But Ka Chon, ante, at §§59, 63-66 and 68-70 per Kwan VP).

112.In my view, the present appeal can be disposed of on a narrower basis.  As a matter of principle, the first question for consideration in any given case is whether the bankruptcy/winding-up proceedings are caught by the relevant exclusive jurisdiction clause upon its true construction.  In this regard, the wording of the exclusive jurisdiction clause can be material.  For example, a clause which simply requires any dispute arising out of an agreement to be resolved by an action to be brought in a specified foreign court may not, upon its true construction, apply to a bankruptcy/winding-up petition, or to a situation where there is, or can be, no bona fide dispute of the relevant debt on substantial grounds.  If the answer to the above question is “no”, there would be no reason to either dismiss or stay the proceedings, and the petition should be allowed to proceed. On the other hand, if the answer is “yes”, the court will have a discretion whether to dismiss or stay the proceedings.  How the discretion ought to be exercised must depend on the circumstances of the case.  I do not consider that an exclusive jurisdiction cause should be given conclusive, or near conclusive, weight in the court’s exercise of its discretion.  Neither would it be right to focus solely on the question of whether there is a bona fide dispute of the debt on substantial grounds.  Wider considerations such as whether the debtor is obviously insolvent, whether there is a need to protect the assets of the debtor, or to immediately put in place a regime to safeguard the documents/records, or investigate the affairs or transactions, of the debtor, as well as the interests of the general body of creditors, may also be taken into account in the exercise of the court’s discretion.  The list of relevant factors cannot be exhaustively stated.  Nor would it be desirable to do so.

113.In the present case, the exclusive jurisdiction clause is not confined to actions to enforce the parties’ obligations under the Agreement (including an action to recover monies due thereunder), but covers a wide range of proceedings (“all legal proceedings arising out of or relating to this Loan Agreement or the other Loan Documents or the transactions contemplated hereby or thereby”).  For the reasons mentioned by G Lam JA at §§61-65 of his judgment, I agree that Tor’s petition is caught by the exclusive jurisdiction clause in the present case.  Having reached that conclusion, the court should next consider whether to exercise its discretion to dismiss/stay the bankruptcy proceedings, or permit the bankruptcy petition to proceed, having regard to all relevant circumstances. The Judge did not do so.  While the Judge apparently accepted that the existence of an exclusive jurisdiction clause (or an arbitration clause) was a factor which would be taken into account by the court when considering a winding-up/bankruptcy petition, she took the view that “unless and until the company/debtor is able to demonstrate to the Court that there is a bona fide dispute on substantial ground in respect of the debt, there is no proper basis for the company to contend that there is a dispute which must be litigated in accordance with the contractually agreed forum” (§49 of the Judgment).  In other words, the Judge seems to have adopted the approach that unless it can be shown that there is a bona fide dispute of the debt on substantial grounds, the winding-up/bankruptcy petition should be allowed to proceed.  Such an approach would effectively render the exclusive jurisdiction clause immaterial or irrelevant.

114.In my view, the Judge has adopted a wrong approach to the exercise of her discretion, thereby entitling the Court of Appeal to exercise the discretion afresh.  For the reasons mentioned by G Lam JA at §§87 and 105 of his judgment and also taking into account the fact that relief under the originating summons issued by CP Global/CP Assets against Lam and Cindy Fung on 5 October 2020 in HCMP 1647/2020 have been granted (see §§1(2) and 3 of the Judgment), I agree that Tor’s petition should be dismissed.  I also agree with the order to be made in this appeal mentioned by G Lam JA at §106 of his judgment.

Mr Jose Maurellet SC and Mr Nick Luxton, instructed by Ropes & Gray, for the Petitioner / Respondent

Ms Rachel Lam SC and Mr Terrence Tai, instructed by Hill Dickinson Hong Kong, for the Debtor / Appellant