Insolvency Applications: Exclusive Jurisdiction Clauses and Arbitration Clauses – A Story of Two Clauses

The interaction between an arbitration clause and a creditor’s request for liquidation is a thorny question which has given rise to a series of cases, notably Lasmos Ltd v Southwest Pacific Bauxite (HK) Ltd [2018] 2 HKLRD 449, Re Asia Master Logistics Ltd [2020] 2 HKLRD 423 and Mais Ka Chon vs. Interactive Brokers LLC [2019] 4 HKLRD 873. While the last two cases doubted the ratio of Lasmos that an arbitration clause governing the claim claim should generally lead to the dismissal of the claim, the Lasmos case remains Hong Kong law at the time of this article.

In Re Guy Kwok-Hung Lam [2021] HKCFI 2135, the Court was faced with a slightly different question: how the existence of an exclusive jurisdiction clause (“EJC”) In favor of a foreign jurisdiction affect the exercise by the Court of its bankruptcy jurisdiction? Notably, the Court concluded that none of the defenses raised by the debtor disclose a good faith dispute. However, the debtor argued that in order to respect the freedom of contract between the parties, even when the debtor has no arguable defense to the creditor’s claim, the creditor must establish its liability in the jurisdiction stipulated by the EJC before filing for bankruptcy.

The court rejected the debtor’s argument. In particular, four points deserve to be underlined.

First, Linda Chan J accepted the creditor’s argument (at § 47) that the authorities of the Commonwealth (including the English, New South Wales and BVI cases) have a fairly well established view that a EJC does in itself prevent a petition for liquidation from being brought in an appropriate jurisdiction.

Second, Her Majesty explained that the reason the EJC does not have this effect is because the Court is concerned about the place of the creditor when it comes to determining whether there is a good faith dispute concerning the debt on which the claim is based (in §48). His Lordship held (citing Re Peveril Gold Mines [1898] 1 Ch 122) that the competence to liquidate a company is conferred by law as a statutory condition annexed to the constitution of the company, and therefore cannot be hindered by an EJC (in §47). The Court further noted that unless the debtor is able to demonstrate the existence of a good faith dispute on substantial grounds, there is no valid basis for the debtor to claim that he there is a dispute which must be argued in accordance with the contractually agreed forum (see § 49).

Third, while setting out counsel’s arguments that the Lasmos should not be extended to EJCs (called “the 2nd point”) and that the Lasmos the case is unfounded in itself (called “the 3rd point”), it was not necessary for the Court to deal with these arguments and the cases which doubted Lasmos. The Court seems to have distinguished the CJE from arbitration clauses and refrained from deciding whether the Lasmos approach is correctly decided.

Finally and significantly, although the Court was faced with only an EJC rather than an arbitration, Madame Madame’s reasoning could arguably be considered to apply to an arbitration clause. The reasoning would be consistent with the analysis of the Court of Appeal in But Ka Chon that the jurisdiction of liquidation cannot be hindered by contract.

During the analysis, Madame la Seigneurie also referred to the arbitration clauses where she said that “the fact that the parties have agreed to an arbitration clause or a CJE is only one factor that would be taken into account by the court when considering a request for liquidation / bankruptcy”(In §49). However, unlike Master of Asia and But Ka Chon where the point did not arise for determination, the determination of Madame la Seigneurie forms the report of Re Guy Kwok-Hung Lam compared to EJC. The result is that the law as it stands now would potentially apply different approaches to arbitration clauses and EJCs – the question of whether Lasmos is a good law remains an ongoing issue to be resolved on another occasion.

Jean Hui and Tommy cheung appeared for the debtor at the first hearing.

Thelma J. Longworth