In a recent landmark case, the Court of Final Appeal in Hong Kong (CFA) clarified its approach to bankruptcy proceedings where the disputed petition debt arises from a contract with an exclusive jurisdiction clause (EJC) favouring a foreign court.

Background

The bankruptcy proceedings related to a disputed debt due under a credit agreement with an EJC favouring New York. The Hong Kong Court of Appeal (CA) upheld the EJC, setting aside the bankruptcy order to allow the dispute to be determined under the agreed jurisdiction. The applicant appealed to the CFA.

Decision

The CFA affirmed the CA's decision, endorsing contractual autonomy but recognising that an EJC does not automatically impact the court's bankruptcy jurisdiction. The CFA stated that, absent countervailing factors, the EJC should be upheld and the Hong Kong courts should generally abstain from exercising bankruptcy or insolvency jurisdiction, taking into account factors such as the risk of insolvency affecting third parties and the presence of bona fide disputes. The CFA found no adverse effects on the sole creditor's interests in this case.

Going forward

Creditors seeking to initiate bankruptcy proceedings based on disputed debts governed by an EJC may face greater difficulty persuading the Hong Kong courts to hear their petitions unless compelling reasons exist. Creditors should review their agreements and consider the scope of any EJC or arbitration clause, as well as the available enforcement actions to recover their debts.

Find out more

To discuss the issues raised in this article in more detail, please contact a member of our Restructuring & Insolvency team.

For a discussion of the effect of EJC's in English winding up proceedings see our alert here.

Re Guy Kwok-Hung Lam [2023] HKCFA 9