Revisiting Exclusive Jurisdiction Clauses And The BVI High Court's Winding Up Jurisdiction In View Of Re Guy Kwok-Hung Lam

• Jurisdiction: United States,Federal
• Law Firm: Forbes Hare
• Subject Matter: Litigation, Mediation & Arbitration, Real Estate and Construction, Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy, Arbitration & Dispute Resolution, Construction & Planning
• Author: Mr Richard Baird
• Published date: 31 May 2023

Forbes Hare

In a decision handed down earlier this month, Re Guy Kwok-Hung Lam [2023] HKCFA 9, Hong Kong's highest court ruled that an exclusive jurisdiction clause prevented a creditor from being able to petition for a debtor's bankruptcy. Because the contract from which the debt arose provided for disputes to be determined in New York, the Court of Final Appeal held that the creditor needed to obtain judgment in New York before it could rely on the debt to prove the debtor's inability to pay.

Importantly, it was not necessary for the debtor to show that the grounds on which he disputed the debt were substantial ones. The Court accepted in principle that a debtor might be prevented from relying on an exclusive jurisdiction clause to mount a completely frivolous defence, as this would be an abuse of process, but the facts of the case were not of that character. It therefore declined to determine, in the exercise of its discretion, whether the grounds of the dispute were substantial. Assessing substantiality for this purpose would have been the equivalent of undertaking a summary judgment determination, but the parties had agreed that that determination must be made in a different forum. Accordingly, the creditor's appeal was dismissed, and the petition stood dismissed pursuant to the orders of the intermediate appellate court below.

Could the same outcome be reached in a BVI case? On current authority, the answer would be no. However, this issue has not been considered by the Privy Council, and the door is not closed to future legal development. The time may well be ripe for courts exercising jurisdiction in the BVI to revisit the interaction of exclusive jurisdiction clauses with the exercise of their insolvency and bankruptcy jurisdiction.

The Sparkasse approach

In addressing the position under BVI law, the starting point is the decision of the Court of Appeal for the Eastern Caribbean in Sparkasse Bregenz Bank AG v Associated Capital Corporation (Civil Appeal No. 10 of 2002; 18 June 2003). This case was brought under the predecessor legislation to the BVI's current Insolvency Act, 2003. The petitioner argued that a BVI company was insolvent because it was unable to pay its debts; specifically, an unpaid debt owing to the petitioner under a contract. The company responded that that the alleged debt was disputed and that, as the contract contained an exclusive jurisdiction clause requiring disputes to be determined in Austria, a winding up order could not be made until the Austrian Court had resolved the dispute.

In an oft-cited passage, Byron CJ held that (at [3]):

"The law governing the making of winding up orders is well settled and could easily be set out at this stage. The Court will order a winding up for failure to pay a due and undisputed debt over the statutory limit, without other evidence of insolvency. If the debt is disputed, the reason given must be substantial and it is not enough for a thoroughly bad reason to be put forward honestly. But if the dispute is simply as to the amount of the debt and there is evidence of insolvency the company could be wound up. To fall within the principle, the dispute must be genuine in both a subjective and objective sense. That means that the reason for not paying the debt must be honestly believed to exist and must be based on substantial or reasonable grounds. Substantial means having substance and not frivolous, which disputes the Court should ignore. There must be so much doubt and question about the liability to pay the debt that the Court sees that there is a question to be decided. The onus is on the company to bring forward a prima facie case which satisfies the Court that there is something which ought to be tried either before the Court itself or in an action or by some other proceeding. A creditor who has served a statutory notice on the company is not entitled to a winding up order if the company bona fide disputes the debt and there is no evidence of the insolvency of the company. If the existence of the debt on which the winding up petition is founded is disputed on grounds showing a substantial defence requiring...