Understanding The Trends: A Review Of Insolvency Litigation In Hong Kong In 2023

Published date15 January 2024
Subject MatterFinance and Banking, Insolvency/Bankruptcy/Re-structuring, Technology, Debt Capital Markets, Financial Services, Insolvency/Bankruptcy, Fin Tech
Law FirmMayer Brown
AuthorMr Billy Lam, Wilson Fung, Johnson C. Y. Ng and Emily H. K. Chen

Insolvency litigation witnessed intriguing developments across multiple aspects in Hong Kong in 2023, ranging from the court's updated Practice Direction on Bankruptcy and Winding-Up Proceedings to on-going debate surrounding the interplay between insolvency proceedings and arbitration clauses.

In this Legal Update, we examine major developments that unfolded. The key takeaways are:

  1. It is now clear that where there is an exclusive jurisdiction clause in the underlying agreement providing for a foreign jurisdiction, the court will generally hold parties to their bargain and stay or dismiss a creditor's bankruptcy/winding-up petition if the debt is disputed. But it's uncertain whether the same approach applies to underlying agreements with arbitration clauses.
  2. The court confirmed that it would take a broad and macroscopic assessment when considering an appeal against a decision to admit or reject a proof of debt.
  3. An updated Practice Direction adds new methods of service for a statutory demand in bankruptcy cases and clarifies various aspects of case management for insolvency proceedings.
  4. The court has jurisdiction to grant an Order to compel a former director of a company in liquidation with centre of main interest in Hong Kong to ratify the replacement of himself as sole director of subsidiaries of the company by a new director.
  5. Keepwell deeds are enforceable in Hong Kong, and the timing of breach is crucial.
  6. For the first time, the court recognized cryptocurrency as property available for distribution by liquidators.
  7. Hong Kong courts have consistently shown willingness to issue letters of request for crossborder recognition and assistance.

Interplay between Winding-up Proceedings and Jurisdiction and Arbitration Clauses

While a creditor commencing winding-up proceedings is enforcing a class remedy which affects all creditors, how far a creditor can do so where there is an exclusive jurisdiction clause providing for a foreign jurisdiction (EJC), or arbitration agreement in the underlying contract from which the debt arises, has been recently considered by the Hong Kong courts.

In its landmark decision in Guy Kwok-Hung Lam v Tor Asia Credit Master Fund LP [2023] HKCFA 9, the Court of Final Appeal importantly held that in the ordinary case of an EJC - absent countervailing factors such as the risk of insolvency affecting third parties, or a dispute that borders on the frivolous or abuse of process - the petitioner and debtor ought to be held to the terms of their contract (known as the "Guy Lam Approach").

In other words, where there is an EJC, the debtor would not be required to demonstrate a bona fide defence on substantial grounds in order to defeat a bankruptcy petition.

There is no doubt that the Guy Lam Approach applies to both bankruptcy and winding-up proceedings. However, an important question then is whether the Guy Lam Approach also applies to winding-up proceedings involving an underlying agreement with an arbitration clause.

In this regard, there have been inconsistent decisions in the Court of First Instance by Company Judges:-

  1. On one hand, in Re Simplicity & Vogue Retailing (HK) , Ltd [2023] HKCFI 1443 and in Re NT Pharma International Co., Ltd [2023] HKCFI 1623, the Hon Madam Justice Linda Chan held that the Guy Lam Approach does not apply to arbitration clauses and made winding-up orders against both companies.
  2. However, in Re Shandong Chenming Paper Holdings Limited [2023] HKCFI 2065, Harris J held that the Guy Lam Approach does apply to arbitration clauses. In a footnote of the judgment, the Hon Mr Justice Harris expressly referred to Simplicity and indicated his agreement to the submission by the company that Linda Chan J's ruling was wrong, as the Court of Final Appeal's view was clearly that the Guy Lam Approach should be taken to the application of an EJC and an arbitration clause.

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