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Court of First Instance draws distinction between arbitration clauses and exclusive jurisdiction clauses in winding up proceedings

Further to our recent news update on the Court of Final Appeal judgment in Re Guy Kwok-Hung Lam [2023] HKCFA 9 (“Guy Lam“), on 30 May 2023, in Re Simplicity & Vogue Retailing (HK) Co., Limited [2023] HKCFI 1443, the Court of First Instance considered the effect of Guy Lam in the context of arbitration clauses in winding up proceedings, and remarked that the ratio in Guy Lam only applies to exclusive jurisdiction clauses, but not to arbitration clauses.

In Re Simplicity & Vogue Retailing (HK) Co., Limited, the subject company acted as the guarantor to discharge obligations of an issuer of certain convertible bonds under a bond instrument. Upon the issuer’s default, the company failed to satisfy a statutory demand within time limit and a petition was presented to wind up the company. The decision by Linda Chan J concerned the application by the company to, among other things, file an affirmation in opposition to the petition out of time and adjourn the petition hearing.

The court held that, as the company failed to demonstrate any good reasons to justify the extension of time or the adjournment sought, there was no proper basis for the court to grant the company’s application, and accordingly, granted a winding-up order. In course of her decision, Linda Chan J also dealt with the grounds raised in the proposed affirmation in opposition, namely:

  1. there was a bona fide dispute as to whether the guarantee had been discharged by reason of a variation of the principal contract between the petitioner and the issuer (Discharge Ground); and
  2. there were arbitration clauses in both the bond instrument and in the guarantee such that the dispute should be referred to arbitration (Arbitration Ground).

In respect of the Discharge Ground, the court found that it was wholly without merit and consequently there was no proper basis to require the parties to refer the “dispute” to arbitration, even if the approach in Guy Lam were to be applied.

In respect of the Arbitration Ground, the court remarked that the ratio in Guy Lam (namely that in an ordinary case of an exclusive jurisdiction clause, absent countervailing factors such as the risk of insolvency affecting third parties and a dispute that borders on the frivolous or abuse of process, the petitioner and the debtor ought to be held to their contract) only applies to exclusive jurisdiction clauses, but not to arbitration clauses.  As far as arbitration clauses are concerned, the principles set out in the But Ka Chon v Interactive Brokers LLC [2019] 4 HKLRD 85 and Sit Kwong Lam v Petrolimex Singapore Pte Ltd [2019] 5 HKLRD 646 should be followed, namely whether or not there is a bona fide dispute on substantial ground, and in that context, the court will also consider whether the 3 requirements in Lasmos are satisfied. The Court does not read Guy Lam as laying down any general rule that if the agreement which gave rise to the petitioning debt contains an arbitration clause and there are no supporting creditors to the petition, the court must dismiss or stay the winding-up petition. To invariably refuse to consider the merit of the “defence” and require to parties to litigate their dispute in arbitration is to adopt a mechanistic approach and fetter the exercise of the court’s discretion. Absence any genuine “dispute” in respect of the debt, as in this case, there is no proper basis to require the parties to refer their “dispute” to arbitration.

It should be noted that the observations re Guy Lam are, strictly speaking, obiter, as the court has already concluded that there is no proper basis to grant the company’s application to adjourn the petition hearing and the Discharge Ground is without merit. Nevertheless, the arguments on Guy Lam were considered “in view of the importance of the point which arises in many cases coming to the Companies Court.” Given the state of flux in this area of law, it may be expected that more cases concerning the effectiveness of arbitration clauses in winding up proceedings will come to be decided by the courts. Until further deliberation by the appellate courts, it appears that a distinction is drawn in respect of the treatment of exclusive jurisdiction clauses and arbitration clauses in a bankruptcy / winding up context.

For further details, the full judgment can be found here.

Date:
12 June 2023
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Liability of Hong Kong banks acting on dishonest payment instructions of corporate customers’ authorised signatories

On 6 February 2023, the Court of Final Appeal (the “CFA“) handed down its judgment on the long running dispute between Citibank N.A. (“Citibank“) and its corporate customer, PT Asuransi Tugu Pratama Indonesia TBK (“Tugu“), in PT Asuransi Tugu Pratama Indonesia Tbk v Citibank N.A. [2023] HKCFA 3 concerning “one of the oldest and most litigated questions in commercial law”, namely “the rights of a corporate customer against a banker who has paid money out of its account on the dishonest instructions of an authorised signatory”.

The dispute concerned 26 dishonestly authorised transfers made out of Tugu’s bank account with Citibank by Tugu’s authorised signatories between 1994 and 1998.  After all funds in the account were paid out, Citibank closed the account as instructed by Tugu’s authorised signatories in 1998.  Tugu demanded payment from Citibank in 2006 and subsequently commenced Court proceedings in 2007.

The CFA allowed Tugu’s appeal.  It held that Tugu’s claim in debt was not time-barred as the debt, undiminished by the unauthorised withdrawals, still subsisted in 2006 when Tugu demanded payment from Citibank, and time did not begin to run for limitation purposes until then.  On the face of the information in Citibank’s hands by 1998, the whole operation of the account was unauthorised, including its closure.  The CFA provided guidance in its judgment (with Lord Sumption giving the leading judgment) on what constitutes notice so as to require a bank to make inquiries before paying out in accordance with its mandate.

The CFA decision reminds banks of their duty to customers and provides guidance on when it puts them “on inquiry” before debiting customers’ accounts.  Although there is no general obligation to inquire into the authority of their customers’ agents, in order to allow banks to comply with their mandate with customers, they should be vigilant in assessing whether the information in hand calls for inquiry.  As such, banks should put in place policies and systems enabling them to flag impropriety and potential fraudulent transactions.

Victims who are out of pocket should consider the availability of a straightforward debt claim against the relevant bank.  The CFA has clarified that time to bring a debt claim does not begin to run for limitation purposes until a demand for the balance in the account has been made.  For such debt claims, the banks cannot run a defence of contributory negligence.

For a more detailed summary of the CFA judgment, please refer to our article

Date:
7 June 2023
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Application of the Cooperation Mechanism for cross-border insolvency proceedings where request for recognition and assistance is initiated by a Mainland court outside the Pilot Areas

In the recent case of Re Guangdong Overseas Construction Corporation [2023] HKCFI 1340, the Court of First Instance (the “CFI“) offered useful guidance on the consensus for mutual recognition of and assistance to insolvency proceedings between the courts of the Mainland and Hong Kong (the “Cooperation Mechanism“).  Since the Cooperation Mechanism came into place in 2021, the Hong Kong court had only recognised and provided assistance to the administrators appointed by the courts in the Mainland in two instances in Re HNA Group Co., Ltd [2021] HKCFI 2897 and Re Peking University Founder Group Company Limited [2021] HKCFI 3817.

In the present case, the administrator appointed by the Guangzhou Intermediate People’s Court of Guangdong Province (the “Guangzhou Court“) over Guangdong Overseas Construction Corporation (the “Company“), a company established in the Mainland, applied for recognition and assistance from the Hong Kong court.  The CFI considered whether the Guangzhou Court, which is a court outside the 3 Pilot Areas designated by the Supreme People’s Court [1], may initiate a request for assistance to the Hong Kong court in light of the terms of the Cooperation Mechanism.

The CFI first reiterated that the jurisdiction to recognise and assist foreign office-holders appointed by a court of another jurisdiction derives from common law.  The Cooperation Mechanism and the “Procedures for a Mainland Administrator’s Application to the Hong Kong SAR Court for Recognition and Assistance – Practical Guide” (the “Practical Guide“) only serve the purpose of prescribing the procedure and the manner in which an application is to be made.  As such, even though the Cooperation Mechanism does not extend to a Mainland court outside the Pilot Areas (such as the Guangzhou Court in the present case), this would not be a factor taken into account by the court since reciprocity is not a requirement for recognition and assistance under common law, and it would be for the Supreme People’s Court to decide whether it is appropriate for courts outside the Pilot Areas to apply for recognition and assistance from the Hong Kong court.  With that said, the CFI noted that, as a matter of practice and to ensure consistency, applicants seeking recognition and assistance should follow the Practical Guide when a letter of request is issued by a court outside the Pilot Areas in the future.

Having considered the above principles, the CFI granted an order to recognise the liquidation of the Company and the appointment of the administrator, and to provide the necessary assistance to the administrator, being satisfied that:

  1. The insolvency proceeding of the Company is a collective insolvency proceeding under the supervision of the Guangzhou Court;
  2. The insolvency proceeding is conducted in the Mainland, which is both the place of incorporation of the Company and its centre of main interest;
  3. The Company has valuable asset in Hong Kong which necessitated assistance for the administrator to carry out his duties; and
  4. The order made is consistent with the substantive law and public policy of the court.

To conclude, the fact that a request for recognition and assistance is initiated by a Mainland court outside the Pilot Areas does not prevent the Hong Kong court from exercising its common law jurisdiction to provide assistance.  After all, the test adopted by the court is to assess whether the criteria for recognition and assistance are satisfied on a case-by-case basis.

[1] Namely, the People’s Courts in Shanghai Municipality, Xiamen Municipality in Fujian Province and Shenzhen Municipality in Guangdong Province.

Date:
7 June 2023
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Update on Re Guy Kwok-Hung Lam – Court of Final Appeal upholds exclusive jurisdiction clause in bankruptcy proceedings

Further to our news update, on 4 May 2023, the Court of Final Appeal handed down its judgment in Re Guy Kwok-Hung Lam [2023] HKCFA 9, affirming the earlier decision of the Court of Appeal to dismiss a bankruptcy petition in light of an exclusive jurisdiction clause. In so doing, the Court of Final Appeal put an end to the longstanding debate on the effectiveness of an exclusive jurisdiction clause in bankruptcy context.

In the judgment by Mr Justice French NPJ (with whom Cheung CJ, Mr Justice Ribeiro PJ, Mr Justice Fok PJ, and Mr Justice Lam PJ agree), it was held that the “established approach” (i.e. a petitioner will ordinarily be entitled to a bankruptcy/winding up order if the petition debt is not subject to a bona fide dispute on substantial grounds) is not appropriate where an exclusive jurisdiction clause is involved.  Where the underlying dispute of the petition debt is subject to an exclusive jurisdiction clause, the court should generally dismiss the petition and hold the parties to their contract, unless there are countervailing factors, such as the risk of insolvency affecting third parties, a frivolous defence, or an abuse of process.

In so finding, the Court of Final Appeal noted that the jurisdiction of the Courts in bankruptcy matters is conferred by statute and is not amenable to exclusion by contract. However, the parties’ agreement to refer their disputes to a foreign court is relevant to the court’s exercise of its discretion to decline jurisdiction. Furthermore, the determination of whether there is a bona fide dispute on substantial grounds, while being a necessary element of the court’s jurisdiction, is a threshold question. It is at that stage that public policy consideration comes into play and the court will adopt a multi-factorial approach. Where a bankruptcy petition is brought by one creditor against another and there is no evidence of a creditor community at risk, the significance of public policy of the legislative scheme for bankruptcy jurisdiction is much diminished.

While the Court of Final Appeal makes clear that its findings do not cover the case where an exclusive jurisdiction clause requires bankruptcy proceedings to be instituted in a foreign court, this decision will likely have far-reaching impact not only in bankruptcy proceedings but also on the treatment of arbitration clauses in bankruptcy or insolvency context.

For further details, the full judgment can be found here.

Date:
2 June 2023
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SFC reprimanded and fined a brokerage firm for regulatory breaches

A brokerage firm (the “Firm“) has been recently reprimanded and fined HK$6 million by the Securities and Futures Commission (the “SFC“) for various regulatory breaches committed in the course of acting as the placing agent in a share placement between November and December 2019.

During the relevant period, the Firm acted as the placing agent for the majority shareholder (the “Shareholder“) of a listed company in Hong Kong (the “Company“) to procure not less than six placees to subscribe for the shares of the Company. In the absence of the Shareholder’s consent, the Firm (i) entered into bought and sold notes in respect of the shares on behalf of the Shareholder with the placees, where the transaction prices were inconsistent with the placing price agreed with the Shareholder, and (ii) transferred the shares from the Shareholder’s account to the placees’ accounts, hoping that the placees would sell the shares on the market to settle the placing price with the Shareholder.

Upon investigation, the SFC found that in failing to safeguard the assets of its client and acting beyond the client’s authorities and instructions, the Firm was grossly negligent and it breached certain provisions of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission in relation to safeguarding client assets, and acting with proper authorization. Nevertheless, the SFC acknowledged that there was no sufficient evidence to support a finding of dishonesty or recurrent breaches on the part of the Firm.

This case serves as a helpful reminder to all licensed firms that it is important to act within their authorities, including verifying whether the instructions they were acting on were given by the person ultimately responsible for the origination of the instructions, and to act with due care and in the best interests of the clients (which is fundamental to the fitness and properness of licensed corporations).

Date:
1 June 2023
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