Lasmos revisited: Court hears bankruptcy petition despite exclusive jurisdiction clause

Key Takeaways

• The Hong Kong Court granted a bankruptcy order even though the respondent contested the debt and the debt was subject to an exclusive jurisdiction clause in favour of a foreign jurisdiction: Re Guy Kwok Hung Lam [2021] HKCFI 2135 (21 July 2021).

• In doing so, the Court rejected the Lasmos¹ approach under which the Court has stayed winding-up petitions based on debts governed by an arbitration clause pending determination of the arbitration.

• The Lasmos approach treats the arbitration clause as having a predominating influence over the Court’s discretion whether to hear the petition. By contrast, the Court in Guy Kwok Hung Lam treated the exclusive jurisdiction clause as but one of the relevant factors. Of greater importance was the futility in requiring the petitioner to obtain a judgment from the foreign jurisdiction as a precondition to hearing the petition when there was no genuine dispute as to the debt.

Background

At the heart of the proceedings was a Credit Agreement, under which Tor Asia Credit Master Fund LP (“Petitioner”) had advanced various term loans to CP Global Inc. (“Borrower”), with Mr Guy Lam (“Respondent”) acting as personal guarantor.

Both the Borrower and the Respondent defaulted, and the Petitioner presented a petition to the Hong Kong Court seeking a bankruptcy order against the Respondent.

Importantly, the Credit Agreement contained an exclusive jurisdiction clause in favour of the New York Courts for all legal proceedings arising out of or relating to the agreement.

Effect of exclusive jurisdiction clause on bankruptcy petition

At the outset, Linda Chan J made clear that the burden was on the Respondent to demonstrate there was a bona fide dispute on substantial grounds in respect of the debt.

The main discussion centred on the exclusive jurisdiction clause. The Respondent contended that the Court should hold the Petitioner to his contractual bargain to resolve the dispute in New York, before invoking the bankruptcy regime in Hong Kong. In doing so, the Respondent relied on the approach of Harris J in Lasmos.

Lasmos involved a winding-up petition based on a debt governed by an arbitration clause. The Court held that it would generally exercise its discretion to stay the petition pending determination of an arbitration in respect of the debt as long as the following conditions were satisfied:

1. the respondent to the petition disputed the debt;
2. the debt was governed by an arbitration clause; and
3. the respondent had brought arbitration proceedings.

Significantly, the Lasmos approach does not require the respondent to show a bona fide dispute on substantial grounds in respect of the debt to obtain a stay.

Returning to the present case, the Respondent contended that an approach similar to the Lasmos approach should be adopted where a petition was based on a debt governed by an exclusive jurisdiction clause, and that the conditions for a stay were satisfied in this case.

Linda Chan J rejected the application of the Lasmos approach to this case. Her Ladyship held that an exclusive jurisdiction clause does not automatically preclude the Court’s jurisdiction to determine a winding-up petition. In doing so, the Court approved well settled common law authorities to this effect from the UK, Australia (specifically New South Wales) and the BVI.

The Court further held that “the fact that the parties have agreed to an arbitration clause or an [exclusive jurisdiction clause] is only a factor which would be taken into account by the Court when considering a winding up/bankruptcy petition”, and that “[P]utting it in another way, it would be a pointless exercise to require the creditor to first obtain an award or a judgment from the agreed forum when there is no real dispute on the debt.”

The Court concluded that there was no bona fide dispute as to the debt, and as such a bankruptcy order should be made.

Significance: scope for further consideration of the Lasmos approach?

This case stands against the application of the Lasmos approach to bankruptcy and winding-up petitions based on debts governed by an exclusive jurisdiction clause in favour of a foreign jurisdiction.

The case has wider implications in calling into question the correctness of the Lasmos approach in petitions based on debts governed by arbitration clauses. Her Ladyship’s reasoning (as quoted above) was not confined to cases involving exclusive jurisdiction clauses. Her Ladyship expressly included reference to cases involving arbitration clauses.

This was not the first time that doubt has been cast on the Lasmos approach – the Court of Appeal expressed reservations in But Ka Chon², and warned about its opportunistic invocation in Sit Kwong Lam³. Neither of these cases required the Court to consider the substantive correctness of the Lasmos approach.

Among the objections to the Lasmos approach are that it curtails a creditor’s statutory right to invoke the Court’s insolvency jurisdiction, and that hearing a petition does not in reality interfere with the parties’ choice of forum. The decision in Re Guy Kwok Hung Lam identifies a further objection to the Lasmos approach – that it would be “pointless” to adopt this approach when the respondent cannot show a real dispute as to the debt.

That said, the death knell for the Lasmos approach has yet to ring. It is supported by English Court of Appeal authority that remains current.⁴ It may be that the Lasmos approach can be justified by reference to policy considerations specifically relating to arbitration clauses. Indeed the petitioner in this case contended that Lasmos should be confined to cases involving arbitration clauses for this very reason. We expect the correctness of the Lasmos approach will be subject to further scrutiny in future cases.