Recently, the Hong Kong courts have considered two important issues for lenders relating to jurisdiction clauses in finance documents:
1. Should the Hong Kong courts dismiss a winding up or bankruptcy petition if the relevant finance document is subject to an exclusive jurisdiction clause (EJC) in favour of a foreign court?
2. Will the Hong Kong courts give effect to asymmetric jurisdiction clauses?
Exclusive jurisdiction clauses and winding up / bankruptcy proceedings
In a series of recent cases, the Hong Kong courts have considered whether a bankruptcy petition or winding up petition can be presented against a debtor if the contract between the creditor and the debtor is subject to an arbitration clause. In Lasmos Ltd v Southwest Pacific Bauxite (HK) Ltd  2 HKLRD 449, it was held that a winding up petition should generally be dismissed if (1) the debtor disputed the debt; (2) the contract contained an arbitration clause that covered any dispute relating to the debt, and (3) the debtor commenced the contractually mandated dispute resolution process. By contrast, the traditional view had been that even if the contract contained an arbitration clause, the debtor must demonstrate a bona fide dispute on substantial grounds in order to resist a winding up / bankruptcy petition.
In Re Guy Kwok-Hung Lam  HKCFI 2135, the Court considered a credit agreement between the lender (Tor Asia Credit Master Fund LP), the borrower and the guarantor / debtor, which contained an EJC (not an arbitration clause). The debtor argued that the bankruptcy petition should be dismissed, because it had commenced proceedings disputing the debt in the contractual jurisdiction, being the New York Supreme Court.
Linda Chan J held that despite the existence of the EJC, the Hong Kong Court retained the jurisdiction to determine whether the debtor should be wound up or bankrupted. The fact that the parties had agreed to an EJC is only a factor to be taken into account by the Court when deciding a winding up / bankruptcy petition. Linda Chan J explained:
“This is because unless and until the company/debtor is able to demonstrate to the Court that there is a bona fide dispute on substantial ground in respect of the debt, there is no proper basis for the company to contend that there is a dispute which must be litigated in accordance with the contractually agreed forum. Putting 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.”
In her judgment, Linda Chan J held that the debtor did not have a bona fide dispute to the debt. There had been an event of default under the credit agreement, and the debtor was liable but failed to repay the term loans. Therefore, a bankruptcy order was made.
In summary, if the relevant finance document contains an EJC specifying a foreign jurisdiction, then the lender may still obtain a winding up / bankruptcy order in Hong Kong if the debtor does not have a bona fide dispute to the debt.
Asymmetric jurisdiction clauses
In finance transactions, lenders will wish to take enforcement action against borrowers and guarantors in their home courts or where they hold assets. However, lenders may wish to restrict borrowers and guarantors to commencing proceedings in specified jurisdictions (such as the Hong Kong courts). In order to address this issue, asymmetric jurisdiction clauses are a long-established feature of international financial documentation. The purpose of an asymmetric jurisdiction clause is that the borrower or guarantor is bound to commence any proceedings in a specified jurisdiction, but the lender is not so limited.
In Union Bank of India v Glory Universal Group Inc  1 HKLRD 381, an Indian bank brought Hong Kong proceedings against a Panamanian company for a sum due under a facility agreement, and against Indian nationals for sums due under a guarantee. Both the facility agreement and the guarantee contained asymmetric jurisdiction clauses, which provided for the exclusive jurisdiction of the English courts. The defendants challenged the jurisdiction of the Hong Kong court.
The Hong Kong court gave effect to the asymmetric jurisdiction clauses in the facility agreement and the guarantee. It was held that the defendants were bound to commence any proceedings in the English courts, but the plaintiff bank was able to commence proceedings in Hong Kong.
In the facility agreement, it was also specified: “The Parties agree that the courts of England are the most appropriate and convenient courts to settle Disputes and accordingly no Party will argue to the contrary.” In addition, it was specified: “This cl 36.1 is for the benefit of the Lender only. As a result, the Lender shall not be prevented from taking proceedings relating to a Dispute in any other courts with jurisdiction.”
The defendant borrower argued that the facility agreement conclusively determined that the English courts were the most appropriate and convenient forum for determining any dispute, including with respect to proceedings commenced by the plaintiff bank. The Hong Kong court rejected this argument. It was held that only the borrower, and not the lender, was bound by the ‘appropriate and convenient forum’ clause.
In conclusion, Union Bank of India provides strong support for the enforcement of asymmetric jurisdiction clauses, allowing lenders to take action in the jurisdiction of their choice to assist in making recoveries.
Nick Luxton acted for the plaintiff lender in Re Guy Kwok Hung Lam (led by Jose Maurellet SC) and for the plaintiff bank in Union Bank of India.