The Legacy of Re Guy Lam Lives on

The landmark Court of Final Appeal (“CFA”) decision of Re Guy Lam[1] has generated numerous articles written by practitioners and academics on the interaction between exclusive jurisdiction clauses and the court’s jurisdiction to wind up or bankrupt a debtor.  Following the CFA’s decision, the Guy Lam bankruptcy continued to impact our legal landscape when the Court of Appeal handed down a novel decision on the treatment of the costs and expenses of the bankrupt trustees (for whom TDW acted) in circumstances where the bankruptcy order was overturned in appeal[2].

In 2 recent Court of Appeal decisions, the Guy Lam judgment has again been revisited[3].

In the recent first instance decisions of Re Simplicity & Vogue Retailing (HK) Co., Limited[4] (“Re Simplicity & Vogue”) and Re Shandong Cheming Paper Holdings Limited[5] (Re Shandong Chenming”), the court had to deal with whether the Guy Lam principle was applicable to analogous situations involving arbitration agreements. In this regard:

• Re Simplicity & Vogue (heard by Linda Chan J) concerned a more straightforward situation where the debtor company argued that its dispute regarding the debt should be referred to arbitration. The court found that the dispute was “wholly without merit” and held that the Guy Lam principle was in any event not applicable to arbitration agreements. It should be noted, however, that the debtor company failed to file any evidence in opposition to the petition and failed to comply with certain conditions imposed by the court.  

• Re Shandong Chenming (heard by Harris J) dealt with a more nuanced issue concerning whether the Guy Lam principle would apply to a cross-claim raised by the debtor company which claim was based on a contract subject to an arbitration agreement. Harris J found that the Guy Lam principle did apply to arbitration agreements and stayed the petition pending the resolution of the cross-claim in arbitration.

Given the conflicting first instance decisions, leave to appeal was granted in both cases to give the Court of Appeal an opportunity to clarify the position.

The Court of Appeal handed down the 2 decisions on the same day. Pausing here, the Court of Appeal described the Guy Lam principle in both decisions as being that contracting parties should be bound to resolve their dispute in accordance with the agreed upon exclusive jurisdiction agreement and a petition should be stayed or dismissed unless the defence “borders on the frivolous or abuse of process” or “where there are countervailing factors such the risk of insolvency affecting third parties”[6]. This is a key issue which practitioners should note in future matters.

The Court of Appeal in both cases held that the Guy Lam principle is grounded in the wider context of the court’s discretion whether it should exercise its insolvency jurisdiction and thus could be applied to cases concerning arbitration agreements and in situations where the arbitration agreement relates to a cross-claim raised by the debtor (and not just where the arbitration agreement relates to the petitioning debt). In the context of cross-claims the Court of Appeal determined that there is “no real difference between cross-claims and disputes of debt as grounds of resistance to winding up”[7].

Importantly, the Court of Appeal emphasised that the Guy Lam principle concerns the exercise of discretion and the approach taken by the court is “multi-factorial”. In doing so, the Court of Appeal rejected one of the appellant’s argument that the Guy Lam principle is limited to the question of locus[8], meaning that the court would still look at the matter as a whole when exercising its discretion. However, it is clear that exclusive jurisdiction or arbitration agreements will be given much weight when the court is asked to exercise its insolvency jurisdiction.

Points to note arising from the Court of Appeal decisions:

(1) The presence of an arbitration agreement is not the end of the matter. The court will take a “multifactorial” approach:

(a) The court will continue to take into account the “Lasmos requirements”. It remains incumbent on the debtor to take active steps to dispute the debt by actually commencing arbitration when asking the court to decline jurisdiction in favour arbitration[9].

(b) Merits are still relevant.  In Re Simplicity & Vogue the Court of Appeal adopted Linda Chan J’s analysis of the merits of the defence and held that “[it] could be shown without detailed argument that the defence raised is one which “borders on the frivolous or abuse of process””[10]. In this regard, it was initially surprising that the third set of arbitral proceedings commenced by the debtor against the petitioner in Re Shandong Chenming was not considered as an abuse of process by Harris J particularly given the “long and torrid history”[11] of the litigation. However, the Court of Appeal has now shed some light as to the quality of the dispute being raised which appears to have substance[12].

(c) Timing of raising a dispute is important particularly as regards cross-claims. The Court of Appeal commented that “delay in putting forward a cross-claim may in appropriate circumstances support a finding that it was raised in abuse of the court’s process as a pretext to stave off a winding up”[13]. This is an encouraging observation to prevent recalcitrant debtors using the existence of an arbitration agreement (or exclusive jurisdiction agreement) merely as a tactical tool where it is clear and obvious that there is no genuine dispute and/or intention to arbitrate. It is also consistent with the approach adopted by the Companies Court in rejecting scanty restructuring proposals to stave off petitions where soft-touch provisional liquidators for restructuring purposes were appointed after the presentation of a petition[14]. Debtors should therefore raise disputes at the earliest opportunity and in doing so, be mindful of the requirements under Rule 32 of the Companies (Winding-up) Rules (Cap. 32H).

(d) Presence of other creditors and evidence showing their support should be brought to the attention of the court. We have yet to see how effective such evidence would be but insolvency proceedings are a “class remedy” and thus the position of other creditors should be influential. Even if the petitioning debt is subject to an arbitration or exclusive jurisdiction agreement, if the debtor is indebted to another creditor and he has no answer to such debt, the court could still exercise its jurisdiction to wind up / bankrupt the debtor, even if procedurally this would first need the supporting creditor to be substituted as petitioner.

(2) Finally, Kwan VP’s statement in paragraph 39 of Re Simplicity & Vogue should be emphasised. The Vice President importantly stated:

“The public policy of the legislative scheme for the court’s insolvency jurisdiction may be prominent where the grounds for disputing the debt are obviously insubstantial. The significance of this public policy may be much diminished where there is no supporting creditor and no evidence of a creditor community at risk. The “strong reasons”[15] or “wholly exceptional circumstances”[16] test should not “obscure the range of consideration relevant to the court’s discretion”. The “countervailing factors” mentioned being “the risk of insolvency affecting third parties and a dispute that borders on the frivolous or abuse of process” are just instances where the court may exercise its discretion not to hold the parties to the agreed dispute resolution mechanism. By this approach, the court retains flexibility to deal with the case as the circumstances require”.

(3) The message is clear and it is an encouraging one. The Guy Lam principle does not put a hard stop on petitions were arbitration or exclusive jurisdiction agreements are in play. However, practitioners will have to test further how effective of a “safety valve”[17] the “frivolous or abuse of process” argument would be and the weight that would be placed on the views of supporting creditors to stave off a debtor’s reliance of an arbitration or exclusive jurisdiction agreement.

Robin Darton and Tim Au

If you would like to discuss any of the matters raised in this article, please contact:

Robin Darton
Partner | E-mail

Tim Au
Partner | E-mail

The above is not intended to be relied on as legal advice and specific legal advice should be sought at all times in relation to the above.

[1] (2023) 26 HKCFAR 119

[2] See our article [link]

[3] Re Simplicity & Vogue [2024] HKCA 299 and Re Shandong Chenming [2024] HKCA 352

[4] [2023] HKCFI 1443

[5] [2023] HKCFI 2065

[6] See paragraph 30 of Re Simplicity & Vogue and paragraph 37 of Re Shandong Chenming

[7] See paragraph 46 of Re Shandong Chenming

[8] See paragraph 36 of Re Shandong Chenming

[9] See paragraph 40 of Re Simplicity & Vogue

[10] See paragraph 47 of Re Simplicity & Vogue

[11] See paragraph 19 of the first instance decision [2023] HKCFI 2065. It should be noted that the petitioner had in those proceedings first served a statutory demand on the debtor on 18 October 2016 (see Harris J’s decision in [2017] 4 HKLRD 84)

[12] See paragraph 13 of Re Shandong Chenming

[13] See paragraph 50 of Re Shandong Chenming

[14] See for example paragraph 42 of Re Lamtex Holdings Limited [2021] 2 HKLRD 177 and subsequent decisions in Re China Bozza Development Holdings Ltd [2021] 2 HKLRD 977 and Re Ping An Securities Group (Holdings) Ltd [2021] 2 HKLRD 204

[15] Citation in the quotation refers to paragraph 86 of the Guy Lam Court of Appeal decision

[16] Citation in the quotation refers paragraph 39 of Salford Estate

[17] See paragraph 49 of Re Shandong Chenming