British Virgin Islands: Revisiting Exclusive Jurisdiction Clauses and the BVI High Court’s Winding Up Jurisdiction in view of Re Guy Kwok-Hung Lam
31 May 2023
Forbes Hare
In a decision handed down earlier this month, Re Guy Kwok-Hung Lam [2023] HKCFA 9, Hong Kong’s highest court ruled that an exclusive jurisdiction clause prevented a creditor from being able to petition for a debtor’s bankruptcy. Because the contract from which the debt arose provided for disputes to be determined in New York, the Court of Final Appeal held that the creditor needed to obtain judgment in New York before it could rely on the debt to prove the debtor’s inability to pay.
Importantly, it was not necessary for the debtor to show that the grounds on which he disputed the debt were substantial ones. The Court accepted in principle that a debtor might be prevented from relying on an exclusive jurisdiction clause to mount a completely frivolous defence, as this would be an abuse of process, but the facts of the case were not of that character. It therefore declined to determine, in the exercise of its discretion, whether the grounds of the dispute were substantial. Assessing substantiality for this purpose would have been the equivalent of undertaking a summary judgment determination, but the parties had agreed that that determination must be made in a different forum. Accordingly, the creditor’s appeal was dismissed, and the petition stood dismissed pursuant to the orders of the intermediate appellate court below.
Could the same outcome be reached in a BVI case? On current authority, the answer would be no. However, this issue has not been considered by the Privy Council, and the door is not closed to future legal development. The time may well be ripe for courts exercising jurisdiction in the BVI to revisit the interaction of exclusive jurisdiction clauses with the exercise of their insolvency and bankruptcy jurisdiction.
The Sparkasse approach
In addressing the position under BVI law, the starting point is the decision of the Court of Appeal for the Eastern Caribbean in Sparkasse Bregenz Bank AG v Associated Capital Corporation (Civil Appeal No. 10 of 2002; 18 June 2003). This case was brought under the predecessor legislation to the BVI’s current Insolvency Act, 2003. The petitioner argued that a BVI company was insolvent because it was unable to pay its debts; specifically, an unpaid debt owing to the petitioner under a contract. The company responded that that the alleged debt was disputed and that, as the contract contained an exclusive jurisdiction clause requiring disputes to be determined in Austria, a winding up order could not be made until the Austrian Court had resolved the dispute.
In an oft-cited passage, Byron CJ held that (at [3]):
“The law governing the making of winding up orders is well settled and could easily be set out at this stage. The Court will order a winding up for failure to pay a due and undisputed debt over the statutory limit, without other evidence of insolvency. If the debt is disputed, the reason given must be substantial and it is not enough for a thoroughly bad reason to be put forward honestly. But if the dispute is simply as to the amount of the debt and there is evidence of insolvency the company could be wound up. To fall within the principle, the dispute must be genuine in both a subjective and objective sense. That means that the reason for not paying the debt must be honestly believed to exist and must be based on substantial or reasonable grounds. Substantial means having substance and not frivolous, which disputes the Court should ignore. There must be so much doubt and question about the liability to pay the debt that the Court sees that there is a question to be decided. The onus is on the company to bring forward a prima facie case which satisfies the Court that there is something which ought to be tried either before the Court itself or in an action or by some other proceeding. A creditor who has served a statutory notice on the company is not entitled to a winding up order if the company bona fide disputes the debt and there is no evidence of the insolvency of the company. If the existence of the debt on which the winding up petition is founded is disputed on grounds showing a substantial defence requiring investigation, the petitioner would not have established that he was a creditor and thus would not be entitled to present the petition, accordingly the presentation of such a petition would be an abuse of the process of the Court. The process of the Companies Court could not be used in cases where there were issues of disputed fact. Such questions must be resolved in actions. A debt disputed on genuine and substantial grounds could not support a winding up petition. Invoking the process of the Court in relation to a debt which was known to be disputed on genuine and substantial grounds was an abuse of the process of the Court.”
On the facts, the Court in Sparkasse held that the company had shown that there was a genuine and substantial dispute over whether any debt was due. In other words, it conducted the assessment which the Court in Re Guy Kwok-Hung Lam said needed to be conducted by the foreign court due to the exclusive jurisdiction clause.
In addressing an argument raised by the company concerning evidence of Austrian law and the proper forum, Byron CJ held that the judge’s role was limited to determining whether a genuine and substantial dispute existed, and that attempting to resolve the dispute by reference to Austrian law would have improperly encroached on and usurped the jurisdiction conferred by the parties on the Austrian court. However, unlike the Court of Final Appeal in Re Guy Kwok-Hung Lam, Byron CJ did not seem to think that merely ascertaining the existence of a substantial dispute (without resolving it) constituted such an encroachment.
When the Insolvency Act commenced in 2004, the expression “substantial dispute” made its way into section 157. This provision requires the BVI Court to set aside a statutory demand if it is satisfied that there is a substantial dispute as to whether the debt demanded (or enough of the debt to bring the undisputed part below the prescribed minimum of US$2,000) is owing or due.
Since the first days of the Insolvency Act, even prior to the establishment of the Commercial Division in 2009, the BVI High Court and the Court of Appeal have applied Byron CJ’s test for what constitutes a substantial dispute to set-aside applications brought under section 157, as well as to applications for the appointment of liquidators to BVI companies on the ground of inability to pay a debt. Early examples include Haldanes v China North Industries Investment Management Ltd (BVIHCV2006/0022; 10 April 2006), Vanderbelt Management Group Ltd v Perez Rivas (Civil Appeal No. 7 of 2006; 3 July 2006), Equator Exploration Limited v BW Peace Limited (BVIHCV2007/0315; 7 May 2008) and China Alarm Holdings Limited v China Alarm Holdings Acquisitions LLC (BVIHCV2008/0385; 20 April 2009), but there are many more recent ones.
Vendort Traders Inc v Evrostroy Grupp LLC [2016] UKPC 15 is the only case involving an application to set aside a BVI statutory demand to reach the Privy Council. The debt demanded was due under an arbitral award. Lord Sumption held that the test for whether there is a substantial dispute under section 157 “is the same as the test for summary judgment, namely whether the debtor can raise a triable issue on this point” (at [1]).
Although Byron CJ in Sparkasse had said that substantial “means having substance and not frivolous”, read in the context of what he said next (i.e. that “[t]here must be so much doubt and question about the liability to pay the debt that the Court sees that there is a question to be decided”) it is clear that he meant by this something more than what the Court of Final Appeal meant in Re Guy Kwok-Hung Lam when it said that a completely frivolous defence which amounted to an abuse of process would not be enough for a debtor to rely on an exclusive jurisdiction clause. In practice, the Sparkasse test has always been treated in the BVI as the equivalent of a summary judgment determination.
Exclusive jurisdiction clauses
None of the BVI cases mentioned above, post-Sparkasse, considered the relevance of an exclusive jurisdiction clause. When this issue arose in Pioneer Freight Futures Company Limited v Worldlink Shipping Ltd (BVIHCV2009/0135 & BVIHCV2009/0152; 1 July 2009), Bannister J in the Commercial Division at first reached essentially the same result as Court of Final Appeal had reached in Re Guy Kwok-Hung Lam, albeit by a different path of reasoning. He held that:
“[16] [The Applicant’s counsel] points out, correctly, that I have a duty under section 157(1)(a) of the Act to decide whether or not the points taken on behalf of [the Respondent] satisfy me that there is a substantial dispute as to [the Applicant]’s claim to be entitled to immediate payment. She says that the exclusive jurisdiction clause cannot operate to relieve me of that duty, so that I am bound by the Act to decide whether the defence raised by [the Respondent] is one of substance. The difficulty that she faces is that if I were to decide that it is not, I would in effect be deciding in this jurisdiction that [the Respondent] has no defence to [the Applicant]’s claim for payment. That seems to me to be indistinguishable from making a judicial determination as to the parties’ rights under the contract.
[17] I think that the fallacy in [the Applicant’s counsel]’s argument on this point is that it assumes that the only matter in dispute is the strength of [the Respondent]’s argument on the construction of the Master Agreement. In truth, [the Respondent]’s position is more than that. [The Respondent] is saying (a) that it wishes to deploy its construction point (b) that it is contractually entitled to deploy the point in the High Court in London and (c) that it is not for the BVI court to deprive it of that right. Understood in this way, it seems to me that [the Respondent], whatever I might think privately about its point of construction, does indeed raise a dispute of substance.”
Put another way, it was the existence of the exclusive jurisdiction clause, rather than the merits of the grounds of the dispute, which elevated the dispute into a substantial one.
However, in De Wet v Vascon Trading Limited (BVIHCV(COM)2011/0129; 6 December 2011), Bannister J held that his approach to the exclusive jurisdiction clause in Pioneer Freight Futures (though not the result of the case) was in error. The correct approach was to determine whether the debt was bona fide disputed on genuine grounds, as Byron CJ had done in Sparkasse, and “[o]nly if a substantial dispute is identified will the exclusive jurisdiction clause fall to be taken into account” (at [16]).
The comment about taking into account an exclusive jurisdiction clause once a substantial dispute has been established must understood in the context that Vascon Trading involved a winding up application. In such a case, it is conceivable that the Court’s discretion whether to stay or to dismiss the application, if a substantial dispute is shown to exist, may be affected by an exclusive jurisdiction clause and by the time within which judgment might be obtained in the proper forum. However, where instead the debtor applies to set aside a statutory demand, once a substantial dispute has been established the statute prescribes that the Court must set aside the demand, so the exclusive jurisdiction clause will have no relevance within the confines of those proceedings.
Bannister J’s change in approach came about as result of the English Court of Appeal’s decision in BST Properties Ltd v Reorg-Apport Penzugyi RT [2001] EWCA Civ 1997, which had not been drawn to his attention when Pioneer Freight Futures was decided. In BST Properties, Parker LJ stated expressly that an exclusive jurisdiction clause requiring disputes to be determined in a foreign court “does not in my judgment affect the question which was facing the Companies Court, namely whether the petition debt is bona fide disputed on substantial grounds” (at [31]).
Brief mention should also be made of non-exclusive jurisdiction clauses. These have attracted comparatively little attention, doubtless because of their less restrictive nature. However, it is important to recall, as the Court of Final Appeal did in Re Guy Kwok-Hung Lam, that even exclusive jurisdiction clauses do not in truth divest courts of any jurisdiction that they possess. Rather, an exclusive jurisdiction clause requiring disputes to be resolved in a different forum will weigh heavily in the court’s discretion whether or not to exercise the jurisdiction vested in it, and only strong reasons (which will not be supplied merely by forum conveniens arguments) will prevent the court from holding the parties to the terms of their bargain by staying the proceedings in favour of the chosen forum.
A fortiori, it is conceivable that a non-exclusive jurisdiction clause, coupled with other factors, might also suffice to weigh as heavily in the court’s exercise of its discretion as an exclusive jurisdiction clause. This would not matter on the Sparkasse approach, which concerns itself only with the grounds of the dispute, and not with where the dispute must be resolved if those grounds are sufficiently substantial. In Angel Wise Limited v Stark Moly Limited (HCVAP2010/0030; 13 February 2012), the non-exclusive jurisdiction clause in that case did not affect the appellate review that the Eastern Caribbean Court of Appeal undertook with respect to a decision refusing to set aside a statutory demand. However, should the approach in Re Guy Kwok-Hung Lam ever find favour in the BVI, it will remain to be seen whether a non-exclusive jurisdiction clause might in some circumstances lead to the same consequence as an exclusive jurisdiction clause.
Scope for future developments
BST Properties remains good law in England. In a very recent decision, City Gardens Ltd v DOK82 Ltd [2023] EWHC 1149 (Ch), the English High Court held that it was bound by BST Properties to decline an invitation to follow the Hong Kong Court of Final Appeal’s decision in Re Guy Kwok-Hung Lam. The Court of Final Appeal had referred to BST Properties and had departed from it, but it was not open to an English High Court Judge to do likewise.
The House of Lords’ approach to the doctrine of stare decisis in Davis v Johnson [1979] AC 264 may make it difficult for the English Court of Appeal to reconsider the correctness of BST Properties, notwithstanding Re Guy Kwok-Hung Lam. The limited exceptions to that principle, as set out in Young v Bristol Aeroplane Co Ltd [1944] KB 718, permit that Court to depart from its earlier decisions only in narrowly defined circumstances.
The position in the BVI is likely to be similar to the position in England, though by a different route. The BVI High Court is not bound by decisions of the English Court of Appeal, but such decisions are in practice treated as highly persuasive and are followed almost invariably. It would therefore be a tall order to persuade a BVI High Court Judge to depart from BST Properties, even in view of the reasoning in Re Guy Kwok-Hung Lam.
Moreover, whilst first instance Judges of the BVI High Court are not bound by each other’s judgments, judicial comity requires them to follow those judgments unless convinced that they were wrongly decided: see Re Global Diversity Opportunity II Ltd (BVIHCOM2020/0176; 13 March 2021) at [12]. This is relevant because departing from BST Properties would also require the Judge to decline to follow Bannister J’s decision in Vascon Trading.
The decision in Sparkasse may provide an even more difficult obstacle to overcome. It is difficult to see how a Judge of the BVI High Court could accede to the reasoning in Re Guy Kwok-Hung Lam, in circumstances where Byron CJ in Sparkasse had undertaken the assessment of substantiality which the Court in Re Guy Kwok-Hung Lam said must instead be undertaken in the forum to which the parties had agreed to submit the dispute.
When the Eastern Caribbean Court of Appeal sits as an intermediate appellate court, with appeals from its decisions lying to the Privy Council, it treats its own decisions as binding in the same way as the English Court of Appeal does, and subject to the same exceptions: see Grant v Herbert (SKBHCVAP2012/0001; 14 July 2017) at [28]. The prospects of the Eastern Caribbean Court of Appeal departing from Sparkasse must be regarded as similar to the prospects of the English Court of Appeal departing from BST Properties.
Whether the United Kingdom Supreme Court is invited to overrule BST Properties, or the Privy Council is invited to overrule Sparkasse, remains to be seen. Decisions of the Hong Kong Court of Final Appeal must carry significant persuasive force, and some additional weight may also attach to the fact that the Court’s opinion in Re Guy Kwok-Hung Lam was written by a former Chief Justice of Australia (Mr Justice Robert French NPJ). However, there is no longer any common current membership between the Court of Final Appeal and the Supreme Court or the Privy Council, so Court of Final Appeal decisions can no longer offer any insight into the thinking of the judges sitting in London.
Some indication of the Privy Council’s thinking might be gleaned from its eagerly awaited judgment in Ting Chuan (Cayman Islands) Holding Corporation v FamilyMart China Holding Co Ltd (JCPC2020/0055; heard 15-16 November 2022). That matter involves an appeal from a decision of the Cayman Islands Court of Appeal, which had declined to stay a winding up petition brought on just and equitable grounds in circumstances where a shareholders’ agreement between the two members of the company contained a clause requiring disputes to be resolved through arbitration. There are clear similarities between arbitration clauses and exclusive jurisdiction clauses, both of which involve contractually binding promises by the parties to resolve their disputes in a certain way.
That having been said, there are also important differences between arbitration clauses and exclusive jurisdiction clauses. In particular, the efficacy of arbitration clauses is underpinned by legislation implementing the UNCITRAL Model Law on International Commercial Arbitration (including in the BVI, Hong Kong and the United Kingdom). Additionally, the public policy which supports holding commercial parties to a contractual obligation to resolve their disputes in private arbitration is not necessarily coterminous with the public policy which supports holding them to a contractual obligation to resolve their disputes in a foreign court. It was for these reasons that the Court of Final Appeal in Re Guy Kwok-Hung Lam held that it was not necessary, in a case involving only an exclusive jurisdiction clause, to explore the interaction of Hong Kong’s Arbitration Ordinance with the Hong Kong Court of First Instance’s bankruptcy and corporate insolvency jurisdiction.
The approach of the BVI courts to arbitration clauses in statutory demand and winding up cases will be the subject of a further article following the handing down of the Privy Council’s judgment in FamilyMart.