What is the effect of Guy Lam on winding up petitions involving an arbitration clause? A third voice

Where a winding up petition is based on a debt arising from a contract with a non-Hong Kong exclusive jurisdiction clause, the court will tend to dismiss or stay the winding up petition in favour of the parties’ agreed forum unless there are strong countervailing factors. The Court of Final Appeal confirmed this approach in its recent landmark decision in Re Guy Kwok Hung Lam [2023] HKCFA 9 (“Guy Lam“; which we discussed here). However, the Court of Final Appeal specifically left the question open for cases involving an arbitration clause.

Case law from lower courts since Guy Lam has not been consistent in approaching this open question. In Simplicity & Vogue Retailing (HK) Co., Limited [2023] HKCFI 1443 (“Simplicity“) where our firm successfully acted for the petitioning creditor, Linda Chan J took the view that the Guy Lam approach is limited to non-Hong Kong exclusive jurisdiction clauses, and therefore inapplicable where the underlying debt is subject to an arbitration clause (see our blogpost). In contrast, in Re Shandong Chenming Paper Holdings Limited [2023] HKCFI 2065 (“Shandong Chenming“), Harris J took the view that there was no difference in the applicable principles when the underlying dispute was subject to an arbitration clause (see our blogpost). Continue reading

When informal workouts don’t work out: English High Court rules bank that lent support to restructuring did not dishonestly assist in putting assets beyond creditors’ reach

In the current economic climate, more and more companies are getting into financial difficulties, informal workouts by debtor companies, with support from certain creditors, seem to be increasingly common. The latest English High Court decision of Henderson & Jones Ltd v Ross & Ors [2023] EWHC 1276 (Ch) highlights a possible litigation risk for the supportive creditors – banks or funds alike – and the advisors involved, especially if the informal workout ultimately falls through.

From time to time, financial institutions are sued by liquidators of wound-up companies for dishonest assistance based on their past dealings with the company. We have defended a few of these claims, ranging from the more commonplace (e.g. the bank acted as a sponsor in the listing of the company now in liquidation), to the novel (e.g. the bank offered trade financing to the company in question). Continue reading

Litigation and Arbitration Funding in Hong Kong: Will the UK Supreme Court decision in PACCAR Affect Hong Kong Litigation Funding?

In R. (on the Application of PACCAR Inc) v Competition Appeal Tribunal [2023] UKSC 28 (judgment handed down on 26 July 2023), the UK Supreme Court held that litigation funding agreements with third parties who play no part in the conduct of litigation, but who are to be paid a share of any damages recovered by the claimant, are “damages-based agreements” (or “DBAs”) within the meaning of the relevant UK legislation which regulates such agreements. Such agreements must therefore comply with the relevant regulatory regime and, if they do not, they are unenforceable under English law.

The likely effect of the UK Supreme Court’s decision is that most English law-governed third-party litigation funding agreements currently in place will be unenforceable, since participants in the litigation funding market have generally assumed that their agreements are not DBAs and therefore do not have to comply with the relevant regulatory regime. For an in depth coverage of the ruling see a full article by our London team. There is also an episode on this issue on our Commercial Litigation podcast. Continue reading

English High Court gives guidance on the so-called creditor duty where a company faces solvency-threatening claim

When a company is in the so-called “twilight zone” approaching insolvency, it is well-established that the directors’ fiduciary duties require them to take into account interest of creditors (the so-called “creditor duty”). In the recent decision of Stephen John Hunt v Jagtar Singh [2023] EWHC 1784 (Ch), the English High Court examined whether it is necessary to establish some form of knowledge (actual or constructive) of insolvency on the part of the directors for the creditor duty to arise, or whether the fact of insolvency is sufficient to trigger the duty.

The creditor duty was recently considered by the UK Supreme Court (“UKSC”) in BTI v Sequana [2022] UKSC 25 (see our previous update here). In that case, the UKSC confirmed the existence of the creditor duty and gave important guidance on the scope of a director’s duty to have regard to the interests of creditors. The UKSC nonetheless did not reach consensus on whether knowledge of the directors that the company is insolvent or bordering on insolvency is an essential element for creditor duty to arise. Continue reading

Can you petition for winding up if your debt is subject to arbitration? The debate continues

Following the Court of Final Appeal’s landmark decision in Guy Lam, Hong Kong’s Court of First Instance (the “Court”) considers that winding-up petitions can be stayed by reason of ongoing cross-claims that are the subject of an arbitration clause

Recently, the Court of Final Appeal confirmed that a Hong Kong bankruptcy petition should generally be stayed or dismissed if the debt in question is subject to a non-Hong Kong exclusive jurisdiction clause. Our discussion on this landmark decision of Guy Kwok-Hung Lam v Tor Asia Credit Master Fund LP [2023] HKCFA 9 can be found here.

Since then, the application of the principles Guy Lam has been considered by the Court of First Instance in the context of a winding up petition, which we have written about here. In that case Linda Chan J took the view that the approach in Guy Lam did not apply where, instead of a non-Hong Kong exclusive jurisdiction clause, there is an arbitration clause. Continue reading

Not “worthless window dressing”: Hong Kong Court declares keepwell deeds are enforceable contractual obligations

In two remarkably similar cases, Re Peking University Founder Group Company Limited [2023] HKCFI 1350 (the “Peking University Case”) and Re Tsinghua Unigroup Co., Ltd [2023] HKCFI 1572 (the “Tsinghua Case”), the Hong Kong Court affirmed the enforceability of keepwell deeds entered into by PRC companies as credit enhancement for bonds issued by their respective offshore subsidiaries. The Court recognised that although keepwell deeds are not guarantees, they are still enforceable contractual obligations that provide additional security to bondholders. However, both cases illustrate that keepwell deeds are sensitive to supervening events and subject to approval from relevant PRC authorities, particularly where the keepwell provider enters into reorganisation proceedings in the PRC.
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In Re Leading Holdings Group Limited [2023] HKCFI 1770, the Hong Kong Court has made it clear for the first time that, based on a construction of the contractual documentation, investors with an indirect participation in notes issued by a company have no standing to petition for winding up of the issuer, despite their obvious commercial interest in the credit of the issuer. Continue reading

Lessons from the Hong Kong Court on the fixed and floating charge distinction

Valuable lessons can be learnt from the Hong Kong Court of First Instance’s (“CFI“) recent decision in Bei Ni Ltd v Cornwell (Hong Kong) Limited [2023] HKCFI 1799. The CFI was confronted with the question of whether a charge over shares in a margin account was a fixed charge or a floating charge.

The CFI held that the key question was whether the proceeds were held for the benefit of the chargee.

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Companies Court holds register of members is not conclusive evidence of share ownership and rectification is not an automatic right

Section 633(1) of the Companies Ordinance allows a person or a member of the company to apply to the Court to request a rectification of the register of members if a name is entered or omitted from the register without sufficient cause or where a person ceases to be a member. The Companies Court (“Court“) in Shi Jiu Xing v Hong Kong A-Sun Group Co Ltd and Others [2023] HKCFI 1852 held that a rectification application under section 633(1) of the Companies Ordinance was subject to the Court’s discretion. The Court also confirmed that, in Hong Kong, the Court continues not to treat the register of members as conclusive evidence and is entitled to consider all relevant facts and circumstances.

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UK Supreme Court clarifies the scope of Quincecare duty for financial institutions executing customer payments

Earlier this month, the UK Supreme Court in Philipp v Barclays Bank UK plc [2023] UKSC 25 addressed the scope of the Quincecare duty in the context of an “authorised push payment” (APP) fraud, where the victim was tricked into willingly authorising the bank to transfer funds into an account controlled by the fraudster. Continue reading