August 11, 2020

Volume X, Number 224

August 11, 2020

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August 10, 2020

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When Do the Hong Kong Courts Have Jurisdiction to Make a Bankruptcy Order Against a Foreign Debtor?

Hong Kong is known to be an international business hub, and also serves as a gateway to China’s Belt and Road Initiative, which has over 65 countries participating in developing infrastructure and investment initiatives between East Asia and Europe.

High value transactions are commonplace and one way to protect the interests of Hong Kong businesses transacting with foreign companies is to seek a guarantee from the directors or shareholders of the foreign company.

However, enforcing the guarantee and proceeding to obtain a bankruptcy order against foreign guarantors is often a worry, in particular on the question of whether the Hong Kong Court will have jurisdiction to make a bankruptcy order if the debtor does not reside in Hong Kong.

There are several grounds upon which a bankruptcy petition can be presented in Hong Kong, one of which is where the individual is personally present in the country on the day the petition is presented. This could, in theory, capture an individual who is visiting as a tourist or on a short business trip.

In this article we consider the case of Re Dai Guoliang [2019] HKCFI 597 decided on 28 February 2019 by the Hong Kong Court of First instance, when the Court considered whether it should exercise its discretion to dismiss or stay a bankruptcy petition against a foreigner.

One of the interesting arguments relied on by the debtor, Mr Dai. Guoliang (“the Debtor”) was whether the Court should exercise that discretion to dismiss the petition by applying the principles applicable to the winding up of overseas companies.

The Court ultimately concluded that the Debtor had sufficient connection with Hong Kong and therefore did not dismiss the petition.

Facts

The facts of the case are as follows:-

Pursuant to a guarantee dated 20 February 2017 the Debtor owed a debt to the petitioner in excess of HK$10 million together with interest. The debt was not disputed.

Section 4 of the Bankruptcy Ordinance (Cap. 6) provides that a bankruptcy petition shall not be presented to the Court unless the debtor:

  1. is domiciled in Hong Kong (the “Domicile Gateway”);

  2. is personally present in Hong Kong on the day on which the petition is presented (the “Personal Presence Gateway”); or

  3. at any time in the period of 3 years ending with that day:

  • has been ordinarily resident, or has had a place of residence, in Hong Kong (the “Ordinary Residence Gateway”); or

  • has carried on business in Hong Kong (the “Business Gateway”)

The petitioner argued that the Domicile Gateway, the Personal Presence Gateway, the Ordinary Residence Gateway and the Business Gateway applied and as such the Court has jurisdiction to make the Debtor bankrupt.

The Debtor opposed the petition on the grounds that only the Personal Presence Gateway was satisfied, but argued that the Court should exercise its discretion to dismiss or stay the petition arguing that:

  • the Court should apply its discretion and not make a bankruptcy order because he did not have sufficient connection with Hong Kong; or

  • the Court should apply its discretion and not make a bankruptcy order by applying the principles in Section 327 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32), which apply to winding up petitions against overseas companies.

The Court of Final Appeal in Kam Leung Sui Kwan v Kam Kwan Lai (2015) 18 HKCFAR 501 confirmed the dicta of Kwan J (as she then was) in Re Beauty China Holdings Ltd [2009] 6 HKC 351, by explaining the relevant self-imposed constraints adopted by the courts — being the three so-called core requirements which the Court shall consider before exercising its statutory jurisdiction to wind up a foreign company pursuant to section 327 of Cap 32. The three so-called core requirements for exercise of discretion are as follows:

  1. that there is sufficient connection between the company and Hong Kong;

  2. that there must be a reasonable possibility that the winding-up order would benefit those applying for it; and

  3. the Court must be able to exercise jurisdiction over one or more persons in the distribution of the company’s assets.

What did the Court conclude?

After reviewing the parties’ affirmations and the petition, and having considered the approach taken for winding up of companies under section 327 of (Cap 32), the Court decided that in personal bankruptcy cases, there was no authority to support the argument that it should apply the rules applicable to winding up.

Deputy High Court Judge Maurellet SC (“the Judge”) heard this case, and concluded that any analogy between the two regimes is a loose one.   In particular, section 4 of the Bankruptcy Ordinance clearly sets out different jurisdictional gateways (as outlined above) including an express provision enabling a petition to be presented where the debtor is personally present in Hong Kong – the Personal Presence Gateway.

The Judge went on to state in paragraph 29 of the judgment that: “the legislature has seen fit to include this gateway to provide jurisdiction and there is no reason in principle why any discretion should be exercised in a way other than one which is flexible and fact specific.”

However, the Judge agreed that in certain cases, the Personal Presence Gateway alone may seem too exorbitant, for example, where a tourist is in Hong Kong for a fleeting period, but this would still be subject to the Court’s discretion.

In considering whether a bankruptcy order would be made against the Debtor in this case, the Court found that since the Debtor was:-

  1. a Hong Kong identity card holder;

  2. the former director and substantial shareholder of a company listed on the Stock Exchange of Hong Kong and with offices in Hong Kong; and

  3. had signed a guarantee with a Hong Kong law governing provision;

the Debtor’s connection with Hong Kong was not limited or tenuous and made a bankruptcy order solely on the basis of the Personal Presence Gateway. It did not need to consider the other gateways.

Comment

There may well be cases when a bankruptcy petition is presented against a tourist who is only travelling to Hong Kong for a short stay, with the petitioner relying upon the Personal Presence Gateway. Section 4 of the Bankruptcy Ordinance allows this.

However, as this case demonstrates the Court will look at more than just whether the debtor was personally present in Hong Kong on the day the petition was presented when deciding whether to exercise its discretion to dismiss a petition. What counts are real business and personal connections between the foreign individual and Hong Kong. These are amongst the factors that influenced the court in this case.

What is clear from this case is that satisfying the Personal Presence Gateway limb alone may not be sufficient to persuade the Court to make a bankruptcy order.

To better protect their interests, Hong Kong entities should ensure that agreements entered into with a foreign individual include a Hong Kong jurisdiction and choice of law clause. This, as it did in this case, will help support a bankruptcy petition presented to a Hong Kong Court which relies on the Personal Presence Gateway as the basis for jurisdiction.

Coupled with this, if the debtor has sufficient and real connections with Hong Kong the Court is less likely to exercise its discretion to dismiss the petition.

© Copyright 2020 Squire Patton Boggs (US) LLPNational Law Review, Volume IX, Number 150

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About this Author

Hin Han Shum, attorney, Squire
Attorney

Hin Han Shum is an associate based in our Hong Kong office. She focuses her practice on telecommunications, commercial and litigation cases. She also advises on data privacy and intellectual property matters.

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