Re City Gardens Ltd v Dok82 Ltd [2023] EWHC 1149 (Ch)

Where a petitioner presents a creditors winding up petition against a company, founded upon an (alleged) debt arising from a contract, can be company defend/oppose the making of a winding up order under section 122 of the Insolvency Act 1986 on the basis that: (1) the debt is disputed/not admitted (at least not £750 or more[1]); and (2) the contract contains an exclusive jurisdiction clause, nominating the court of another jurisdiction (not England and Wales), as the parties/contractants' choosen forum for resolving disputes related to the contract?

This issue (amongst others) arose in the case of City Gardens Ltd v Dok82 Ltd [2023] EWHC 1149 (Ch) (‘City Gardens’), an appeal heard by HHJ Pearce sitting as a Judge of the High Court (judgment handed down 15.5.23), against the decision of a first instance district judge.

Note, a second interesting issue arose in City Gardens, namely, in relation to the effect of a governing law clause, nominating a foreign law as governing disputes under the contract, on the Companies Court ability to determine whether the petition debt is genuinely disputed, on substantial grounds. A separate article considers this issue in City Gardens (available here).

Summary
For those short on time, the answer to the question posed in the first paragraph above, is that the exclusive jurisdiction clause is irrelevant. Where the debt is disputed/not admitted, the Companies Court hearing the creditors winding up petition is tasked with determining whether or not the company/respondent, in good faith, disputes the debt founding the petition, on substantial grounds. It must undertake this task[2]. The exclusive jurisdiction clause does not prevent, or render, impermissible, the Companies Court undertaking this task, and making a determination on the issue.

This decision is consistent with Hex Technologies Ltd v DCBX Ltd [2023] EWHC 537 (Ch) ('Hex') (Deputy Insolvency and Companies Court Judge Addy KC on 21.3.23), which doubted a contrary decision in Al Kuwari v Cantervale Ltd [2022] EWHC 3490 (Ch) ('Al Kuwari') (Insolvency and Companies Court Judge Prentis on 2.12.22). Though, neither Hex nor Al Kuwari were mentioned in City Gardens.

Readers will note that the decision in City Gardens on the relevance of an exclusive jurisdiction clause, is in marked contrast to the relevance of an arbitration clause (see Salford Estates (No.2) Ltd v Altomart Ltd [2014] EWCA Civ 1575; [2015] B.C.C. 306 (‘Salford Estates’) (paragraphs 39 to 41), Telnic Ltd v Knipp Medien Und Kommunikation GmbH [2020] EWHC 2075 (Ch) ('Telnic') (at paragraphs 26 and 27) and Eco Measure Market Exchange Ltd [2015] BCC 877)('Eco Measure').

Facts
City Gardens Limited (petitioner/appellant) and Dok82 Limited (company/respondent) entered into a contract for the supply of furniture packs for use on property developments. The contract was: (1) company/respondent to supply furniture packs to the petitioner/appellant; (2) petitioner/appellant to pay in advance for the furniture pack but such payment be refundable if a property development in question did not go ahead (paragraph 3).

In the event: (1) the petitioner/appellant paid a substantial sum for a furniture pack for a particular property development; (2) the particular property development later did not go ahead; and so, (3) the petitioner/appellant became entitled to a refund in respect to the relevant furniture pack (paragraph 4).

Later, the parties/contractants entered in a (second) legally binding contract (called, somewhat unhelpfully, a 'Memorandum of Understanding' ('MOU')), which: (a) recorded the existing position (paragraph 5); and (b) substituting some of the existing rights, for those in the MOU contract (particular, the quantum of the principal sum owed, and when it must be paid by)(paragraphs 5-6). The MOU contract (so far as relevant): (1) reduced the principal sum due; (2) required repayment by certain dates (including a long stop date); and (3) contained a exclusive jurisdiction clause, nominating the Hong Kong courts as having exclusive jurisdiction over disputes arising under the MOU contract.

No refund was made and the petitioner/appellant presented a creditors winding up petition, founded upon non-compliance with the long stop payment obligation in the MOU (paragraph 7). The company/respondent defended the creditors winding up petition on 4 grounds. The ground relevant to this article, was that:

'As a matter of construction, the court could not determine what sums (if any) were due under the [MOU]....' (paragraph 8.3)

First Instance

DJ at first instance dismissed the creditors winding up petition, on the ground (amongst others) that the Companies Court was prevented by the exclusive jurisdiction clause from determining whether or not the company disputed, in good faith, the petition debt on substantial grounds. The learned appeal judge recorded, at paragraphs 10.2, 10.3 and 10.5 of City Gardens, what the first instance DJ's had found in the first instance DJ's judgment:

'That it was not open to the court to adjudicate on the construction of the terms of the [MOU] because of the exclusive jurisdiction clause.... As it is put at paragraph 17: " this court cannot entertain the jurisdiction of this agreement, because the parties contracted to the exclusive jurisdiction of the Hong Kong courts."

Further, that the court could not rule on matters of construction or set off because they were matters of Hong Kong law. For example, she said at paragraph 18 of the judgment: "The question put by [counsel for the Respondent] to the court was this: 'Applying the laws of the jurisdiction of Hong Kong, is the debt properly due?' That is the question for the court to deal with today and the only court to be able to deal with that is the court of Hong Kong."

...

As it is put at paragraph 20 of the judgment:

"a petition can be brought against a debtor company in the UK, but not when that purported debt is based on a debt that is the subject of an entirely separate jurisdiction and the petitioning creditor cannot show that the debt is one that is within the remit of this court."

Grounds of Appeal

The petitioner/appellant appealed. The relevant ground was ground 1 - which was itself, subdivided into two subgrounds (as summarised by the learned appeal judge, at paragraphs 14 and 15):

'Ground 1A : The Judge erred in law and/or fact in determining that the Petition should be dismissed because the petition debt arose from a contract that is the subject of an exclusive jurisdiction clause in favour of Hong Kong. The Judge should instead have asked herself whether the Petition Debt was disputed on genuine and substantial grounds.

Ground 1B: Further or alternatively the court wrongly took into account the exclusive jurisdiction clause, in determining whether there was a genuine dispute on substantial grounds.'

Argument

The petitioner/appellant contended (paragraph 23) that the first instance DJ had erred on the effect of the exclusive jurisdiction clause, citing paragraph 7.637 of French on Applications to Wind Up Companies (4th edition):

"The fact that a creditor petitioner and the company sought to be wound up have agreed that a court outside England and Wales is to have exclusive jurisdiction to decide disputes about the debt on which the petition is based does not preclude the English court from deciding whether there is a dispute about the debt sufficient to prevent the winding-up petition proceeding."

And that the authors of French cite BST Properties Ltd v Reorg-Apport Penzugyi RT [2001] EWCA Civ 1997 ('BST Properties') and Citigate Dewe Rogerson Ltd v Artaban Public Affairs Sprl [2009] EWHC 1689 ('Citigate') in support of this proposition.

In response, the company/respondent:

(1) invited the Companies Court to consider '...the position where a winding up petition is based on a debt alleged to arise from a contract containing an arbitration clause.' (paragraph 24) and that, 'in that situation if the debt is not admitted, the court will dismiss or stay the petition so as to compel the parties to resolve the dispute through arbitration rather than through the court process.' (paragraph 24), replying on (1) Salford Estates; and (2) Telnic, as established this principle of law.

(2) contended that the '...same principle should apply in the context of an exclusive jurisdiction clause, on the ground that the parties should be required to adhere to their chosen mode of dispute resolution, in this case the jurisdiction of the Hong Kong courts.'  In support of this argument, the company/respondent referred to the Hong Kong Court of Appeal case of Guy Kwok Hung Lam v Tor Asia Credit Master Fund LP [2022] HKCA 1297 ('Lam v Tor Asia') - particularly, the judgment of Hon G Lam JA, where Hon G Lam JA said, at paragraph 86:

'Under the statutes the court has a discretionary power whether to make a winding up or bankruptcy order. The presence of an exclusive jurisdiction agreement between the parties in favour of another forum does not mean that the court is bound to stay or dismiss the petition. But, adopting the same approach as in ordinary actions, such an agreement should ordinarily be given effect unless there are strong reasons to the contrary. It follows that where the debt on which a winding up or bankruptcy petition is based is disputed and the parties are bound by an exclusive jurisdiction clause in favour of another forum precluding the determination of that dispute by the Hong Kong court, the petition should not be allowed to proceed, in the absence of strong reasons, pending the determination of the dispute in the agreed forum. As in the case of ordinary actions, it is neither possible nor desirable to define what may constitute strong reasons. One can conceive of cases where the debtor may be incontestably and massively insolvent quite apart from the disputed petition debt, or it may for other reasons be a menace to commercial society if allowed to continue to trade, or there may be other creditors seeking a winding up whose debts are not subject to any jurisdiction agreement, or the assets may be in jeopardy, or there may be a need to investigate potential wrongdoings, or the effect of a dismissal or stay of the petition would be to deprive the petitioner of a real remedy or would otherwise result in injustice. Under this approach the court retains flexibility to deal with the case as the circumstances require, taking into account other powers of the court that may become relevant, such as the power to allow the petitioner to be substituted by other creditors and the power to appoint a provisional liquidator or interim trustee.'

Responding to this, the petitioner/appellant argued that this argument must fail, because:

(1) BST Properties held, the petitioner/appellant said, that '...the existence of an exclusive jurisdiction clause in favour of the determination of the dispute in a foreign jurisdiction is not only not determinative of whether the domestic companies court should proceed with the determination of whether the petition debt is bona fide disputed on substantial grounds, it is irrelevant to that task.' (paragraph 26)[3]

(2) the English High Court hearing the City Gardens appeal was bound the BST Properties decision, as a matter of precedent, because the BST Properties decision was a English Court of Appeal decision. That '[a]ccordingly, even if the court found ...Lam v Tor Asia to be attractively reasoned from first principles and/or persuasive...this court is bound by the decision in [BST Properties] to find not only that the exclusive jurisdiction clause in this contract did not prevent the court from determining the issue under Section 123 of the Insolvency Act 1986 but that it was irrelevant to that exercise.' (paragraph 27)

Decision on Appeal
The learned appeal judge in City Gardens reached the following conclusion, at paragraph 42:

‘Having considered the judgment of the Court of Appeal in [BST Properties], I am satisfied that the [petitioner/appellant] is correct in its argument that the exclusive jurisdiction clause was of no relevance to the determination of the issue before the lower court. That decision is binding authority for the proposition that the Companies Court, in considering the exercise of its power to wind up under section 122 of the Insolvency Act 1986, is itself charged with determining whether the petitioner is genuinely a creditor. For that purpose, it has to determine whether the alleged debt is disputed in good faith on substantial grounds. Even where the alleged debt is based upon a contract which has an exclusive jurisdiction clause in favour of a foreign jurisdiction, the judgment as to the exercise of the winding up power remains that of the domestic court. It follows that the petition should not have been dismissed on the grounds of the existence of the exclusive jurisdiction clause, whether because, on account of the clause, it had no power to hear the petition or because it should (or indeed could) decline in its discretion to hear the petition.'

Necessarily obiter, the learned appeal judge in City Gardens did go on to consider what he would have done had he not been bound by BST Properties. He said in City Gardens, at paragraph 43:

‘Had I not been bound by Court of Appeal authority, an interesting question might have arisen as to whether the English courts should follow the judgment in Lam v Tor Asia, finding that, by analogy with the position in cases with arbitration clauses, the court should, wherever a debt is not admitted, give effect to an exclusive jurisdiction clause by requiring the issue on the debt to be tried in the foreign jurisdiction before permitting a winding up order to be made. In the event, it is unnecessary for me to consider that question in this appeal, notwithstanding [counsel for the petitioner/appellant] careful analysis of the Hong Kong judgment and his attractive argument that it should not be followed’

Other Authorities

The decision in City Gardens is consistent with Hex Technologies Ltd v DCBX Ltd [2023] EWHC 537 (Ch) (Deputy Insolvency and Companies Court Judge Addy KC on 21.3.23) ('Hex'), which doubted a contrary decision on this point in Al Kuwari v Cantervale Ltd [2022] EWHC 3490 (Ch) (Insolvency and Companies Court Judge Prentis on 2.12.22). In Hex, the deputy ICC Judge held that there was not an irreconcilable conflict between BST Properties and Salford Estates, and so, pending further consideration of the issue by the Court of Appeal, the court in Hex was bound to follow BST Properties.

Parties' Choosen Forum for Dispute Resolution - Absence of Uniformity in Approach

An 'exclusive jurisdiction clause' is but one type of clause wherein the parties can agree, as part of their agreement, as to who shall determine any dispute that may arise under the contract. Another type of clause is an arbitration clause (or arbitration agreement).

The outcome of City Gardens for 'exclusive jurisdiction clauses' is in marked contrast to the law in relation to arbitration clauses/agreements (see Salford Estates, Telnic and Eco Measure). This different in treatment will need rationalising. In Hex, the deputy ICC Judge saw a basis for a difference in approach, at paragraph 68:

'...notwithstanding ICC Judge Prentis' conclusion that arbitration agreements and exclusive jurisdiction clauses are, for these purposes, a distinction without a difference, in my judgment BST Properties Limited and Salford Estates can presently be distinguished on the basis that Salford Estates was decided by reference to the legislative policy of the 1996 Act, which differed materially from the prior Arbitration Act, whereas there is no equivalent legislative policy in relation to exclusive jurisdiction clauses to inform the exercise of the court's discretion.'

Conclusion
In City Gardens, the Companies Court decided it was bound by the Court of Appeal decision in BST Properties and so held that the exclusive jurisdiction clause was irrelevant to the Companies Court’s task of determining whether or not the debt founding the winding up petition was, in good faith, disputed by the company/respondent, on grounds that were substantial. In other words, the existence of the exclusive jurisdiction clause did not prevent, or render impermissible, the Companies Court determining this issue.

Though expressly not determining the matter, the ‘hint’ from the Companies Court in City Gardens, given at paragraph 43, was that, even if the authority of BST Properties had not bound the Companies Court, there was still an ‘attractive’ argument that Lam v Tor Asia should not be following in England and Wales. It will be interested to see if the company/respondent in City Gardens appeals (whether to the Court of Appeal, or through a leapfrog certificate, straight to the Supreme Court - as counternanced as potentially appropriate in Hex at paragraph 71)

SIMON HILL © 2023*

BARRISTER

33 BEDFORD ROW

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