Jurisdictional Challenge Does Not Stay an Unless Order to File Defence

In the case of Jovial Paradise Limited v Ever Harmony Enterprises Limited and others [2024] HKCFI 3500 involving a USD88 million loan, the Court of First Instance was asked to determine the Defendants' jurisdictional challenge and the application to set aside a default judgment. The Plaintiff, represented by DLA Piper Hong Kong, obtained a favourable ruling and was awarded costs of the hearing. The DLA Piper team was led by Harris Chan (Partner), assisted by Cleo Chau (Senior Associate).

 

FACTUAL BACKGROUND

The Facility Agreement

In August 2019, the Plaintiff as lender entered into a facility agreement (Facility Agreement) for a USD88 million loan (Loan) with 1^st and 2^nd Defendants as borrowers (Borrowers) and the 3^rd to 5^th Defendants as guarantors (Guarantors). In the Facility Agreement, the Guarantors agree to guarantee the Borrowers' obligations to repay the Loan on time.

According to the Facility Agreement, Hong Kong law is the governing law and Hong Kong Courts have exclusive jurisdiction to settle any disputes relating to a "Finance Document" (which is defined to include the Facility Agreement).

Subsequently, the parties entered into an Amendment and Restated Agreement which restated the clauses in the Facility Agreement on the guarantee, governing law and exclusive jurisdiction. Further, each of the Guarantors executed a personal guarantee governed by PRC law (PRC Personal Guarantees).

Thereafter the Borrowers failed to pay interest on the Loan and became liable to repay the entire outstanding part of the Loan. The Plaintiff then commenced action in the Court of First Instance to recover the Loan from the Borrowers and enforce the guarantee against the Guarantors under the Facility Agreement and/or the Amendment and Restated Agreement. It is worth noting that the Plaintiff does not rely on the PRC Personal Guarantees to sue the Guarantors in these proceedings.

Procedural History

On 4 March 2024, the Court granted an unless order that the Defendants do file and serve their Defence by 2 April 2024 (Unless Order Deadline), failing which the Defendants be debarred from doing so and the Plaintiff be at liberty to apply for judgment against the Defendants.

By a summons dated 28 March 2024, the Defendants sought, inter alia, (i) a declaration that the Hong Kong Court has no jurisdiction over the Guarantors in respect of the subject matter of the claims and (ii) an order that all further proceedings in the Hong Kong Court be stayed in favour of the relevant PRC Court on the ground of forum non conveniens (Jurisdiction Summons).

As the Defendants failed to file any Defence by the Unless Order Deadline, the Plaintiff applied for default judgment against the Defendants and obtained the same on 3 July 2024 (Default Judgment).

The Defendants then took out a summons for the Default Judgment to be set aside (Setting-aside Summons).

 

ISSUES

The issues before the Court were (1) whether the Plaintiff's claim should be stayed on the ground of forum non conveniens and (2) whether the Default Judgment should be set aside.

 

DECISION

The Court dismissed both the Jurisdiction Summons and the Setting-aside Summons.

Jurisdiction Summons

Amongst others, the Defendants argued that the execution of the PRC Personal Guarantees is one of the condition precedent documents for the Amendment and Restated Agreement to take effect. As such, the Plaintiff shall and can only assert its claim against the Guarantors under the PRC Personal Guarantees. As PRC law is the governing law in the PRC Personal Guarantees, it follows that the relevant PRC Court is the proper forum for the current dispute.

The Court held that Hong Kong Courts were the proper forum for the following reasons:

1. The PRC Personal Guarantees was specifically included in the Amendment and Restated Agreement as a further security agreement, which is a separate obligation from that in the Facility Agreement and the Amendment and Restated Agreement;
2. The execution of the PRC Personal Guarantees as a condition precedent does not render its terms forming part of or superseding the terms of the Amendment and Restated Agreement; and
3. The parties have agreed to submit under a jurisdiction clause and there is no reason or exceptional circumstances why the Court should depart from the jurisdiction clause in the Facility Agreement and the Amendment and Restated Agreement.

In March 2025, the Defendants' application for leave to appeal against the decision regarding the Jurisdiction Summons was rejected by the Court of First Instance.

Setting-aside Summons

To set aside a regular judgment, the Defendants have to show that there is a manifestly arguable defence on merits apparent from the papers already before the Court. However, the Court found that the Defendants did not put forward any substantive defence.

Further, the Defendants contended that the Default Judgment should be entered inter partes. The Court held that there was no room for argument on whether the Defendants were in default so an inter partes hearing for argument is unnecessary. Once an unless order has been made, a jurisdictional challenge does not stay the deadline for filing a defence. The Plaintiff was entitled to apply for the Default Judgment as the Defendants did not file their Defence before the Unless Order Deadline.

 

KEY TAKEAWAYS

The Court's decision in this case reinforces the importance of keeping track of filing deadlines, especially unless orders to file pleadings. A jurisdictional challenge does not automatically stay the deadline to file a defence after an unless order has been made. In such circumstances, the plaintiff is entitled to apply for a default judgment

It is common for loan agreements to have various security documents that are executed in the PRC and with PRC law as the governing law. However, the aforesaid alone does not convince the Court to deviate from the jurisdiction clause in the main loan agreement. Lenders should review the governing law and jurisdiction clauses carefully, especially when the loan agreements are subsequently amended and restated.

The full judgment of the case can be accessed here.