Introduction

In a recent High Court decision, the Court had the opportunity to provide further guidance on winding up foreign companies in Hong Kong. In this case, the Court made it clear that some core requirements will be able to enlist the winding-up jurisdiction of Hong Kong Courts to pressurize foreign companies to pay their debts, while at the same time, these requirements do not have to be rigidly followed.

Background

The Plaintiff, Shandong Chenming Paper Holdings Limited (“Shandong Chenming”) is a sizeable company incorporated in the People’s Republic of China with a dual primary listing of H shares on the Main Board of The Stock Exchange of Hong Kong Limited (“HKEX”) and is registered as a non-Hong Kong company under Part 16 of the Companies Ordinance in Hong Kong.

In 2005, Shandong Chenming and Arjowiggins HKK 2 Ltd (“Arjo”), a private Hong Kong company, entered into a joint venture agreement and established a joint venture company in the Mainland to manufacture paper products.  Subsequently, disputes arose and various proceedings including an arbitration proceeding were commenced, and damages of RMB 167,860,000 were awarded to Arjo. On 7 December 2015, Arjo obtained leave from the Court to enforce the arbitral award in Hong Kong. While Shandong Chenming did not appeal against the ruling in the arbitration, it refused to pay. Arjo then served a statutory demand on Shandong Chenming for the contractual damages, legal and tribunal fees plus interest. In response, the company sought to restrain Arjo from submitting a winding-up petition by arguing that Hong Kong Courts lacked the jurisdiction to wind it up.

The Three Core Requirements

The Court’s discretionary power to wind up a foreign company comes from section 327(3) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32). The Court quoted the applicable principles summarized in Kam Leung Siu Kwan v Kam Kwan Lai (2015) 18 HKCFAR 501 and reiterated that the exercise of this jurisdiction is discretionary as Hong Kong courts see that it is generally more appropriate to wind-up a foreign company in its country of incorporation.

To have a good reason to exercise this discretion, Hong Kong courts have long developed three core requirements which must be satisfied before exercising such discretion:

1.       There had to be a sufficient connection with Hong Kong, but this did not necessarily have to consist in the presence of assets within the jurisdiction;

2.       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.

Key Dispute

While accepting that the 1st and 3rd of the core requirements were satisfied, Shandong Chenming argued that the 2nd requirement was not satisfied because it has no assets in Hong Kong and does not conduct business in Hong Kong, and therefore, its sole connection with Hong Kong would be its listing on the HKEx. A liquidator, even if the company is being wound up, would be unable to achieve anything and thus the winding-up order would be “an exercise in futility”.

In order to consider whether the Court’s scope of jurisdiction covers Shandong Chenming, the issue to be decided is whether there is a reasonable prospect that Arjo would benefit from a winding-up order against Shandong Chenming. This requirement is commonly fulfilled by the presence of assets within jurisdiction which can be distributed amongst creditors. It can also be satisfied by the opportunity of appointing a liquidator for the purpose of investigating misappropriation and misapplication of the assets of the company.

The Decision

The Judge found that the value of Shandong Chenming’s listed status in Hong Kong was not capable of providing a material benefit to the Arjo or other creditors of the company due to its structure of the ownership and control, nevertheless, the Judge found that Arjo would still benefit from a winding up order.

The Judge found that Arjo would be able to derive benefits from the leverage created by the prospect of a winding-up petition or the appointment of a liquidator. Given the "immediate and severe" consequences of a winding-up order, it would exert considerable pressure on Shandong Chenming’s management to satisfy its debt to Arjo. Following the winding-up, the control of Shandong Chenming in Hong Kong will be shifted to directors appointed by the liquidators, the shares transferred from the date of the presentation of winding up petition will be declared void unless otherwise ordered by the Court, and besides, the status of being a Hong Kong listed company would cease to be viable. Therefore, the damage done to one’s reputation and the interference in carrying on business overseas as a consequence of enforcement action by a liquidator would be immense.

While having a second primary listing in Hong Kong but refusing to pay the arbitration award, the Judge found that Shangdong Chenming was trying to take advantage of Hong Kong’s financial system and the legal system that underpins it and thus this conduct was unacceptable. Therefore, even in the absence of the aforementioned benefits of leverage, the Court would have found enough to justify a winding-up order.

Conclusion

While this judgment confirms that the core requirements remain critical in exercising the discretion, the Court also conveyed a message that the application of the requirements can be moderated if circumstances necessitate it. It also serves as a clear reminder that the Hong Kong courts are prepared to take robust steps to uphold the integrity of our legal system by enlisting their winding-up powers to ensure parties will perform their legal obligations.

 

For enquiries, please contact our Litigation & Dispute Resolution Department:

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.

Published by ONC Lawyers © 2017