Hong Kong Courts used to find that where a foreign company, being a company not incorporated and registered in Hong Kong, had assets in Hong Kong, the company had a sufficient connection with Hong Kong to justify its being wound up here.  The Court in the recent case of Re Gottinghen Trading Ltd [2012] 3 HKLRD 453 refused to wind up a foreign company despite the existence of company assets in Hong Kong, showing that more stringent measures are now in place.

Background: Can Hong Kong Courts
wind up foreign companies?

Under the Companies Ordinance (Cap. 32) (the “CO”), a foreign company, being a company neither incorporated nor registered in Hong Kong, is known as an “unregistered company”.Hong Kong Courts may exercise their right to wind up unregistered companies under s 327 CO as long as three requirements formulated in the case of Re Real Estate Development Co [1991] BCLC 210 and applied in Hong Kong in the case of Re Zhu Kuan Group Company Limited, unreported, HCCW No. 874 of 2003 are met:

1.A sufficient connection with Hong Kong is established;

2.There is a reasonable possibility that the winding up would benefit those applying for it; and

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

Core requirements

I. Sufficient connection with Hong Kong

Sufficient connection with Hong Kong can usually be satisfied by showing that the unregistered company has assets within Hong Kong. In Re Irish Shipping Ltd. [1985] HKLR 437, the Court cited and approved the principles in In Re Compania Merabello [1973] Ch. 75 that the assets need not be commercial, or assets showing the company had previously carried on business in Hong Kong, or even assets distributable to creditors by the liquidator in the winding-up, as long as the winding-up order would be of some benefit to creditors.Two Hong Kong cases, however, proposed a more stringent standard. Re Zhu Kuansuggested that the existence of a single bank account in Hong Kong at one time in the past was not enough to establish sufficient connection, and Re Beauty China Holdings Ltd, unreported, HCCW 364/2009 suggested that the existence of cash, cash equivalents and pledged time deposits in Hong Kong dollars did not mean that the company’s assets were held in Hong Kong.

II. Reasonable possibility of benefit

Usually, once it was shown that assets were not worthless such that those seeking the winding-up could recover something, a reasonable possibility of benefit would be established.The requirement was not hard to meet. In Re Beauty Chinait was held that even where the liabilities of a company’s subsidiary exceeded its assets, this still showed a reasonable possibility of benefit as it did not mean that there was no prospect of recovery whatsoever.In that case, a major portion of the liabilities of the subsidiary was due to its immediate holding company, which was in turn wholly owned by the company to be wound up.The subsidiary had current assets due from its fellow subsidiaries.In Re Zhu Kuan, no evidence was put forward regarding the financial position of a HK$2 company of which the insolvent company had a 50% shareholding. The HK$2 company had never carried on business. The Court opined that it was “disinclined to reject the possibility that there may be some recovery” and held there was a reasonable possibility of benefit.

Significant overlap between the first two core requirements

Case law suggests that the mere existence of assets in Hong Kong would satisfy the first requirement, regardless of the actual worth of the assets; as for the second requirement, some value pertaining to the assets has to be established. There is, however, significant overlap between the two factors, as the existence of substantial assets in the jurisdiction usually satisfies both requirements.

III. Exercising jurisdiction over one or more persons

The third requirement is mostly uncontroversial. In Gottinghen, it was held that this would be met if at least one shareholder is ordinarily resident or domiciled in Hong Kong.

A more stringent approach in Gottinghen

Facts of the case

Gottinghen concerned two companies – C1 and C2 – that were the subject of a shareholders’ dispute and winding up petitions had been presented under s 327(3)(c) CO on the ground that it was just and equitable to wind up the companies due to the deadlock occasioned by the dispute. C1 was incorporated in the British Virgin Islands and C2, in Samoa, making them unregistered companies. They were owned by the Petitioner and the 1^st Respondent, each of whom held 50% of each company respectively. Both the Petitioner and the 1^st Respondent were not resident in Hong Kong. C1’s garment export business was based in Shanghai and had no connection to Hong Kong; C2 was used solely to apply for two shares in two initial offerings and did not carry on a business. Other than Hong Kong bank accounts, the two companies did not have assets in Hong Kong. There was no suggestion that books and records had ever been kept in Hong Kong.

Ruling

Harris J held that there was no basis to wind up C1 and C2. The most appropriate jurisdiction in which to wind up a company would be its place of incorporation. Before the Hong Kong Court would exercise its discretion to wind up an unregistered company here, the first requirement that there was sufficient connection with Hong Kong had to be satisfied. The presence of assets was a possible factor for consideration but was not decisive.

Harris J applied a more stringent approach than that of previous case law.Given that the power to wind up unregistered companies is “exorbitant”, Hong Kong Courts must be justified in exercising their jurisdiction through a connection that is “sufficient to justify the Court setting in motion its winding-up procedures over a body which prima facie is beyond the limits of territoriality” (quoting Re Real Estate Development Co).Therefore, even though there were assets in the jurisdiction in Gottinghen (the two bank accounts), Harris J considered that was an insufficient connection.Harris J considered that in today’s world of global interconnectivity, liquid assets could easily be moved from one jurisdiction to another through electronic means such as e-banking, and it was merely for convenience that the bank accounts were in Hong Kong. This did not demonstrate a sufficient connection for the first requirement.Thus, notwithstanding the fact that C1’s bank accounts in Hong Kong contained some HKD24,440,329.57 in cash and equities of HKD7,201,376.80, the Court found it was unnecessary for C1’s bank accounts to be in Hong Kong.As for C2, the connection was even weaker as C2’s bank account only had HKD50,000 at the time the petition was presented which fell to HKD31,953.10 at the time of ruling. Where the amount is very small, the assets become of little, if any, relevance.

Although Gottinghen focused on the first requirement of sufficient connection, it departed from the essence of previous case law. It stressed the appositeness of winding up the unregistered company in Hong Kong and set a higher standard for assessing this by examining rigorously whether the amount of assets led one to conclude there was sufficient connection to Hong Kong. This contrasted with the lower threshold in the second requirement pre-Gottinghen, where the Courts were readier to find a reasonable possibility of benefit where the company had little assets or even where a subsidiary’s liabilities outstripped its assets.

Higher thresholds for shareholder dispute cases?

Gottinghen suggests different thresholds apply when establishing sufficient connection according to the type of winding up sought. Harris J distinguished between winding up cases that are brought upon (1) insolvency and (2) just and equitable grounds, the latter usually occurring in a shareholders’ dispute scenario.For insolvency cases, the focus would be on whether there were assets within the jurisdiction. The purpose behind winding up insolvent companies is to pay creditors for a debt due from the company; therefore whether or not assets exist in Hong Kong is important. Otherwise, it is pointless to wind it up here as it benefits no creditor. In just and equitable winding up cases, however, the Courts are asked to determine disputes between parties over the conduct of the company.In those cases the more pertinent factors would include whether the company carries on business in Hong Kong, if Hong Kong was the place where matters giving rise to the dispute occurred and whether the shareholders had a connection with Hong Kong.Therefore, it could be that Gottinghen’s stringent assessment of the value of the assets in determining whether sufficient connection exists for the Court to exercise jurisdiction would be more applicable in just and equitable winding up cases, and that in insolvency cases the threshold would not be pitched as high.