In a recent decision of Re Insigma Technology Co Ltd unreported, HCCW 224/2013 (15 October 2014),  Harris J restated the general principles of winding up a foreign company under section 327 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32).  He also warned the prospective petitioners of the possibility that an indemnity costs order may be made against them if their Petitions to wind up a foreign company were found to be speculative.

Background

Insigma Technology Co Ltd (“Insigma”) is a company incorporated in the People’s Republic of China (“PRC”) and listed on the Shanghai Stock Exchange.  It has not been registered in Hong Kong under Part XI of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) (“CWUMPO”) or Part 16 of the Companies Ordinance (Cap 622).  It has no established place of business in Hong Kong either.  Nevertheless, Insigma has a 95% interest in a Hong Kong incorporated company, Innovation (Hong Kong) International Investment Ltd (“Innovation”). 

In 2010, Alstom Technology Ltd (“Alstom”) obtained an arbitration award against Insigma in Singapore (the “Award”).  Alstom’s attempt to have the Award recognized and enforced in the Hangzhou Intermediate People’s Court of Zhejiang Province was unsuccessful with the result that the debt was not recognised in PRC.  Alstom had also accepted that it could not apply to wind up Insigma in PRC.

However, Alstom obtained an order in Hong Kong to enforce the Award as a judgment.  On 20 March 2013, Alstom served a statutory demand on Insigma’s solicitors in Hong Kong.  Subsequently, Alstom issued a petition to wind up Insigma on the grounds of insolvency (the “Petition”). 

Alstom contended that the appointment of provisional liquidators and liquidators against Insigma may bring a “reasonable possibility of benefit” to Alstom as they can investigate Insigma’s affairs and/or seek assistance to identify, take control of and recover Insigma’s assets located in Hong Kong and other jurisdictions.  Further, it was alleged that it is just and equitable to wind up Insigma because the Award remained unpaid notwithstanding that Alstom had already obtained the Enforcement Order and Charging Order against Insigma.

The Law

According to section 327(3)(b) and (c) of CWUMPO, the Court may wind up an unregistered company if it is unable to pay its debts or if the Court is satisfied that it is just and equitable to do so; section 327(4) provides that an unregistered company is deemed to be unable to pay its debts if it has been served with a statutory demand and has neglected to settle the same within 21 days.

The Court’s Analysis

Harris J noted that it is highly unusual to seek to wind up an active listed company in a jurisdiction other than that in which it is incorporated or listed.  Under the relevant principles of private international law, the existence or dissolution of a foreign corporation is generally to be determined in accordance with the law of its place of incorporation and by that place’s courts.  Accordingly, the Hong Kong Court will not exercise its prima facie jurisdiction to wind up a foreign company unless a sufficient connection with Hong Kong is shown to justify engaging Hong Kong’s insolvency regime over the company.  To establish the sufficient connection with Hong Kong, exceptional facts are called for, for instance, the company should have significant presence and creditors in Hong Kong so as to bear some characteristics of a domestic liquidation.

Harris J summarized the general principles emerging from the line of cases in the past 2 years where the High Court has considered in depth the criteria by reference to which the Court should determine whether or not to exercise the power given by section 327 of CWUMPO to wind up both solvent and insolvent companies incorporated in another jurisdiction:[1]

The power conferred by section 327 of CWUMPO is discretionary.  Three core requirements must be satisfied in order to justify the Court exercising the discretion:

1.       There is sufficient connection with Hong Kong to justify setting in motion the Hong Kong insolvency regime, which prima facie requires a liquidator to liquidate a company’s assets wherever they are located and similarly invite proofs of debt from creditors, both in Hong Kong and overseas.

2.       There is a reasonable possibility of a winding-up order benefiting those applying for it. 

3.       There must be a person subject to the Court’s jurisdiction (other than by being the petitioner or a creditor who will become subject to the Court’s jurisdiction if he submits a proof of debt) and having a material economic interest in a winding-up.

 

Furthermore, Harris J clarified that, where the connection between a company’s affairs and Hong Kong is sufficiently strong and the benefit of a winding-up is sufficiently substantial to justify a winding-up order, the 3^rd core requirement can be dispensed with.

1^st core requirement – substantial connection

In considering the substance of the connection with Hong Kong and whether or not it is sufficient to justify making a winding-up order, it is important to have regard to the order being sought and its consequences.  A winding-up order engages the whole of the winding-up regime, which is designed for the liquidation of Hong Kong companies, whose assets and creditors are largely located here.  It is extended to unregistered companies only in cases where there is justification for subjecting them to the regime and the formulation of the three core requirements reflects this. 

Whether the connection is sufficiently strong depends on both the nature of the individual matters relied on and also the significance of the company’s Hong Kong connection to its activities viewed as a whole.  In other words, the Court will ask how Hong Kong fits into the overall scheme of the company’s activities viewed in their entirety.

Alstom relied on Insigma’s interest in Innovation (the “Interest”) and an indirect interest in another Hong Kong private company, Insigma M&E (Hong Kong) Ltd (“Insigma HK”), as satisfying the 1^st core requirement.  Nevertheless, the Court held that Insigma HK is not Insigma’s asset in Hong Kong and thus the connection was only limited to the Interest.  The Interest had a significant value and, when viewed in isolation, might reasonably be suggested to constitute a substantial connection with Hong Kong.  However, Insigma carried on business largely in PRC, where it is listed.  Accordingly, the Interest represented a very small part of Insigma’s assets and commercial affairs, and did not provide sufficient connection to justify the Hong Kong Court to engage the insolvency regime over Insigma and require the liquidator to attempt to realize Insigma’s assets in PRC.

On finding there to be no substantial connection with Hong Kong, i.e. the 1^st core requirement not being satisfied, Harris J drew the conclusion that Insigma cannot be wound up in Hong Kong.  Nevertheless, for the sake of completeness, Harris J went on to discuss the 2^nd and 3^rd core requirements.

2^nd core requirement – benefit to creditors

While Harris J accepted Alstom’s submission that the liquidator may be better able to take steps to realize the full value of the shares, he commented that there was a large degree of artificiality about this argument because what Alstom had in mind was a realization for its own benefit; not the realization of Insigma’s assets in Hong Kong for the benefit of the creditors as a whole.  Alstom clearly wished to use a winding-up order in Hong Kong to enforce the Award and recover the sums for itself.  There would be little point in putting Insigma into liquidation rather than enforcing the Charging Order because the proceeds of Insigma’s assets have to be shared with other creditors, which results in an even lower recovery for Alstom.  Moreover, no other creditors were in support of the Petition.

Alstom tried to raise another benefit that a liquidator appointed in Hong Kong could take steps in PRC to consider further collection of assets and/or investigate Insigma’s affairs outside Hong Kong.  Harris J held that there was no realistic possibility that a PRC Court and regulators would recognize a liquidator appointed by the Hong Kong Court.  As stated in “The Reply of the Supreme People’s Court to the Request for Instructions on Norstar Automobile Industrial Holding Ltd’s Application for Recognition of a Court Order of the Hong Kong Special Administrative Region dated September 28, 2011”, there is no legal basis for PRC Courts to recognize any winding-up order issued by the High Court of the Hong Kong Special Administrative Region.  Therefore, the 2^nd core requirement could not be satisfied.

3^rd core requirement – a person subject to the Court’s jurisdiction other than by virtue of being the petitioner with sufficient economic interest in a winding-up

Alstom argued that it satisfied the 3^rd requirement as it had obtained recognition of the Award in Hong Kong.  Harris J reiterated that a creditor cannot satisfy this requirement simply by presenting a petition.  The creditor must be subject to the Court’s jurisdiction by virtue of doing something more such as obtaining the benefit of a judgment debt in Hong Kong.  He added that, a foreign party who commences litigation before a Hong Kong Court and obtains judgment will normally satisfy the 3^rd requirement.  However, it would be artificial to treat a petitioner as satisfying the 3^rd core requirement simply by registering an arbitration award.  Harris J was of the view that Alstom’s submission to the jurisdiction of Hong Kong was too tenuous to justify the Court engaging the Hong Kong insolvency regime over Insigma.

Conclusion

Alstom sought to obtain a winding-up order against Insigma (an active company incorporated and listed in PRC) in Hong Kong.  With no creditors domiciled or resided here, Insigma had little connection with Hong Kong.  Harris J noted that the Petition was not a genuine attempt to engage the Hong Kong insolvency regime for the protection of Insigma’s creditors, but seems to be merely a means to put pressure on Insigma.  As Alstom failed to satisfy the 3 core requirements, the Court could not exercise its discretion under section 327 of CWUMPO to wind up Insigma, and accordingly, the Petition was dismissed.  Harris J noted the speculative nature of the Petition and commented that but for Insigma’s failure to honour the Award, he would have ordered that the costs be paid on an indemnity basis.

 

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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 © 2014