Introduction

The Hong Kong Court of Final Appeal has given its judgment in the Yung Kee restaurant case,[1] thereby bringing the protracted litigation finally to an end. The case concerned a shareholder dispute between two brothers, namely Kam Kwan Lai and Kam Kwan Sing (the “deceased”), who unfortunately died in 2007, with regard to the operation of the well-known restaurant, Yung Kee.

Background

The subject company, Yung Kee Holdings Limited (the “Company”), was incorporated in the BVI. It is a holding company of another BVI company, Long Yau, which in turn operates two Hong Kong subsidiaries carrying on business exclusively in Hong Kong. The restaurant business was started by the late Kam Shui Fai (“Kam Senior”). After the death of Kam Senior in December 2004, the two brothers became shareholders of the Company, each holding directly or indirectly 45% of the shares, with the remaining 10% being held by their sister. The two brothers later fell out and the deceased brought proceedings in the Hong Kong court seeking an order that Kwan Lai buy him out on the ground that the affairs of the Company were being carried on in a manner which was unfairly prejudicial to him, pursuant to s 168A of the Old Companies Ordinance (the “Ordinance”).  In the alternative, the deceased sought an order that the Company be wound up on the just and equitable ground under s 327(3)(c) of the Ordinance.

At first instance, Harris J held that the court did not have jurisdiction to make an order under s 168A and that the Company’s connection with Hong Kong was not sufficiently strong to justify the exercise of its jurisdiction to make a winding up order under s 327(3)(c). However, notwithstanding these conclusions, Harris J nevertheless heard evidence on the substantive merits of the petition and found that the affairs of the Company had been carried on in a manner that was unfairly prejudicial to the deceased. On appeal, the Court of Appeal affirmed the trial judge’s rulings in relation to both s 168A and s 327(3)(c), and further reversed the judge’s finding on the existence of unfair prejudice. The case finally came before the CFA.

Section 168A: Jurisdiction

S 168A applies to “specified corporation”, which includes “non-Hong Kong company”, defined as “companies incorporated outside Hong Kong which establish a place of business in Hong Kong.” Noting that the Company was incorporated in the BVI, the court found that its jurisdiction to make an order under s 168A depends on whether the Company has established “a place of business” in Hong Kong. The court held that a “place of business connotes a place where or from which the company either carries on or possibly intends to carry on business.” Although business is not confined to commercial transactions or transactions which create legal obligations, in the view of the CFA, it simply does not cover purely internal activities, such as changes to the composition of the board or payment of dividends. Further, the CFA agreed with Harris J’s statement that the word “establish” indicates that some degree of permanence as being a location of the company’s business is required. On the evidence, the court concluded that the Company had not established a place of business in Hong Kong and therefore affirmed the decision of the courts below that the Hong Kong courts have no jurisdiction to make an order under s 168A in this case.

Section 327(3)(c): Sufficient connection with Hong Kong

The court went on to consider the petition under s 327(3)(c), pursuant to which an unregistered company may be wound up if the court is of the opinion that it is just and equitable that the company should be wound up. The court accepted that the most appropriate jurisdiction to wind up a company is the place of incorporation. As such, there must be some connection between the foreign company and Hong Kong, which justifies the exercise of the exorbitant jurisdiction. In this regard, the court referred to the three so-called core requirements, which must be satisfied before the court will exercise its discretionary jurisdiction to wind up an overseas company. The three core requirements are summarized by Kwan J (as she then was) in Re Beauty China Holdings Ltd [2009] 6 HKC 351 at para 23 as follows:

1. There had to be sufficient connection with Hong Kong;
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. 

In the present case, the focus was on the first requirement.

The court first considered whether a “more stringent” connection was required in the case of a shareholder’s petition compared to creditor’s petition, on the ground that the shareholders of a foreign company voluntarily adopted the law of the state of incorporation as the law governing the company’s legal status. The CFA gave a firm answer of “no”, holding that shareholders, no less than creditors, are entitled to bring winding up proceedings in Hong Kong in respect of a foreign company. But the factors which are relevant to establish the sufficient connection are different in the two cases, due to the different nature of the dispute and the purpose for which the winding up order is sought. The court noted that in the case of a shareholder’s petition, the dispute is between the petitioner and the other shareholders, and the company is the subject of the dispute rather than a party to it. Accordingly, the court held that the presence of the other shareholders within the jurisdiction is an extremely weighty factor in establishing the sufficiency of the connection between the company and Hong Kong.

The court pointed out that there were compelling factors in the present case which established relevant connection with Hong Kong:

1. The Company itself is merely a holding company of a group of directly and indirectly held subsidiaries and carries on no business of any kind whether in the BVI or Hong Kong.
2. All the underlying assets of the Company, that is to say the assets of its wholly owned subsidiary Long Yau, are situate in Hong Kong.
3. The business of the group is wholly carried on by the Company’s indirectly held subsidiaries, that is to say subsidiaries of Long Yau, all of which are incorporated in Hong Kong and carry on business exclusively in Hong Kong.
4. The whole of the Company’s income is derived from businesses carried on in Hong Kong.
5. All the Company’s shareholders and directors are and always have been resident in Hong Kong and none of them has ever set foot in the BVI where the Company is incorporated.
   
6. All the directors of its directly and indirectly held subsidiaries are and always have been resident in Hong Kong and none of them has ever set foot in the BVI.
   
7. All board meetings of the Company and its subsidiaries are held in Hong Kong and all administrative matters relating to the Company are discussed and decided in Hong Kong.
   
8. Crucially the dispute is a family dispute between parties all of whom are and always have been resident in Hong Kong and the events giving rise to it and the conduct of which complaints is made all took place in Hong Kong.
   
9. The only connection which the Company has with the BVI is that both it and its wholly owned direct subsidiary Long Yau are incorporated there. The fact that the Company’s only asset, being its shareholding in Long Yau, is situated in the BVI is a consequence of this. 

In essence, the court disagreed with the findings of the courts below that there was insufficient connection because the Company itself merely held shares in another BVI holding company. The court held that there is no doctrinal reason to exclude a connection through a wholly owned subsidiary. Further, the court drew an analogy with its previous decision in Waddington Ltd v Chan Chun Hoo [2008] 11 HKCFAR 370, in which the court allowed a minority shareholder of the parent company to bring a derivative action to recover money misappropriated from a subsidiary. The court, in Waddington, recognized that the value of a parent company resides in the value of its subsidiaries’ assets. As such, any depletion of a subsidiary’s assets causes indirect but real loss to the parent company and its shareholders. By the same token, the shareholder who brings a petition to wind up a company does so in order to realize his investment, and if the company is a holding company, then to realize the value of its underlying assets. Giving effect to the close connection between a holding company and the assets of its direct and indirectly held subsidiaries, in the court’s view, reflects the nature of the dispute and the purpose for which the proceedings are brought.

Is it just and equitable to wind up the Company?

Having concluded that it was open to the court to hear the petition under s 327(3)(c), the court went on to consider the merits of the petitioner’s complaints. The court referred to the speech by Lord Hoffmann in O’Neill v Phillips [1999] 1 WLR 1092 at p.1098 G-H, in which his Lordship noted that an unfair prejudice petition had two features. While a member of a company will not ordinarily be entitled to complain of unfairness unless there has been some breach of the terms on which he agreed that the affairs of the company should be conducted, there will be cases in which equitable considerations make it unfair for those conducting the affairs of the company to rely upon their strict legal rights.

The court agreed with the findings made by Harris J, namely there was a mutual understanding between the brothers that each is entitled to fully participate in the running of the business and to be properly consulted. But such understanding has been breached by Kwan Lai, as “he consciously took steps to control the Company and then exercised that control without proper regard to previous understandings”.

Therefore, the court was of the view that the proper order to make in the present case is a winding-up order. Nonetheless, the court ordered a stay of the winding up order for 28 days to give the parties an opportunity to agree the terms on which the petitioner’s shares in the Company should be purchased. If no such agreement is reached before the expiration of the period, the winding up order will take effect automatically.  

Implications

The CFA decision is to be welcome as it clarifies the “sufficient connection” test with a strong common sense flavor. Indeed, how could Hong Kong not be the natural jurisdiction in which Hong Kong residents resolve a dispute over the future of their Hong Kong business, even though such business is held by an overseas corporation?

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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.