In our issue last month we discussed the problems faced when attempting to wind up a foreign company in Hong Kong, citing the recent case of Re Gottinghen. Now, with the decision of Re Yung Kee Holdings Limited fresh off the judicial press, the difficulties seem even harder to surmount.

Background: The Yung Kee Saga

Re Yung Kee Holdings Limited, unreported, HCCW 154/2010 concerned a local family restaurant business set up by the Petitioner’s father, Kam Shui Fai (“Kam Senior”), who left the business to his two sons, the Petitioner Kam Kwan Sing and the Petitioner’s brother Kam Kwan Lai, the 1^st Respondent (“Kwan Lai”). Kwan Lai was the majority shareholder and the Petitioner, the minority one. The Petitioner initiated proceedings to wind up Yung Kee Holdings Limited (“Yung Kee”) on, amongst other things, the grounds of unfair prejudice pursuant to section 168A of the Companies Ordinance (the “CO”), claiming that Kwan Lai had run the company in a manner unfairly prejudicial to him.

Access Denied

Closing the portals shut

Before deciding on whether there was unfair prejudice, the Court first considered whether it had jurisdiction to wind up Yung Kee under section 168A CO, which applied to a “specified corporation”. The CO defined “specified corporation” in section 2(1) as being either a “company” or a “non-Hong Kong company”. This issue was pertinent since Yung Kee was a company incorporated in the British Virgin Islands (“BVI”). Harris J eventually held that the Court did not have jurisdiction.

A non-Hong Kong company

A non-Hong Kong company is defined in section 332 CO as being a company “incorporated outside Hong Kong which… establish[ed] a place of business in Hong Kong.” The Court then considered what “a place of business in Hong Kong” meant. It was the key issue that determined whether a non-Hong Kong company could be wound up here in Hong Kong.

A place of business in Hong Kong

In considering the degree of participation in Hong Kong that would classify a company as having a place of business in Hong Kong, Harris J cited with approval the judgment of Sakhrani J in Singamas Management Services Ltd v Axis Intermodal (UK) Ltd, [2011] 5 HKLRD 145 where he stressed: “It is important to bear in mind that “any place of business established by the company in Hong Kong” is not the same as any place where the company carries on business in Hong Kong.” Thus, the Court in Yung Keeaverred that “a place of business in Hong Kong”, meaning the company is required to have a place at which it carries on business in Hong Kong, suggests that its activities within the jurisdiction has to be sufficiently substantial so as to require it to have a permanent establishment in Hong Kong. Merely having a place where the company carries on business in Hong Kong is insufficient as many instances could be envisioned of companies which have staff visiting Hong Kong frequently on business trips working out of the same hotel or business centre. That would hardly suffice as a place of business. Harris J thus imposed a stricter interpretation of the clause, “a place of business in Hong Kong”.

Harris J cited a variety of factors supporting the Court’s view that Yung Kee had not established a place of business in the jurisdiction. Firstly, Yung Kee was a BVI-incorporated, investment holding company whose only asset was the sole ownership of 100% of shares in another BVI company called Long Yau, which in turn held the Hong Kong company responsible for running Yung Kee’s restaurant business. Harris J opined that this corporate structure may have been the result of a desire to minimise estate duty payable in the days prior to the abolition of estate duty in February 2006. The net effect of this two-tiered system of ownership by Yung Kee was a corporate structure effectively distancing Yung Kee from Hong Kong. Both Yung Kee and Long Yau did not register under Part XI CO as registered non-Hong Kong companies that had established a place of business in Hong Kong.

Yung Kee itself neither had an office, nor leased premises, in Hong Kong. It had no financial dealings and hence, no financial records, assets, current or continuing liabilities nor creditors; it also had no employees. It had no income apart from dividends from Long Yau. Its board functions were limited to changing the membership of the board and payment of dividends, there was no evidence of directors undertaking (as directors of Yung Kee instead of in their capacity as directors of Yung Kee’s subsidiary operations in Hong Kong) discussions regarding the business strategy of the corporate group held under Yung Kee as holding company. Viewing these factors in the round, the Court found that Yung Kee did not demonstrate substantial activities in Hong Kong and thus had not established a place of business here. Therefore, the Court declined jurisdiction to wind it up.

The Way Ahead

Non-Hong Kong companies have been popular in Hong Kong – confidentiality is maintained by having company records and financial information held in offshore jurisdictions. Re Yung Kee Holdings Limitedsuggests, however, that problems may arise at a later stage if these companies are subsequently ensnared in shareholder disputes. It may be that businesses now have to think ahead at the pre-incorporation stage and envisage the jurisdiction to which they wish to submit. Choice of jurisdiction clauses in the company’s memorandum and articles of association stipulating Hong Kong as the preferred jurisdiction may encourage the Hong Kong Courts to exercise their jurisdiction. Bearing in mind Harris J’s view that the non-Hong Kong company has to have substantial business operations here and his assessment of many factors in the round, it would not be fastidious for non-Hong Kong companies that wish to invoke the jurisdiction of the Hong Kong Courts to introduce more of a Hong Kong element into their operations.