In our November 2012 issue we discussed the judgment of Re Yung Kee Holdings Limited.  The Court of Appeal recently affirmed the lower court’s judgment in refusing to exercise the discretion to wind up a foreign company.

Family feud in a nutshell

The dispute concerned a famous local family restaurant business started by Kam Shui Fai, who left the business to his two sons Kam Kwan Sing (“Kwan Sing”) and his brother Kam Kwan Lai (“Kwan Lai”).  Kwan Lai was the majority shareholder of Yung Kee Holdings Limited (“Yung Kee”), a BVI-incorporated investing holding company for the business, and Kwan Sing was the minority shareholder.  Kwan Sing initiated proceedings for an order for Kwan Lai to buy out Kwan Sing’s shareholding in Yung Kee under section 168A of the Companies Ordinance (Cap. 32) (now replaced by the new Companies Ordinance (Cap. 622)) (“old CO”) on the ground that Kwan Lai had run Yung Kee in a manner unfairly prejudicial to him or, alternatively, for an order under section 327(3) of the old CO that it would be just and equitable to wind up Yung Kee.

In the Court of First Instance, Harris J held that the court did not have jurisdiction under section 168A to grant a buy-out order, and that the court should not exercise its discretion to assume jurisdiction under section 327(3)(c) to wind up Yung Kee.  Harris J further opined that, as the court did not have to rule on the matter, had the court had jurisdiction under section 168A, the court would have found that the affairs of Yung Kee had been carried on in a manner that was unfairly prejudicial to Kwan Sing and it would have been appropriate to make a buy-out order.

Kwan Sing passed away shortly before Harris J delivered his judgment.  The present appeal was brought by his personal representative.  The petitioner appealed, amongst other things, against Harris J’s judgment that the court had no jurisdiction under section 168A and his decision not to exercise the discretion under section 327(3)(c) to wind up Yung Kee.  Kwan Lai (together with other respondents) appealed against Harris J’s conclusion that there had been unfairly prejudicial conduct on his part.

Jurisdictional issues

Winding up a foreign company – section 327(3)(c)

In relation to the discretionary jurisdiction of the court to wind up a foreign company under section 327(3)(c), the Court of Appeal (“CA”) confirmed the three core principles and core requirements laid down in Re Real Estate Development Co [1991] BCLC 210 (which has been applied in Hong Kong):

1. there must be a sufficient connection with Hong Kong, but this does 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. one or more persons interested in the distribution of the company’s assets must be persons over whom the court is able to exercise jurisdiction.

CA remarked that the jurisdiction conferred by section 327 is exorbitant, because the appropriate forum for the winding up of a foreign company is the court having jurisdiction in its place of incorporation.  The court would not assume jurisdiction unless it is satisfied the assumption is defensible in terms of justice and expediency.

Moreover, a distinction should be drawn between a creditors’ winding-up petition on the insolvency ground and a shareholder’s petition on the just and equitable ground.  In the former case, creditors may not be attached to the state of incorporation of the foreign company and they may suffer prejudice if they were subject exclusively to the law and processes of that state of incorporation.  In contrast, the shareholders of a foreign company must have voluntarily adopted the law of the state of incorporation as governing the company’s legal status.  Thus, there is much less justification for a shareholder to seek to circumvent the law of the state of incorporation and resort to another jurisdiction to wind up the company.

In the present case, CA noted that Yung Kee has no assets in Hong Kong and none of the offshore intermediate companies were registered under Part XI of the old CO.  It was a deliberate attempt to distance the ultimate holding company, i.e. Yung Kee, from Hong Kong.  It would thus be difficult to say that Yung Kee has sufficient connection with Hong Kong for the purpose of exercising the winding-up jurisdiction.

The petitioner sought to argue that the business of Yung Kee, as an investment holding company, was to manage the affairs of its subsidiaries which undertake the principal business activities of the group, and the decisions were made and meetings were held in Hong Kong.  As such, Yung Kee should have a sufficient connection with Hong Kong.

CA noted that most of the decisions and resolutions relied upon by the petitioner flowed from the action by Kwan Lai to reconstitute the board of Yung Kee, which could hardly be considered as normal business of Yung Kee.  Further, the mere presence of shareholders and directors making internal administrative decisions in Hong Kong is not of itself sufficient to establish substantial connection between Yung Kee and Hong Kong.  As a result, CA affirmed Harris J’s exercise of discretion not to assume jurisdiction to wind up Yung Kee.

Unfair prejudice – section 168A

The petitioner relied on similar arguments advanced in relation to the exercise of jurisdiction under section 327(3)(c) and sought to argue that Yung Kee had established a place of business in Hong Kong. Thus, the court should have jurisdiction to make a buy-out order under section 168A.

Without going into the details of the findings by Harris J, CA affirmed the learned judge’s reasoning and conclusion that the matters relied on by the petitioner were not sufficient to support an inference that Yung Kee had established a place of business in Hong Kong.  “A place of business in Hong Kong” means that there must be an establishment of an office in Hong Kong where activities connected with the company’s subsidiary objects and incidental to the main business is conducted. CA rejected the argument that internal corporate activities were the kind of business which would be carried out by an investment holding company like Yung Kee. Internal corporate activities such as changing membership of the board and declaring dividends do not fall within the paramount or subsidiary objects of Yung Kee. Given that the activities conducted in the Hong Kong office were so limited, the Hong Kong office could not be regarded as a place of business in Hong Kong. Besides, the Hong Kong office would seem to have been largely a correspondence address of Yung Kee.  As such, Harris J was right in holding that the court did not have jurisdiction to hear the petition under section 168A.

Was there unfair prejudice?

As mentioned, by cross-appeal the respondents sought to appeal against Harris J’s finding that the affairs of Yung Kee had been conducted in a manner unfairly prejudicial to the interests of Kwan Sing.  CA took the view that the issue is on the application of the law to the facts of this case.

Albeit obiter, CA reversed Harris J’s finding based on the following reasons.  First, CA noted that Harris J accepted that there had been a common understanding between Kwan Sing and Kwan Lai that they would have equal say in Yung Kee’s affairs.  Thus, when Kwan Lai took steps to control Yung Kee (by appointing an additional director to the board, thereby changing the composition of the board), Harris J considered that inconsistent with the way in which Kwan Sing and Kwan Lai had previously conducted the business and lack of regard for Kwan Sing’s reasonable expectation.  CA also questioned the evidential basis for Harris J’s finding that there was a common understanding between Kwan Sing and Kwan Lai.

CA also criticised Harris J’s approach in determining the fairness of the conduct of Kwan Lai by reference to the legitimate expectation of Kwan Sing.  The correct approach requires the examination of whether Kwan Sing can pray in aid of any equity to restrain the exercise of Kwan Lai’s majority voting power to appoint an additional director in the board of Yung Kee.  If such equity could not be identified, it matters not that Kwan Sing’s expectation was upset and the trust and confidence between the brothers were destroyed. It was undisputed that the other two children of Kam Shui Fai who are also shareholders of Yung Kee could exercise their votes in any manner as they deemed fit. There was no evidence suggesting an understanding or agreement that Kwan Sing and Kwan Lai had to vote in unison whenever there was any difference in opinion amongst shareholders or directors. Given that Kwan Sing did not have an equitable power of veto if the matter were to be decided by votes, CA found that there was no mutual understanding to the effect that Kwan Lai could not exercise his majority voting power to change the composition of the board.

Shareholders beware

The appeal judgment demonstrated clearly the difficulty in resolving a shareholders’ dispute of a foreign company in Hong Kong.  It is not uncommon that Hong Kong businesses adopt a two-tier offshore company structure for investment holding, which undoubtedly has its benefits.  Yet, shareholders should bear in mind that they are also running the risk that when things turn sour Hong Kong courts may refuse to exercise discretion to assume jurisdiction to wind up the company (unless the connection between the company and Hong Kong is compellingly strong) and the aggrieved shareholder may be left with no alternative relief.

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

E: insolvency@onc.hk                                                      T: (852) 2810 1212 W: www.onc.hk                                                                F: (852) 2804 6311 19th Floor, Three Exchange Square, 8 Connaught Place, Central, Hong Kong

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