Introduction

In the recent case of Silver Starlight Limited v China CITIC Bank Corporation Limited, Tianjin Branch & Others [2021] HKCA 1248, which concerns a company incorporated in the British Virgin Islands (“BVI”), the Court of Appeal (“Court”) made it clear that in an application for injunction to prevent the presentation of a winding-up petition against a foreign company, the applicant bears the burden to show that it is not reasonably arguable that the core requirements would be satisfied at the time of the hearing of the petition.

Background

The plaintiff, Silver Starlight Limited, is a BVI incorporated company, which is wholly owned by Mr Pan Sutong, a Hong Kong resident. The plaintiff has acquired 35.59% of the shares in a Hong Kong company, Goldin Properties Holdings Ltd (“Goldin Holdings”), from the public shareholders during the privatisation exercise (the “Privatisation”). Goldin Holdings holds a very substantial property development project in Tianjin. In May 2017, to finance the payment in the Privatisation, the plaintiff borrowed HK$8 billion from the 1^st and 2^nd defendants and HK$4 billion from the 3^rd defendant. Since November 2019, the plaintiff has been in default of payment of interest for both loans, and on 10 December 2019, it was notified that the loan of HK$8 billion was immediately due and payable. On 11 January 2021, the defendants’ solicitors issued a statutory demand to the plaintiff for the HK$8 billion loan.

On 22 February 2021, the plaintiff issued its application by originating summons for an injunction to restrain the three defendants from presenting a winding‑up petition based on their statutory demand in respect of the HK$8 billion loan. It advanced two main grounds in support of the application:

1. that the jurisdictional requirements for winding up a foreign company are not satisfied, and
2. that there was a bona fide dispute of the debt on substantial grounds.

On 3 June 2021, Deputy Judge M K Liu decided both points against the plaintiff and dismissed the originating summons. The plaintiff appealed, contending that the judge was erroneous on both issues. The defendants filed a respondents’ notice of additional grounds for upholding the Judgment. Urgent directions were given for the hearing of the appeal, with an interim order preventing the presentation of a petition pending the determination of the appeal.

The legal principle

The principles governing whether the court will exercise its statutory power to wind up a foreign company pursuant to section 327 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) are well established. Generally, there are three core requirements:

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

The applicable principles for the grant of an injunction to prevent the presentation of a winding‑up petition are based on the court’s inherent jurisdiction to prevent abuse of process rather than the American Cyanamid principles for an ordinary interlocutory injunction. The right to petition for winding up in appropriate circumstances is a statutory right. If the court would restrict a would-be petitioner, there must be clear and persuasive grounds. It is ordinarily not an abuse to invoke the winding up remedy against a foreign company where it is arguable that the three core requirements can be satisfied. Therefore, when seeking an injunction on the jurisdictional ground, the applicant bears the burden to show that the petition is bound to fail for not meeting the core requirements.

Court’s rulings

For the first requirement, the Court rejected the plaintiff’s contention that its connection with Hong Kong is insufficient. Specifically:

1. the plaintiff contended that the judge erred in holding that the mere presence of assets in Hong Kong will suffice. The Court disagreed, confirming that the presence of significant assets in Hong Kong which may be made available for distribution in the liquidation can usually establish a sufficient connection with Hong Kong. In the present case, the plaintiff undertook its principal significant commercial activity in Hong Kong, i.e. borrowing funds to acquire shares in the Privatisation;
2. the plaintiff further submitted that the location of its sole owner is irrelevant. The Court held that the location of the plaintiff’s central management and control is still relevant even though this factor may be of greater weight in the case of a shareholder’s petition than a creditor’s petition.
   
3. the plaintiff also argued that although the corporate chain includes companies incorporated or registered in Hong Kong, this is of little substance in showing a connection. The Court disagreed, stating that whether a sufficient connection exists is a question of degree. The Court will approach the judge’s decision as a conclusion akin to the exercise of discretion. 

The plaintiff’s challenge in relation to the first core requirement thus failed.

For the second requirement, the plaintiff contended that the liquidator would not derive any direct benefit from its underlying assets which are located in Mainland China because a liquidator appointed by a Hong Kong court may not be recognised in other jurisdictions including the Mainland. The Court rejected such arguments and held that the plaintiff failed to demonstrate that there was no reasonable possibility that a winding up order would benefit the defendants. The plaintiff holds freely transferable shares in Goldin Holdings, whose net assets are about HK$22.5 billion. Although the minority shareholding cannot result in a management control, it is sufficient to preclude any special resolution in general meetings. The Court distinguished the present case from cases where the asset in question was only shares in a BVI company. The plaintiff’s challenge in relation to the second core requirement thus also failed.

Lastly, the Court also affirmed the judge’s conclusion that the plaintiff failed to show a bona fide dispute of the debt on substantial grounds. Accordingly, the Court dismissed the appeal.

Conclusion

This case is the most recent judgment of the Court of Appeal which reviews the the principles for the grant of an injunction to restrain the presentation of a creditor’s winding-up petition. It has clarified that in order to successfully stop a winding-up petition against a foreign company, the plaintiff company has to show that the petition is bound to fail for not meeting the core requirements, such that it is an abuse of process. The local presence of significant assets can usually establish a sufficient connection with Hong Kong. Further, where the plaintiff company holds shares in a Hong Kong incorporated company, a winding-up order will usually be considered to be a benefit to the creditors even if the underlying assets are located in Mainland China.