Introduction

In Champ Prestige International Limited v China City Construction (International) Co, Limited [2020] HKCFI 355, the Court of First Instance reiterated the principles explained in the landmark decision of Kam Leung Sui Kwan v Kam Kwan Lai  (2015) 18 HKCFAR 501 (“Yung Kee”) that govern the circumstances in which the Court would exercise the discretion to wind up a foreign incorporated company. In the case, the Court also refused to exercise its discretion to stay a petition in favour of arbitration.

Background of the case

Champ Prestige International Limited (“Champ Prestige”) and China City Construction (International) Co, Limited (“China City”) entered into a joint venture for the development of land in Miami, Florida through an investment company incorporated in the British Virgin Islands, Dingway Investment Limited (the “Company”).

In October 2015, China City and Champ Prestige entered into a sale and purchase agreement (the “SPA”) in which China City transferred 45% of the Company’s issued shares to Champ Prestige.  The SPA contains terms on financing arrangements for the development of the land including a put option that Champ Prestige could exercise in the event that China City did not fulfil its funding obligations. The SPA also contains an arbitration clause which provides that any disputes arising from or in connection with the SPA shall be submitted to the Hong Kong International Arbitration Centre. In April 2016, the parties entered into a cooperation agreement with further terms on the development of the land and also with a term on arbitration.

In mid 2016, China City started to experience financial problems and Champ Prestige exercised its put option in March 2017. In an attempt to resolve the financial problems, in June 2017, the parties entered into a framework agreement (the “Framework Agreement”) which provided for the sale of the loan or the sale of one party’s shares to the other party. The Framework Agreement does not contain any arbitration clause.

On 1 February 2018, Champ Prestige issued a petition seeking the winding up of the Company on the just and equitable grounds under section 327(3) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32), alleging that the Company is unable to progress its intended business purpose to develop the land in Miami, Florida due to the failure of China City to fulfil its obligations pursuant to the various agreements.

On the other hand, China City applied to strike out the petition for winding up on the grounds that the petition fails to satisfy the three core requirements for the Court to exercise its discretion to wind up foreign incorporated companies, namely (i) there has to be a sufficient connection with Hong Kong; (2) there must be a reasonable possibility that the winding-up order will 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, and alternatively that the dispute should be referred to arbitration.

The discretion to wind up a foreign incorporated company

Due to the fact that the Company’s ultimate business and assets are all located in Florida, China City argued that there is insufficient connection between Hong Kong and the Company to justify the Court exercising its jurisdiction to wind up the Company. By citing the decision of Yung Kee, the Court in this case held that one must look and see whether the management and ownership have sufficient connection with Hong Kong to justify the Court exercising its discretion.

By taking a general and common sense approach, the Court found that the ownership and management of the Company are more closely connected with Hong Kong than they are with either the United States or the British Virgin Islands. To reach this conclusion, the Court took into consideration that (i) four out of five directors of the Company are residents in Hong Kong, (ii) China City is incorporated in Hong Kong, (iii) Champ Prestige, although incorporated in the British Virgin Islands, is owned by a Hong Kong listed company, and (iv) the project in Miami is dormant.

The application for a stay to arbitration

The Court cited its decision in Re Quiksilver Glorious Sun JV [2014] 4 HKLRD 759, in which the Court decided that in determining whether or not the complaints in a shareholders’ petition should be referred to arbitration if an arbitration agreement has been agreed between shareholders, the correct approach is to identify the substance of the dispute between the parties and ask whether or not that dispute is covered by the arbitration agreement.

Where the complaints form part of one continuing narrative, the Court would be reluctant to stay a petition on the grounds that some, but not all the factual matters in dispute are the subject of an arbitration clause unless “it is clear and obvious that a dispute the subject of an arbitration clause would be central and probably determinative of the factual issues raised by the petition”. 

Having reviewed Champ Prestige’s complaints, the Court found that even though part of Champ Prestige’s complaints related to matters arising under the SPA or the cooperation agreement and both of which contained arbitration clauses, such complaints were also of relevance to the determination of whether or not there has been a break down in trust and confidence between the parties, which was one of the complaints. The present case was not a case in which part of a dispute can sensibly be hived off and referred to arbitration and the balance of the complaints stayed until the arbitration is complete following which the petition continues to determine the outstanding issues. The stay application was therefore dismissed.

Conclusion

This case demonstrates the Court may exercise its discretion to wind up a foreign incorporated company if there is sufficient connection between the company and Hong Kong. Parties of commercial agreements should also be aware that, in the context of winding-up proceeding, even though there are arbitration agreements entered into between the parties, the Court will not stay the winding up petition in favour of arbitration unless the central or determinative factual matters in dispute in the petition are the subject of an arbitration clause.