Introduction

In the recent case of Re Grand Peace Group Holdings Ltd [2021] HKCFI 2361, which concerns the winding-up of a foreign incorporated listed company, the Court of First Instance revisited the 2^nd core requirement and considered whether the possibility of the court making an order to compel the directors of the company to execute the documents necessary for the liquidators to take control of the company’s BVI subsidiaries would be sufficient to be considered as a real possibility of benefit to the petitioner.

Background

Grand Peace Group Holdings Ltd (the “Company”) was incorporated in Bermuda and listed on the GEM Board of The Stock Exchange of Hong Kong Limited (the “HKEX”). On 19 December 2019, a winding-up petition (the “Petition”) was issued against the Company. The Petition has been adjourned for several occasions to allow the Company to restructure its debt. On 30 April 2021, the GEM Listing Committee determined that the Company’s shares should be delisted from the HKEX.

On 21 May 2021, Chan (the “Applicant”), one of the Company’s creditors, being dissatisfied with the multiple adjournments, applied to substitute as the petitioner and sought an immediate winding up order. On 16 August 2021, the GEM Listing Committee upheld the decision that the Company’s shares should be delisted from the HKEX. In view of the delisting decision, restructuring previously envisaged by the Company was no longer feasible. The only issue before the Court at the hearing is to determine jurisdiction.

The legal principle of winding up foreign companies

It is now well established that 3 core requirements must be satisfied before the Court would exercise its discretion to wind up a foreign incorporated company, namely that: (1) the foreign company had a sufficient connection with Hong Kong; (2) there must be a reasonable possibility that the winding-up order would benefit the petitioner; and (3) the court must be able to exercise jurisdiction over person(s) in the distribution of the company’s assets.

In Re China Huiyuan Juice Group Limited [2021] 1 HKLRD 255, the court has decided that in general, it would be futile to appoint liquidators over a company incorporated in Bermuda in order to take control of its subsidiaries incorporated in the BVI with the ultimate aim of taking control of subsidiaries in the Mainland owned by the BVI companies. The correct course should be seeking to wind up the holding company in its place of incorporation.

On this occasion, there was no dispute that the 1^st and 3^rd core requirements were met. The only issue was whether the 2^nd core requirement was satisfied. With reference to the decision in Re Yung Kee Holdings Limited (2015) 18 HKCFAR 501, the Applicant argued that the 2^nd core requirement can be satisfied if the majority of the directors of the Company are in Hong Kong and therefore subjected to the in personam jurisdiction of the Hong Kong court. It was argued that the Hong Kong court could make an order to compel directors of the Company to execute documents necessary for liquidators to take control of the BVI subsidiaries.

Court’s rulings

The Court was of the view that there are 2 main problems with the approach taken by the Applicant. On the one hand, the BVI Registrar of companies will likely refuse to recognize and effect the necessary changes for liquidators to take control of the BVI subsidiaries if he was alerted to the fact that documents with which he had been presented had only been executed under the compulsion of an order made by a Hong Kong court on the application of a liquidator appointed in Hong Kong. Even if the BVI Registrar of companies made the necessary changes, it would still be open to a disgruntled creditor or member to apply to the BVI court for an order to rectify the register.

On the other hand, once a company is in liquidation and Hong Kong court appoints a liquidator, directors cease to have any power as the liquidator steps in. It would thus be artificial for the court to make an order compelling directors to execute necessary documents at the request of the liquidator.

It would be an exception to the general rule if the centre of the main interest of the BVI subsidiaries were in Hong Kong and what was sought was the appointment of liquidators in Hong Kong with a view to an application being made to one of the Intermediate People’s Courts of Shanghai, Shenzhen or Xiamen under the “Record of Meeting of the Supreme People's Court and the Government of the Hong Kong Special Administrative Region on Mutual Recognition of and Assistance to Bankruptcy (Insolvency) Proceedings between the Courts of the Mainland and of the Hong Kong Special Administrative Region” (the “Cooperation Mechanism”). However, the Applicant did not intend to make such application pursuant to the Corporation Mechanism.

On the facts, the Court found that the Company’s only asset in Hong Kong is an unquantified debt of less than HK$80,000 owed by a subsidiary incorporated in Hong Kong. Therefore, neither the Company’s assets in Hong Kong nor the value of the Company’s listing status that has now been lost is sufficient to satisfy the 2^nd core requirement.

As a result, the substitution application made by the Applicant was dismissed. The winding up petition was further adjourned as per the request of the parties until later this year in order that the Company can put forward a proposal for scheme of arrangement.

Conclusion

This case is important as it illustrates how the Court will approach the 2^nd core requirement in winding up a foreign incorporated listed company in Hong Kong that owns subsidiaries in the Mainland China through offshore entities. The fact that directors of a company are subjected to the in personam jurisdiction of the Court alone would not satisfy the 2^nd core requirement. The petitioner will have to persuade the court that the benefit to wind up a foreign company is tangible and justifies winding up the company in Hong Kong rather than in its place of incorporation.