18 November, 2015
The Court of Final Appeal’s recent decision in the Yung Kee saga (Kam Leung Sui Kwan, Personal Representative of the Estate of Kam Kwan Sing, the deceased v Kam Kwan Lai & Ors (FACV 4/2015, 11 November 2015)) has widened the door to winding-up relief for shareholders of foreign companies.
Recent developments
On 11 November 2015, Yung Kee Holdings Limited (incorporated in the British Virgin Islands (“BVI”)) (the “Company”) was ordered to be wound up by the Court of Final Appeal (“CFA”). Overturning the Court of Appeal and the Court of First Instance, the CFA ruled that the Company has a sufficient connection to Hong Kong to justify the making of a Hong Kong winding-up order.
Implications for offshore holding companies and shareholders
Hong Kong is home to numerous businesses held through offshore holding companies. The CFA’s decision shows that these types of group structures will not be an obstruction to the Hong Kong court exercising
its discretion to wind-up an offshore holding company. The court will consider the corporate structure and operations holistically to determine whether it should wind-up a foreign company. Once the foreign company is wound-up, shareholders can realize their investments through the Hong Kong insolvency regime, rather than having to do so through an offshore liquidation.
Further, a liquidator appointed by the Hong Kong court will be able to use the tools under Hong Kong insolvency law to realize assets and conduct investigations (e.g. private examinations of directors). This will bypass the difficulties often faced by foreign liquidators in Hong Kong and will greatly assist shareholders whose investments are predominantly in Hong Kong.
What the case says
The Company is the ultimate holding company of a group of companies with operations in Hong Kong, including the famous Yung Kee Restaurant. The Company has no business of its own, its sole function being a holding company. Its only asset consists of shares in a wholly owned subsidiary in the BVI, Long Yau Limited (“Long Yau”). Long Yau in turn holds two operating subsidiaries which are both incorporated and carry on business exclusively in Hong Kong. The other companies in the group hold various properties in Hong Kong, including the Yung Kee Building.
Sufficient connection to Hong Kong can be established through a wholly owned subsidiary
The CFA confirmed that when considering whether to exercise its discretion to wind-up a foreign company, the court should consider the following three core requirements:
- the company must have a sufficient connection to Hong Kong, but this does not necessarily require the presence of assets within the jurisdiction;
- there must be a reasonable possibility that the winding-up order would benefit those applying for it; and
- the court must be able to exercise jurisdiction over one or more persons in the distribution of the company’s assets.
In the appeal, the CFA focused on the first core requirement and found that the Company had a sufficient connection to Hong Kong notwithstanding the fact that it was only a holding company and had carried on no business of its own in Hong Kong. The sufficient connection could be established through the Company’s wholly owned subsidiary, Long Yau.
Differing with the lower courts’ views, the CFA considered that there should not be a more stringent connection required in shareholders’ petitions when compared to creditors’ petitions. The question is whether, “having regard to all the circumstances, including the fact that the company is incorporated in another jurisdiction, it is just and equitable that the company should be wound up in Hong Kong.” A key consideration for shareholders’ petitions is the presence of the shareholders in the jurisdiction.
In establishing the Company’s sufficient connection, the CFA noted that:
- the Company’s underlying assets (albeit held through its subsidiary, Long Yau) are all in Hong Kong;
- the business of the group is conducted exclusively in Hong Kong;
- all of the Company’s income is derived from businesses in Hong Kong;
- the Company’s shareholders and directors are resident in Hong Kong;
- all of the directors of the Company’s directly and indirectly held subsidiaries are resident in Hong Kong;
- all the board meetings of the Company and its subsidiaries are held in Hong Kong and all administrative matters relating to the Company are discussed and decided in Hong Kong; and
- the dispute is a family dispute between parties who are all resident in Hong Kong and the events being complained of took place in Hong Kong.
On the contrary, the Company’s only connection to the BVI is that both it and its wholly owned subsidiary, Long Yau, are incorporated there. In fact, it was recognized by the respondents, which the CFA agreed with, that had the Company held all of its subsidiaries directly, rather than through Long Yau, it would have had a sufficient connection to Hong Kong. The CFA held that the existence of Long Yau in the group’s holding structure would not defeat the Company’s connections with Hong Kong. Whilst the companies are separate legal entities, in this case, there was “an obvious and close connection between a company and its wholly owned subsidiary, and there is no reason, because there is no need, to disregard their different personalities when considering whether the said core requirements are satisfied” and there was “no doctrinal reason to exclude a connection through a wholly owned subsidiary”.
When is it just and equitable to wind-up a company?
The CFA further confirmed that a finding that the company’s affairs have been conducted in a manner that is unfairly prejudicial to the interests of the shareholders would be sufficient to enable the court to wind-up a company on the ground that it is just and equitable to do so (s. 327(3)(c) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32)).
In this case, the CFA was satisfied that the affairs of the Company had been conducted in a manner that was unfairly prejudicial to the interests of the petitioner. There was a mutual understanding between the petitioner and his brother that the Yung Kee Restaurant and the group’s business would be jointly run or managed. The CFA found that this understanding had been breached by the petitioner’s brother, and it was therefore just and equitable to wind-up the Company.
Final chance for a buy-out
Although the CFA considered that this would be a proper case to make a winding-up order, it recognized that the parties may think it would be more desirable for the petitioner’s shareholding to be bought out. For this reason, the CFA ordered that the winding-up order be stayed for 28 days for the parties to agree on the terms of a buy-out. If the parties are unable to agree on a buy-out, the winding-up order will take effect automatically after 28 days. This is an interesting exercise of the court’s discretion.
Actions to consider
Aggrieved shareholders of a foreign company whose business is substantively in Hong Kong will now find it easier to obtain relief under the Hong Kong insolvency regime. When facing disputes, shareholders should seek legal advice as to what options are available in order to best preserve or recoup their investment.
Further, this decision has reinforced the importance of good record- keeping. In the context of establishing whether a company is sufficiently connected to Hong Kong, we consider that it would be prudent for shareholders to keep proper minutes and documentation relating to meetings and matters discussed and decided in Hong Kong.
Conclusion
This decision has considerably improved the ability of shareholders to petition for the winding-up of a foreign company in Hong Kong. The floodgates may now have been opened as the court is willing to look beyond offshore holding structures when determining whether it should wind-up a foreign company, even where the company is purely a holding company and has never directly conducted any business in Hong Kong.
For further information, please contact:
Cynthia Tang, Partner, Baker & McKenzie
cynthia.tang@bakermckenzie.com
