Hong Kong – Yung Kee – The End Of A Saga.

26 November, 2015

 

 

Yung Kee – the end of a saga

 

FACV No. 4 of 2015 – date of judgment 11 November 2015 (on appeal from CACV No. 266 of 2012)

 

On 11 November 2015, the Court of Final Appeal unanimously decided that it is just and equitable to make a winding up order against Yung Kee Holdings Limited (incorporated in the BVI) (the “Company”) in Hong Kong, reversing the decisions of the Court of Appeal and the Court of First Instance.  Most importantly, the CFA provided guidance on what factors will constitute a “sufficient connection with Hong Kong” when winding up a foreign company based on just and equitable grounds.

 

Background of the case

 

It is a shareholders’ dispute primarily between two brothers of the Yung Kee group, being the owner of the famous roasted goose restaurant in Central.  A familiar Hong Kong tale.

 

Each of the brothers own 45% of the shares of the Company, while the remaining 10% is owned by their sister.  The Company is the holding company of another BVI company, Long Yau Limited (“Long Yau”) which in turn has eight direct and indirect subsidiaries.  Long Yau’s two operating subsidiaries are both incorporated and carry on business exclusively in Hong Kong.  The other companies are property holding companies which own properties in Hong Kong including the Yung Kee Building where the restaurant is located. 

The elder brother (now deceased) commenced Hong Kong proceedings seeking:

 

an order for the younger brother to buy his shares in the Company under s168A1 of the Companies Ordinance (Cap 32) (the “Ordinance”) on the ground that the Company’s affairs were being carried on in an unfairly prejudicial manner; and alternatively,
an order for the winding up of the Company on just and equitable grounds under s327(3) of the Ordinance.

 

Both grounds raise jurisdictional issues concerning the winding up of foreign companies.  As explained below, the Court of Appeal decided that the elder brother failed on both grounds.

 

s168A of the Ordinance

 

Whether the Company has established “a place of business”?

 

The Hong Kong court only has jurisdiction to make a s.168A order where the foreign company has established a local “place of business”.

 

The CFA held that a “place of business” connotes a place where a company either carries on or possibly intends to carry on business.  While “business” includes commercial transactions or transactions which create legal obligations, it does not extend to purely internal matters not affecting 3rd parties or requiring the establishment of premises where those internal matters can be transacted. Further, the geographical location where the company’s directors discuss the company affairs and hold board meetings is not by itself sufficient to make it the company’s “place of business”.  The CFA also accepted that the word “establish” indicates some degree of regularity and permanence of location is required.

The elder brother claimed that the Company established its place of business on one of the floors in Yung Kee Building starting in April 2009. The CFA affirmed the decision of the lower courts in finding the Company had not established a place of business in Hong Kong based on:

 

There was no evidence that the Company had or needed an office in the Yung Kee Building.  It did not keep its books and records or register of members there.

 

The Company did not maintain a share transfer or share registration office in Hong Kong.

 

No board or general meetings were held before April 2009, and since then there were only 8 resolutions all of which concerned internal matters such as payment of dividends and changes to the composition of the board.

 

There was no conclusive evidence that an important paper resolution of shareholders was signed in the Yung Kee Building; but in any case this would not have made it the company’s place of business.

 

s327(c) of the Ordinance 

 

Does the Company have sufficient connection with Hong Kong?

 

The CFA confirmed that the three core requirements2 are the considerations to be satisfied before the court will exercise its statutory jurisdiction to wind up a foreign company.  The arguments in this case focus on the first requirement of “sufficient connection”.  The CFA rephrased the question on the sufficient connection requirement in the case of a creditors’ petition, as follows:

 

“Whether there is a sufficient connection between the company and this jurisdiction to justify the court in ordering a company to be wound up despite the fact that its incorporated elsewhere; and in deciding that question the fact that there is a reasonable prospect that the petitioner will derive a sufficient benefit from the making of a winding up order, whether by distribution of its assets or otherwise, will always be necessary and will often be sufficient.”

The lower courts considered that a more stringent connection was required for a shareholder’s petition.  The CFA disagreed, and decided that the same question should also apply to shareholders petitions, but the factors to apply to the two types of petitions will be different:

 

(a) Creditor petitions: The purpose is to obtain payment in or towards satisfaction of its debt.  The presence of significant assets in Hong Kong for distribution amongst creditors will usually establish a sufficient connection.

(b) Shareholder petitions: The purpose is to realise the petitioner’s investment in the company.  The presence of shareholders within the jurisdiction is highly relevant and will usually be the most important single factor.

The CFA held that the following 9 factors established a relevant connection between the Company and Hong Kong:

 

1. The Company is merely a holding company of a group of directly and indirectly held subsidiary companies and carries on no business of any kind whether in the BVI or Hong Kong.
2. All the underlying assets of the Company (which are the assets of its wholly owned subsidiary Long Yau) are in Hong Kong.
3. The business of the group is wholly carried on by the Company’s indirectly held subsidiaries (which are Long Yau’s subsidiaries) which are all incorporated in Hong Kong and carry on business exclusively in Hong Kong.
4. The whole of the Company’s income is derived from businesses carried on in Hong Kong.
5. All the Company’s shareholders and directors are and have always been resident in Hong Kong and none of them have ever set foot in the BVI where the Company is incorporated.
6. Same as [5] for the directors of the Company’s directly and indirectly held subsidiaries.
7. All 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.
8. Crucially the dispute is a family dispute between the parties, all of whom are and have always been resident in Hong Kong and the events giving rise to it and the conduct of which complaint is made all took place in Hong Kong.
9. The only connection which the Company has with the BVI is that both it and its wholly owned direct subsidiary Long Yau are incorporated there. The fact that the Company’s only asset, being its shareholding in Long Yau, is situate in the BVI is merely a consequence of this.

 

Is there sufficient benefit derived from a winding up order?

 

The likelihood that the petitioner will derive some benefit from the winding up order established a sufficient connection between the Company and Hong Kong, and is in any case the second requirement of the three core requirements.

The CFA explained that in a shareholders’ petition, whether some benefit can be derived from a winding up order depends on the presence of assets which may be made available to a liquidator (i.e. in this case, the underlying assets held by Long Yau), but not the presence of assets within the jurisdiction to which the company has title (i.e. in this case, the Company’s shares in Long Yau).

 

Just and equitable to wind up

 

Having concluded that there is jurisdiction to wind up the Company, the CFA then considered the merits of the petition.  The CFA (disagreeing with the Court of Appeal) agreed with the trial judge’s findings and conclusions that there existed a mutual understanding between the brothers that the business would be jointly run between them, which was breached by the younger brother.

 

Accordingly, the CFA decided that it is just and equitable to make a winding up order against the Company, but granted a stay of 28 days to allow the parties to negotiate a buyout proposal of the shareholding.

 

Takeaway points

 

This CFA decision:

 

has relaxed the “sufficient connection” test for winding up foreign companies based on just and equitable grounds.  The test is now the same as that for petitions based on insolvency grounds, but the factors to take into account may be different.  The presence of a shareholder within the jurisdiction is highly relevant and will usually be the most important single factor; and
may signal a new era of just and equitable winding up of offshore holding companies with shareholders and subsidiaries’ underlying assets/businesses in Hong Kong, which was a rarity in the past.

 

1   Now superseded by sections 722 to 726 of the Companies Ordinance (Cap. 622)
2    The three core requirements as summarised in Re Beauty China Holdings Ltd (2009) 6 HKC 351:

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;
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.