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Case Background

14th June, 2022 -The Court of Final Appeal (“CFA”) handed down a judgment in Shandong Chenming Paper Holdings Limited v Arjowiggins HKK 2 Limited [2022] HKCFA 11 (“CFA Decision”) yesterday, ruling on the nature of benefits conferred by a winding up order required to wind up a foreign incorporated company.

The jurisdiction of the Hong Kong Court to wind up a foreign incorporated company is statue based, under section 327(3) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32).  There are numerous examples where the Hong Kong Court has exercised such jurisdiction in recent years. 

3 Threshold Requirements 

The statutory jurisdiction is subject to 3 threshold requirements as explained in the well- known Yung Kee decision:

  1. There must 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.At the outset, the CFA remarked that the above requirements should not be seen as statutory construction.  The requirements are self-imposed restraints on the exercise of an exorbitant jurisdiction contrary to international comity, since winding up a foreign incorporated company is prima facie beyond the limits of territoriality.  

The appeal only concerned the 2nd requirement, as the parties agreed that the 1st and 3rd requirements were satisfied.

The Benefit in Question

The Appellant is a company incorporated in the Mainland of the PRC, and is registered in Hong Kong as a non-Hong Kong company, having a place of business in Hong Kong.  It has a primary listing of H shares on the Stock Exchange of Hong Kong Limited (“HKSE”), but has no assets in Hong Kong.  

The Respondent obtained an arbitral award against the Appellant, enforced it in Hong Kong, and served a statutory demand on the Appellant.   The leverage for the Respondent to threaten the commencement of winding up proceedings stems from the adverse consequences on the listing status of the Appellant on the HKSE.   

The Appellant then obtained an interlocutory injunction prohibiting the Respondent from presenting a winding up petition.  An Originating Summons seeking a declaration that the three requirements would not be satisfied for the Hong Kong Court to exercise its jurisdiction to wind up the Appellant was then issued.

At the Court of First Instance, it was held that the 2nd requirement was satisfied because the leverage created by the prospect of a winding up petition constituted sufficient benefit for the respondent, and alternatively, the 2nd requirement could be “moderated” on the basis that the appellant’s failure to satisfy the award amounted to contempt in a non-technical sense. 

The Court of Appeal agreed with the CFI’s decision but did not agree that the 2nd requirement was capable of moderation.

The CFA’s Decision

After considering the authorities in Hong Kong and England, the CFA made the following observations on the nature of benefits in relation to the 2nd requirement:-

  1. There is no doctrinal justification for confining the relevant benefit narrowly to the distribution of assets by the liquidator in the winding up of the company;
  2. It is sufficient that the benefit would be enjoyed solely by the petitioners;
  3. There is also no doctrinal justification requiring the relevant benefit to come from the assets of the company;
  4. There are cases where even though there was nothing for the liquidator to administer the courts did not find any difficulty in holding that the second requirement was satisfied so long as some useful purpose serving the legitimate interest of the petitioner can be identified;
  5. The benefit need not be monetary or tangible in nature; and
  6. The fact that a similar result could be achieved by other means does not preclude a particular benefit from being relied upon for the purposes of fulfilling the second requirement.

Since the 2nd requirement would only be engaged once the 1st requirement (sufficient connection) was satisfied, the CFA confirmed that the 2nd requirement is a low threshold.  

Conclusion

In view of the established proposition that it is entirely proper to put pressure and seek to enforce payment of an undisputed debt by the presentation of a winding up petition, the CFA had no difficulty to confirm that the commercial pressure arising from the prospect of presenting a winding up petition was a relevant benefit for the purposes of satisfying the 2nd requirement.  The proposition that sufficient benefit can only be found in consequences flowing from the making of the winding up order was unduly narrow.  In passing, the CFA also held that the 2nd requirement cannot be moderated as suggested by the CFI.  

In response to the Appellant’s contention based on comity, the CFA ruled that the issue of comity would only be relevant if the benefit in question depended on the liquidator exercising his authority in a foreign jurisdiction.  Since the benefit in question was the listing of the Appellant’s shares on the HKSE, there was no issue of comity.  

WRITTEN BY

Gall
For further information, please contact:

Kenix Yuen – Partner, Gall
kenixyuen@gallhk.com

Practice Area(s):

COMMERCIAL LITIGATION AND DISPUTE RESOLUTION

CHINA RELATED DISPUTES

FRAUD AND ASSET TRACING

ARBITRATION

INSOLVENCY

REGULATORY AND FINANCIAL CRIME INVESTIGATIONS

Kenix qualified as a solicitor in Hong Kong in October 2012. She joined Gall in June 2013, having previously worked for another boutique litigation firm. Prior to commencing her career as a solicitor, Kenix worked in the Legal and Compliance Department of an international bank and the individual tax team of one of the Big Four accounting firms. She holds a Bachelor of Laws in conjunction with a Bachelor of Business Administration (Law) from The University of Hong Kong, a Master of Social Science in Health Care Ethics and Law from The University of Manchester, a Master of Science in International Finance from The Berlin School of Economics and Law.

Since joining Gall, Kenix specialises in cross border commercial litigation and international arbitrations (in particular, involving element(s) of the People’s Republic of China (“PRC”)) covering contractual disputes, shareholders’ disputes, directors’ duties, fraud and asset tracing, misrepresentation and mis-selling claims. She also has experience in advising on regulatory investigations conducted by the Securities and Futures Commission and a regulatory inquiry from the Insurance Agents Registration Board.

Kenix’s recent cases include:

  • Successfully dismissing the contractual claims against Rio Tinto Shipping (Asia) Pte Ltd. by NewOcean Petroleum Company Limited, a supplier of oil bunkers, and setting aside leave to serve a Concurrent Writ out of jurisdiction based on a tortious claim, arising from the liquidation of the OW Bunkers Group (HCA 446/2015, 15.04.2016; HCA 2265/2016, 18.05.2017, 16.03.2018);
  • Representing Madam Zhang Lan, a prominent PRC entrepreneur, in CIETAC arbitrations, defending misrepresentation claims of around USD300 million commenced by a private equity fund, and defending the related Hong Kong proceedings (HCMP 585, 586/2017, 14.03.2018);
  • Representing a reputable and sizable investment firm in Shanghai in an arbitration, pursuing claims in relation to a share purchase agreement against an offshore entity controlled by a PRC individual, and successfully dismissing the opponent’s application to set aside the arbitral awards (HCCT 39/2014, 19.06.2015);
  • Representing and advising a witness in the Inquiry into Excess Lead Found in Drinking Water;
  • Advising and representing private equity firms / investment firms in various cross border disputes concerning the management and control, and disposal of assets worth more than a billion US dollars.
  • Advising and representing a licensed representative in a claim brought by investors against an international bank;
  • Representing a HK listed company defending claims made by an ex-director and counter-claiming for breach of fiduciary duties;
  • Advising a PRC individual in relation to an ICAC investigation and the related financial regulatory matters;
  • Representing a company in Singapore in a breach of fiduciary duties claim against a director for misappropriation of assets;
  • Representing a garment manufacturing company in Ningbo in pursuing contractual and tortious claims against an international retail chain stores;
  • Advising a PRC individual on the recovery of shares in a listed company which have been unlawfully transferred;
  • Representing directors of a Hong Kong listed company defending claims brought by ex-director based on the alleged misrepresentations on an investment in the PRC;
  • Representing investors pursuing claims against financial institutions concerning mis-selling of investment products;
  • Representing victims of internet fraud to apply for Mareva and proprietary injunctions against the recipients of funds;
  • Representing recipients of funds to defend claims by victim of internet fraud based on unjust enrichment, constructive trust, knowing receipt and dishonest assistance;
  • Representing foreign litigants to apply for or discharge Mareva and proprietary injunction prohibiting disposal of assets in Hong Kong in aid of foreign proceedings;
  • Successfully striking out professional negligence claims by a litigant in person against a law firm (HCA 173/2014, 05.11.2015).

Kenix is a native Cantonese speaker and is fluent in Mandarin and English.

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