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8 August, 2017
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In two recent judgments, the Companies Court and the Court of Appeal have considered the Court’s power to wind up foreign companies in Hong Kong. These are the first two reported winding up cases considering the three core requirements1 necessary to enliven Hong Kong insolvency jurisdiction following the Court of Final Appeal’s judgment in the Yung Kee case2. The cases concern foreign companies not honouring judgment debts and arbitral awards, and then challenging the jurisdiction of the Hong Kong Court to wind them up.
Penta Investment Advisers Limited v Allied Weli Development Limited – CACV 58 of 2016 (date of judgment 11 July 2017)
Background
Allied Weli Development Limited (“Allied Weli”) is a BVI company registered as a non-Hong Kong company in 2002 with its principal place of business in Hong Kong. Dispute arose out of a deed of guarantee (the “Deed”) entered into between Allied Weli and Penta Investment Advisers Limited (“Penta”). In 2014, Penta obtained a Hong Kong judgment against Allied Weli. Allied Weli’s appeal against the judgment to the Court of Appeal and its application for leave to appeal to the Court of Final Appeal were both dismissed. On 24 July 2015, Penta issued a statutory demand against Allied Weli which was not satisfied, followed by a winding up petition.
On 6 August 2015, Allied Weli changed its management and moved its place of registration from Hong Kong to the Marshall Islands. Thereafter, the management and business were said to be conducted from Taiwan and the Marshall Islands rather than Hong Kong. When the petition was heard by Harris J, the only defence raised was one of jurisdiction saying that Allied Weli no longer had any connection to Hong Kong. This was (not surprisingly) rejected out of hand by Harris J in his short judgment dated 22 February 2016. He held that Allied Weli should be wound up on insolvency grounds so that its affairs could be thoroughly investigated by liquidators appointed by the Court.
The appeal
Allied Weli raised the following three grounds of appeal, all of which were rejected by the Court of Appeal:
Harris J relied on a historical rather than present connection to Hong Kong to establish a sufficient connection between the company and Hong Kong, and the need to investigate the company’s affairs cannot be relied upon as the only ground for winding up;
Because the Hong Kong Court may render assistance to foreign liquidators, the discretion to wind up foreign companies should no longer be exercised; and
The winding up will bring no benefit to other creditors within the jurisdiction besides the petitioner.
Sufficient connection
The Court of Appeal held that once a sufficient connection to Hong Kong is established, local jurisdiction is established even after the “original” connecting factors cease to exist3. The Court of Appeal found that there was a sufficient connection between Allied Weli and Hong Kong because:
Allied Weli had its principal place of business in Hong Kong until its recent move to the Marshall Islands. Also, its past directors and company secretary were based and resided in Hong Kong.
Allied Weli’s ultimate parent company is a listed company in Hong Kong, principally engaged in the Hong Kong financial services sector.
Allied Weli has more than 20 wholly-owned subsidiaries which are either incorporated in Hong Kong or have their principal place of operation in Hong Kong. Officers of these subsidiaries also reside in Hong Kong.
The Deed underpinning the subject debt is governed by Hong Kong law and provides for the non-exclusive jurisdiction of the Hong Kong Courts.
The Deed was executed and the company seal affixed in Hong Kong by Allied Weli’s managing director.
Other grounds
The Court of Appeal also found that:
There was clearly a proper basis to investigate the affairs of Allied Weli given that it went from having net assets of HK$800 million in 2009 until an alleged net liability position of HK$ 900,000 in 2014.
Jurisprudence on the assistance afforded to foreign liquidators by the Hong Kong Court do not support the contention that Hong Kong should only assume a secondary role of assisting in a foreign liquidation. If this view were to be adopted, it would undermine the statutory scheme to wind up foreign companies in Hong Kong.
There is no authority that more than one local creditor is needed; just one will suffice.
The Court of Appeal dismissed the appeal with costs against Allied Weli on an indemnity basis. The Court also ordered that Allied Weli and its solicitors to disclose the identity of the funder of the appeal, and the funder be joined in the proceedings for the purpose of costs.
Shandong Chenming Paper Holdings Limited v Arjowiggins HKK 2 Limited – HCMP 3060 of 2016 (date of judgment 7 July 2017)
Background
Shandong Chenming Paper Holdings Limited (“Shandong Chenming”) is a PRC company listed in both Shenzhen and Hong Kong, but has no assets and/or business in Hong Kong. A statutory demand was served on Shandong Chenming by its creditor Arjowiggins HKK 2 Limited (“Arjowiggins”) based on an arbitral award which the Court had granted leave to be enforced in Hong Kong. Shandong Chenming then sought an order from the Court declaring that the three core requirements were not satisfied. The declaration, if granted, would effectively restrain Arjowiggins from issuing a winding up petition against Shandong Chenming in Hong Kong.
As shown by its financial statements, Shandong Chenming was solvent with substantial assets and business in the PRC. It did not dispute that the arbitral award was payable, and only contended that the second limb of the three core requirements was not satisfied (namely that Arjowiggins would benefit from a winding up order in Hong Kong). It argued that a Hong Kong liquidator would achieve nothing of value in the PRC and that a winding up order in Hong Kong would be a futile exercise. As a result it said, the proper course for Arjowiggins would be to enforce the arbitral award in the PRC.
Benefits from a winding up order?
Benefits to a creditor are generally connected with the realization of assets for the benefit of creditors or the broader purpose of investigating the cause of the company’s liquidation. Upon considering the listed shares, the company structure and the articles of association of Shandong Chenming, Harris J concluded that the value of its listing status in Hong Kong was incapable of providing any material benefit to its creditors. Nevertheless, Harris J found that Arjowiggins would still benefit from a winding up order because of the following:
Benefits in a broad sense
1. The management of Shandong Chenming would be expected to pay the arbitral award given the immediate and severe consequence of a winding up order. Examples of Arjowiggin’s leverage include:
a control of Shandong Chenming in Hong Kong shifting to directors appointed by the liquidators;
b share transfers from the date of the presentation of winding up petition being made void unless otherwise ordered by the Court; and
c the status of Shandong Chenming as a Hong Kong listed company being jeopardised.
Public interest as an alternative ground
2. Shandong Chenming’s refusal to honour the arbitral award showed its disregard for the integrity of Hong Kong’s legal system and contempt for the Court of Hong Kong.
3. Harris J considered that there is a clear public interest that Shandong Chenming’s conduct be called into question; with a clear message to other foreign companies being communicated that they cannot take the benefit of Hong Kong’s financial system without also accepting the responsibility of complying with Hong Kong law.
Harris J ordered that Shandong Chenming’s application be dismissed with costs to be assessed on an indemnity basis.
Conclusion
The two decisions illustrate:
Jurisprudence on the three core requirements for winding up foreign companies will continue to develop post Yung Kee.
Benefit(s) to be obtained from a winding up order against a foreign company will be interpreted broadly; with public interest considerations to be taken into account.
The Hong Kong Court will not tolerate foreign companies seeking to evade payment of a judgment debt and/or arbitral award.
1 As summarised by The Hon Kwan J (as she then was) in Re Beauty China Holdings Ltd [2009] 6 HKC 351 and approved in the Yung Kee case:
There had to be a sufficient connection with Hong Kong, but this did 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.
2 Kam Leung Siu Kwan v Kam Kwan Lai (2015) 18 HKCFAR 501
