16 November, 2015
On Wednesday, the Court of Final Appeal ("CFA") reversed the lower courts' decision in the Yung Kee case1, holding that the Hong Kong court has jurisdiction to order the winding up of Yung Kee Holdings Limited (the "Company"), a holding company incorporated in the British Virgin Islands and not registered in Hong Kong.
The CFA found that there was sufficient connection between the Company and Hong Kong for the purposes of s.327(3)(c) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (the "C(WUMP)O"). The Company is the ultimate holding company of Yung Kee restaurant and other group companies operating and incorporated in Hong Kong.
The Court held that the requisite connection can be established through the Company's shareholders and subsidiaries, in this case, all in Hong Kong. It also overturned the lower courts' statements that a "more stringent" connection was required in the case of a shareholders' petition as compared to a petition brought by a creditor.
This is a significant development in Hong Kong company law. It will have wide repercussions for businesses with existing or planned complex corporate structures and parties looking to enforce shareholders rights involving overseas holding companies.
THE CORPORATE STRUCTURE, BUSINESS ACTIVITIES AND THE PLAYERS
As noted in the CFA's decision:
- The Company was incorporated in the BVI as the ultimate holding company of a group of companies. The structure was put in place with a view to avoiding estate duty.
- The Company's sole asset is the shares in a wholly owned subsidiary, Long Yau Limited, also incorporated in the BVI.
- Long Yau in turn has eight subsidiaries: two are operating subsidiaries that are incorporated and carry on business exclusively in Hong Kong (including the Yung Kee Restaurant); the other companies are property owning companies which own properties in Hong Kong.
- All the underlying assets of the Company are situate in Hong Kong; the business of the group is carried out by companies incorporated in Hong Kong and carrying out business exclusively in Hong Kong; the income is all derived from Hong Kong business;
- The Company's and its subsidiaries' shareholders and directors are and always have been resident in Hong Kong; all group administrative matters are discussed and decided in Hong Kong; all parties to the disputes are resident in Hong Kong;
- The only connection to the BVI is the incorporation of the two holding companies there.
In the Court of Appeal, the business of the subsidiaries was disregarded on the principles of separate legal personality. However, it was accepted that had the Company held all its subsidiaries directly instead of indirectly through the medium of its wholly owned subsidiary Long Yau, there would be sufficient connection with Hong Kong to justify the Court exercising its jurisdiction to wind up the Company.
STATUTORY JURISDICTION TO WIND UP A NON-HONG KONG COMPANY
No place of business in Hong Kong – s.168A
The CFA agreed with the lower courts that there is no jurisdiction to make an order under s.168A of the old Companies Ordinance, which requires a non-Hong Kong company to have established a place of business in Hong Kong. The CFA gave their view that a "place of business" connotes a place where or from which the company either carries on or possibly intends to carry on a business. Purely internal organizational changes in the governance of the company itself, such as a company's directors discussing its affairs or holding board meetings, is not sufficient by itself to make that place the company's "place of business".
The equivalent provisions to s.168A of the old Companies Ordinance can now be found at ss.722-726 of the new Companies Ordinance.
Any unregistered company – s.327
Section 327 of the C(WUMP)O provides, inter alia, that any unregistered company may be wound up (i) in the case of insolvency (s.327(3)(b)), or (ii) on just and equitable grounds (s.327(3)(c)).
The CFA referred to the three so-called "core requirements" which had been adopted by the courts as the test for it to exercise its statutory jurisdiction to wind up a foreign company, as summarized in Re Beauty China Holdings2 but clarified that these "core requirements" should be better treated as part of the court's discretion and in any event, pointed out the substantial overlap between the requirements. The CFA also distinguished the present application, which was a shareholder's petition on the just and equitable ground, from Re Beauty China and other cases, which concerned creditors' petitions on the grounds of insolvency.
The Court restated the test:
"the question in the case of a creditor’s petition is 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 it is incorporated elsewhere; and that 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 the distribution of its assets or otherwise, will always be necessary and will often be sufficient."
NO "VERY EXCEPTIONAL" REQUIREMENT FOR SHAREHOLDER'S PETITION
The CFA disagreed with the lower courts that a "more stringent" connection was required in the case of a shareholders' petition. While authorities on such petitions were rare, it saw no reason why it should have to be a very exceptional case for the court to be willing to exercise its statutory jurisdiction to wind up a foreign company on the just and equitable ground.
The CFA observed that shareholders' petitions are normally brought only in the case of small, private, family or quasi-partnership companies and that such companies in England would rarely involve overseas incorporated companies – unlike in Hong Kong, where there are far more family companies owned by foreign holding companies.
Shareholders, no less than creditors, are entitled to bring winding up proceedings in Hong Kong in respect of a foreign company, and in either case must establish a sufficient connection between the place of incorporation and Hong Kong.
In the case of a shareholder's petition on the just and equitable ground, 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.
FACTORS ESTABLISHING A SUFFICIENT CONNECTION
The CFA recognized that the factors relevant to establishing the connection will be different for a creditor's petition and a shareholder's petition, because the nature of the dispute and the purpose for which the winding up order is sought are different:
- Creditors seek a winding up order against their debtor in order to obtain payment in or towards satisfaction of their debts. They only need prove their debt and then may chase assets wherever they may be found and seek winding up orders in different jurisdictions until the debt is satisfied.
- For shareholders, the company is the subject of the dispute rather than a party to it.The purpose in seeking a winding up order is not so much to obtain payment of a debt but rather to realise the petitioner’s investment in the company.
Given the nature of the dispute and the fact that it is a dispute between the shareholders, their presence in the jurisdiction is highly relevant and will usually be the most important single factor.
BENEFIT TO BE DERIVED
There must be a reasonable prospect that the petitioner will derive a sufficient benefit from the making of a winding up order, in order for the court to exercise its jurisdiction over an overseas company.
The shareholder who brings a petition to wind up a company does so in order to realise his investment, and if the company is a holding company then his purpose is to realise the value of its underlying assets, whether they belong to its direct or indirect subsidiaries.
The CFA underlined its recognition that a company and its shareholders are separate and distinct legal entities, but that it does not follow that a sufficient connection cannot be established through its shareholders or subsidiaries. By giving effect to the close connection between a holding company and the assets of its direct and indirectly held subsidiaries, it merely reflects the nature of the dispute and the purpose for which the proceedings are brought.
ON THE MERITS – IS IT JUST AND EQUITABLE?
The CFA proceeded to consider the petition on its merits. It agreed with the trial judge that there had been a mutual understanding that both brothers would participate in the business and that that understanding had been breached. Accordingly, on the merits, it was just and equitable to wind up the Company.
CLOSING REMARKS
This is an important decision of the CFA favouring substance over form, and looking to the underlying purpose of an action. It will have wide ranging effect for Hong Kong's business community.
And lastly, there is still time to sample Yung Kee's famous roast goose, as the Court stayed the winding up order for 28 days to give the parties an opportunity to come to an agreement for the petitioner's shares to be bought out.
Click here to read the full judgment.
Click here to read our note on the Court of Appeal judgment from April 2014.
1 Kam Leung Sui Kwan v Kam Kwan Lai FACV 4 of 2015
2 Re Beauty China Holdings Ltd [ [2009] 6 HKC 351 at p. 355-6 [para 23]
“(1) 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;
(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.
