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Winding-up a Foreign Incorporated Company in Hong Kong – Nature of Benefits Conferred by a Winding Up Order

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.  

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