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Sufficiently connected?
20 November 2015
Winding up offshore entities in Hong Kong
Against a background where the Hong Kong Courts have increasingly shown a readiness to grant orders
assisting liquidators appointed by the Cayman Islands and BVI Courts, the Court of Final Appeal has helpfully
clarified the circumstances in which an offshore incorporated company might be the subject of a winding up
order in Hong Kong.
The lengthy legal battle over the iconic Yung Kee roast goose restaurant concluded recently with the Hong Kong Court of Final Appeal (the “CFA”)
deciding that the British Virgin Islands (“BVI”) incorporated ultimate holding company of the group, Yung Kee Holdings Limited (the “Company”), had
a connection with Hong Kong sufficient to justify a winding up order being made against it. The CFA however stayed the order for 28 days to leave
the door open for the founder’s two sons to seek to agree a buyout of shares1.
The proceedings were launched in 2010 by the now deceased elder brother, Kwan-Sing. The remedy sought was an order that his younger brother,
Kwai-Lai, buy out his shares, or vice versa, on the basis that the affairs of the Company were being carried on in a manner which was unfairly
prejudicial2 (the “Unfair Prejudice Claim”), in the alternative that the Company should be wound up on the just and equitable ground3.
The Unfair Prejudice Claim
The relevant Hong Kong legislation provides that an unfair prejudice claim can only apply to: (i) a Hong Kong company or (ii) an overseas company
which has established a place of business in Hong Kong. Both the CFA and the courts below found that the Company had not established a place of
business in Hong Kong, and affirmed that the courts of Hong Kong therefore had no jurisdiction to make an order in relation to the Unfair Prejudice
Claim. In particular, the CFA held that the carrying on of administrative tasks, holding board meetings, and passing resolutions at a particular local
venue are not in themselves sufficient to make that place a “place of business” for the purposes of the legislation.
The Winding up Order
The CFA then moved on to consider the winding up of the Company on the just and equitable ground and reaffirmed the established three core
requirements which must be satisfied before the Hong Kong court will wind up a foreign company, namely that:
Kam Leung Sui Kwan v Kam Kwan Lai & Ors [FACV No.4 of 2015]
Section 168A of the Companies Ordinance (Cap.32), now superseded by ss. 722 to 726 of the new Companies Ordinance (Cap. 622)
3
Section 327(3)(c) of the Companies Ordinance (Cap.32), now retained as s.327(3)(c) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32)
1
2
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1) There is a sufficient connection with Hong Kong;
2)There is a reasonable possibility that the winding-up order would benefit those applying for it; and
3)The court is able to exercise jurisdiction over one or more persons in the distribution of the company’s assets (ordinarily meaning that there must
be creditors in the jurisdiction).
The CFA focused on the first limb and dissented from the view of the lower courts that a “more stringent” connection is required in cases where the
winding up petition is presented by the shareholders (as opposed to creditors). The CFA held that, in such instances, the presence of the shareholders
within the jurisdiction is a weighty factor in establishing a sufficient connection with Hong Kong as the dispute is essentially one between the
shareholders, and the company is the subject of the dispute rather than a party to it.
Further, the CFA disagreed with the courts below that the interposition of an intermediary company between a company and the ultimate assets in
Hong Kong made the connection insufficient. Instead, the CFA held that where a shareholder presents a petition to realise his investment, it should
not matter whether the underlying assets belong to the subject company directly or indirectly.
In reaching its conclusion that a sufficient connection with Hong Kong had been established, the CFA also took into account the facts that all of the
underlying assets of the Company are situated in Hong Kong, that the whole of the Company’s income is derived from the Hong Kong business and
that the events giving rise to the dispute between the shareholders all took place in Hong Kong.
Foreign office holders
In the context of this decision, it should also be understood that the Hong Kong courts have shown an increasing willingness to assist foreign office
holders, appointed by the offshore courts, who are looking to recover assets or take other steps in Hong Kong. By way of example, in a very recent
case, L v G LTD4, a petition to wind up a Cayman company listed in Hong Kong was presented on the ground of insolvency. Subsequently it became
clear that the company had issued a petition for its own winding up in Cayman together with an application to appoint provisional liquidators. The
Hong Kong Companies judge, Harris J, considered that it was unnecessary for a petition also to be brought in Hong Kong, the reason being that to
wind up a company in its place of incorporation, rather than in Hong Kong, does not mean that the liquidators would be unable to deal with the
affairs of the company in Hong Kong. At common law, the court has the power to recognise foreign liquidators and to assist them in carrying out their
functions. In the case of liquidators appointed in jurisdictions with similar insolvency regimes to Hong Kong (such as BVI and Cayman) such assistance
may extend to granting orders that give foreign liquidators substantially similar powers to, for example, recover assets, investigate the affairs of the
company by examination and seek documents as a domestically appointed liquidator would have.
Conclusion
The CFA decision shows that there is considerable flexibility in the manner in which the core criteria applicable to winding up foreign companies in
Hong Kong might be applied. In this instance, the facts that the substantive underlying business was exclusively based in Hong Kong and that the
dispute between the shareholders arose directly out of the management of that underlying business in Hong Kong was sufficient to tip the balance,
notwithstanding that the offshore holding company in question did not, at least directly, hold any assets in Hong Kong.
The appointment of liquidators by the Hong Kong court to a BVI or Cayman Islands entity, will more often than not also raise related questions as to
the effect of such an appointment in the company’s home jurisdiction, for example in connection with the directors’ continuing capacity to manage
the company, the prospects (if any) of the Hong Kong appointed liquidators being recognised by the offshore courts and/or whether or not a winding
up order should also be sought and obtained in the home jurisdiction. These are often complex questions that require a detailed analysis of the facts
and consideration of the relevant local laws.
4
HCCW318/2015, judgment handed down on 4 November 2015
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In any event, every case will be different on its own facts and, where an offshore entity is involved, it will always be sensible to review and consider all
available options, including, most obviously, the possible appointment of liquidators in the jurisdiction in which the entity is incorporated being the
natural forum. In that regard, encouragingly for those who favour practical judicial co-operation in cross border insolvency matters, the Hong Kong
Courts have increasingly shown that they are prepared to make orders where appropriate to assist foreign office holders in the recovery of assets and
in the discharge of their duties.
Authors
Rowena Lawrence
Crystal Au-Yeung
Counsel - Hong Kong
T: +852 2596 3379
E: [email protected]
Legal Manager - Hong Kong
T: +852 2596 3384
E: [email protected]
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The information contained in this advisory is necessarily brief and general in nature and does not constitute legal or taxation advice. Appropriate legal or other professional advice should
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