The three "core requirements", as explained in Kam Leung Sui Kwan v Kam Kwan Lai (2015) 18 HKCFAR 501 (the "Yung Kee" case) and pursuant to section 327(3) of the Companies (Winding Up and Miscellaneous Provision) Ordinance (Cap. 32), are:
- There has to be a sufficient connection with Hong Kong, but this does not necessarily have to consist of assets present within the jurisdiction.
- There must be a reasonable possibility that the winding-up order will benefit those applying for it.
- The court must be able to exercise jurisdiction over one or more persons in the distribution of the company's assets.
The appeal was concerned with the second requirement, with the question before the CFA being whether the Hong Kong court should exercise its winding-up jurisdiction over foreign companies on the basis that a "benefit" is made out if such "benefit" does not arise as a consequence of the winding-up order being made, but rather, would only ever be realised if the winding-up order were either avoided or discharged.
Background
Shandong Chenming was a company incorporated on the mainland and registered as a non-Hong Kong company under Part 16 of the Companies Ordinance (Cap. 622), having a place of business in Hong Kong. Shandong Chenming and Arjowiggins established a joint venture in the mainland and following a dispute, Arjowiggins commenced an arbitration in October 2012 pursuant to a joint venture agreement. In November 2015, the arbitral tribunal rendered an award ordering Shandong Chenming to pay RMB167,860,000 to Arjowiggins.
Arjowiggins obtained a court order granting it leave to enforce the award in December 2015 and soon afterwards, Shandong Chenming applied to set aside the order and the award. The application was dismissed.
On 18 October 2016, Arjowiggins served a statutory demand on the Shandong Chenming in respect of contractual damages and legal fees. Shandong Chenming paid nothing, instead obtaining an interim injunction order to prevent Arjowiggins from presenting a petition to wind it up. Leave was granted to allow Arjowiggins to seek a declaration that, since Shandong Chenming was an unregistered company, Arjowiggins would not be able to satisfy the three core requirements for the Hong Kong court to exercise its jurisdiction.
Shandong Chenming accepted that the first and third core requirements were met. The argument was whether the second requirement was met.
Shandong Chenming argued that it conducted no business in or from Hong Kong, had no assets in Hong Kong and that its only connection with Hong Kong was its listing. Shandong Chenming argued there was no reasonable prospect that Arjowiggins would benefit from the making of a winding-up order in Hong Kong and that it should take steps to enforce the award in the mainland instead.
The real benefit
The Court of Final Appeal (Chief Justice Cheung, the Honourable Messrs Justices Ribeiro PJ, Fok PJ, Lam PL and Lord Collins of Mapesbury NPJ) observed that it is "entirely proper to seek to enforce payment of an undisputed debt by the presentation of a winding-up petition" and that "pressure on a debtor to pay an undisputed debt is a proper benefit of allowing a winding-up petition to proceed" (see our alert Hong Kong court sets high bar for injunctions restraining presentation of winding-up petitions).
The Court of Final Appeal also emphasised that the benefit need not flow from an administration of the assets after a winding-up order is made, noting that there was "no doctrinal justification for confining the relevant benefit narrowly to the distribution of assets by the liquidator in the winding up of the company". Once it was accepted that commercial pressure to achieve the repayment of an undisputed debt is "an entirely proper purpose for a creditor's winding-up petition", it was "difficult to see any principled basis for excluding that commercial pressure as a relevant benefit for the purposes of the second requirement".
The "essential consideration" was whether a reasonable possibility exists of a "sufficient benefit accruing to the petitioner from being permitted to set in motion winding-up procedures in Hong Kong in respect of a non-Hong Kong company". The court said that benefit would exist even "where setting those procedures in motion results in the payment of an undisputed debt."
The Court of Final Appeal said that "leverage" was "always in the background of any instance of civil litigation" and that a winding-up petition was no different. In the present case, that leverage stemmed from the adverse consequences on Shandong Chenming's listing status in the Hong Kong Stock Exchange.
A broad interpretation
The CFA judgment confirms that the Hong Kong courts are prepared to apply a broad interpretation of where "benefit" lies in the context of winding-up foreign companies. However, there are limits to the discretion.
In Re Grand Peace Group Holdings Limited [2021] HKCFI 2361 for example, the Honourable Mr. Justice Harris observed that the second core requirement could be satisfied if it could be demonstrated that the centre of main interests was in Hong Kong and what was sought was the making of applications pursuant to the new Hong Kong-mainland China insolvency arrangement (see our alert Real and discernible benefit – Hong Kong court sets out principles for winding-up offshore holding companies).
The decision in Shandong Chenming represents a welcome development for creditors seeking repayment of debts from foreign companies that have a substantial connection to Hong Kong.
Authored by Jonathan Leitch, Yolanda Lau, Nigel Sharman, and Fiona Wong.
