Hong Kong: Sufficiently Connected? 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:

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.

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.

Footnotes

1. Kam Leung Sui Kwan v Kam Kwan Lai & Ors [FACV No.4 of 2015]

2. 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)

4. HCCW318/2015, judgment handed down on 4 November 2015

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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