Hong Kong Court Decision On Unfair Preference And Issue Estoppel In Liquidation Proceedings

In RZ3262019 Limited (in Liquidation) v Zhou Ying Investments Group Limited and others [2025] HKCFI 4350, the Hong Kong Court considered key issues concerning unfair preference claims and the application of issue estoppel in proceedings brought by liquidators. This decision provides important guidance on the interaction between Hong Kong insolvency law and Mainland Court decisions, particularly in the context of strike-out applications based on issue estoppel.

Background

The liquidators alleged that two guarantees provided by a subsidiary were executed as part of a conspiracy between the 1^st and 2^nd Defendants to defraud the company's creditors. They further alleged that the 1^st Defendant was under the control of the 2^nd Defendant, which also controlled the company and the 3^rd Defendant.

Arguing that this constitutes unfair preference, the liquidators sought restorative relief under sections 266, 266A and 266B of the Companies (Winding up and Miscellaneous Provisions) Ordinance (Cap. 32) ("CWMPO"), including:

• A declaration that the guarantees and related sums received by the 1^st Defendant constituted unfair preference, as the company was influenced by a desire to prefer the 1^st Defendant.
• An order for repayment of those sums to the liquidators.

Prior to the Hong Kong proceedings, the 1^st Defendant enforced the guarantees in the Mainland and received payment. A retrial application in the Sichuan Higher People's Court ("Mainland Court") challenged the validity of the guarantees on the basis that they were part of a fraudulent scheme orchestrated by the 2^nd Defendant. The application also alleged that the guarantees and related enforcement proceedings amounted to "malicious conspiracy". The Mainland Court dismissed the application, finding the guarantees valid and enforceable under PRC law.

The 1^st and 2^nd Defendants then sought to strike out the Hong Kong claim, arguing that the Mainland Court had already determined the same issues, and that issue estoppel barred the liquidators from re-litigating the same matter in Hong Kong.

Decision

The Hong Kong Court dismissed the strike out application, ruling that issue estoppel did not apply. To establish issue estoppel, three conditions must be met:

1. The same issue must have been previously determined by a judicial decision (whether by a Hong Kong or non-Hong Kong court).

2. The decision must have been made by a court of competent jurisdiction and be final.

3. The parties to the earlier decision must be the same as those in the current proceedings.

The Hong Kong Court found that the Defendants failed to satisfy the first condition i.e. that the same issue had already been determined. In particular:

• The issues were not identical. Having regard to the PRC legal opinions on the standard of proof for "malicious conspiracy", the Hong Kong Court was satisfied that the standard under PRC law was "beyond reasonable doubt", which is higher than the "balance of probabilities" standard applied in Hong Kong.
• Precision in the identification of issues is essential. The Hong Kong Court emphasised the need for careful analysis when comparing issues across jurisdictions. Material differences in legal standards, such as the burden or standard of proof, can render the issues materially distinct.
• No determination of key allegations. The Mainland Court did not address the evidence or arguments relating to the alleged "conspiracy" and "control", which are central to the liquidators' unfair preference claim under the CWMPO. It was not plain and obvious that these issues had been determined by the Mainland Court. As such, the Defendants failed to discharge their burden in seeking to strike out the liquidators' claim on the basis of issue estoppel.

Comments

This decision highlights that a prior judgment from another jurisdiction does not automatically preclude proceedings in Hong Kong. Issue estoppel only applies where identical issues have been determined, and differences in legal tests can be fatal to an estoppel argument. Hong Kong Courts will carefully scrutinise whether the same issue has truly been determined before applying estoppel.

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.