Court of Appeal reaffirms three core requirements to wind up foreign company

Under section 327 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32), the Court can exercise its discretion to wind up a foreign-incorporated company. A recent case reaffirms the three core requirements necessary to enable the court to exercise that discretion.

The Court of Final Appeal confirmed in  Kam Leung Siu Kwan v Kam Kwan Lai (2015) 18 HKCFAR 501 (Kam v Kam) that there are three “core requirements” which must be satisfied before the Court will exercise its statutory jurisdiction to wind-up a foreign-incorporated company, namely:-

1. 

there has to be a sufficient connection with Hong Kong, but this does not necessarily have to consist of the presence of assets within the jurisdiction;

2. 

there must be a reasonable possibility that the winding-up order will 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.

Previously, we reported on the Court of First Instance judgment in Shandong Chenming Paper Holdings Ltd v Arjowiggins HKK 2 Ltd (HCMP 3060/2016) in which the Court gave an extensive analysis on what constitutes a sufficient benefit under the second core requirement.

The Court of First Instance decision was appealed and here, we look at the judgment recently handed down by the Court of Appeal. 

Court of First Instance decision

At first instance, the Court took the view that the leverage created by the prospect of a winding-up petition or the appointment of a liquidator and the steps that a liquidator may take to recover assets would constitute reasonable prospects of benefit for the petitioner, i.e. Arjowiggins in this case, such as to satisfy the second core requirement. 

The Court went on to hold that even if the leverage did not constitute a reasonable prospect of benefit to Arjowiggins arising from the making of a winding-up order, the second core requirement could be moderated, i.e. dispensed with, where justified by the circumstances of the case and that the present case was one in which moderation would have been justified.

On such basis, the Court dismissed Shandong Chenming’s application for a declaration that Arjowiggins would not be able to satisfy the three core requirements for the Court to exercise its jurisdiction to wind up Shandong Chenming.

Court of Appeal decision (CACV 158/2017)

Shandong Chenming contended that the judge at first instance had been wrong to conclude that the leverage created by the prospect of a winding-up petition could satisfy the second core requirement and also wrong to conclude that the second core requirement was capable of moderation, and in any event, the present circumstances did not call for moderation.

Could the second core requirement be moderated?

The Court of Appeal revisited the propositions in the Court of Final Appeal decision in Kam v Kam and Court of Appeal decision, Re China Medical Technologies [2018] HKCA 111, and confirmed that whilst the third core requirement might sometimes be dispensed with in appropriate circumstances, the second core requirement was always essential.

The Court considered that in the enquiry as to whether the second core requirement was met, there is some flexibility as to the nature or extent of the likely benefit to the petitioner as long as the benefit can be said to be a real possibility, rather than a merely theoretical one.

In light of its conclusion, there was no need for the Court to decide whether the present case was an appropriate case to moderate the second core requirement.

Was the leverage created by the prospect of a winding-up order sufficient to satisfy the second core requirement?

The Court of Appeal went on to conclude that the judge at first instance had not erred in deciding that the leverage created by the prospect of a winding-up order was sufficient to satisfy the second core requirement.

There was no evidence to support Shandong Chenming’s contention that Arjowiggins did not intend to seek the making of a winding-up order and was merely attempting to put pressure on Shandong Chengming to pay the arbitral award.

The Court of Appeal disagreed with Shandong Chenming’s suggestion that it might be improper to exert pressure to pay by presenting a winding-up petition.  It is only improper to seek to use a winding-up petition to pressure a company into payment of a disputed debt, the Court said. Where the debt is undisputed or indisputable, as in this case, the petitioner is entitled to present a winding-up petition ex debito justitiae and thus cannot be said to be acting improperly.

The Court also rejected Shandong Chenming’s argument that the benefit available to a petitioner has to be one that also benefits all other creditors, as that proposition contradicts case authorities. 

The Court of Appeal therefore concluded that there was a real possibility of benefit to Arjowiggins in the making of a winding-up order against Shandong Chenming and the appeal was dismissed.

Comment

This judgment reaffirms the three core requirements approved in Kam v Kam for the Hong Kong Courts to exercise their jurisdiction to wind up a foreign company under s.327 of Cap.32.  It also clarifies that the second core requirement is an essential requirement, which cannot be moderated or dispensed with, whereas the third core requirement can be dispensed with in appropriate circumstances.

Further, the Court of Appeal confirmed that the leverage arising from the prospect of a winding-up order being made, is sufficient to satisfy the second core requirement. It further confirmed that it is not improper for a creditor to use the winding-up mechanism to exert pressure on a debtor for payment, so long as the debt is undisputed or indisputable.