Winding up a foreign incorporated company in Hong Kong – What constitutes sufficient benefit?

Generally speaking, the most appropriate jurisdiction in which to wind up a company is the jurisdiction where the company is incorporated, and the jurisdiction to wind up a foreign company has often been described as exorbitant or as usurping the functions of the courts of the country of incorporation. In a recent decision (Shandong Chenming Paper Holdings Ltd v Arjowiggins HKK 2 Ltd (HCMP 3060/2016), Hong Kong’s Court of First Instance looked at the requirements that must be satisfied before the Hong Kong Court will wind up a foreign company, in particular, the requirement that there must be a reasonable possibility that the winding-up will benefit those applying for it. Here, the Court held that the leverage created by the prospect of a winding-up petition or appointment of a liquidator and the steps that a liquidator may take to recover assets amounted to such benefit. 

Section 327 of Cap 32 

The Hong Kong courts are empowered by section 327 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) to wind up a foreign incorporated company. Section 327 is in the following terms:- 

(1) Subject to the provisions of this Part, any unregistered company may be wound up under this Ordinance… 

(3) The circumstances in which an unregistered company may be wound up are as follows:- 

(a) if the company is dissolved, or has ceased to carry on business, or is carrying on business only for the purpose of winding up its affairs; 

(b) if the company is unable to pay its debts; 

(c) if the court is of the opinion that it is just and equitable that the company should be wound up. 

3 Core Requirements 

The court’s power to wind up a foreign company under Section 327 is discretionary, and as such, the courts have developed guidelines to be followed in the  exercise of that discretion, namely three “core requirements” which must be satisfied before the court will exercise its statutory jurisdiction to wind-up a foreign-incorporated company:- 

(1)  there has to be a sufficient connection between the company and  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 would 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. 

In the Shandong Chenming Paper Holdings case, the court elaborated on and clarified what would constitute a sufficient benefit under the second core requirement. Common “benefits” relied on include the company having assets within the jurisdiction and the opportunity for a liquidator to realise assets within the jurisdiction. It has also been held that an opportunity for a liquidator to investigate misappropriation and misapplication of a company’s assets, including an examination pursuant to section 221 of the Companies Ordinance (Cap. 622), is capable of being a sufficient benefit. 

Shandong Chenming Paper Holdings Case – The Facts 

Shandong Chenming Paper Holdings Ltd (the Company) was a company incorporated in the Mainland, with a listing of A and B shares on the Shenzhen Stock Exchange and a dual primary listing of H shares on the Main Board of the Hong Kong Stock Exchange. It was registered as a non-Hong Kong company, under Part 16 of the Companies Ordinance (Cap. 622). 

The Company had entered into a joint venture with Arjowiggins. Disputes arose and were submitted to arbitration and an arbitral award was made in Arjowiggin’s favour, who then obtained leave to enforce the award. The Company unsuccessfully applied to set aside the award and Arjowiggins served a statutory demand on the Company. The Company did not dispute, that as a matter of Hong Kong law, the award was payable. What it argued, was that the second core requirement was not satisfied i.e. that Arjowiggins would derive sufficient benefit from the winding-up order to justify putting the Company into compulsory liquidation in Hong Kong. It was accepted that the other 2 core requirements were satisfied. 

Would a benefit be derived from a winding-up? 

Arjowiggin’s case was that it would derive a benefit from a winding-up order because:- 

(1)    the company’s H share listed status was a valuable and realisable asset in Hong Kong; and 

(2)    a liquidator would be able to investigate the restructuring and potentially take action to recover assets held by a valuable subsidiary.    

Although the Court did not accept the two above grounds, it still found that Arjowigggins would derive  a benefit  from a winding-up order, namely 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, even if such steps were problematic.  

Further, the Court noted that the three core requirements are self-imposed restraints on making a winding-up order against a foreign company and as such constituted guidance as to the circumstances in which the Court’s discretion should be exercised and could be moderated if the circumstances clearly called for it. Here, the Court found that the circumstances did call for such moderation.  

The Company, the Court said,had chosen to have a second primary listing in Hong Kong. An arbitration award had been made against it, which was enforceable as a judgment in Hong Kong. The Company did not suggest that it could not pay the award, but simply refused to do so and took the position that there was nothing Arjowiggins could do about it in Hong Kong. This, the Court said, was unacceptable. The Company wished to take advantage of Hong Kong’s financial and legal systems, but its refusal to honour the award showed a complete disregard for the integrity of Hong Kong’s legal system. If the Company wished to be listed in Hong Kong, the Court said, it should honour the award and respect the Court’s decision by which it gave Arjowiggins leave to enforce the award. There was a public interest, the Court said, in steps being taken to remedy the Company’s conduct and to disabuse other Mainland companies of the idea that they can take the benefit of access to Hong Kong’s financial system without the burden of complying with Hong Kong laws. 

Comment 

This case confirms that when deciding whether to wind-up a foreign company, although the Court must consider the three core requirements, those requirements are only guidelines, which can be moderated where, as here, the circumstances call for such. It also shows that various factors can amount to a “benefit” to be derived from the winding up. As the Court said, what is required, is for it to be demonstrated that there is a reasonable prospect that the petitioner will derive a benefit consistent with the statutory purpose of the winding-up jurisdiction. It said that generally, such a benefit is likely to be connected with either the realisation of assets for the benefit of creditors or the broader purpose of investigating the circumstances in which the company has come to be put into liquidation. So long as it is demonstrated, the Court said, that on the balance of probabilities, there is a reasonable prospect that a benefit will result, which falls within these categories and that it is sufficiently substantial to justify an order which engages the Hong Kong insolvency regime, the second core requirement will be satisfied. Here, the Court held that the leverage created by the prospect of a winding-up petition or appointment of a liquidator could amount to such benefit.