Clarifications on the Second Requirement for Winding Up a Foreign Company in Hong Kong

A Hong Kong court could exercise jurisdiction to wind up a foreign company pursuant to section 327(3) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, if the 3 core requirements are satisfied.  As explained in Kam Leung Sui Kwan v Kam Kwan Lai (2015) 18 HKCFAR 501 (“Yung Kee Case”), the 3 core requirements are as follows:

  • There must be a sufficient connection with Hong Kong;
  • There must be a reasonable possibility that the winding-up order would benefit those applying for it; and
  • The court must be able to exercise jurisdiction over one or more persons in the distribution of the company’s assets

(“3 Core Requirements“).

In a recent Court of Final Appeal (CFA) case Shandong Chenming Paper Holdings Limited v Arjowiggins HKK 2 Limited [2022] HKCFA 11 (“Shangdong Case“), the CFA provided clarifications on the second limb (“Second Limb“) of the 3 Core Requirements – in particular, the nature of the benefit that will satisfy the Second Limb.

The background facts are as follows. In October 2016, the Respondent served a statutory demand on the Appellant (a Mainland Chinese company listed in Shenzhen and Hong Kong) in respect of the amounts due under an arbitral award (“Award“), but the amounts remained outstanding. Subsequently, the Respondent presented a winding-up petition to the Court.

The Appellant accepted that the first and third requirements were met in the courts below. The issue in the Shandong Case at the CFA level was limited to the nature of the benefit that will satisfy the Second Limb.  The Court, taking into account that the rationale behind the Second Limb is to ensure the winding-up process will serve some useful purpose to the petitioner, held that applying commercial pressure on the Appellant to seek repayment of the undisputed debt which could be brought by presenting a winding-up petition is an entirely proper and relevant benefit. The Court explained that the benefit is not confined to a narrow scope of tangible or monetary benefits upon the actual making of the winding-up order; instead, the ‘leverage’ created by the prospect of a winding-up (as opposed to the making of a winding-up order) is a legitimate form of ‘benefit’ under the Second Limb. In response to the Appellant’s contention that according to the Yung Kee Case, the benefit must flow from the making of a winding-up order and must be sufficient and tangible and that there is no justification for departing from that, the Court responded that the 3 Core Requirements are self-imposed restraints on the Court’s exercise of jurisdiction and should not be approached as if it were an exercise of statutory construction, and is subject to the Court’s discretion.

In fact, the Second Limb has been discussed in some previous cases as well.  In Re China Huiyuan Juice Group Ltd [2020] HKCFI 2940 (“Huiyuan Case“), Re China Greenfresh Group Co Ltd (“the Company”) [2021] HKCFI 1182 (“Greenfresh Case“) and Re Grand Peace Group Holdings Ltd [2021] HKCFI 2361 (“Grand Peace Case“), Harris J held that the winding-up petition did not meet the Second Limb, and that it is necessary for a petitioner to demonstrate by evidence that there is a real possibility of a tangible and sufficient benefit to creditors which would derive from the making of a winding-up order. Although it seems to be inconsistent with the Shandong Case in that the latter suggested that “benefit” is not limited to one arising from the making of a winding-up order and needs not be monetary or tangible, perhaps these cases could still be reconciled in the following way:

Firstly, the case facts are distinguishable. The Shandong Case differs in that the Appellant was solvent and operating profitably, the only reason for non-payment was recalcitrance. Also, the debt was undisputed. As noted in paragraph 39 of the judgment, there is a crucial distinction between undisputed and disputed debts and previous case laws demonstrated a winding-up petition presented in order to bring pressure on a company to pay an undisputed debt is perfectly proper. Further, given that the Appellant was solvent and operating profitably, the likelihood of the Appellant repaying the undisputed debt upon being applied commercial pressure would perhaps be a strong enough reason to constitute a real benefit to the petitioner. In contrast, in the 3 other cases, there may not be much leverage created by the prospect of a winding-up petition given that it was relatively less certain that the company in question could repay the petitioner even upon winding-up. The fact that these cases did not appear to include “leverage” as a benefit could mean that  the relevance of commercial pressure or leverage created by the prospect of a winding-up petition was minimal or non-existent.  Accordingly, the fact that these cases recognised a benefit arising from the making of a winding-up order and did not explicitly recognise other benefit such as “leverage” should not be interpreted as ruling out any other benefit not arising from the making of a winding-up order.

Secondly, on reading the judgments of the Huiyuan Case, Greenfresh Case and Grand Peace Case closely, it appears that when Harris J stated the need for “real possibility of a tangible benefit”, it was stated as opposed to hypothetical or theoretical benefits that potentially arise, which would be different from the benefits in the Shandong Case, which were beyond theoretical or hypothetical. In addition, in a recent case of Re Up Energy Development Group Ltd [2022] HKCFI 1329 in which it was held that the Second Limb was satisfied, the Judge noted that the Second Limb is not a high threshold to discharge and the petitioner is only required to demonstrate a real possibility of benefit, and that the nature or extent of the likely benefit to be shown under the Second Limb is to be given flexibility. Therefore, it seems that the Shandong Case and those previous cases are not necessarily in conflict, perhaps only with different focuses.

Taking into account all of the above factors, it appears that on top of the existing requirements that the benefit required to be shown under the Second Limb ought to be discernible and real as opposed to hypothetical or theoretical, the Shandong Case has clarified the scope by also expressly including intangible benefits such as leverage created by the prospect of a winding-up petition.

28 June 2022
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