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Hong Kong Court of Final Appeal Clarifies the Requirements to Wind-Up Foreign Companies
7 July 2022

In a recent case of Shandong Chenming Paper Holdings Limited v Arjowiggins HKK 2 Limited [2022] HKCFA 11, the Court of Final Appeal of Hong Kong (“CFA”) confirmed that for the purposes of winding up foreign incorporated companies, the “leverage” created by the prospect of a winding-up action can be a form of “benefit” under the requirement that the winding-up order would benefit those applying for it. In particular, the CFA showed willingness to adopt a pragmatic approach in assessing whether it would be useful to entertain a winding-up petition in respect of a foreign company.

Case Background

The Appellant was a PRC company listed in Shenzhen and Hong Kong. It is registered as a non-Hong Kong company and has a place of business in Hong Kong. Due to disputes arising from the joint venture between the Appellant and the Respondent, the Respondent commenced an arbitration in Hong Kong and an arbitral award was made against the Appellant. The Respondent then served a statutory demand on the Appellant. The Appellant did not pay any part of the amounts and applied for an interim injunction to prevent the Respondent from presenting a winding-up petition.

3 Core Requirements

It is settled law that for the Hong Kong court to exercise its jurisdiction to wind up a foreign incorporated company, 3 core requirements under section 327(3) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) must be satisfied :-

1. There must be a sufficient connection with Hong Kong;
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.

At the Court of First Instance (“CFI”) level, the Appellant accepted that the 1st and 3rd core requirements were met in the present case and so the issue in question concerns only the 2nd core requirement. The judge held that the 2nd core requirement was satisfied as the leverage created by the prospect of a winding-up petition constituted sufficient benefit for the Respondent. The reason is that unless the Appellant was surprisingly indifferent to the adverse consequences of a winding-up order, such as the loss of its status as a Hong Kong listed company, one would expect it to pay the arbitral award. The Court of Appeal upheld the CFI’s decision that there was a real possibility of benefit to the Respondent in the making of a winding-up order against the Appellant.

2nd Core Requirement : “Benefit” of Winding-Up Order

The CFA held that the benefit for the purposes of the 2nd core requirement is not limited only to one arising from the making of a winding-up order and need not be monetary or tangible in nature. In this regard, the CFA opined that a pragmatic approach should be applied in assessing whether it would be useful to entertain a winding-up petition in respect of a foreign company. The benefit that a petitioning creditor can rely upon to satisfy the second core requirement will vary from case to case depending on its facts. The CFA made the following observations after considering the relevant authorities :-

(1) There is no doctrinal justification for confining the relevant benefit narrowly to the distribution of assets by the liquidator in the winding up of the company;

(2) It is sufficient that the benefit would be enjoyed solely by the petitioners;

(3) There is also no doctrinal justification requiring the relevant benefit to come from the assets of the company;

(4) There are cases where even though there was nothing for the liquidator to administer the courts did not find any difficulty in holding that the second requirement was satisfied so long as some useful purpose serving the legitimate interest of the petitioner can be identified;

(5) The benefit need not be monetary or tangible in nature; and

(6) The fact that a similar result could be achieved by other means does not preclude a particular benefit from being relied upon for the purposes of fulfilling the second requirement.

It is also important to draw a distinction between undisputed and disputed debts. Where the debt is disputed, the presentation of a winding-up petition may amount to an abuse of the process of the court. On the other hand, the courts have long emphasised that a winding-up petition presented with a view to exerting pressure on a company to pay a debt which is indisputable is entirely proper.

Having recognised that asserting commercial pressure to achieve the repayment of an undisputed debt is a perfectly proper purpose for a creditor’s winding-up petition, the CFA confirmed that commercial pressure is a relevant benefit for the purposes of the 2nd core requirement. Certainly, the strength of the “leverage” will depend on the practical impact of a winding-up order to be made in this jurisdiction.

In the present case, the leverage stems from the adverse consequences on the listing status of the Appellant on the Hong Kong Stock Exchange. Any potential impact in terms of possible sanctions by the Listing Division is as much effective before as after the making of a winding-up order. In view of this, the benefit derived from such leverage is incidental to the possibility of the making of a winding-up order.

The CFA unanimously dismissed the appeal accordingly.

Conclusion

The CFA emphasises that the rationale of the benefit requirement is to ensure that the winding-up process will serve some useful purpose to the petitioner. Although such threshold is recognised to be a low one, the leverage must be significant and any moderation of the 2nd core requirement is inappropriate. The CFA’s clarification on the 2nd core requirement is most welcome. It may now be easier for the creditors of foreign companies which are sufficiently connected to Hong Kong to satisfy the benefit requirement if there will be significant commercial pressure on the debtor company in case of a winding-up petition.

If you have any questions on the above eNews or require assistance on insolvency law, experienced lawyers in our Litigation team will be happy to assist you.

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