It’s All About Connections: Winding Up Foreign Companies in Hong Kong

Cross-border insolvency issues are a common feature in litigation before the Companies Court in Hong Kong, not least due to the prevalence in the region of corporate structures that inevitably have at their helm an overseas holding company, often incorporated in offshore jurisdictions such as Bermuda, the British Virgin Islands (“BVI”) or the Cayman Islands.

One question that often arises in practice is whether a winding up order can be sought in Hong Kong in respect of such unregistered foreign companies. This issue recently took centre stage in the high-profile Yung Kee saga concerning a bitter brotherly feud over the iconic local roast goose restaurant. In summary, the late elder brother presented a petition in March 2010 alleging that the affairs of Yung Kee Holdings Limited (the “Company”), which was the BVI holding company of the group and in which he held 45% of the shares, had been carried out in a manner unfairly prejudicial to him. The petitioner sought an order that his younger brother, who had an effective 55% controlling interest in the Company, buy him out, or alternatively, that the solvent Company be wound up on the just and equitable ground under s327(3)(c) of the former Companies Ordinance, Cap.32.

Both the trial judge (Harris J) and the Court of Appeal (Lam VP, Kwan and Barma JJA) held that the Company’s connection to Hong Kong was not sufficiently strong to enliven the court’s jurisdiction to make a winding up order, emphasising that the jurisdiction to wind up foreign companies was an “exorbitant” one.

Not so, held the Court of Final Appeal (“CFA”) in a joint judgment delivered by Chief Justice Ma and Lord Millett NPJ (with whom Ribeiro, Tang and Fok PJJ agreed) on 11 November 2015. The CFA ruled that the Company did have a sufficient connection with Hong Kong to justify a winding up order being made, but stayed the winding up order for 28 days to allow the family an opportunity to buy out the petitioner’s shareholding in the Company.

The factors which the CFA considered to be compelling in establishing the relevant connection between the Company and Hong Kong included that (i) the Company’s income is derived from businesses carried on locally; (ii) the Company’s shareholders and directors, as well as the directors of the Company’s subsidiaries are all Hong Kong residents; (iii) all board meetings are held in Hong Kong; and (iv) the events giving rise to the family dispute took place in Hong Kong. Whilst the Court of Appeal focussed on the fact that the Company merely held shares in another BVI holding company (Long Yau Limited, which in turn held the Hong Kong subsidiaries and assets), the CFA clarified that this interposition of a wholly-owned subsidiary did not defeat the Company’s connections with Hong Kong.

In this regard, the judgment is a triumph of substance over form and offers assurance that the Hong Kong courts will not shy away from setting in motion its winding up procedures over an offshore company provided there is good reason to do so.

The following are some of the salient points arising from the judgment:

• As it is most appropriate to wind up a foreign company in its place of incorporation, good reason was needed to exercise the discretionary statutory jurisdiction under s327(3)(c) to wind up foreign companies in Hong Kong. However, it was misleading to suggest that the statutory jurisdiction was exorbitant or usurped the functions of the country of incorporation.
• Three so-called core requirements have been laid down by the courts as self-imposed constraints to guide the exercise of the court’s discretion when winding up a foreign company (see Judgment at [20], applying Re Beauty China Holdings Ltd [2009] 6 HKC 351 at [23]):
• “there had to be a sufficient connection with Hong Kong, but this did not necessarily have to consist in the presence of assets within the jurisdiction;
• 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.”
• These requirements are not to be interpreted as legislation but are matters for the court’s discretion as the connection of a company with Hong Kong is a question of degree that will necessarily vary from case to case.
• In creditors’ petitions to wind up a foreign company on grounds of insolvency, there is substantial overlap between the requirements. The fact that there is a reasonable prospect that the petitioner will derive a sufficient benefit from the making of a winding up order, whether by the distribution of its assets or otherwise, will always be necessary and will often be sufficient.
• In shareholders’ petitions to wind up foreign companies on just and equitable grounds, the presence of shareholders within the jurisdiction is an extremely weighty factor in establishing the sufficiency of the connection between the company and Hong Kong.

One potential limitation of winding up an overseas company in Hong Kong is the uncertainty over whether the order and the liquidator appointed in Hong Kong will be recognised in the country of incorporation. In Yung Kee, the CFA were not confident that a local liquidator would be able to replace the directors of the Company’s wholly-owned BVI subsidiary as this change must be effected by a company’s shareholders. However, to give effect to its judgment and to ensure that the underlying assets of the Company are made available to the liquidator, the court could make further orders, including injunctions, against the respondents (who were all subject to the court’s in personam jurisdiction).