Hong Kong Court of Final Appeal Clarifies the Benefit Requirement in Winding up Foreign Companies

On June 14, 2022, the Hong Kong Court of Final Appeal (the “CFA”) handed down a long-awaited and landmark judgment in Shandong Chenming Paper Holdings Limited v Arjowiggins HKK 2 Limited [2022] HKCFA 11, which would have significant implications to companies incorporated in offshore jurisdictions but listed in Hong Kong.

As explained below, in order to invoke the jurisdiction of the Hong Kong courts to wind up a foreign-incorporated company, it is a pre-requisite for a petitioner to demonstrate, amongst other things, a reasonable possibility that a winding-up order would benefit those applying for it. The CFA clarified that it would not be necessary to prove that a benefit would flow directly from the making of a winding-up order. The commercial pressure caused by the presentation of a winding-up petition would qualify as a relevant benefit.

The Law

The CFA held in Kam Leung Sui Kwan v Kam Kwan Lai (2015) 18 HKCFAR 501 that in order to invoke a Hong Kong court’s jurisdiction to wind up a foreign-incorporated company in Hong Kong, three core requirements would have to be satisfied, namely:

1. There must be a sufficient connection with Hong Kong, but this did not necessarily have to consist of the presence of assets within the jurisdiction (the “First Core Requirement”);
2. There must be a reasonable possibility that the winding-up order would benefit those applying for it (the “Second Core Requirement”); and
3. The court must be able to exercise jurisdiction over one or more persons in the distribution of the company’s assets (the “Third Core Requirement”).

The Facts

The appellant company, Shandong Chenming Paper Holdings Limited (the “Appellant”), is a company incorporated in Mainland China. Both A and B shares are listed on the Shenzhen Stock Exchange. The Appellant also has a primary listing of H shares on the Stock Exchange of Hong Kong Limited. It is registered as a non-Hong Kong company under Part 16 of the Companies Ordinance (Cap. 622) (the “CO”), having a place of business in Hong Kong.

Disputes arose between the Appellant and the respondent, Arjowiggins HKK 2 Limited (the “Respondent”), which were resolved via arbitration. In October 2016, the Respondent prevailed and obtained leave from the Hong Kong Court of First Instance (the “CFI”) to enforce the arbitral award. The Respondent subsequently served a statutory demand on the Appellant for contractual damages, costs, interest and various fees payable.

In November 2016, the Appellant applied for and obtained an interim injunction order from the CFI to prevent the Respondent from presenting a petition to wind it up. The Appellant subsequently also sought a declaration that, since it is an “unregistered company” under the CO, the Respondent would not be able to satisfy the Core Requirements for the Hong Kong court to exercise its jurisdiction to wind up the Appellant.

The CFI Decision

The parties did not dispute that the First Core Requirement and the Third Core Requirement were satisfied in these circumstances. The only dispute was whether the Second Core Requirement was fulfilled.

The CFI held, inter alia, that the Second Core Requirement was satisfied because the leverage created by the prospect of a winding-up petition constituted sufficient benefit for the Respondent.

In light of the CFI’s decision, the interim injunction lapsed. The Respondent then presented a winding-up petition against the Appellant. The Appellant appealed against the CFI’s decision and the CFI adjourned the petition upon the Appellant undertaking to procure a third party to pay into court HKD 355,141,100.06 (the equivalent of the amounts claimed in the statutory demand) and HKD 33,971,332.38 (being interest thereon). These sums were duly paid into court.

The Court of Appeal’s Decision

The Appellant appealed to the Court of Appeal (the “CA”), which upheld the CFI’s decision and dismissed the appeal. The CA agreed that there was a real possibility of benefit to the Respondent in the making of a winding-up order against the Appellant, but it disagreed with the CFI that the Second Core Requirement was capable of moderation.

The CFA’s Decision

The CFA did not accept the Appellant’s argument that the necessary benefit prescribed under the Second Core Requirement must be a sufficient and tangible benefit that results from the making of a winding-up order.

The CFA pertinently held that:

• The relevant benefit should not be confined narrowly to the distribution of assets by the liquidator in the winding up of the company;
• It is sufficient that the benefit would be enjoyed solely by the petitioner;
• The benefit need not come from the assets of the company;
• The Second Core Requirement could be satisfied even in the absence of assets for administration by liquidators, so long as some useful purpose serving the legitimate interest of the petitioner could be identified;
• The benefit need not be monetary or tangible in nature; and
• 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 Core Requirement.
• The essential consideration is whether a reasonable possibility exists of a sufficient benefit accruing to the petitioner from being permitted to set in motion winding-up procedures in Hong Kong in respect of a non-Hong Kong company.

Under the Companies (Winding Up and Miscellaneous Provisions) Ordinance, a company’s failure to satisfy a sum under a statutory demand within 21 days operates as conclusive proof of its inability to pay its debts for the purpose of establishing the court’s jurisdiction to make a winding-up order. Where the company is so deemed to be unable to pay its debts, the CFA considered that it was perfectly proper for a creditor to present a winding-up petition against it and use such petition as a means of applying commercial pressure to seek payment of an undisputed debt.

On that basis, the CFA concluded that there is no principled basis for excluding commercial pressure as a relevant benefit for the purposes of the Second Core Requirement.

In this case, the CFA found that the commercial pressure was established not just from the service of a statutory demand and the presentation of the winding-up petition; it also continued even after the making of a winding-up order. Commercial pressure clearly continued after the presentation of the winding-up order because the Appellant had to procure a third party to make payment into court to adjourn the substantive hearing of the winding-up petition, and pressure also manifested from impact of a winding-up order on the listing status of the Appellant in the Stock Exchange of Hong Kong. Separately, the CFA also observed that commercial pressure can continue to operate in the form of a stay of the winding-up proceedings upon satisfaction of the debts of the petitioning and supporting creditors.

Comment

The CFA’s decision is significant as it holds that the relevant “benefit” under the Second Core Requirement should be interpreted broadly and liberally. It is now clear that “benefit” does not necessarily have to be monetary or tangible or have to arise only after the making of a winding-up order. It would suffice if some commercial pressure could be exerted on the debtor company by setting in motion the winding-up procedures. The threshold of demonstrating commercial pressure does not appear to be high, thus giving creditors more ammunition to seek repayment of debts. This decision also reflects the Hong Kong courts’ robustness in recent years to assert jurisdiction to wind up companies that are incorporated overseas but have sufficient connection with Hong Kong.