Hong Kong Insolvency Law: Court of Final Appeal clarifies “benefit” requirement for winding up foreign incorporated companies
Hong Kong Insolvency Law
It is well-established that three core requirements must be satisfied before the Court would exercise jurisdiction to wind up a foreign incorporated company in Hong Kong; one of such requirements is the reasonable possibility that the winding-up order would benefit those applying for it. Recently, the Court of Final Appeal confirmed that 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 this requirement: Shandong Chenming Paper Holdings Limited v Arjowiggins HKK 2 Limited  HKCFA 11. Albert Wan provides a concise summary of the decision and the key takeaways.
In Kam Leung Sui Kwan v Kam Kwan Lai (2015) 18 HKCFAR 501 (also known as the Yung Kee case), the Court of Final Appeal (“CFA“) laid down the three core requirements to be satisfied before the court will exercise jurisdiction to wind up a foreign incorporated company in Hong Kong, namely:-
• There must 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.
In Shandong Chenming Paper Holdings Limited v Arjowiggins HKK 2 Limited  HKCFA 11, the CFA confirmed that 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 2nd core requirement.
The Appellant was a Mainland Chinese company listed in Hong Kong. Following disputes between the parties under a joint venture agreement, the Respondent obtained an arbitral award (Award) in its favour. Subsequently, the Respondent obtained leave from court to enforce the Award in Hong Kong.
In October 2016, the Respondent served a statutory demand on the Appellant in respect of the amounts due under the Award. The Appellant did not pay the amounts demanded and sought declaratory relief to prevent the Respondent from presenting a winding-up petition against it.
In the courts below, the Appellant accepted that the first and third requirements were met. At trial, Harris J held that the second requirement was satisfied because the leverage created by the prospect of a winding-up petition constituted sufficient benefit for the Respondent. Harris J’s decision was upheld in the Court of Appeal.
Court of Final Appeal Judgment
Before the CFA, the Appellant argued that the second requirement was not met on two broad bases:
(1) “Comity argument” — the core requirements are jurisdictional restraints, and that their rationale is comity and the concomitant presumption against extra-territoriality. The proper interpretation of the core requirements must be informed by their limitations and the principle of non-interference, and in particular that comity militates against accepting leverage as a proper benefit.
(2) “The ‘need for the making of a winding-up order’ argument” — the second core requirement has always insisted that the benefit referred to has to be a benefit resulting from the making of the winding-up order and that there is no justification for departing from this understanding of the second core requirement. The authorities demonstrate that the nature of the benefit contemplated is property which is either money or something convertible into money, such as assets or choses in action, rather than an intangible benefit in a loose or broad sense, and there is no warrant to create new categories of benefit.
The CFA noted that the three requirements articulated in Yung Kee are not statutory provisions and their interpretation should not be approached as if it were an exercise of statutory construction. Their purpose is a self-imposed restraints on the exercise of jurisdiction. They do not go to the existence of the jurisdiction to wind up foreign companies.
In respect of “the ‘need for the making of a winding-up order’ argument”, the CFA held that it is entirely proper to seek to enforce a payment of an undisputed debt by the presentation of a winding-up petition. Pressure on a debtor to pay an undisputed debt is a proper benefit of allowing a winding-up petition to proceed.
The CFA observed that the benefit is not confined to the distribution of assets by the liquidator in the winding up of the company, and need not be monetary or tangible in nature. The requirement was satisfied so long as some useful purpose serving the legitimate interest of the petitioner can be identified. Commercial pressure is a legitimate benefit under the second requirement.
In respect of the “comity argument”, the CFA held that the sufficient connection is plainly provided by the fact that the Appellant’s shares are listed on the Stock Exchange of Hong Kong and it has a registered place of business in Hong Kong. If sufficient connection is established under the first requirement, any issue related to forum conveniens should only be a factor (as opposed to an essential requirement) that the court would consider at the hearing of the petition in deciding if a winding-up order should be made.
This judgment is significant because it is the first time for the CFA to be called upon to clarify the benefit requirement for the Court to exercise jurisdiction to wind up a foreign incorporated company in Hong Kong.
There were cases which decided differently in the past. For example, in Re China Huiyuan Juice Group Ltd  HKCFI 2940 and Re Grand Peace Group Holdings Ltd  HKCFI 2361, the Court of First Instance held that to satisfy the second core requirement, it is necessary for a petitioner to demonstrate by evidence that there was real possibility of a tangible benefits to the creditors. However, in the present case, the CFA held that the benefit need not be tangible.
The threshold to identify some useful purpose is a low one. Creditors of foreign companies sufficiently connected to Hong Kong may exert commercial pressure to the company by presenting a winding-up petition in Hong Kong courts.
Prior to joining the Bar in 2017, Albert obtained a Master of Law (LLM) at University of Cambridge and Bachelor of Laws (LLB) at City University of Hong Kong with First Class Honours. His practice covers general civil, land, building management, company, probate, contract, tort, commercial, construction, bankruptcy, personal injuries, judicial review and election petition.
In the area of company law, Albert’s experience includes successfully obtaining a quia timet injunction to restrain a winding up petition and obtaining leave to serve out a winding up petition to a BVI company.
Outside of his practice, he is a contributor to the Lexis Advance Hong Kong Practical Guidance on Company and Corporate.
Albert accepts instructions for both advocacy and advisory work, and has been instructed on matters covering a wide range of areas of law. Find out more from Albert’s profile.
This article was first published on 17 June 2022.
Disclaimer: This article does not constitute legal advice and seeks to set out the general principles of the law. Detailed advice should therefore be sought from a legal professional relating to the individual merits and facts of a particular case. The photograph which appears in this article is included for decorative purposes only and should not be taken as a depiction of any matter to which the case is related.