Recent case on winding up foreign companies in Hong Kong

The court's discretionary power to wind up foreign companies

The court in Hong Kong has a discretionary statutory power under s327 of the Companies (Winding-up and Miscellaneous Provisions) Ordinance (Cap. 32) to wind up foreign companies. In exercising this discretionary power, the court is generally mindful not to usurp the functions of the courts of the country of incorporation and, accordingly, the following three “core requirements” must be satisfied:

1. there should be a sufficient connection between the company and Hong Kong, but this does not necessarily have to extend to the presence of assets within the jurisdiction;
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.

Factual background

Shandong Chenming Paper Holdings Ltd (the "Company") is incorporated in the Mainland and is registered as a non-Hong Kong company under Part 16 of the Companies Ordinance (Cap. 622). Its shares are listed on the Shenzhen Stock Exchange with a dual primary listing of H shares on the Hong Kong Stock Exchange.

Arjowiggins HKK 2 Ltd ("Arjowiggins") obtained a favourable arbitral award in Hong Kong in relation to the Company's breach of a joint venture agreement and subsequently obtained leave to enforce the arbitral award against the Company. The Company tried unsuccessfully in seeking to set aside the award and Arjowiggins served a statutory demand on the Company. The Company made an ex parte application to the court on notice to enjoin Arjowiggins from issuing a winding-up petition and then issued an originating summons seeking a declaration that the circumstances did not satisfy the "three core requirements" for the court to exercise its discretion. In particular, the Company contended that the second core requirement was not satisfied because Arjowiggins would not derive sufficient benefit from a winding-up order made in Hong Kong.

The ruling

Mr. Justice Harris found for the Company that the fact it was listed in Hong Kong, did not, of itself, mean that there would be a material benefit for Arjowiggins or creditors of the Company in pursuing winding-up proceedings in Hong Kong.

Nevertheless, the court found that the benefit derived from the proposed winding-up was the “leverage” created by the prospect of being wound up. In essence, the “immediate and severe” consequences of a winding-up order would, among other things, be that:

1. the Company’s directors would immediately lose control of the Company in Hong Kong to the liquidator.
2. share transfers would become void unless otherwise ordered by the court; and
3. the status of the Company as a Hong Kong listed company would be jeopardised.

The Company’s reputation would be impaired and there would be substantial interference with the Company’s ability to carry on business overseas because of the liquidator’s enforcement action. The Company would, in such circumstances, have no choice but to pay the outstanding debt (i.e. honour the arbitral award) to Arjowiggins unless it was prepared to suffer the consequences. This demonstrated a reasonable prospect that Arjowiggins would derive a benefit from the winding-up of the Company.

Mr. Justice Harris also took into account public interest considerations: the Company’s refusal to pay the debt, notwithstanding its ability to do so, showed a disregard for the integrity of Hong Kong’s legal system. If a company wished to be listed in Hong Kong, it should honour adverse arbitral award.

The court therefore dismissed the Company’s originating summons and further ordered costs to be assessed on an indemnity basis to reflect the Company’s unethical conduct.

Key takeaway points

The decision in Shandong Chenming illustrates that the court, in exercising its discretion in winding up foreign companies, is willing to be flexible with the "three core requirements" where circumstances clearly call for it. The present case broadens the scope of the second requirement and acknowledges that a benefit can be derived from a winding-up order when leverage is created by the prospect of a winding-up petition or by the appointment of a liquidator and the steps that a liquidator may take to recover assets.