Hong Kong Court refused to wind up a foreign company as liquidators would not have any power over offshore subsidiaries

In Re Grand Peace Group Holdings Limited [2021] HKCFI 2361, the Hong Kong Court refused to exercise its discretionary jurisdiction to wind up an offshore holding company due to difficulties in the recognition of Hong Kong liquidators in the BVI.

Background

The company was incorporated in Bermuda (the Company) and had been delisted from the Hong Kong Stock Exchange.  The Company had subsidiaries incorporated in the British Virgin Islands (the BVI subsidiaries) that owned some companies in Mainland China (the Mainland subsidiaries).  The BVI subsidiaries also carried on funeral and money lending business in Hong Kong. The Mainland subsidiaries did not have any assets.

A petition to wind up the Company was presented in December 2019 (the Petition) and had been adjourned to facilitate restructuring.  A creditor of the Company, Mr Chan (the Applicant), became dissatisfied with the progress of the restructuring and applied to be substituted as the petitioner.

Issue

The issue in this application was whether the Court should exercise its discretionary jurisdiction to wind up a foreign incorporated company.  The Court agreed that the appropriate course seemed to be to make a usual winding up order given the lack of a feasible restructuring plan.  However, as the Company was not incorporated in Hong Kong, the three usual core requirements must be satisfied before the Court would exercise its discretion to wind up this foreign incorporated company, namely:

• a sufficient connection with Hong Kong;
• a reasonable possibility that the winding up order would benefit those applying for it. The benefit must be real and discernible; and
• the ability of the court to exercise jurisdiction over one or more persons in the distribution of the company's assets.

The crux of the dispute was the second core requirement.  The Court noted that, prior to the signing of a cooperation agreement by the Secretary for Justice and the Supreme People's Court for mutual recognition of insolvency processes on 14 May 2021 (the Cooperation Mechanism), a Mainland court would recognise the status of a foreign liquidator of a company only if the latter was appointed by the courts of the place of incorporation of that company.  At the same time, it appeared from Bermuda, Cayman and BVI case law that a BVI court would not recognise liquidators appointed in Hong Kong over a company incorporated in Bermuda or Cayman Islands.  The cumulative effect was that if the Hong Kong Court appointed liquidators over the Company, these liquidators would not have power over the BVI subsidiaries, and thus in turn could not control the Mainland subsidiaries.  In other words, the initial appointment would become futile (and thus of no benefit).

The Applicant argued that this difficulty (non-recognition of Hong Kong liquidators by BVI courts) could be circumvented by the fact that the majority of directors of the Company were in Hong Kong and amenable to the in personam jurisdiction of the Hong Kong Court, and (so the Applicant argued) the Hong Kong Court could thus compel these directors to execute the documents to enable the liquidators to take control of the BVI subsidiaries.

Decision

The Court dismissed the Applicant's arguments that the difficulty of non-recognition of Hong Kong liquidators by BVI courts could be side-stepped, because:

• Under the BVI private international law, only a liquidator appointed by the court of the place of incorporation would be recognised and assisted. If the BVI authorities were alerted to the fact that the relevant documents empowering the liquidators were executed under the compulsion of orders from the Hong Kong Court to circumvent the BVI private international law, they might refuse to recognise those relevant documents and in turn the liquidators' authority.
• As a matter of Hong Kong law, the management of the affairs of a foreign company is determined by the laws of the place of its incorporation, to which the Hong Kong Court should have regard. As mentioned, liquidators appointed by the Hong Kong Court could not be lawful agents of the BVI subsidiaries under Bermuda or BVI laws.
• It is a well-established common law principle in Hong Kong, and in Bermuda and the BVI (as the Court was bound to assume in the absence of evidence to the contrary) that, once liquidators are appointed, the directors' powers cease. Hence, the directors of the Company could not have executed the documents necessary to empower the liquidators to manage the affairs of the BVI subsidiaries once the Court had wound up the Company.

Based on the above grounds, the Court was not satisfied that winding up the Company in Hong Kong for the purpose of obtaining control over the BVI subsidiaries provided sufficient benefit to satisfy the second core requirement.

Could the second core requirement be satisfied in some other way?

The Court noted that, under the Cooperation Mechanism, the Intermediate People's Courts in the Mainland China could recognise insolvency processes conducted under the jurisdiction of the High Court, and that the liquidators appointed in Hong Kong for BVI companies (with the centre of main interests or "COMI" in Hong Kong for six months or more) would as well be recognised in the Mainland vis-à-vis the subsidiaries in the Mainland China.  If, therefore, the Applicant's purpose of seeking an appointment of liquidators in Hong Kong had been to further make an application under the Cooperation Mechanism to realise any value in the Mainland subsidiaries, then there might have been an argument that the second core requirement was satisfied.  Nonetheless, this was not the case here, and the evidence showed that the Mainland subsidiaries had no assets.

The Court also held that, as the Company had been delisted, the Applicant could not point to its listing status to satisfy the second core requirement.

The Court therefore declined to exercise its discretionary jurisdiction to wind up the Company.

Comments

As illustrated by several cases on which we have commented (see examples here and here), the second core requirement tends to lead to the most argument when the Hong Kong Court considers whether to wind up a foreign company.

This case applies the approach first explained in Re China Huiyuan Juice Group Limited [2020] HKCFI 2940 (discussed in our previous blog post here), and may be contrasted with the scenario in Re China All Access (Holdings) Ltd  [2021] HKCFI 1842 (discussed in our previous blog post here), where the Cooperation Mechanism helped the petitioner satisfy the second core requirement. Each case must of course turn on its own facts, but it is clear that the Hong Kong Court has developed a reasoned and consistent approach to dealing with winding-up petitions against offshore incorporated structures with operations in Mainland China.