Hong Kong Court of Appeal cooks elder brother's goose in Yung Kee case by dismissing appeal

On 6 March 2014 the Court of Appeal dismissed an appeal in the Yung Kee Holdings Limited family company dispute. In doing so, the Court of Appeal affirmed the first instance judgment of the Honourable Mr Justice Harris on the issue of the jurisdiction of the Hong Kong Court over the dispute, but refused to determine whether there were grounds for granting relief if the court had jurisdiction, overturning the trial judge's finding on that point.

This decision indicates that the courts will not exercise jurisdiction to wind up foreign companies which are the subject of shareholder disputes where there is not a sufficient link to Hong Kong. It may have an impact on disputes involving BVI companies, particularly holding companies, even where there are Hong Kong shareholders and subsidiaries with extensive businesses in Hong Kong.

Background to the appeal

Yung Kee is a well-known restaurant in Hong Kong famous for its roast goose dishes. Following the death of its founder, the relationship between two of his sons, Kam Kwan Sing and Kam Kwan Lai, broke down. Kam Kwan Sing brought a petition against Kam Kwan Lai and Yung Kee Holdings Limited, a BVI company and the ultimate holding company of Yung Kee restaurant and other family businesses, to force Kam Kwan Lai to buy out his shareholding, or alternatively to order the winding up of Yung Kee Holdings Limited.

The Court of First Instance dismissed the petition. Harris J found that, although a quasi-partnership existed between the two brothers and that Kam Kwan Lai's use of his majority shareholding to implement changes to the company's board of directors unfairly prejudiced Kam Kwan Sing's interests, the court had no jurisdiction to order Yung Kee Holdings to be wound up or Kam Kwan Sing to be bought out, on the basis that the Hong Kong Court had no jurisdiction to make such orders over the company.   This judgment was discussed in our previous e-bulletin here.

The appeal

Kam Kwan Sing died shortly before Harris J's judgment was handed down. His estate, represented by his widow, appealed against Harris J's decision, mainly against his findings on jurisdiction that:

1)   The court could not exercise jurisdiction to wind up Yung Kee Holdings Limited under section 327(3)(c) of the Companies Ordinance,[1] as the company had no "sufficient connection" to Hong Kong; and

2)   The court had no jurisdiction to hear Kam Kwan Sing's petition under s.168A of the Companies Ordinance,^[2] as the company had not satisfied the requirement to have "established a place of business" in Hong Kong.

The Court of Appeal dismissed the appeal on jurisdiction and confirmed Harris J's judgment, while adding some helpful comments, which are set out below, in relation to the issues in question.  

Refusal to exercise an "exorbitant" power under section 327(3)(c) – no sufficient connection to Hong Kong

The Court of Appeal first dealt with the issue of jurisdiction to wind up Yung Kee Holdings Limited under section 327(3)(c). It noted in particular that exercising jurisdiction to wind up a non-Hong Kong company was an "exorbitant" discretion, particularly in cases involving shareholder disputes rather than creditors' claims, and needed to be supported by reasons which indicated that it would be just and expedient to do so. To that end, a foreign company not registered in Hong Kong must have a sufficient connection to Hong Kong in order for the court to justify a winding up order.

While Kam Kwan Sing's widow claimed that the company's subsidiaries' extensive restaurant business in Hong Kong should be taken into account when determining whether the company had a sufficient connection, the court did not accept that argument. Because of the exorbitance of exercising jurisdiction to wind up a foreign company, the court could not take a loose interpretation of what constituted a sufficient connection to Hong Kong in the way that it could under other statutory provisions or case law. Accordingly, the Court of Appeal affirmed Harris J's finding in this respect.

No jurisdiction under section 168A – no established place of business in Hong Kong

As to the issue of jurisdiction under section 168A, Kam Kwan Sing's widow argued that Harris J failed to appreciate the fact that Yung Kee Holdings Limited was an investment holding company, and the fact that internal corporate decisions and administration – by nature the "business" of an investment holding company – took place in Hong Kong, would satisfy the requirement of the company having established a place of business in Hong Kong.

However the Court of Appeal rejected this argument, and agreed with Harris J that internal corporate activities and administration alone were not sufficient in proving that the company had established a place of business in Hong Kong: the company was only a "passive investor" and did not have any substantial role in the operations and businesses of its subsidiaries, with its only asset being its shareholding in an intermediate holding company. Therefore the Court agreed with Harris J and concluded that it had no jurisdiction under section 168A.

Unfair prejudice – a matter for the BVI courts

Since the Court of Appeal affirmed Harris J's findings on jurisdiction, it did not have to deal with the issue of unfair prejudice, and any finding on this issue would not affect the outcome. However, it addressed the issue of unfair prejudice in light of submissions from Kam Kwan Lai during the appeal.

The court observed that Harris J's decision on unfair and prejudicial conduct was based mainly on the premise that the two brothers had a mutual understanding that the composition of the company's board of directors would be unchanged, and that Kam Kwan Lai's actions of appointing his son to the board disregarded that agreement. However, the Court of Appeal found that there was insufficient evidence to suggest that there was such an understanding.

The Court added that Kam Kwan Sing's claim of unfairly prejudicial conduct may succeed on other grounds, such as the claim that Kam Kwan Lai breached an understanding between the brothers on not excluding Kam Kwan Sing from the management of the company, but chose not to draw any conclusion on whether those grounds were valid. It observed that Kam Kwan Sing's estate may pursue the case in the BVI courts, and the Court of Appeal did not want to pre-empt the decision of BVI courts in a matter where it had no jurisdiction.

Take away points 

• The judge at first instance was at pains to emphasise that he was not changing the law, but merely applying the existing law on jurisdiction issues to unusual facts.  However, some will see the Court of Appeal's decision as indicating a reluctance to exercise discretion to wind up foreign companies in shareholder disputes.
   
• This may impact offshore holding companies which control subsidiaries with extensive businesses in Hong Kong – and whose shareholders are based in Hong Kong – but have no substantial business activity in Hong Kong of their own.
   
• Kam Kwan Sing and Kam Kwan Lai's father set up Yung Kee Holdings Limited as an offshore holding company for his Yung Kee restaurant and other businesses, structured deliberately to avoid any links to Hong Kong, and therefore perhaps to avoid estate duty before it was abolished in 2006. In light of the abolition of estate duty, shareholders of offshore holding companies may consider re-establishing links to Hong Kong, so that it becomes easier to assert that Hong Kong courts have jurisdiction to wind up the company or grant other relief in shareholder disputes. The threshold for a company to have "established a business" in Hong Kong is not high (the statutory definition includes "a share transfer office and a share registration office").

If you wish to discuss, please contact Gareth Thomas or Richard Norridge of our Private Wealth and Trusts team.

[1]        As a result of the commencement of the new Companies Ordinance, the section is now 327(3)(c) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32).