Hong Kong Court of Final Appeal clarifies the law in respect of shareholders' petitions to wind up foreign companies on just and equitable grounds

In its landmark decision of Kam Leung Sui Kwan v Kam Kwan Lai & Ors FACV 4/2015, issued yesterday, the Court of Final Appeal has brought some closure to the long running Yung Kee restaurant matter by making a winding up order against Yung Kee Holdings Limited (YKHL) with a 28-day stay to allow the parties to consider possible buy-out opportunities.  This reverses the previous decisions in the Court of First Instance and the Court of Appeal by holding that there was sufficient connection with Hong Kong to wind-up the ultimate BVI holding company on the just and equitable basis. 

In doing so, the CFA has provided much needed guidance, amidst a dearth of such cases in both Hong Kong and England, on how the Hong Kong Court should exercise its discretion under its statutory jurisdiction to hear a shareholder's petition to wind up a foreign company on just and equitable grounds. 

This is a milestone decision for shareholders seeking to wind up foreign parent companies with management from and/or assets indirectly held in Hong Kong.  The case is particularly useful in the context of Hong Kong family disputes where it is common for family companies to own beneficially underlying assets in Hong Kong to be held by foreign holding companies in jurisdictions such as the BVI and Cayman Islands. The convenience of being able to litigate these matters before the Hong Kong courts, with the saving of time and cost that this will mean, will be of great benefit to the parties.

Background

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 YKHL, 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 YKHL.

Court of First Instance and Court of Appeal's decisions

The Court of First Instance dismissed the petition.  At first instance, 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 YKHL (incorporated in the BVI) 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 matter was escalated to the Court of Appeal which dismissed the appeal on jurisdiction and confirmed Harris J’s judgment, adding some comments which are discussed in our previous blog post here. 

At both levels, the court held that the Company's connection with Hong Kong was not sufficiently strong to justify it in exercising its jurisdiction to make a winding up order under s327(3)(c) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap.32) primarily because of the exorbitance of exercising its jurisdiction to wind up a foreign company.  The court could not make 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.

Court of Final Appeal's decision

The Court of Final Appeal disagreed and overturned the Court of First Instance and the Court of Appeal's reasoning and analysis on how to exercise its discretion to wind up a foreign company on just and equitable grounds; in particular, how to establish a sufficient connection between such a company with Hong Kong. 

The CFA accepted as a starting point that the most appropriate jurisdiction to wind up a company is the place of incorporation, then applied Kwan J's summary in Re Beauty China Holdings [2009] 6 HKC 35 that there are three core requirements that must be met before the Hong Kong Courts can exercise its discretion under its statutory jurisdiction pursuant to s.327(3)(c) to wind up a foreign company on just and equitable grounds as "necessary self-imposed constraints" in such cases, being the same as those that apply to creditor's petitions to wind up a foreign company, as follows:

1. there must be a sufficient connection with Hong Kong;
2. there must be a reasonable possibility that a winding up order would benefit the applicants; and
3. the Court must be able to exercise jurisdiction over one or more persons in the distribution of the relevant company's assets. 

This case focused primarily, if not entirely, on the first requirement.

One of the key points of the CFA judgment is that it rejected the view of the lower courts that a "more stringent" connection was required in the case of a shareholder's petition to wind up a foreign company when compared to similar petitions brought by creditors.  Instead it held that "Shareholders, no less than creditors, are entitled to bring winding up proceedings in Hong Kong in respect of a foreign company, and in either case they must establish a sufficient connection between the place of incorporation and Hong Kong."  The difference, however, lies in the factors that are relevant to establish the requisite connection, each of which differ from case to case depending on the:

1. nature of the dispute; and
2. purpose for which the winding up order is sought. 

Creditors usually seek a winding up order against a debtor company in pursuit of their debts.  In such situations, the presence in Hong Kong of significant assets that the liquidator can access and distribute amongst the creditors will usually be sufficient to establish a jurisdictional connection.   Also, parties to the dispute differ depending on whether winding up is sought by a creditor or shareholders.  In the case of a creditor's petition, the dispute is between the petitioner and the company.  In the case of the shareholder's petition, the dispute is between the petitioner and other shareholders, and the company is the subject of the dispute.  For shareholder's petitions, the presence of other shareholders within the jurisdiction is "an extremely weighty factor in establishing the sufficiency of the connection between the company and Hong Kong'. Indeed, as stated in the judgment, "their presence in the jurisdiction is highly relevant and will usually be the most important single factor".

The lower courts found that YKHL did not have a sufficient connection to Hong Kong. They held that companies and their members each are 'separate legal personalities'.  YKHL held shares only of another BVI company called Long Yau Limited (Long Yau) and so its only asset was situated in the BVI and not in Hong Kong.  Instead, it was Long Yau who held shares in Hong Kong companies and it was the respective Hong Kong companies who actually held the businesses and assets in Hong Kong making any connection to YKHL remote.

Rejecting this analysis, the CFA held that although companies and shareholders are "separate and distinct legal entities", this does not mean that there is no connection between them or that a sufficient connection cannot be established through their shareholders or subsidiaries. In doing so, the CFA relied on its own reasoning in Waddington Ltd v Chan Chun Hoo (a 2008 landmark CFA case on multiple derivative actions in which the CFA allowed a shareholder of a parent company to sue on behalf of its subsidiary in relation to wrongdoings committed against a subsidiary) in which it recognized that there is a close connection between a holding company and the assets of its direct and indirect subsidiaries.  In this judgment, the CFA took the Waddington analysis a step further and clarified that giving effect to this close connection does not mean that the court has identified one with the other or that it has treated the businesses and assets of the group as if they belong to the holding company. 

Once the CFA established that the requirement for a sufficient connection had been met, it went on to consider whether, on the facts of the case, it was just and equitable to wind up the company.  The CFA held that it was and made a winding up order against Yung Kee but with a 28-day stay in which parties might wish to consider buy-out opportunities as an alternative to winding up.

Comments

This decision is a significant step forward in allowing the Hong Kong jurisdiction to be invoked to wind up offshore companies here in the alternative to prospective shareholders having to seek such remedies in the place of incorporation.

It is fairly common for Hong Kong family-owned companies to create structures where assets and businesses in Hong Kong are held directly or indirectly by a foreign parent company in jurisdictions such as the BVI and Cayman Islands.  As such, this is a milestone decision for shareholders based in Hong Kong seeking to wind up foreign parent companies with assets directly or indirectly held in Hong Kong.  In particular, the judgment will benefit shareholders who desire to wind up, in Hong Kong, offshore holding companies which control subsidiaries with extensive businesses and assets in Hong Kong, and whose shareholders are based in Hong Kong, but which have no substantial business activity in Hong Kong of their own.

Further, the CFA rejected the sparing use of the just and equitable ground to wind up foreign companies at the suit of a shareholder.  The CFA saw "no reason why it should have to be a very exceptional case for the court to be willing to exercise its statutory jurisdiction to wind up a foreign company on the just and equitable ground".  This broader approach is likely to see this case being applied more frequently in Hong Kong and in other common law jurisdictions.  Moreover, it will hopefully give Hong Kong based shareholders the confidence to seek redress in the more convenient forum of the Hong Kong court rather than having to travel halfway across the globe to the Caribbean to do so.

If you wish to discuss, please contact:
Richard Norridge of our Private Wealth and Trusts team, Damien Whitehead of our Restructuring and Insolvency team or
Julian Copeman, Gareth Thomas or Dominic Geiser of our Dispute Resolution team.