Three requirements for winding up foreign company restated by Hong Kong Court of Appeal

The long-running saga between Shandong Chenming Paper Holdings ("Shandong Chenming") and Arjowiggins HKK2 Ltd ("Arjowiggins") has continued with the Court of Appeal handing down its judgment on an appeal against a lower court judgment which had dismissed Shandong Chenming’s application to injunct Arjowiggins from presenting a winding-up petition against Shandong Chenming (Shandong Chenming Paper Holdings Limited v. Arjowiggins HKK2 Limited [2020] HKCA 670).  The Court of Appeal held that the fact that Shandong Chenming was a PRC company, even though solvent, with no assets in Hong Kong and listed on the Hong Kong stock exchange, was not a bar to a winding-up petition being presented against it in Hong Kong.

The Court of Appeal's judgment (the "2020 judgment") can be found here.

Background

The original dispute arose over a joint venture between Shandong Chenming and Arjowiggins.  Arjowiggins commenced arbitration proceedings against Shandong Chenming in 2012 over an alleged contractual breach by the latter. The tribunal rendered an award in favour of Arjowiggins in 2015 and Arjowiggins proceeded to obtain leave to enforce the award in Hong Kong.  Shandong Chenming applied to set aside the award but this application was dismissed in 2016.

In 2016, as the contractual damages awarded in its favour in the arbitration, the legal fees and the fees related to the arbitration were still outstanding from Shandong Chenming, Arjowiggins served a statutory demand on Shandong Chenming.  This led to Shandong Chenming Paper Holdings Limited v. Arjowiggins HKK2 Limited [2017] 4 HKLRD 84 (the "2017 decision"), on which we previously commented here.  In this action, Shandong Chenming sought a declaration that Arjowiggins could not seek to wind up Shandong Chenming pursuant to section 327(3) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) ("C(WUMP)O") on the basis that the three core requirements for a Hong Kong Court to exercise jurisdiction to wind up an unregistered company were not all satisfied.  The present judgment resulted from an appeal of the 2017 decision.

On an interesting side note, between the 2017 decision and the 2020 judgment, the dispute between Shandong Chenming and Arjowiggins also led to Arjowiggins HKK2 Ltd v. Shandong Chenming Paper Holdings Ltd [2018] HKCFI 93, which is well known for having dealt with the separate issue of the Hong Kong Court’s willingness to grant anti-suit injunctions to restrain foreign proceedings in breach of an arbitration agreement (and on which our previous commentary can be found here).

Issues in the 2017 decision

Following the Court of Final Appeal’s decision in Kam Leung Siu Kwan v. Kam Kwan Lai (2015) 18 HKCFAR 501, a Hong Kong Court has to be satisfied that three core requirements are met before it may exercise its jurisdiction to wind up a foreign unregistered company:

1. there must be a "sufficient connection" with Hong Kong, but this does not necessarily have to consist in 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.

The 2017 decision and the 2020 judgment were concerned only with the second core requirement above, as Shandong Chenming conceded that the first and third core requirements were met.  If the second core requirement was not met, the question was then whether the second core requirement was capable of being "moderated" or "dispensed with" depending on the circumstances of the case.  If so, the subsequent question was whether circumstances justifying such moderation had in fact arisen in Arjowiggins' case.

2017 decision

The Court in the 2017 decision found that the second core requirement on benefit was met, because the severity of a winding-up order on a Hong Kong listed company would be immense and therefore its prospect would put pressure on the company to pay the debt due.  The Court held that a company could not contest a petition on the grounds that it was solvent, and a solvent company that failed to pay a judgment or award out of intransigence was liable to be wound up.

However, the Court went on to hold that, even if a reasonable prospect of benefit could not be found, the second core requirement was one that could be moderated based on the circumstances of the case.

Issues in the 2020 judgment

Shandong Chenming argued in its appeal that the "leverage created by the prospect of a winding-up petition" could not be used to satisfy the second core requirement, and in any case, the second core requirement was not capable of moderation.

The issues dealt with in the 2020 judgment were therefore:

1. whether the benefit of the "leverage" identified by the judge could amount to a sufficient benefit to satisfy the second core requirement (the "leverage issue"); and

2. whether the second core requirement could, in an appropriate case, be "moderated" or dispensed with, and if so, whether this was an appropriate case (the "moderation issue").

2020 judgment

The Court considered the moderation issue first and decided that, based on Kam v. Kam (cited above), the second core requirement was always essential (and it was the third core requirement, not the second core requirement, that could be dispensed with in the appropriate circumstances).  The Court also found that it was common for the Court to adopt self-imposed constraints on the exercise of its own discretion in order to provide a degree of predictability as to how the discretion would likely be exercised.

As the Court found that moderation of the second core requirement was not permitted, the Court did not consider whether this was an appropriate case for applying such moderation.

The Court went on to agree with the 2017 decision on the leverage issue and found that there was a real and substantial benefit to Arjowiggins in making the winding-up order in order to put pressure on Shandong Chenming to make payment.  In doing so, the Court rejected a number of arguments put forward by Shandong Chenming, including that:

1. winding-up has the nature of a collective remedy for creditors as a class and so it is necessary for the benefit available to a petitioner to be one that benefits not just it, but all other creditors as well.  This was rejected because Kam v. Kam made it clear that what was needed was of benefit to the petitioner and there was no suggestion that it was necessary to be for the benefit of the creditors as a whole;

2. the winding-up in this case would be a detriment to other creditors and other stakeholders in the company.  This argument was rejected for the same reason as the first, and also the fact that Shandong Chenming apparently possessed very substantial net assets, which suggested that there was no real likelihood of other creditors suffering any reduction in their potential recoveries; and

3. the court should be very reluctant to wind up an evidently solvent company. This was rejected because it was not considered relevant to the issue of whether or not the Court should exercise its section 327 jurisdiction.

The appeal was, therefore, dismissed, and the declaration preventing Arjowiggins from presenting a winding-up petition against Shandong Chenming was refused.

Comment

The Court reaffirmed the applicability of the "three core requirements" in the exercise of the Court’s discretion with respect to section 327 of C(WUMP)O. However, even though the Court of Appeal confirmed the result from the 2017 decision, it is notable that the Court of Appeal decided that the second core requirement (i.e., whether there is a reasonable prospect of benefit to the petitioner) was not capable of being moderated.  Indeed, the Court of Appeal found that the second core requirement was, amongst the core requirements, particularly essential.