IS THE JUICE WORTH THE SQUEEZE?

This post refers to the Court of Appeal decision in Shandong Chenming.  The Court of Final Appeal has in May 2022 further considered the second core requirement in Shandong Chenming. See our blog post here.

The natural and most appropriate jurisdiction in which to wind up a company is its place of incorporation. The Hong Kong Companies Court, however, routinely deals with winding up petitions against companies which are incorporated outside Hong Kong, but listed on the Hong Kong Stock Exchange (“HKEx”). Given recent economic difficulties, the number of such petitions has been on the rise.

The recent Hong Kong Companies Court decision in Re China Huiyuan Juice Group Limited [2020] HKCFI 2940 illustrates the difficulties creditors may face in seeking to wind up a typical offshore-incorporated company listed in Hong Kong and with operations in Mainland China.

Typical structure

The following structure is common among many corporate groups with a listing on the HKEx:

• the listed holding company is incorporated in an offshore jurisdiction, usually Caribbean;
• the listed holding company owns certain intermediate subsidiaries incorporated offshore; and
• the offshore intermediate subsidiaries in turn own a web of Mainland Chinese subsidiaries (if necessary, through structures such as a VIE (variable interest entity) structure), where most if not all of the group’s business is conducted and assets held.

The facts in Re China Huiyuan Juice

China Huiyuan Juice Group Limited (the “Company”) is incorporated in the Cayman Islands and listed on the HKEx. It has a similar group structure to that outlined above.

The Company was insolvent. It was also appealing against the HKEx’s decision to have it delisted.

A creditor of the Company (the “Petitioner”) petitioned for its winding up. The Company did not dispute the debt, but sought to have the petition adjourned pending a major restructuring of its debts steered by its onshore creditors (i.e. those in Mainland China).

The Petitioner opposed any adjournment. It argued that the proposed restructuring was unrealistic, as the Company would almost certainly be delisted. The Petitioner sought immediate winding up.

The Court considered the principles for exercising its discretionary jurisdiction to wind up a foreign company, and how the matter should proceed.

Benefits of a winding up order

The three “core requirements” which should usually be met before the Hong Kong Court will exercise its discretion to wind up a foreign company were set out in Kam Leung Sui Kwan v Kam Kwan Lai [2015] 18 HKCFAR 501 (see our article here).

Of the three core requirements, this case turned on the second, i.e. whether there was “a reasonable possibility that the winding up order would benefit those applying for it”. In this regard, the Court applied a recent Court of Appeal decision in Shandong Chenming Paper Holdings Ltd v Arjowiggins HKK 2 Ltd [2020] HKCA 670 (see our article here). In Shandong Chenming, the Court of Appeal suggested that the second core requirement was particularly essential and could not be displaced.

Notably, expanding on Shandong Chenming, the Court in this case emphasised that a petitioner had to demonstrate by evidence that there was a real possibility of a tangible benefit to creditors.

In deciding this question, the Court considered the Company’s group structure, and found that a winding up order would unlikely lead to any such benefit:

1. Even if a winding up order was made, and a Hong Kong liquidator appointed over the Company, the liquidator would unlikely be recognised in Mainland China, and unlikely be able to take control of the Company’s Mainland subsidiaries and realise their assets.
2. A Hong Kong liquidator of the Company would also unlikely be recognised in the Cayman Islands for him to take control of the offshore intermediate subsidiaries (which might then allow him to seek to be recognised as a legal representative for the intermediate subsidiaries in Mainland China).
3. Therefore, winding up the Company in Hong Kong would not advance the recovery of its assets in Mainland China.
4. While the Company had a potential claim against a former director in Mainland China, as a Hong Kong liquidator was unlikely to be recognised there, he would unlikely be able to investigate and pursue the claim.

The Petitioner asserted (as petitioners often do) that the protection of the Company’s listed status was in itself a sufficient benefit to satisfy the second core requirement, and thus, its winding up. In rejecting this assertion, the Court suggested that it was no longer sufficient for a petitioner to merely rely on the assumptions that: (i) the value of a listing could be realised; and (ii) the realised value could prove to be more than an insignificant benefit to creditors. Instead, a petitioner should adduce evidence that could establish a real, not hypothetical, prospect of the listing being realised for an amount that produced a meaningful return to creditors.

The Court held that the listed status of a wound-up company is unlikely to have any value nowadays, given the now common restructuring technique of having soft-touch provisional liquidators appointed to listed companies and seeking to have them recognised in Hong Kong.

On the other hand, the Court was not satisfied that the Company had provided a coherent plan with a “quantified anticipated return to creditors” to justify the adjournment sought.

The Court decided to adjourn the petition to allow both the Company and the Petitioner to file further evidence.

Insights

This decision is significant for creditors on a few levels.

First, it seems to have raised the evidential bar for the second core requirement for winding up in Hong Kong. Before this decision, creditors sometimes took for granted that the second core requirement would be met by pointing to the company’s listed status. From now on, the Court will require evidence of this, e.g. from a witness familiar with the current practice of the HKEx and the current value of a listed company.

Secondly, it demonstrates the significant barriers to enforcement posed by the typical listed group structure. These barriers appear to be systemic and indeed widespread. Creditors may find that Hong Kong insolvency proceedings to be of little utility – despite the company’s listing here.

Thirdly, the Court noted the differing views of the Company’s onshore and offshore creditors on the utility of a restructuring. The Court suggested that the onshore creditors were probably better placed to assess what course was most likely to maximise the return to creditors. In particular, the Court was ready to give significant weight to the views of state-owned banks in Mainland China, acknowledging their understanding of governmental policies, the Mainland systems and imperatives, and their likely greater influence on restructuring and insolvency processes in the Mainland.