It still counts: Hong Kong Court finds minority shareholding has reasonable possibility to benefit winding-up petitioner

It is well-established that certain core jurisdictional requirements must normally be met before a Hong Kong Court will exercise its discretion to wind up a foreign company (Core Jurisdictional Requirements). These were explained in our previous post:

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 the petitioner; and
3. the Court must be able to exercise jurisdiction over one or more persons in the distribution of the company’s assets.

The Court has previously found that the second requirement is particularly essential. It is, in fact, also usually the most hotly-debated requirement.

In a recent case, the Hong Kong Court of Appeal found that the second requirement can be met by a minority shareholding in a Hong Kong private company, the assets of which are in mainland China.

Background

Silver Starlight Limited (Silver Starlight), a BVI company, was the subject of an imminent winding-up petition in Hong Kong, having been served with a statutory demand for a HK$8 billion loan.

The loan was taken out in 2017 with two banks in order to finance the acquisition of 35.59% shares in a Hong Kong company, Goldin Properties Holdings Ltd (Goldin). Goldin was originally a listed company, but became privatised and delisted in 2017. Silver Starlight was incorporated specifically to acquire a minority shareholding in Goldin in this privatisation exercise.

Goldin is a property developer that owns substantial projects in Tianjin through a chain of BVI, Hong Kong and mainland companies.

Since late 2019, Silver Starlight has been in default of paying the interest on the $8 billion loan. The banks served a statutory demand on Silver Starlight for the repayment of the loan.

Arguments in the first instance

Silver Starlight applied for an injunction to restrain the banks from presenting a winding-up petition based on its non-compliance with the statutory demand. It argued, among other things, that the Core Jurisdictional Requirements were not satisfied.

Silver Starlight's claims were entirely rejected by the Court of First Instance. However, the Court issued an interim order to prevent a winding-up petition from being filed before the hearing of the appeal.

Arguments on appeal

On appeal, Silver Starlight argued that the Court was wrong in its findings regarding the Core Jurisdictional Requirements.

The banks, on the other hand, argued that the Court should refuse to grant the injunction, unless it was plain and obvious that the Core Jurisdictional Requirements would not be satisfied at the hearing of the winding-up petition.

Key points highlighted by the Court of Appeal

Right to petition for winding-up

At the outset, the appeal judges held that the right to petition for winding-up was an important statutory right for creditors, and that therefore this right should not be restrained unless there were clear and persuasive grounds to do so. The applicant for an injunction to prevent a winding-up petition needed to show that the petition amounted to an abuse of process.

Core Jurisdictional Requirements

The appeal judges held the injunction would only be granted if Silver Starlight could demonstrate that was not reasonably arguable that the Core Jurisdictional Requirements could be satisfied at the time of the hearing of the winding-up petition.

The most interesting discussions were centred around the second jurisdictional requirement, namely whether there was a reasonable possibility that the winding-up order would benefit the petitioner.

The lower court concluded that Silver Starlight's 35.59% shareholding in Goldin could be realised and distributed to the creditors upon liquidation, therefore benefiting the petitioner banks and satisfying the second requirement.

Against this finding, Silver Starlight stressed that the underlying assets of Goldin were located in the mainland and the fact that Silver Starlight is only a minority shareholder of Goldin. For these reasons, the liquidators of Silver Starlight, as a minority shareholder,  would neither be able to obtain control of Goldin, nor the underlying assets in mainland.

This argument did not find favour with the appeal judges. Rather, the judges referred to several reasons why the 35.59% Goldin shares could bring reasonable benefits to the banks:

1. the Goldin shares were freely transferable;
2. Goldin owned substantial net assets amounting to HK$22.5 billion;
3. A 35.59% shareholder could not change the composition of Goldin's board, but could nonetheless block special resolutions in general meetings;
4. The shares entailed entitlement to dividends and to wind up Goldin on proper grounds;
5. Silver Starlight did not have any evidence to show that a buyer of the shares could not be found; and
6. There was no general proposition that no reasonable benefit could be derived where the underlying assets were located outside of the jurisdiction.

Silver Starlight therefore failed to discharge its burden to show it was plain and obvious that there was no reasonable possibility for a winding-up order to benefit the banks.

Comments

The Court of Appeal stated for the first time that an injunction to prevent the winding-up of a foreign company would only be granted if the applicant could  demonstrate that it was not reasonably arguable that the Core Jurisdictional Requirements could be satisfied at the time of the hearing of the petition.

The observations of the Court regarding a minority shareholding also provides helpful guidance to petitioners going forward. However, whether each requirement is satisfied is a question of fact in the particular circumstances of each case.

It is also worth reminding that this case was decided in the context of an injunction application, where the burden is on the debtor company to prove the contrary (i.e. that the Core Jurisdictional Requirements will not be satisfied), which Silver Starlight failed to do so. The remarks made in this case, while helpful, must be read in light of this context. Ultimately, the Court of Appeal was not laying down a general rule that whenever a debtor company has a minority shareholding in a private company, the second of the Core Jurisdictional Requirements will be invariably satisfied.