Hong Kong - Cross Border Insolvency - The Court Of Appeal's Judgment On The Three Core Requirements.
Legal News & Analysis - Asia Pacific - Hong Kong - Insolvency & Restructuring
7 September 2020
The three core requirements are factors relevant to the exercise of the Court’s discretion to wind up a foreign incorporated company. In this case, the Court of Appeal considered the second core requirement. Despite the fact that Shandong Chenming is a Hong Kong listed PRC incorporated company with no assets in Hong Kong, this does not stop winding up petition from being presented in Hong Kong against it for its failure to honour an arbitration award.
The three core requirements
The Court’s jurisdiction to wind up a foreign incorporated company under statute2 is discretionary, and the three core requirements are the Court’s self-imposed factors relevant to the exercise of such discretion.
The three core requirements as approved by the Court of Final Appeal in the case of Kam Leung Siu Kwan v Kam Kwan Lai (2015) 18 HKCFAR 501 (the “Yung Kee case”) are as follows:
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;
There must be a reasonable possibility that the winding up order would benefit those applying for it; and
The court must be able to exercise jurisdiction over one or more persons in the distribution of the company’s assets.
This is an appeal case in respect of the second core requirement.
Shandong Chenming Paper Holdings Limited (“Shandong Chenming”) is a PRC company listed in both Shenzhen and Hong Kong, but has no assets
and/or business in Hong Kong. Based on an arbitral award which the Court had granted leave to be enforced in Hong Kong, Arjowiggins HKK 2 Limited (“Arjowiggins”) served a statutory demand on Shandong Chenming. Shandong Chenming then sought an order from the Court declaring that the three core requirements were not satisfied. The declaration, if granted, would effectively restrain Arjowiggins from issuing a winding up petition against Shandong Chenming in Hong Kong.
Shandong Chenming was able to show it was solvent with substantial assets and business in the PRC. It did not dispute that the arbitral award was payable, and only contended that the second limb of the three core requirements was not satisfied (namely that Arjowiggins would benefit from a winding up order in Hong Kong). It argued that a Hong Kong liquidator would achieve nothing of value in the PRC and that a winding up order in Hong Kong would be a futile exercise. As a result it said, the proper course for Arjowiggins would be to enforce the arbitral award in the PRC.
Harris J held that (1) the Arjowiggin’s leverage against Shandong Chenming arising out of the prospect of a winding up order is capable of satisfying the second core requirement; and (2) the circumstances of the case would justify moderation of that requirement. Please see our previous client alert on Harris J’s decision:
Cross border insolvency – The three core requirements post Yung Kee
Can the second core requirement be moderated?
Hon Barma JA delivered the judgment. The Court of Appeal decided that the second core requirement cannot be moderated.
In Re China Medical Technologies Inc  HKCA 111, the Court of Appeal3 concluded that the third core requirement could be dispensed with in a suitable case4. That conclusion was based on the obiter expressed by the Court of Final Appeal in the Yung Kee case that the second core requirement is always essential and often sufficient.
The Court of Appeal considered that it was common for the Court to adopt self-imposed constraints on the exercise of its discretion which provide predictability as to how the discretion is likely to be exercised. The Court of Appeal further considered that there would seldom be circumstances where it would be justified to wind up a company which could provide no reasonable prospect of any benefit to the petitioner.
Benefits from a winding up order?
The benefit to Argowiggins was described by Harris J as being:
“... the leverage created by the prospect of a winding up petition, or the appointment of a liquidator and the
steps a liquidator may take to recover assets even if such steps are problematic...”
Shandong Chenming raised the following arguments which were all rejected by the Court of Appeal:
Arjowiggins’ leverage was no more than the pressure imposed on Shandong Chenming to pay the debt in order to avoid the seriously adverse consequences of a winding up order. If Arjowiggins did obtain a benefit (i.e. payment of the debt owed), the winding up process would have to be terminated.
The benefit which the Companies Judge found should not be taken into account when considering the second core requirement:
As winding up has the nature of a collective remedy for creditors as a class, it is necessary for the benefit available to a petitioner to be one that benefits not just himself, but all the other creditors.
The making of a winding up order would not only benefit the other creditors, but would be a detriment to them and other stakeholders.
The Court should be very reluctant to wind up an evidently solvent company.
The Court of Appeal found that:
There was a real benefit to Arjowiggins in the making of a winding up order against Shandong Chenming. The benefit was not affected by the possibility that Arjowiggins might obtain the benefit of payment of its award at an earlier stage. While it is improper to seek to use a winding up petition to pressure a company into payment of a disputed debt, a petitioner is entitled to present a winding up petition where the debt is undisputed or indisputable and cannot be said to be acting improperly.
It was clear from the Yung Kee case that only a benefit of a winding up order to the petitioner is required but not a benefit to all the creditors.
The present appeal concerns whether the Court should exercise its jurisdiction over Shandong Chenming under s327 of Cap 32. Whether a solvent company should be wound up for refusing to pay its indisputable debt concerns a different discretion which arises only after the Court has decided it has jurisdiction over the solvent foreign company.
The Court of Appeal therefore dismissed the appeal, which means that Argowiggins can present a winding up petition against Shandong Chengming in Hong Kong based on the unsatisfied arbitration award.
The Court of Appeal confirmed that the second core requirement (i.e. reasonable benefit of a winding up order to the petitioner) cannot be moderated and is always necessary.
In appropriate circumstances, foreign companies (with sufficient connection to Hong Kong) seeking to evade payment of a judgment debt and/or arbitral award may risk being wound up by the Hong Kong Court.
Alexander Tang, Stephenson Harwood
1 Please refer to - https://legalref.judiciary.hk/lrs/common/ju/ju_frame.jsp?DIS=129977&currpage=T
2 sections 327(1) and (3) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32)
3 Differently constituted but the judgment was also delivered by Hon Barma JA
4 Based on the view expressed by the Court of Final Appeal in Kam Leung Siu Kwan v Kam Kwan Lai (2015) 18 HKCFAR 501