Cross-border insolvency - winding up a foreign incorporated company in Hong Kong
Shandong Chenming Paper Holdings Ltd v Arjowiggins HKK2 Ltd  HKCU 1738
In the case of Shandong Chenming Paper Holdings Ltd v Arjowiggins HKK2 Ltd, the Court of First Instance held that a foreign company with a secondary listing in Hong Kong can be wound up in Hong Kong for failing to pay an arbitral award, despite the company being solvent and having no assets within the jurisdiction. This case further develops the law on the winding-up of foreign companies in Hong Kong and represents a significant development since the landmark case of Yung Kee in 20151 .
Shandong Chenming Paper Holdings Limited ("Shandong") is a Mainland incorporated company listed on the Shenzhen Stock Exchange. It is also a registered non-Hong Kong Company with a dual primary listing of H shares on the Hong Kong Stock Exchange.
The background dispute in this case arises from a joint venture agreement entered between Shandong and Arjowiggins HKK2 Limited ("AH2"). The dispute, which was arbitrated in Hong Kong, resulted in damages of RMB 167,860,000 being awarded to AH2 on 20 November 2015 ("Award"). Although Shandong applied to the Court to set aside the Award in September 2016, its application was dismissed. A statutory demand was subsequently served by AH2 against Shandong in October 2016. In response, Shandong sought an order to stop AH2 from obtaining a winding-up order.
Law on the winding up of foreign companies in Hong Kong
The Court’s power to wind up foreign companies is found under sections 327(1) & (3) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, (Cap 32). Past cases have confirmed that this is a discretionary power, and that three core requirements ("Core Requirements") must be met before the Court will exercise its discretion to wind-up a foreign company. The Core Requirements were summarized in the case of Re Beauty China Holdings Ltd 2as follows:-
1. there has to be a sufficient connection with Hong Kong, but this does not necessarily have to include 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.
In the current case, the issue in dispute was whether the second Core Requirement for winding up a foreign company had been met.
Whether AH-2 would benefit from winding-up Shandong in Hong Kong
Usually, a creditor applies to wind-up a debtor company in the hope of recovering its debts through liquidating the assets of the company. As Shandong did not have any assets in Hong Kong, it was argued that AH2 would not derive any benefit from obtaining a winding-up order against Shandong in Hong Kong.
However, the Court found that the benefit of a winding-up order is not limited to obtaining the assets of the debtor. Instead, the Court found that the threat of a winding-up order would give AH2 leverage against Shandong, as the appointment of a liquidator would have serious consequences for the company. Control of Shandong would be forced out of the hands of its directors into the hands of the liquidator, share transfers would become void unless otherwise ordered by the Court, and Shandong's listed status would be at risk. In the view of the Court, the leverage gained by the threat of liquidation would be of sufficient benefit to AH2 to meet the second Core Requirement.
Winding-up on the grounds of public interest
In addition to the above finding, the Court also put forward public interest as an alternative ground for winding up Shandong. In the judgement, the Court followed the decision in Yung Kee that the Core Requirements are self-imposed restrains. In the view of the Court, foreign companies should not be allowed to dishonor judgement debts or arbitral awards. Therefore, there is a public interest in dissuading foreign companies from taking advantage of Hong Kong's financial system without complying with the laws of Hong Kong.
There are two main points to take away from this judgement. First, the case illustrates the approach of the Court in interpreting what constitutes a benefit when considering the Core Requirements for winding-up a foreign company. The Court's approach in this case shows that the benefit will be interpreted widely and is not limited to the recovery of assets through liquidation. Secondly, the case shows that the Court may be prepared to take a hardline and dispense with the traditional Core Requirements on the grounds of public interest, especially in cases where the company has refused to honour a Hong Kong Judgement or Arbitral Award.
1 Kam Leung Sui Kwan v Kam Kwan Lai & Ors FACV 4/2015
2 6 HKC 351
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