Foreign companies in Hong Kong: You can’t have your cake and eat it too

Summary

In the recent decision of Shandong Chenming Paper Holdings v Arjowiggins HKK 2 Ltd, the High Court of Hong Kong has provided further guidance on the winding up of foreign companies in Hong Kong.

Background

Shandong Chenming Paper Holding (the “Company“) is a paper conglomerate incorporated in the People’s Republic of CHina with a dual listing in Shenzhen and Hong Kong. The Company and Arjowiggins HKK2 Ltd (“Arjo“) entered into a joint venture partnership in 2005 for the purpose of manufacturing paper products. Disputes subsequently arose and an arbitration proceeding was commenced in November 2015, resulting in an award of RMB 167,860,000 damages in favour of Arjo.

On 7 December 2015, Arjo obtained leave from the Honourable Madam Justice Mimmie Chan to enforce the arbitral award.

Since the Company did not appeal to the ruling and yet refused to pay (there was no suggestion that the Company did not have the funds to satisfy the arbitral award), Arjo served a statutory demand for the payment totalling approximately RMB 302 million, which includes the contractual damages, legal and tribunal fees plus interest. In response, the Company sought to restrain Arjo from submitting a winding-up petition, arguing that Hong Kong Court lacked the jurisdiction to wind-up the Company.

The Decision

The Court’s jurisdiction to wind up foreign companies under section 327 of the Companies (Winding-up and Miscellaneous Provisions) Ordinance (Cap 32) is well known. As this power is discretionary, the Court has developed ‘self-imposed constraints’ to justify the exercise of its discretion (the three core requirements), including that:

  1. there had to be a sufficient connection with Hong Kong, but this did 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 apply 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 Company, while accepting that the first and third of the above requirements were satisfied, argued that the second requirement (that Arjo would derive sufficient benefits from a winding-up order) was not satisfied.

In this regard, the Company argued that it had no assets in or businesses conducted from Hong Kong and the sole connection with Hong Kong was its listing on the HKEX. This follows that a liquidator appointed in Hong Kong will be able to achieve nothing, and that a winding-up order would be ‘an exercise in futility’.

Arjo contended the share listing status as a ‘valuable and realisable’ asset in Hong Kong. In addition, Arjo argued that a restructuring of the Company and its assets during the arbitration process was a matter which ought to be investigated by a liquidator.

While the Honourable Mr Justice Harris found that the value of the Company’s listing status in Hong Kong was, viewed realistically, not capable of providing a material benefit to Arjo or other creditors, he held that the availability of the restructured assets to a liquidator was material to the second requirement.

In addition, Mr Justice Harris held that a winding up order would exert considerable pressure on the Company’s management to satisfy its debts to Arjo and this would indirectly constitute a ‘benefit’ to Arjo capable of satisfying the second requirement.  However, notwithstanding this finding, Mr Justice Harris held that there was an additional matter which justified the “moderation” of the requirement that benefit to Arjo be shown.

Mr Justice Harris found that the Company, while having a primary listing in Hong Kong, had simply refused to pay the arbitral award (which had become enforceable as an order of the Court).  He found that there was a strong public interest to disabuse foreign companies of the idea that they can take the benefit of access to Hong Kong’s financial system without the burden of complying with the law. The refusal to honour the arbitration award and the listing in Hong Kong showed contempt for the integrity of Hong Kong’s legal system.

Conclusion

The judgment of the Court in this matter confirms that while the “three core requirements” remain critical to the exercise of the Court’s discretion, the application of those requirements can be moderated if the circumstances clearly call for it.  In this case, it was clear that Company was trying to take the benefit of Hong Kong’s financial system while at the same time, trying to disregard the integrity of its legal system, and Mr Justice Harris, in dismissing the matter, held that it was necessary to “disabuse other mainland companies of the idea” that they can have their cake and eat it too.

Gareth Thomas
Gareth Thomas
Partner, Head of commercial litigation Hong Kong
Email | Profile
+852 2101 4025
Jeremy Haywood
Jeremy Haywood
Associate
Email
+852 2101 4120

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