Dispute Resolution Newsletter – December 2015
Court of Final Appeal – Winding Up Foreign Companies in Hong Kong
Sufficient Connection With Hong Kong
Creditors vs Shareholders’ Petition
It has long been thought that a shareholders’ petition should be subject to a more stringent “connection to Hong Kong” test as compared to a creditors’ petition. In overturning both the CA and the CFI in this regard, the CFA did not agree that a more stringent connection was required in the case of a shareholder’s petition, noting that:
“Shareholders, no less than creditors, are entitled to bring winding up proceedings in Hong Kong in respect of a foreign company…”
In making its decision, the CFA confirmed that the factors relevant to establish a “connection” were however different between a shareholders’ petition and a creditors’ petition. This was due to the difference in the nature of the dispute and the purpose of the winding up. The differences can be summed up in the following table:
|Company Status||Parties||Nature||Purpose||Essential Factor|
|Creditors’ Winding-Up Petition||Insolvent (generally presumed)||Petitioner vs. Company||A third party creditor seeking relief against the company||To obtain payment of debts||Significant assets within Hong Kong which may be made available to the liquidator for the distribution among the creditors|
|Shareholders’ Winding-Up Petition||Solvent||Petitioner vs.
(although company is a party, it is merely the subject of the dispute)
|Dispute between the shareholders based on equitable principles||To realise petitioner’s investment in the company||Shareholders are within the jurisdiction (i.e. in Hong Kong)|
Separate and Distinct Legal Entities
It is worth noting that in the lower Courts, the 1st Respondent argued successfully that the interposition of subsidiaries between the Company and the ultimate company operating the Hong Kong businesses effectively ‘blocked’ any connection between the Company and Hong Kong. This argument was premised upon the fundamental concept that each company was separate and distinct from its subsidiaries and shareholders.
Although the CFA acknowledged this point, the Court held that it did not prevent a finding of “connection” because the Petitioner was not seeking to “lift the corporate veil”. Rather, the Petitioner was seeking to realise his investment in the Company. If the Company was a holding company, the Petitioner’s purpose would be to realise the underlying assets. Accordingly, there would be no reason why assets of a subsidiary should be excluded from consideration when determining whether the Company had a sufficient connection with Hong Kong. The nature of the dispute and purpose of the proceedings was again, of primary importance.