In the recent case of Re Shandong Chenming Paper Holdings Limited  HKCA 670, the Court of Appeal clarified the requirements for the court to exercise discretion to wind up a foreign incorporated company pursuant to section 327(3) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance ("Cap 32"). It was held that, among other considerations, the leverage created by the prospect of a winding-up petition (i.e. the negative impacts on the company's reputation and control over its operations as a result of liquidation) amounted to sufficient benefit to the petitioners.
Shandong Chenming Paper Holdings Limited ("Chenming") is a company incorporated in the Mainland China engaging in paper manufacturing, forestry, finance and real estate. Its shares were listed on the Shenzhen Stock Exchange and the Stock Exchange of Hong Kong Limited.
In October 2005, Chenming entered into a joint venture agreement with Arjowiggins HKK 2 Ltd ("Arjowiggins"). In October 2012, Arjowiggins commenced arbitration against Chenming alleging that Chenming was in breach of the joint venture agreement and later obtained an arbitral award against Chenming for damages in the sum of RMB167,860,000 (the "Award"). Arjowiggins then obtained leave to enforce the Award in Hong Kong. Chenming failed to pay. Arjowiggins thus served a statutory demand on Chenming. In response, Chenming sought to restrain Arjowiggins from submitting a winding-up petition, contending that the Hong Kong Court lacks the jurisdiction to wind it up. At first instance, Harris J dismissed Chenming's application and ordered it to pay Arjowiggins' costs on an indemnity basis. Chenming appealed (the "Appeal").
Key issues in the Appeal
In Re Beauty China Holdings Ltd  6 HKC 351, the Court identified three core requirements that must be satisfied before the Court will exercise its jurisdiction to wind up a foreign company, namely: (1) there had to be a sufficient connection with Hong Kong, but it 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 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 present case, it was undisputed that the first and the third requirements were met. The main issue was therefore whether the second core requirement was also met. In this regard, the Court considered (1) whether the benefit identified by the lower court judge was a sufficient benefit to satisfy the second requirement; and (2) whether the second requirement can be "moderated" or dispensed with.
Findings of CA
At first instance, Harris J accepted that the value of Chenming's listing status in Hong Kong was not capable of providing a material benefit to Arjowiggins or other creditors of the company. Nevertheless, his Lordship considered that Arjowiggins would still benefit from a winding up order, in that Arjowiggins would be able to derive benefits from the leverage created by the prospect of a winding-up order or the appointment of a liquidator. Given the "immediate and severe" consequences of a winding-up order, it would exert considerable pressure on Chenming's management to satisfy its debt to Arjowiggins. Such leverage may constitute a benefit indirectly and thereby satisfy the 2nd requirement under the three core requirements.
Although it is discouraged to use winding-up proceedings to pressure solvent companies to pay disputed debts, the fact that the Award was undisputed and that Chenming was solvent and operating profitably suggested that it was well able to repay the Award, but simply refused to do so thinking that there was nothing Arjowiggins could do about it in Hong Kong.
The Court of Appeal agreed and concluded that there is in the present case a sufficient likelihood of benefit to Arjowiggins so as to justify the court in exercising its jurisdiction over Chenming under section 327 of Cap 32.
However, the Court of Appeal disagreed with Harris J and clarified that the 2nd core requirement, given its essential nature, is not one that can be moderated or dispensed with.
The detailed discussions in the Appeal clarified the circumstances under which the Hong Kong Court would exercise its discretionary jurisdiction to wind up a foreign incorporated company under Cap 32. Parties and their legal advisers should always bear in mind that it is always necessary and essential to satisfy the Court that the petitioner would reasonably and sufficiently benefit from a winding-up order.
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