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Slide The Court of Appeal revisited the three core requirements for winding up foreign-incoporated companies Background The Court of Appeal (the “CA”) handed down its judgment in Shandong Chenming Paper Holdings Limited v. Arjowiggins HKK 2 Limited [2020] HKCA 670 (“the Case”) on 5 August 2020, reaffirming the three core requirements the Court will consider in exercising its discretion to wind up foreign-incorporated companies (“Three Core Requirements”). The CA dismissed the appeal against the lower court’s decision in refusing to grant a declaration that since the Plaintiff, Shandong Chenming Paper Holdings Limited (the “Company”) is an unregistered company, the Defendant, Arjowiggins HKK 2 Limited (the “Creditor”) could not satisfy the Three Core Requirements for the Court to exercise its discretion to wind up the Company in Hong Kong pursuant to section 327(3) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) (the “Declaration”).

The CA held in the Case that there was a sufficient likelihood of benefit to the Creditor to justify the Court to exercise its discretion to consider winding up the Company under section 327 of Cap 32.

For Issue 1, the CA ruled that while it was improper to use a winding-up petition to pressure a company into payment of a disputed debt, in the Case, the debt was undisputed, and thus the Creditor was entitled to present a winding-up petition as of right. Hon Barma JA agreed that there was a real possibility of benefit to the Creditor in the making of a winding-up order against the Company. The benefit (in the case of an undisputed debt) 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…”. This was not affected by the possibility that the Creditor might obtain the benefit of payment of its arbitral award before an actual winding up order against the Company would be made.

For Issue 2, the CA held that pursuant to the Yung Kee case, the second core requirement was always essential and not capable of moderation (i.e. cannot be dispensed with). Further, it was common for the court to adopt self-imposed constraints on the exercise of a discretion conferred upon it by statute, which could provide limits on the discretion and a degree of predictability as to how the discretion could be exercised. It would seldom be the case that the court would grant a winding up order when it provides no reasonable prospect of benefit to the petitioner. Exceptionally, only the third core requirement might be capable of being dispensed with in a suitable case (Re China Medical Technologies [2018] HKCA 111, at [20]).

The CA also considered some other suggested benefits put forward by the Creditor for the purpose of the second core requirement, with its response as follows:
there has to be a sufficient connection with Hong Kong, but this did 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.
As the Company accepted that the first and third core requirements were met, the main issues in the appeal revolved around the second core requirement, namely (1) whether the benefit of “leverage” identified by the lower court can amount to a sufficient benefit to satisfy the second core requirement (“Issue 1”); and (2) whether the second core requirement can, in an appropriate case, be “moderated” (in other words, dispensed with), and if so, whether this is an appropriate case for it (“Issue 2”). The Three Core Requirements there were receivables and payables arising between the Company and its Sub-sub-subsidiary to be netted off periodically, which might involve unfair preference, and in future there would be amounts owed by the Sub-sub-subsidiary to the Company, which would constitute assets located in Hong Kong to be available to a liquidator (the CA rejected this argument, as it was not easy to see how it could amount to unfair preference when the Company was not insolvent. The prospect of future receivables arising would appear to be a matter of speculation). Contact us YTL LLP Alfred Leung James Yeung Partner Partner Suites 2606-08 China Resources Building 26 Harbour Road Wanchai, Hong Kong (+852) 3468 7200
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September 2020 Home/ Insights 1. The Creditor obtained leave to enforce an arbitral award against the Company in 2015. The Creditor then served a statutory demand on the Company in respect of the arbitral award. The Company did not settle any part of the Creditor’s statutory demand and applied to the Court for an injunction to prevent the Creditor from presenting a winding up petition against the Company. Although the Court allowed the Company’s application for an injunction to be replaced by the Declaration, the Company’s application for the Declaration was eventually dismissed by the Court.

The Court held that (1) “the leverage created by the prospect of a winding up petition” could satisfy the second core requirement; and (2) the second core requirement could be moderated, as justified by the circumstances of the case.
1. 2.
3. 2. As approved by Kam Leung Siu Kwan v Kam Kwan Lai (2015) 18 HKCFAR 501 (“Yung Kee Case”), the Three Core requirements for the Court to exercise its jurisdiction to wind up a foreign-incorporated company under Cap 32. are as follows:

3. 4. Implications and takeaway The CA revisited and reaffirmed the paramount importance of the “Three Core Requirements” when exercising its discretionary jurisdiction to wind up a foreign-incorporated company under Cap 32. Notably, the second core requirement is always essential and cannot be moderated or dispensed with.

Furthermore, notwithstanding the Company’s status (that it is a solvent company, incorporated in the PRC and listed in Shenzhen and Hong Kong, which conducted no business and had no assets in Hong Kong), the Creditor is still entitled to present a winding-up petition against it in Hong Kong, largely because of the benefit of “leverage created by the prospect of a winding-up petition” which can amount to a sufficient benefit to satisfy the second core requirement and the distinguished feature that the debt concerned was undisputed.
The CA’s findings How we can help Our firm has extensive experience in restructuring and insolvency matters. We advise companies (listed or private), creditors as well as other stakeholders on insolvency procedures, and have extensive experience of acting for these parties.

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there were benefits identified from realisation of value from the Company’s sub-sub-subsidiary Chenming HK Limited (“Sub-sub-subsidiary”) (the CA rejected this argument, as it was not a direct subsidiary and had no directors subject to the Hong Kong court’s jurisdiction to produce any benefit to the Creditor); a liquidator might be able to raise funds to pay off the Creditor through the use of the general mandate to issue shares (the CA rejected this argument, as it was difficult to see any real possibility of investors being willing to subscribe for such shares in circumstances in which the Company would be in liquidation); the restructuring of the Company might be set aside under section 60 of the Conveyancing and Property Ordinance (Cap 219) (the CA rejected this argument, as this was not likely to have any real prospect given the Company always appears to be highly solvent, and the appointment of a liquidator was not necessary to enable the Creditor to pursue this remedy); and All information contained in this article are for the purposes of general information only. This article is not to be treated as legal advice or opinion. YTL LLP accepts no responsibility for any loss or damage arising directly or indirectly from any action taken (or not taken) which may arise from reliance on information contained in this article. Please seek legal advice concerning your own circumstances and any legal queries that you may have.