Cross-Border Insolvencies Update: Hong Kong Courts Declined to Wind Up Listed Company after Creditors Failed to Show “Tangible Benefit”

Introduction

In Re China Huiyuan Group Ltd [2020] HKCFI 2940, the Court of First Instance declined to wind up a Hong Kong-listed Cayman company as the Court held that the petitioner failed to demonstrate that there was a real possibility of a tangible benefit to creditors upon the making of a winding up order.

Facts

SDF III Holdings Limited (the “Petitioner”) issued a petition to wind-up China Huiyuan Juice Group Limited (the “Company”) on the grounds of insolvency. The debt is not disputed.

The Company is incorporated in the Cayman Islands and listed on the Main Board of the Hong Kong Stock Exchange. The Company’s assets include ownership of subsidiaries incorporated in the BVI that own subsidiaries in the Mainland, which in turn own the Company’s underlying assets and carry on the manufacturing and other operations.

There is no dispute that the Company is insolvent. The Company seeks an adjournment of the Petition to progress a restructuring of the Company’s debt. As the trading of shares has been suspended and that the Company is facing a potential delisting, the Company views that restructuring is the only way to bring the group’s business back on track and would benefit the Company’s creditors in the long run.

The decision for the Court to be made, therefore, is whether to make an immediate winding-up order or grant an adjournment.

Issues

The issues are as follows:-

  1. What are the principles which guide the Court’s exercise of its discretionary jurisdiction to wind-up a foreign incorporated company;
  2. Whether a winding-up order here would be consistent with the aforesaid principles; and
  3. Whether an adjournment should be granted.

The Principles

Under section 327 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32), the Hong Kong Court has jurisdiction to wind up foreign incorporated companies. However, the most appropriate jurisdiction to wind-up a company is the jurisdiction where it is incorporated. Over the years, the Hong Kong Court has developed three criteria to assesses whether or not a good reason for making a winding-up-order are as follows (commonly known as the “three core requirements”):-

  1. there had to be a sufficient connection with Hong Kong;
  2. there must be a reasonable possibility that a wind-up order would benefit the applicant; and
  3. the court must be able to exercise jurisdiction over one or more persons to distribute company’s assets.

The listing alone constitutes sufficient connection with Hong Kong to satisfy the first core requirement. There will normally be other creditors in Hong Kong, who will satisfy the third core requirement.

In relation to the second core requirement, the Court of Appeal has clarified in its recent decision in Shangdong Chenming Paper Holdings Ltd v Arjowiggins HKK 2 Ltd [2020] HKEC 2290 that it is necessary for a petitioner to demonstrate by evidence that there is a real possibility of a tangible benefit to creditors and evidence should be adduced and set out in the petition, or else the petition is demurrable. Potential hypothetical benefits are insufficient.

The Petitioner sought to rely on the following to satisfy the second core requirement:-

i. Realising the value of the listing

The Court noted that the value of the listings seems to have dropped to the costs of a conventional restructuring. It is insufficient to invite the court to assume that the value of a listing can be realised at a value that proves to be more than an insignificant benefit to creditors.

It is necessary to have evidence to establish that there is a real, not hypothetical prospect of the listing being realised for an amount that produces a meaningful return to creditors not an amount so small that they are likely to be largely indifferent to whether they receive it or not.

ii. Accessing assets in the Mainland

To obtain control of the Company’s Mainland subsidiaries, it is necessary for a liquidator appointed by the Hong Kong court to first be appointed as liquidator of the Mainland subsidiaries’ immediate holding company. The general rule is that the court will recognise at common law only the authority of the liquidator appointed under the law of the place of incorporation of the company except for a scheme of arrangement introduced by a foreign liquidator in the offshore jurisdictions.

Hence, a liquidator appointed in Hong Kong would unlikely be recognised in BVI and thereby unable to control the BVI subsidiaries, meaning that the Mainland companies could not be controlled too so actually no benefit can be obtained by winding-up up the Company in Hong Kong.

iii. Claims against the majority shareholders for unauthorised Loans

The Petitioner also complained about the integrity of the Company’s management arising from, amongst other things, loans made to a majority shareholder’s personal companies. The loans were found to have been made by Mainland subsidiaries of the Company in the Mainland.

As the liquidator’s appointment would not be recognized in the Mainland, nothing much can be done.

In conclusion, the Petitioner has not demonstrated a real benefit that it would gain from the winding up of the Company in Hong Kong and consequently the second core requirement failed.

The Company’s Application for an Adjournment to Allow it to Restructure

While the Court was not satisfied that the Company had provided a coherent plan with a “quantified anticipated return to creditors”, the Court decided to allow parties time to adduce further evidence on the progress of its proposed restructuring in detail before making a decision.

Practical Implications

As the evidentiary bar has been raised -  the Court will no longer assume that the realisation of the listing status constitutes a real benefit without evidence – it follows that it would be more difficult to wind-up offshore-incorporated companies listed in Hong Kong as it is very common for those listed companies to use intermediary offshore holding structures to hold their ultimate businesses and operations in the Mainland.

Creditors should consider carefully if it is worth petitioning in Hong Kong rather than going straight to the relevant offshore jurisdiction, and if a petitioner purports to rely on the value of the listing as a real benefit, it will be necessary to adduce evidence demonstrating that on balance this will prove to be the case if a winding-up order is made.

It will not be sufficient to file an affirmation in which the deponent simply recites this to be his belief. Evidence from a witness familiar with the current practice of the Stock Exchange of Hong Kong and the current value of a listed company will be required.

Jurisdictions: 

Solicitor, ONC Lawyers

Joshua Chu is a Litigation Solicitor qualified to practice in Hong Kong. Before becoming a lawyer, Joshua worked in the healthcare industry serving as the IT department head at a private hospital as well as overseeing their procurement operations.

Since embarking upon his legal career, his past legal experience includes representing the successful party in one of Hong Kong’s first cryptocurrency litigation cases as well as appearing before the Review Body on Bid Challenges under the World Trade Organization Government Procurement Agreement concerning a health care industry related tender.

Today, Joshua’s practice is mainly focused in the field of dispute resolution and technology law.

Aside from his legal practice, Joshua is currently also a Senior Consultant with a regulatory consulting firm which had been founded by ex-SFC Regulators as well as being a management consultant for the Korean Blockchain Centre.

Associate, ONC Lawyers