The Yung Kee Case: The Court of Final Appeal Decides

On 11 November 2015, the Court of Final Appeal handed down its judgment on the petitioner’s appeal in the Yung Kee Holdings Limited (“YKHL”) family company dispute. The Court of Final Appeal affirmed the lower courts’ finding that there was no jurisdiction with regard to an unfair prejudice claim under s. 168A of the former Companies Ordinance (Cap. 32) (now s. 724 of the Companies Ordinance (Cap. 622)). However, it allowed the appeal on jurisdiction under s. 327(3)(c) (which confers jurisdiction to wind up foreign companies), and held that it would be just and equitable, pursuant to
s. 327(3)(c), to wind up the BVI-incorporated YKHL on the facts as found by the trial judge.

The leading judgment, delivered jointly by Ma CJ and Lord Millet NPJ, is the first ever judgment by a final appellate court in the entire Commonwealth dealing directly with the question of jurisdiction to wind-up foreign companies on the just and equitable ground in a shareholders’ dispute.

Background to the Appeal

Yung Kee is a well-known restaurant in Central famous for its roast goose dishes. The family business began in the 1930s, and eventually developed into a substantial group of companies, with YKHL as the group’s ultimate holding company.

After the death of the founder Kam Senior, the relationship between two of his sons, Kam Kwan Sing and Kam Kwan Lai, broke down. On 29 March 2010, Kam Kwan Sing brought a petition against Kam Kwan Lai on the ground that the affairs of YKHL had been conducted in a manner unfairly prejudicial to his interests. Kam Kwan Sing sought an order that Kam Kwan Lai buy out his shares under s. 168A, alternatively that YKHL be wound up pursuant to s. 327(3)(c).

The corporate structure of the Yung Kee group was central to the disputes on jurisdiction. YKHL, the ultimate holding company incorporated in the BVI, did not conduct business in its own right, and had no employees or bank accounts. Its sole asset consisted of the shares in its wholly owned subsidiary Long Yau Limited, another BVI company, whose sole function was also to act as a holding company. The operating and property holding companies of the group, being subsidiaries of Long Yau Limited, were incorporated in Hong Kong or the BVI.

The Court of First Instance dismissed the petition on jurisdictional grounds. Harris J found that a quasi-partnership existed between the two brothers and that Kam Kwan Lai’s use of his majority shareholding to implement changes to the company’s board of directors unfairly prejudiced Kam Kwan Sing’s interests, but the court lacked jurisdiction to:

(1) grant relief under s. 168A, as YKHL had not established a “place of business” in Hong Kong and, accordingly, was neither a “non-Hong Kong company” within the meaning of s. 332 of Cap. 32 (now defined in s. 2 of Cap. 622) nor a “specified corporation” within the meaning of s. 168A;

(2) wind up YKHL on the just and equitable ground under s. 327(3)(c), because the company did not have sufficient connection with Hong Kong.

Kam Kwan Sing died shortly before Harris J’s judgment was handed down. His estate appealed against Harris J’s decision with a change of tack, seeking primarily a winding up order and in the alternative a share purchase under s.168A. The Court of Appeal upheld Harris J’s holding on jurisdiction under s.327(3)(c) because:

(1) in considering YKHL’s connection with Hong Kong, the activities and affairs of the company’s sub-subsidiaries in Hong Kong and the fact that the company’s shareholders had connections with Hong Kong were not relevant by reason of the doctrine of separate corporate personality;

(2) the presence of shareholders and directors of YKHL making internal administrative decisions in Hong Kong was not sufficient to establish the requisite connection with Hong Kong.

The Court of Appeal also held that the court had no jurisdiction to grant relief under s. 168A, because:

(1) YKHL’s internal corporate activities (insofar as carried out within Hong Kong) were not sufficient for the purpose of “establishing a place of business in Hong Kong”;

(2) it was not permissible to take into account the activities and affairs of the subsidiaries for the purpose of “establishing a place of business in Hong Kong”, as in the case of s.327(3)(c).

Further, the Court of Appeal reversed Harris J’s finding that Kam Kwan Lai had conducted the affairs of YKHL in a manner unfairly prejudicial to the interests of Kam Kwan Sing, on the basis that the judge had not made sufficient findings on the mutual understanding between Kam Kwan Sing and Kam Kwan Lai.

Kam Kwan Sing’s estate subsequently appealed to the Court of Final Appeal on both the jurisdiction issues and the reversal of the findings of unfair prejudice by the Court of Appeal.

Section 168A – What the Court of Final Appeal Tells Us?

The Court of Final Appeal first dealt with the issue of jurisdiction to grant relief under s. 168A.

Kam Kwan Sing’s estate argued that the inclusion of a share transfer or registration office in the definition of “place of business” under s. 341 of Cap.32 (now s. 774 of Cap. 622) shows that a “place of business” may include a place where the company carries on purely administrative activities, which were the only activities of YKHL. The Court of Final Appeal rejected that argument, holding that s. 341 does not define “place of business” but extends its ordinary meaning to include places which would otherwise not normally be regarded as places of business. Hence the section told against the petitioner’s submission rather than in his favour.

In dealing with the argument that “business” for the purpose of establishing s. 168A jurisdiction can include internal administrative activities, the Court of Final Appeal held that while “business” is not confined to commercial transactions or transactions which create legal obligations, there is no reason to suppose that it covers purely internal activities in the governance of the company itself; and there is nothing in fact or law which requires a company which does not carry on business at all to have a place of business (leaving aside the share transfer and registration office) somewhere.

Moreover, the Court of Final Appeal affirmed the lower courts’ holding that the fact that a company’s directors discuss its affairs in a particular place is not sufficient by itself to make that place the company’s place of business. It held that the requisite degree of regularity and permanence of location for establishing a “place of business” was not factually established in the case of YKHL.

The Court of Final Appeal therefore concluded that it had no jurisdiction under s. 168A.

However, it is noteworthy that the Court of Final Appeal did not deal with the petitioner’s argument that it was permissible to take into account the activities and affairs of the subsidiaries for the purpose of establishing a place of business in Hong Kong. In this respect, the judgment of the Court of Appeal remains the last word on the topic, and the answer given by the Court of Appeal was negative. It would therefore appear that the fundamental principle that each company in a group of companies is a separate legal entity is still applicable in the context of considering whether a foreign company is amenable to the Hong Kong courts’ jurisdiction under what is now s. 724 of Cap. 622.

Section 327(3)(c) – The More Liberal Approach Adopted by the Court of Final Appeal

Regarding jurisdiction under s. 327(3)(c), the Court of Final Appeal began by remarking that the description of the jurisdiction to wind up foreign companies as “exorbitant” is unhelpful except as a reminder that there must be good reason to exercise an abnormal jurisdiction even though it is one which statute has expressly conferred on the court.

The Court of Final Appeal drew a distinction between a creditors’ petition and a shareholders’ petition, because of the difference in the nature of the dispute and the purpose for which the winding up order is sought. In a creditors’ petition, the presence in Hong Kong of significant assets which may be made available to the liquidator for distribution among the creditors will usually suffice, and the question is whether the petitioner will derive a sufficient benefit from the making of a winding up order. In a shareholders’ petition, the dispute is between the petitioner and the other shareholders, and the company is the subject of the dispute rather than a party to it. Accordingly, the presence of shareholders within the jurisdiction is an extremely weighty factor in establishing the sufficiency of the connection between the company and Hong Kong. Furthermore, the petitioner’s purpose in seeking a winding up order in such a case is also different, for the object is not to obtain payment of a debt, but to realise the shareholder’s investment in the company. Where the dispute between shareholders is based on equitable principles, which are applicable in the place where the shareholders live, the presence of shareholders in the jurisdiction is highly relevant and will usually be the most important single factor.

The respondents contended that the imposition of Long Yau in the corporate structure meant that the only assets of YKHL consisted of shares in Long Yau which were situated in the BVI; and that the underlying businesses and assets of the group, which were situated in Hong Kong, did not belong to YKHL. This contention was rejected by the Court of Final Appeal. The Court of Final Appeal held that while a company and its shareholders are separate legal entities, there is no doctrinal reason to exclude a connection through a wholly owned subsidiary. Where the connection is claimed through an indirect subsidiary, the question is similar to the one which arose in Waddington Ltd v Chan Chun Hoo (2008) 11 HKCFAR 370, and the court must ask itself whether the petitioner has a legitimate interest in the relief claimed. Giving effect to the close connection between a holding company and the assets of its directly and indirectly held subsidiaries does not entail identifying the one with the other, or treating the businesses and assets of the group as if they belong to the holding company, it merely reflects the nature of the dispute and the purpose for which the proceedings are brought.

Furthermore, the practical issue that the registrar of companies in the BVI might not accept the alteration of the register of members of Long Yau by replacing the shareholders with a Hong Kong liquidator could be resolved by the Hong Kong court granting appropriate orders as might be necessary to give effect to its own judgment, given that all the individual respondents resided in Hong Kong and were subject to the in personam jurisdiction of Hong Kong court.

The Court of Final Appeal accordingly concluded that the requirement of a sufficient connection with Hong Kong for the purposes of s. 327(3)(c) was satisfied.

Conclusion

After holding it had jurisdiction under s. 327(3)(c), the Court of Final Appeal confirmed Harris J’s findings and conclusions on unfair prejudice and reversed the judgment of the Court of Appeal. As a result, a winding up order was made, but it was stayed for 28days for the parties to negotiate on the terms of a possible buy-out.

It would appear that from now on, the Hong Kong courts will adopt a more liberal approach in finding the relevant connection between a foreign holding company and Hong Kong in a just and equitable winding up, and will probably satisfy themselves that the requirement of sufficient connection is established where shareholders reside in Hong Kong and where indirect subsidiaries have extensive businesses and assets in Hong Kong.

Jurisdictions: 

Barrister, Temple Chambers

Barrister, Temple Chambers