27 November 2015
On 11 November 2015, the Court of Final Appeal ("CFA") delivered its judgment in the high-profile Yung Kee case1. The CFA reversed the lower court's decision and decided Yung Kee Holdings Limited (the "Company"), incorporated in the BVI and indirectly holding the well-known Yung Kee restaurant, has sufficient connection with Hong Kong to trigger the Hong Kong court's winding-up jurisdiction, and to do so on just and equitable ground2.
The winding-up order has been stayed for 28 days to allow the parties to discuss the acquisition of the Petitioner's shares in the Company. The winding-up order will take effect automatically should no agreement be reached.
The Company is an investment holding company incorporated in the BVI but it is not registered in Hong Kong. The Company ultimately owns the Yung Kee restaurant through a complex intermediate corporate structure.
The deceased petitioner alleged that the affairs of the Company were conducted in a manner which was unfairly prejudicial towards him. He sought an order for the 1st Respondent to buy his shares in the Company3, or alternatively, an order that the Company be wound up on just and equitable ground.
A Place of Business in Hong Kong
Although winding-up was the primary relief sought by the petitioner on appeal, the CFA considered the prayer for a buy-out order first. In practical terms, the relevant legislative provision only applies to Hong Kong companies and "non-Hong Kong companies", i.e., companies incorporated outside Hong Kong but which have established a place of business here.
The CFA agreed with the lower court that the Company has not "established a place of business" in Hong Kong for the following reasons:
i. There was no evidence that the Company had, or needed, an office in the Yung Kee Building or kept its books and records there;
ii. The Company did not keep a share transfer or share registration office in Hong Kong;
iii. No board or general meetings had been held prior to April 2009, and since then there were only eight written resolutions of the Company or its directors, which were all concerned with internal matters.
Therefore, the CFA concluded that the Company is not a "non-Hong Kong company" and the courts in Hong Kong have no jurisdiction to grant the order sought under Section 168A.
Sufficient Connection with Hong Kong
Having considered jurisdiction from the perspective of unfairly prejudicial conduct, the CFA turned its focus to jurisdiction from a winding-up perspective.
While the CFA affirmed the principle that normally the most appropriate jurisdiction to bring a winding-up petition is the one where the relevant company was incorporated, it also acknowledged that a winding-up petition could be presented in Hong Kong with regard to a company incorporated elsewhere.
The authorities have established what are referred to as the three "core requirements"4 in the exercise of this discretionary jurisdiction. The CFA in the present case focused on the first requirement, namely a "sufficient connection with Hong Kong".
In deciding whether there is "sufficient connection", the CFA held that the test is whether the petitioner will derive significant benefit from a winding-up order in Hong Kong even though the company is incorporated elsewhere. It is not necessary for the benefit to be derived from its assets or be channelled through the hands of a liquidator.
The CFA disagreed that more stringent requirements should be imposed on the shareholder's winding-up petitions compared to petitions brought by creditors as the considering factors are different.
In considering a shareholder's petition on just and equitable ground, the question should be whether it is just and equitable to wind up the company in Hong Kong having regards to all the circumstances.
The CFA relied on the following "compelling" factors (among others) in concluding that there is sufficient connection with Hong Kong:
i. The shareholders and directors of the Company and its subsidiaries are residents in Hong Kong - the CFA in particular identified this as an "extremely weighty" factor;
ii. The Company's underlying assets and business are all in Hong Kong;
iii. The Company's income is derived from the business in Hong Kong;
iv. The Company's administrative decisions and the relevant events giving rise to the dispute all took place in Hong Kong.
Having come to the view that the jurisdiction to wind up the Company exists, the CFA further held that the facts warranted the exercise of that jurisdiction. A winding-up order was made but, as noted above, it is currently subject to a stay for the parties to negotiate possible settlement terms.
This decision is significant for the following reasons:
i. It confirms that while the natural forum for a winding-up petition is the jurisdiction where a company is incorporated, Hong Kong courts may be persuaded to exercise their jurisdiction should there be sufficient connection with Hong Kong;
ii. The presence of shareholders and directors in Hong Kong is an extremely weighty factor for courts to find sufficient connection;
iii. The case also shows that setting up an offshore company to hold assets/run a business in Hong Kong through complex corporate structures (i.e., no place of business in Hong Kong) does not necessarily sever the connection with Hong Kong; and
iv. The CFA clarified the factors to be considered in petitions brought by creditors and those brought by shareholders.
1. Kam Leung Sui Kwan, personal representative of the estate of Kam Kwan Sing, the deceased v. Kam Kwan Lai & Ors. (FACV 4/2015, on appeal from CACV 266/2012, HCCW 154/2010)
2. An order under Section 327(3)(c) of the old Companies Ordinance (Cap. 32) when the petition was presented (now the Companies (Winding Up and Miscellaneous Provisions) Ordinance).
3. An order under Section 168A of the former Companies Ordinance, which is now repealed and replaced by Section 722 to 726 of the new Companies Ordinance (Cap.622).
4. As summarised by Kwan J (as the learned Justice of Appeal then was) in Re Beauty China Holdings Ltd  6 HKC 351, the 3 core requirements are:
(1) there had to be a sufficient connection with Hong Kong, but this did 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.