Core requirements to wind up foreign companies in Hong Kong - Shandong Chenming Paper Holdings v Arjowiggins HKK 2 Ltd

The Court of the First Instance (High Court) of Hong Kong has provided further guidance on the core requirements to be considered when winding up foreign companies in Hong Kong.

Shandong Chenming Paper Holdings Limited (the "Company") is listed in both Shenzhen and Hong Kong but had no assets or business in Hong Kong. Its business was principally dealing with paper making, forestry, finance and real estate. 

The Company had entered into a joint venture agreement and steam supply contract with Arjowiggins HKK 2 Ltd ("Arjowiggins") in October 2005. Disputes subsequently arose in relation to whether the Company was entitled to terminate the steam supply contract.

Various proceedings were commenced by the Company, resulting in an arbitral award in the sum of  RMB 167,860,000 (estimated £19,164,100) made in Arjowiggins' favour, who then obtained leave to enforce the award in Hong Kong in December 2015. The Company tried to set aside the award but their application was dismissed as totally without merit.

Arjowiggins then served a Statutory Demand on the Company in October 2016. In order to avoid the Statutory Demand and any subsequent winding up petition, the Company issued an application to restrain presentation of a petition arguing that the Hong Kong Court lacked the jurisdiction to wind up the Company.

The Hong Kong Court has a discretionary jurisdictional power in relation to winding up foreign companies. In order to exercise this discretion, in similar circumstances to the test in the UK, three requirements must be met -

1. the case must have a sufficient connection with Hong Kong, which does not necessarily require assets to be present in 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.

The issue in this case centred on the second core requirement, whether Arjowiggins would receive benefit from the winding up order. The Company argued that its only connection with Hong Kong was its listing, it had no assets nor conducted any business in Hong Kong. The Company also argued it was solvent with substantial assets and business in China. It argued that a Liquidator appointed in Hong Kong would achieve nothing of any value in China and a winding up order in Hong Kong would be futile.

Arjowiggins argued that it would derive benefit from a winding up order because the listing was a valuable and realisable asset in Hong Kong. In addition, prior to the arbitration, the Company had a directly held subsidiary (Chenming) in Hong Kong, which controlled a significant part of the Company's profit. After the arbitration was underway the Company had instigated a restructuring of the group removing this direct link. Chenming instead became an indirect subsidiary held through companies in China and the British Virgin Islands.  Arjowiggins argued that a Liquidator would be able to investigate and potentially recover assets held by Chenming. 

The Court acknowledged that the value of the Company's listing was unlikely to be realised and was therefore not capable of providing a benefit to Arjowiggins. However, the issue was not to determine whether the Company had assets in the jurisdiction but whether Arjowiggins would benefit from a winding up order. It was at least arguable that a Liquidator would be able to investigate and recover assets held by Chenming in China for the benefit of creditors but this was held to be a factor of limited weight.

The Court however recognised that the consequences of a winding up order would be immediate and severe. It determined that this pressure on the Company would encourage satisfaction of its debts to Arjowiggins, which would be a benefit resulting from a winding up order.

A further factor that was considered by Mr Justice Harris was one of public policy. The Company had chosen to have a second primary listing in Hong Kong and that an arbitration award had been made against it, which had become enforceable as per a Hong Kong court order. The Court noted that the Company did not suggest it did not have the funds to pay the award, just that it refused to do. This was seen as an attempted abuse of the Hong Kong legal system and Mr Justice Harris was keen to highlight that foreign companies cannot take advantage of Hong Kong's financial system without the burden of its legal system.      

The judgment in this case confirms existing case law in Hong Kong about the importance of the "three core requirements" when considering the discretionary jurisdictional power of the Court. However, it also highlights the power of the Court when determining how the requirements are applied. Particularly, how the requirements can be moderated in the interest of public policy. The judgment is a clear warning to foreign companies not to attempt to disabuse the Hong Kong financial and legal system or risk facing robust consequences.

This article was written by Alan Bennett and Iona Jones.