Hong Kong

In Re Success Lane Development Limited [2025] HKCFI 1121, the Companies Court considered whether a company could resist a winding-up petition presented based on outstanding interlocutory costs orders (payable forthwith or within 14 days upon summary assessment) by relying on a cross-claim for damages in ongoing legal proceedings. Background The dispute between the Petitioner and the debtor Company  arose over a "Long Stay Room Contract" under which the Company rented a hotel room for storage purposes.  In the District Court, the Petitioner alleged that the Company had damaged various items stored in the hotel room, and claimed against the Petitioner for damages in the sum of at least HK$3,000,000. The Petitioner had obtained various costs orders against the Company as a result of interlocutory applications in the District Court proceedings.  The costs orders are all payable forthwith in the total sum of HK$697,534.66 plus judgment interest (the “Costs Orders”). Based on the unpaid Costs Orders, the Petitioner served a Statutory Demand on the Company.  Shortly after the expiry of the Statutory Demand, the Company applied to set aside and stay the Costs Orders by commencing a separate set of District Court proceedings.  Yet, the said applications were also dismissed. As of the date of the Petition hearing, the Costs Order were either orders not appealed against, or orders against which leave to appeal had been refused by the Court of Appeal.  The main issue at the hearing was whether the Company could resist the Petition (based on Costs Orders payable forthwith) with a cross-claim (for damages in the sum of at least HK$3,000,000 in the ongoing District Court proceedings, the “Cross-claim”). The Court’s Reasons The Companies Court held that the Company could not resist the Petition with the Cross-claim for the following reasons:- (1) The underlying policy of making costs orders payable forthwith is to deter parties from commencing unmeritorious interlocutory applications. To uphold this policy, the Court should regard such costs orders as free-standing, and though such costs orders are not equivalent of cash, it should be as readily enforceable almost as readily cash-able as cheques. In this case, the Company should not be allowed to use the Cross-claim to resist the Petition. (2) There could be no injustice done to the Company if it is to be wound up, because if the Company has a valid claim against the Petitioner, the Company in liquidation could still pursue it. (3) On the contrary, it would be unjust if the Company could resist the Petition based on the Corss-clam, as (a) it would in effect confer a right on the Company to retain the Petitioner’s money as a security for its Cross-claim, and (b) the Costs Orders, being free-standing and supposed to be readily enforceable, have nothing to do with the Cross-claim, in the sense that even if the Company eventually succeeds in its claim in the District Court, the Company would still have to pay the Costs Orders. Having said that, the Companies Court also indicated that its decision was made based on the present facts, and that there may be different considerations if, e.g. the District Court main proceedings are not ongoing but finally concluded, or the receiving party may be to blame for not enforcing any immediately payable costs orders earlier. In view of this case, company debtors should note that the existence of a cross-claim against the petitioner generally would not constitute a valid ground to oppose a winding-up petition presented based on costs orders payable forthwith.  As such, it is advisable for company debtors to settle any costs orders payable forthwith as soon as possible to avoid winding-up petitions being presented against them.  In case of any doubt, legal advice should be sought. If you have any inquiries, please feel free to contact us for more information. Managing Partner: Ian Lo Email: [email protected] Partner: Anderson Siu Email: [email protected]  

Factual Background Up Energy Development Group Ltd (the “Company”) was incorporated in Bermuda and listed on the Hong Kong Stock Exchange. It entered into provisional liquidation in October 2016 and was eventually wound up in Bermuda Court on 11 March 2022.  In Hong Kong, the winding up order was made on 6 May 2022. At the Hong Kong Court of First Instance (the “CFI”), the Company’s provisional liquidators (“PLs”) appointed by the Bermuda Court submitted that they anticipated winding-up order would be made shortly in Bermuda (which did materialize), and they did not need an additional ancillary winding-up order in Hong Kong as there were no benefits.  However, the CFI found otherwise. Ince represents the opposing creditor (the “Appellant”), in its appeal against the winding-up order made by the CFI.   Legal Position in Hong Kong for Winding Up Foreign Incorporated Companies In asking Hong Kong courts to exercise their discretion to wind up foreign incorporated companies, petitioners must satisfy the 3 threshold requirements below:- There must be a sufficient connection with Hong Kong; 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. The 3 threshold requirements represent the Hong Kong courts’ self-imposed restraints emanated from the Hong Kong Court of Final Appeal’s decision in Kam Leung Sui Kwan v Kam Kwai Lai (2015) 18 HKCFAR 501, which considered the need to avoid exorbitantly usurping the jurisdiction where the company is incorporated, as it is supposedly the most appropriate jurisdiction to wind up a company. Amongst the aforesaid requirements, the 2nd threshold requirement faces the most contention in terms of its factual application. The legal principles are, however, quite settled, and will be satisfied as long as the benefit is of “real possibility”, rather than merely a “theoretical” one when assessed by a “pragmatic” lens. (see Shandong Chenming Paper Holdings Limited v Arjowiggins HKK 2 Ltd (2022) 22 HKCFAR 98).   Findings of the Court of Appeal (“CA”) While CA agrees it was unsatisfactory that the petitioner did not plead how the 2nd threshold requirement was met and only mentioned such matters in its skeleton arguments, which afforded no opportunity for the PLs and the Appellant to properly respond, this alone was not determinative of the appeal. Rather, the crux lies in whether the CFI was correct in finding that the 2nd threshold requirement is satisfied on the evidence. In this connection, CA answered in the negative. First, CA found there were “real problems” with respect to the assets relied on by CFI. (1) In respect of the Company’s bank deposit: about HK$170,000 out of the HK$200,000 is due to the bank, which left only HK$30,000 of cash, which is negligible in the scheme of things. (2) In respect of the Company’s cash funds: whilst CFI found the Company would presumably have substantial cash funds as it had incurred substantial legal costs in dealing with resumption of trading, the Scheme, the petition and the Bermuda Proceedings, and remuneration paid to PLs. However, CA agreed with the Appellant that the petitioner did not raise evidence or even in its skeleton submissions any of such matters, and it would thus be speculative to assume that such cash funds (which were derived from loans as submitted by the PLs) would necessarily belong to the Company rather than, for example, held on trust for the loan funders. (3) Further, 2 of the 3 companies which CFI thought were “direct subsidiaries” of the Company were in fact only indirectly held by the Company through BVI companies. In this regard, even the petitioner’s own BVI legal expert considered that a HK winding up order would be unlikely to be recognised in the BVI, and thus would not really derive benefit for the creditors. The only remaining subsidiary UE Finance, is dwarfed by liabilities, and there is accordingly no basis to regard Company’s shareholding in UE Finance as a meaningful asset to produce value for its creditors. Second, CA accepted that the “full suite of powers” enjoyed by liquidators under Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) are only theoretical in the present case, as the petitioner did not explain why such powers are needed or would benefit the creditors.  In particular, CA placed significance in the PL’s stance that they did not see any specific matter that called for investigation, especially because they had been in their office for several years and would have acquired considerable familiarity with the affairs of the Company.  In other words, there was no factual basis for saying that there is reasonable possibility for real benefit for the petitioner from the winding up. Third, whilst the status of the Company as a HK listed company might theoretically entail the following 6 matters (as found by CFI):- (1) The Company maintained principal place of business in HK and has given an undertaking to comply with the Listing Rules; (2) The Company maintained sufficient management presence in HK; (3) The Company raised funds through the issue of shares; convertible notes or bonds and benefited from ability to trade on HKEx; (4) The Company borrowed loans from banks and other financial institutions in HK; (5) The Company had an obligation to comply with the provisions under the Companies Ordinance which apply to non-HK company; and (6) The Company had an obligation to comply with Securities and Futures Ordinance, CA found that the above factors do not justify that there is a reasonable possibility of real benefit derived from the availability of more extensive powers on winding up. CA found that the above factors do not justify that there is a reasonable possibility of real benefit derived from the availability of more extensive powers on winding up.   Conclusion Although the CA maintains even the most contentious 2nd threshold requirement remains a “low” test with many types and ranges of benefits already explored and accepted by case precedents, factual circumstances must still be applied in support of the argument that there are real benefits from a winding up order in Hong Kong. Any creditor seeking to wind up a company in Hong Kong should also properly plead matters related to the 3 threshold requirements to avoid the argument of procedural unfairness. In case of doubt, legal advice should be sought. The full CA judgment can be accessed here.   If you have any inquiries, please feel free to contact us for more information Managing Partner: Ian Lo Email: [email protected] Partner: Anderson Siu Email: [email protected]

Introduction In a recent decision, the Hong Kong Court examined the interplay between arbitration agreements and cross-border insolvency proceedings. This decision highlights the divergence between Hong Kong’s pro-arbitration stance, whereby winding-up proceeding will be stayed in favour of arbitration unless there is abuse (see Re Guy Kwok Hung Lam (2023) 26 HKCFAR 129) and the creditor-friendly approach in the UK and other common law jurisdictions, whereby the debtor is required to show the usual bona fide dispute on substantial grounds to compel arbitration (see Sian Participation Corp (In Liquidation) v Halimeda International Ltd [2024] UKPC 16). Facts Hyalroute Communication Group Limited (“Hyalroute”), a company incorporated in the Cayman Islands, applied to the Hong Kong Courts for an anti-suit injunction to restrain a creditor, Industrial and Commercial Bank of China (Asia) Limited (the “Bank”), from presenting any winding-up petition against it in the Cayman Islands. The dispute arose from a Term Facility Agreement (“TFA”), under which Hyalroute guaranteed a US$100 million loan to its subsidiaries. A 2021 military coup in Myanmar disrupted one subsidiary’s operations, which hindered the subsidiaries’ repayments under the TFA.  To mitigate risks, the Bank secured a MIGA Insurance, which covered war and currency restrictions, with premiums paid by Hyalroute and its subsidiaries.  Under the TFA, Hyalroute may make a Covered Risk Application to suspend its guarantee obligations.  Hyalroute claimed that it had made such application in February 2021 and its liabilities were suspended as a result.  Despite this, the Bank served a statutory demand pursuant to the Cayman law.  Hyalroute argued that the dispute fell within the TFA’s arbitration clause, which mandates that “[a]ny dispute, controversy or claim arising in any way out of or in connection with [the TFA] … shall be referred to and finally resolved by binding arbitration …” at the HKIAC.   Analysis It is well-established that foreign proceedings in breach of a valid and binding arbitration agreement or exclusive jurisdiction clause will be ordinarily restrained unless strong reasons to the contrary are shown by the defendant (Giorgio Armani SpA v Elan Clothes Co Ltd [2019] 2 HKLRD 313).  Contractual anti-suit injunctions, as sought in this case, focus on enforcing the parties’ agreement to arbitrate. In non-contractual anti-suit injunctions, where no contractual breach is involved, the focus would then be shifted to whether the foreign proceedings are vexatious, oppressive, or inconsistent with the principles of forum non conveniens. The arbitration clause in the TFA imposes (1) a positive obligation on the parties to have disputes within the scope of the clause (i.e. dispute, controversy or claim arising in any way out of or in connection with the TFA) finally resolved by arbitration; and (2) a negative obligation on the parties to preclude them from having disputes finally resolved in a non-contractual forum. The critical issue is, whether the Cayman winding-up proceedings would have the effect of finally resolving the dispute on Hyalroute’s indebtedness, thereby breaching the arbitration clause.  The concept of “final resolution” of a dispute means that the process is capable of giving rise to an estoppel in relation to the precise issues decided. The Bank contended that in considering this issue, the Court should consider Cayman law; and under Cayman law, winding-up proceedings do not resolve the substantive debt dispute.  Therefore, the Bank’s intended presentation of the Cayman winding-up petition would not breach the TFA. In contrast, Hyalroute argued that as Hong Kong law is the governing law under the TFA, Hong Kong law should take precedence over Cayman law regardless of the position under Cayman law; and under Hong Kong law (Re Guy Lam), winding-up proceedings determine parties’ rights and obligations, which could have the effect of “finally resolving”. Therefore, the Bank’s intended winding-up proceedings in the Cayman Islands would be in breach of the TFA. The Hong Kong Court decided that the Bank’s contention is correct and accord with common and commercial sense.  Lacking expert evidence on Cayman law, the Hong Kong Court directly considered the relevant materials on Cayman law and applied its own knowledge and reasoning of the common law to analyse the position.  The Hong Kong Court found that under Cayman law, the Cayman Court in winding-up proceedings only determine the threshold question of whether a debt is bona fide disputed on substantial grounds, but not the substantive dispute itself. Thus, such proceedings do not “finally resolve” the dispute within the meaning of the arbitration clause. The Bank’s intended presentation of a Cayman winding-up petition would not amount to any breach of the TFA. Additionally, the defence relied by Hyalroute about the suspension of its guarantee obligations under the TFA were found to be frivolous and abusive. There was no finding that any formal Covered Risk Application was made, and there were only informal discussions.  The MIGA insurance policy was also terminated in 2022 due to unpaid premiums, hence there could not be any suspension of guarantee obligations. As such, the Hong Kong Court dismissed Hyalroute’s application for an anti-suit injunction, as there was no breach of the arbitration agreement, and Hyalroute failed to demonstrate any strong reasons for granting the injunction. Key Takeaways The Hyalroute decision offers critical insights for navigating arbitration and insolvency in cross-border contexts: Foreign Law Considerations: The ruling clarifies that Hong Kong courts will not automatically apply Re Guy Lam’s pro-arbitration stance to foreign winding-up proceedings. When assessing whether foreign proceedings breach an arbitration agreement, Hong Kong courts may consider the foreign jurisdiction’s law to determine the proceedings’ effect, even if the arbitration agreement is governed by Hong Kong law. Drafting arbitration clauses: Parties are reminded to draft arbitration clauses with precision.  In this case, the phrase “finally resolved” was pivotal, limiting the clause’s application to proceedings that determine disputes with res judicata or estoppel. Explicit references to “insolvency proceedings” should be included if so intended, especially in cross-border contexts involving offshore jurisdictions. Ambiguities may limit enforceability of such clause against winding-up petitions.   If you have any inquiries, please feel free to contact us for more information Managing Partner: Ian Lo Email: [email protected] Partner: Anderson Siu Email: [email protected]  

Hong Kong’s Court of First Instance recognizes the parental rights of same-sex couples, challenging outdated laws and prioritizing equality and children’s rights  A recent judgment from the Hong Kong Court of First Instance has ignited significant discussion, not just within legal circles but across society, regarding the evolving definitions of family and parenthood. This ruling, centered on the legal recognition of a child born to a same-sex couple through assisted reproductive technology, stands as a compelling testament to the dynamic interplay between law, societal norms, and individual rights. It prompts us to reflect on how legal frameworks adapt to modern family structures and the profound implications for equality and human dignity. At the heart of this case is K, a young child born to a female same-sex couple, R and B. Their journey to parenthood involved reciprocal in-vitro fertilisation (RIVF) in South Africa, a process where R, the genetic mother, provided the egg, and B, the gestational mother, carried the pregnancy to term. Despite their marriage in South Africa and their shared commitment to raising K and the declaration by Her Madam Justice Au Yeung that R is a parent in common law, The Hong Kong Government only recognized B as K's legal parent on the birth certificate. R, the biological and social parent, found herself without legal recognition, a situation that led to significant practical and emotional challenges for the family. This legal vacuum prompted K, through R as his next friend, to seek judicial review, challenging the existing legal framework's failure to acknowledge diverse family structures. This challenge comes in the wake of the landmark Sham Tsz Kit case, which established a constitutional requirement for appropriate recognition of same-sex partnerships in Hong Kong, acknowledging their various potential consequences, including breakdown. As Mr. Justice Coleman noted in paragraph 15 of the judgment, while the government emphasized that the South African marriage was not recognized in Hong Kong, their position is at least analogous and comparable to the position of opposite-sex married couples in Hong Kong. The legal battle: Arguments and judicial scrutiny The legal challenge mounted by K centered on the alleged unconstitutionality of key provisions within the Parent and Child Ordinance (PCO) and the Births and Deaths Registration Ordinance (BDRO). The core contention was that these laws, together with the decision by the HK Government not to provide for the registration K in the birth certificate of her own gentically related child, violated fundamental rights enshrined in Hong Kong's Bill of Rights (BOR, Cap. 383) and Basic Law (BL). Specifically, the arguments invoked the right to privacy and family life (BOR 14 & 19), the rights of children (BOR 20), and the right to equality (BOR 22, BL 25). Mr. Justice Coleman's decision and reasoning Mr. Justice Coleman's judgment meticulously dissected the parties' arguments, ultimately siding with K that there is encroachment on or infringement of the BORs engaged and that the constitutional challenge is made good.  Below are a few key findings/reasons from the learned Justice : Rejection of 'Parent at Common Law' Declaration: While acknowledging the previous declaration by Au Yeung J that R was a 'parent at common law', Mr. Justice Coleman found this declaration to be of no practical legal effect. He reasoned that if the PCO explicitly taken out common law rights, then there can be no parent at common law. Unconstitutionality of PCO and BDRO: The court found that the existing provisions of the PCO and BDRO were unconstitutional as they discriminated against children born to same-sex parents and interfered with their privacy and family rights. The judge emphasized that K's identity and well-being were negatively impacted by the lack of legal recognition for R. Rejection of Government's Justifications: The judge systematically dismissed the government's arguments. He found no legitimate aim for the discriminatory treatment and concluded that the measures were disproportionate. He particularly rejected the idea that guardianship orders were a sufficient alternative, stating that they do not confer the same status or rights as legal parenthood. He also dismissed the government's reliance on 'social consensus,' asserting that the will of the majority cannot dictate the court's function in upholding constitutional rights. He emphasized that 'a parent is a parent,' regardless of the circumstances of their child's birth or the parents' sexual orientation. (See Judgment, e.g., paras. 121-168.) A step forward for equality and modern family recognition This judgment marks a significant stride towards a more inclusive and equitable legal landscape in Hong Kong. It underscores several critical points that resonate far beyond the immediate parties involved: Affirmation of Diverse Family Structures: The ruling acknowledges the reality of modern families, moving beyond traditional definitions to embrace the complexities of assisted reproduction and same-sex partnerships. It sends a powerful message that love, commitment, and biological connection, rather than outdated legal constructs, should define parenthood. Child-Centric Approach: At its core, the decision prioritizes the best interests of the child. The court recognized the profound impact of legal non-recognition on a child's identity, well-being, and practical interactions with society. By ensuring that both parents are legally acknowledged, the judgment provides children with stability, security, and a complete sense of their family unit. The Importance of Legal Recognition: The case highlights the critical role of official documents, like birth certificates, in a person's identity and legal standing. It demonstrates that the absence of legal recognition can lead to tangible disadvantages and emotional distress, reinforcing the need for legal frameworks to accurately reflect social realities. Judicial Activism in Protecting Rights: this case stands is a testament to the judiciary's role in safeguarding fundamental rights. This approach ensures that laws evolve with societal values and constitutional guarantees, even in the absence of direct legislative reform. This development in Hong Kong aligns with a global trend towards greater recognition of LGBTQ+ rights and diverse family forms. Jurisdictions worldwide are grappling with similar questions, and many have already moved to grant legal recognition to same-sex parents. This Judgement also prompts further consideration of how other areas of law might need to adapt to fully reflect and protect the rights of all families. The conversation now shifts to how these principles will be implemented and how society will continue to embrace and support all its members, regardless of their family structure. This ruling is not just a legal precedent; it is a societal milestone, urging us to reflect on what truly constitutes a family in the 21st century and how our laws can best serve the interests of every child. The ongoing struggle for equality: A reality check Despite this landmark judicial victory on human rights, the path to full equality for same-sex couples in Hong Kong remains fraught with challenges. This was starkly illustrated by the recent news that legislation to create a separate legal framework for same-sex relationships failed to pass, with many voter rejecting the bill on the basis that it does not accord with traditional value.   This development underscores the persistent difficulty of achieving legislative reform in this area and highlights the crucial role the judiciary plays in protecting fundamental rights when the political process stalls. This is where Mr. Justice Coleman's postscript in his judgment becomes particularly poignant. He wisely noted that when an 'inexorable event' occurs — such as the reality of same-sex couples forming families and having children — society and its legal frameworks must adapt. His words serve as a powerful reminder that while legislative change may be slow, the courts can and must step in to provide for and accommodate the lived realities of all members of society, ensuring that the law does not lag too far behind the inevitable march of social progress. This judgment, therefore, is not just a victory for one family, but a beacon of hope and a call to action for a more inclusive and just future. Author: Raphael Wong