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:-

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.

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Partner: Anderson Siu

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