A new Court of Final Appeal ruling casts new light on the enforcement of shareholders’ rights in respect of a non-Hong Kong company which does not have a place of business in Hong Kong.
In a shareholders’ dispute involving the affairs of a non-Hong Kong company, a minority shareholder may try to seek relief under Division 2 of Part 14 of the Companies Ordinance (Cap 622) (CO). The equivalent provisions used to be Section 168A of the former Companies Ordinance (Cap 32) – now the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) (C(WUMP)O). Other statutory reliefs include the statutory injunctive relief and declaration under Division 3 of Part 14, inspection of the company’s records by members under Division 5 of Part 14 and statutory derivative action under Division 4 of Part 14.
Alternatively, the minority shareholder may seek to wind up the company on the just and equitable ground pursuant to Section 327 of C(WUMP)O. This is the same provision as in the former Companies Ordinance and it is retained in the C(WUMP)O. Here, the petitioner’s purpose in seeking a winding up order is to realise his or her investment in the company, which is different from a petition brought by a creditor for which the purpose is to obtain payment of a debt.
Unfair prejudice relief – place of business in Hong Kong?
In order to seek the statutory unfair prejudice relief against a non-Hong Kong company, the applicant needs to establish that the non-Hong Kong company establishes a place of business in Hong Kong. The same requirement shall apply to other statutory reliefs available to members under Part 14 which cover non-Hong Kong companies. ‘Place of business’ is defined by the CO to include a share transfer or share registration office. However, such definition only provides for a prima facie case as the word ‘include’ has the meaning that the list is not exhaustive. A company incorporated outside Hong Kong does not necessarily establish a place of business in Hong Kong by performing or carrying out business activities in Hong Kong. It is noteworthy that the test of ‘business’ under the Business Registration Ordinance is much wider and covers any form of commercial activity which is materially different from the definition of ‘a place of business’ under the CO.
Winding up proceedings on just and equitable ground – the core requirements
Section 327(3)(c) of the C(WUMP)O provides that a non-Hong Kong company may be wound up if the court thinks that it is just and equitable to wind up such company. Re Beauty China Holdings Ltd (2009) set out the core requirements for the court to exercise its jurisdiction to wind up a non-Hong Kong company, namely:
- there has to be a sufficient connection with Hong Kong, but this does not necessarily have to consist in the presence of assets within the jurisdiction
- 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 interested in the distribution of the company’s assets.
The CFA’s decision in the Yung Kee Case
On 11 November 2015, the Court of Final Appeal (CFA) reversed the decision of the Court of Appeal in the Yung Kee case and made an order winding up Yung Kee Holdings Ltd (Company). The CFA’s decision is significant since the definition of ‘place of business in Hong Kong’ is reaffirmed, and more importantly, the test for the Hong Kong courts to invoke their statutory jurisdiction to wind up a non-Hong Kong company on just and equitable ground is restated. Curiously, and as the CFA noted, before the Yung Kee case there had only been a few cases in Hong Kong of a shareholder’s petition to wind up a foreign company and most of these cases were concerned with purely interlocutory applications and the point on jurisdiction was not discussed. This may perhaps be understandable since the best way to achieve an exit is to obtain a buyout order from the court based on unfair prejudice petition as one could get a fair value of the shares without a discount on the minority shareholding as opposed to a share in the realisable value of assets upon liquidation.
The Yung Kee case concerns a family business which has been operating in Hong Kong for decades. The Company was incorporated in the BVI as the ultimate holding company of a group of companies (including one direct subsidiary named Long Yau and eight indirect subsidiaries) and does not carry out any investment or business. Long Yau is another BVI company which has two operating subsidiaries which are both incorporated in Hong Kong and operate the core business of the group in Hong Kong. The protagonists of the dispute are the two brothers being two shareholders of the Company. The elder brother complained that the affairs of the Company had been carried out in a manner what was unfairly prejudicial to him. The two brothers initially attempted to resolve the dispute with a proposed buy-out but failed. They subsequently resorted to litigation. The complaining brother sought remedies under both Sections 168A and 327 of the former Companies Ordinance.
In relation to the application for unfair prejudice relief under Section 168A (now sections 724 to 726), the CFA was of the view that ‘place of business’ connotes a place where or from which a company either carries on or possibly intends to carry on business, and that the fact that a company’s directors discuss its affairs and hold their board meetings in a particular place is not sufficient by itself to make that place the company’s ‘place of business’. Further, 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 organisational changes in the governance of the company itself. The CFA also agreed with the lower courts that the word ‘establish’ indicates that some degree of regularity and permanence of location is required.
The CFA found that the Company did not keep a share transfer or share registration office in Hong Kong. It held no board or general meetings prior to 2009, and since then there were only eight resolutions of the Company or its directors which were all concerned with internal matters such as the payment of dividends or changes to the composition of the board. In light of the above, the CFA held that the courts of Hong Kong have no jurisdiction to make an order under Section 168A as the Company does not have a place of business in Hong Kong.
As regards the petition for a winding up order on just and equitable ground, the starting point is that there is no need to show that the Company has ever had a place of business or carried out business within the jurisdiction.
It was the CFA’s view that there are substantial overlaps between the three core requirements set out in Re Beauty China Holdings Ltd. The real test in the case of a creditor’s petition is whether there is a sufficient connection between the company and this jurisdiction to justify the court in ordering a company to be wound up despite the fact that it is incorporated elsewhere; and that in deciding that question the fact that there is a reasonable prospect that the petitioner will derive a sufficient benefit from the making of a winding up order, whether by the distribution of its assets or otherwise, will always be necessary and will often be sufficient.
The CFA also disagreed with the lower courts that a more stringent connection is required in the case of a shareholder’s petition. Whilst the CFA recognised the difference in terms of purpose and factors relevant to establishing the connection between a creditor’s petition and a shareholder’s petition, it was of the view that just like a creditor’s petition, the important question relating to a shareholder’s petition is that whether there is a sufficient connection between the company and the jurisdiction. Indeed, given the nature of the dispute and the fact that it is a dispute between shareholders, their presence in the jurisdiction is highly relevant and will usually be the most important single factor.
The CFA held that the requirement of a sufficient connection with Hong Kong for the purpose of Section 327(3)(c) is satisfied after considering the connecting factors with Hong Kong in the present case, including that:
- all the underlying assets indirectly owned by the Company are situated in Hong Kong
- the business of the group is wholly carried out by the Company’s indirectly held subsidiaries which are incorporated in Hong Kong, and
- the whole of the Company’s income is derived from businesses carried out exclusively in Hong Kong.
When considering whether it would be just and equitable to wind up the Company, the CFA agreed with the trial judge that there used to be a mutual understanding between the brothers that the family business should be jointly run or managed and that understanding was breached by the respondent brother. On such basis, the CFA held that it was just and equitable to wind up the Company.
The Yung Kee case is an important decision which represents an example as to how a shareholder may seek remedy from the Hong Kong courts in order to enforce his or her rights in a non-Hong Kong company which involve overseas holding companies and does not have a place of business in Hong Kong. Whilst the threshold to establish a place of business in Hong Kong remains unchanged, the CFA set out the criteria as to when the Hong Kong courts may exercise their statutory jurisdiction to wind up a foreign company on just and equitable ground, and those criteria should not be as stringent as the lower courts had previously adopted or certain authorities had suggested.
Also, the CFA allowed the Company to be wound up but still ordered a stay of the winding up order for 28 days to give the parties an opportunity to agree the terms on which the petitioner’s shares in the Company could be purchased by the respondent. Also, in the event that a winding up order is confirmed, the petitioner or the liquidator will be permitted to apply for an injunction order in order to make the underlying assets of the Company available to the liquidator. It appears that the court made these practical arrangements in order to provide the petitioner with other alternatives to realise his investment in the Company. Such approach is in line with the spirit of the statutory relief for a shareholder to wind up a company on just and equitable ground.