Article preview
The Hong Kong Court Looks at the ‘Sufficient Connection’ Test to Liquidate Foreign Registered Company
Robert-Jan Temmink, Barrister, and Turlough Stone, Barrister, Quadrant Chambers, London, UKIntroduction
On 13 November 2015, the Hong Kong Court of Final Appeal (CFA) delivered its judgment in the long-running saga of Kam Leung Sui Kwan v Kaw Kwan Lai & Ors FACV No. 4 of 2015. Overturning the decisions of the Court of First Instance (CFI) and the Court of Appeal (CA), the CFA ordered the winding up of Yung Kee Holdings Limited (the Company), a company incorporated in the British Virgin Islands, which was the ultimate holding company of a world-famous goose restaurant in Hong Kong, the Yung Kee (the Restaurant), and other group companies incorporated and operating in Hong Kong. It did so on the basis that there was a sufficient connection between the Company and Hong Kong to wind up the Company on the just and equitable basis.
The CFA’s judgment provides important guidance on the approach to be taken when a court is called upon to exercise its discretion to make a winding up order against a foreign company on the just and equitable ground. It obviously has great significance in Hong Kong, where it is standard practice for family-owned companies to structure themselves so that assets and businesses in Hong Kong are held by a foreign parent company in jurisdictions such as the Cayman Islands or the BVI. Its impact may well be wider, however. The CFA rejected the suggestion that it is only in very exceptional cases that the court should be willing to exercise its statutory jurisdiction to wind up a foreign company on the just and equitable ground. Moreover, it emphasised the importance of substance over form, and the need to have regard to the nature of the dispute and the purpose for which the proceedings are brought: namely a shareholder’s intention to wind up a company in order to realise the value of the assets directly or indirectly held by its subsidiaries.
Background
In the 1930s, Kam Shui Fai (Kam Senior) established a cooked food stall in the Sheung Wan district of Hong Kong. Many decades of hard graft by Kam Senior bore fruit, such that by the time of Kam Senior’s death in 2004, his family’s business and assets included the Restaurant, a nightclub, and various properties, including the Yung Kee Building. All of the underlying assets were situated in Hong Kong. The businesses of the group were carried out by companies incorporated in Hong Kong, which carried out their activities exclusively in that jurisdiction.
These companies were subsidiaries of a company incorporated in the BVI, Long Yau Limited (Long Yau). Long Yau in its turn was a wholly-owned subsidiary (and indeed the only asset) of the Company. Kam Senior’s two sons, Kam Kwan Sing (Kwan Sing) and Kam Kwan Lai (Kwan Lai) each directly or indirectly held 45% of the shares in the Company. Although their sister indirectly held the remaining 10%, the votes they conferred were effectively at Kwan Lai’s disposal, giving him majority control of the Company.
The two brothers fell out, and Kwan Sing brought proceedings seeking an order pursuant to s.168A of the then Hong Kong Companies Ordinance (now superseded) for Kwan Lai to buy his shares out on the grounds that the affairs of the Company were being conducted in a manner that was unfairly prejudicial towards him; alternatively an order that the Company be wound up on the just and equitable ground under s.327(3)(c) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance.
Copyright 2006 Chase Cambria Company (Publishing) Limited. All rights reserved.