Wednesday, November 25, 2015

Winding-Up of a Foreign Company: Lessons from Hong Kong

[The following guest post is contributed by Suprotik Das, a 4th year law student at the Jindal Global Law School, Sonepat, Haryana.]

This post seeks to address some developments with regard to the winding up of foreign companies and multiple derivative actions. On November 11, 2015, the Hong Kong Court of Final Appeal handed down a landmark decision in the case of Kam Leung Sui Kwan v. Kam Kwan Lai & Ors.[1] with regard to the winding up of a holding company registered in the British Virgin Islands. The case concerns a feud between two brothers with regard to the operation of the famous Yung Kee Restaurant in Hong Kong.

A simplified version of the corporate structure is as follows: Yung Kee Holdings Limited, a BVI registered company (YKHL) owns 100% shares in another BVI registered company known as Long Yau Limited (LY), which owns the famous Yung Kee Restaurant in Hong Kong.

The petitioner, also the minority shareholder alleged that the affairs of YKHL were carried on in such a way that it was unfairly prejudicing his interests. He prayed for the 1st Respondent to buy his shares in the Company as per Section 168A of the former Companies Ordinance (cap. 32). This is now s. 725(2)(a)(iv)(B) of the Companies Ordinance (cap. 622).
However, this was rejected, as for an order under this section it was necessary for a company to have a place of business in Hong Kong. The court found that the company’s register of members was in the BVI, it did not have any share transfer office in Hong Kong and had passed only eight resolutions in Hong Kong, out of which most were paper resolutions. Accordingly, the company did not have a ‘place of business in Hong Kong’.

However, the petitioner was successful under Section 327(3)(c) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance. This section deals with the winding up of unregistered companies in Hong Kong if the court is of opinion that it is just and equitable that the company be wound up. The court used the reasoning in an old English case – Re Real Estate Development Co.[2] to state that a court has jurisdiction to wind up a foreign company such that:

- there must be a sufficient connection with Hong Kong;

- there must be a reasonable possibility that a winding up order would benefit the petitioners.

- the Court must be able to exercise jurisdiction over one or more persons in the distribution of the relevant company's assets.

On paragraph 27 of the case, the Court distinguishes creditors and shareholders’ petitions for winding up. For a creditors’ winding up petition in respect of a foreign company, the presence of assets in a jurisdiction is enough to prove the ‘sufficient connection’ requirement. Since the dispute is between shareholders inter se, the presence of shareholders in the jurisdiction is a significant factor to establish the ‘sufficient connection with Hong Kong’.

Further, in paragraph 32 of the case, the shareholders and directors of the company and its subsidiaries are resident in Hong Kong.  The Company’s underlying assets and the business carried on by its sub-subsidiaries are all located in Hong Kong.  The income of the Company is derived from the business in Hong Kong. The Company’s administrative decisions as well as the relevant events giving rise to the dispute all took place in Hong Kong.  In the light of these compelling factors, the Court held that the requirement of a sufficient connection with Hong Kong is satisfied. The Court actually went into the substantive merits of the claim for ‘just and equitable’ winding up and found that it was the intention of brothers’ father that the business be run together by them. However, since the respondent excluded the petitioner from some aspects of the business, the Court then upheld winding up on the just and equitable grounds and not on the oppression remedy.

Multiple Derivative Claim

A derivative claim allows a disgruntled shareholder to sue or bring legal proceedings on behalf of the company. In the judgement, the Court refers to the famous case of Waddington Ltd. v. Chan Chun Hoo[3] where a shareholder of a holding company was allowed to bring a derivative action on behalf of the company’s subsidiary. The court allowed the action because the holding company and its shareholders would suffer an indirect loss if there was any detriment to the subsidiary’s assets. If there is a loss in value to the assets of a subsidiary, there would be a subsequent loss in the value of the parent company.

In this case, an interesting development has taken place. The petitioner, being the shareholder of YKHL in the BVI is now allowed to bring an action to wind up the company. It is pertinent to note that Long Yau Limited owns the restaurant business and has assets in Hong Kong. Nevertheless, this results in a unique derivative action wherein a shareholder of foreign company (YKHL) which is a parent company of a number of subsidiaries (LY, which owns the restaurant) which do business in Hong Kong can commence legal proceedings on behalf of it, merely due to the presence of other shareholders. The court’s justification behind this was that if a shareholder brings a petition to wind up a company, he does it to realise his investment. If the company is a holding company, the purpose of winding up is to realise the value of its underlying assets.  

Position in India

A foreign company, as per S. 2(42) of the Indian Companies Act 2013, is defined as –

“any company or body corporate incorporated outside India which—

(a) has a place of business in India whether by itself or through an agent, physically or through electronic mode; and

(b) conducts any business activity in India in any other manner.”

It is well established that a foreign company can be an unregistered company in India[4]. Winding up of unregistered companies in India is governed by Section 375(3)(c) of the Indian Companies Act 2013 (Section 583 of the Companies Act, 1956). This mirrors Section 327(3)(c) of the Hong Kong Companies (Winding Up and Miscellaneous Provisions) Ordinance.

In India, winding up of foreign companies have mostly focused on the presence of substantial assets or funds in India (see D.D.G. Hansa v. Bharat Aluminium Co. Ltd.[5] and Rajah of Vizianagaram vs. Official Receiver[6]). A foreign holding company has never been wound up due to the presence of other shareholders in India.

Since, this represents a rare occasion in the Commonwealth that a court has granted leave to commence an action of such a nature, it’s implications will be interesting to note, considering the multitude of foreign companies that do business in India that have complex corporate structures involving holding companies and subsidiaries.

- Suprotik Das

[1] FACV 4/2015
[2]  [1991] B.C.L.C. 210 
[3] [2008] 11 HKCFAR 370
[4] In Re: Strauss And Co. Limited, (1936) 38 BOMLR 1080; Mohan Lal v. Chawla Bank Ltd., AIR 1949 All. 778.
[5] (1984) 55 Comp Cas 727 (Cal)
[6] AIR 1962 SC 500

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