In the recent case Kam Leung Sui Kwan v Kam Kwan Lai & Ors FACV 4/2015 (11 November 2015), the Hong Kong Court of Final Appeal (“CFA”) ordered the ultimate foreign holding company of a world famous roast goose restaurant in Hong Kong, Yung Kee Holdings Limited (“Yung Kee”) to be wound up on the grounds that it is just and equitable to do so pursuant to section 327(3)(c) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) (“Section 327(3)(c)”). In doing so, this landmark decision overturned the decisions of the lower courts and marked the end of the long running family dispute between the shareholders of Yung Kee.

Background

The business of Yung Kee was founded by the late Kam Shui Fai (“Kam Senior”). From its humble beginnings as a cooked food stall in Sheung Wan in the 1930s, the business and assets of Yung Kee now comprises a restaurant in Hong Kong (the “Restaurant”), the Kee Club and various properties in Hong Kong including the Yung Kee Building.

When Kam Senior passed away in December 2004, the two brothers Kam Kwan Sing (“Kwan Sing”) and Kam Kwan Lai (“Kwan Lai”) each directly or indirectly held 45% of the shares in Yung Kee, and their sister indirectly held the remaining 10%.

The siblings had previously worked well together, but as years passed, they ultimately fell out with each other. Kwan Sing (now deceased) (the “Petitioner”) then brought a petition against Yung Kee and alleged that Kwan Lai carried on the affairs of Yung Kee in breach of the mutual understanding as a result of various actions of Kwan Lai in 2009. The Petitioner sought an order for Kwan Lai to buy-out the Petitioner’s shares in Yung Kee under section 168A of the former Companies Ordinance (Cap. 32) (“Section 168A”), or alternatively, an order to wind up Yung Kee on the just and equitable ground under Section 327(3)(c). The equivalent provisions of Section 168A can now be found in sections 722 to 726 of the new Companies Ordinance (Cap. 622).

Decisions of the lower courts

The Court of First Instance dismissed the petition on the basis it lacked jurisdiction under Section 168A and Section 327(3)(c). However, the Court of First Instance held that had it found in the Petitioner’s favour on jurisdictional issues, it considered the affairs of Yung Kee were carried out in a manner that is unfairly prejudicial to the Petitioner’s interests.

The Court of Appeal re-affirmed the decision to dismiss the petition, but reversed the Court of First instance’s decision on unfair prejudice.

The Petitioner then appealed to the CFA.

Decision of the CFA

Under Section 327(3)(c), the court has the jurisdiction to wind up a company not registered in Hong Kong if it is of the opinion that it is just and equitable to do so.

The CFA re-affirmed that the court must, in exercising its discretion under Section 327(3)(c), have regard to the following three core requirements:

  1. There must be sufficient connection with Hong Kong; 
  2. There must be a reasonable possibility that the winding up order would benefit the petitioner; and 
  3. The court must be able to exercise jurisdiction over one or more persons in the distribution of the company’s assets.

The focus of the CFA’s decision is on the first core requirement. In order to establish this requirement, the CFA recognised that the connection must be sufficient to justify the court setting in motion its winding up procedures over a body which at first glance is beyond its territorial limits.

In the present case, Yung Kee is a company incorporated in the British Virgin Islands (“BVI”) but is not registered in Hong Kong. Yung Kee has one direct BVI subsidiary, Long Yau Limited (“Long Yau”), and eight indirect subsidiaries. The indirect subsidiaries of Yung Kee hold the Restaurant, Kee Club and various properties (including Yung Kee Building) in Hong Kong.

Yung Kee has never played a part in the operations of the group of which it is an ultimate holding company. Yung Kee’s sole income consists of dividends distributed directly to its shareholders by Long Yau on its behalf.

Both of the lower courts found that Yung Kee does not have sufficient connection with Hong Kong as it only held shares in Long Yau. Given the separate and distinct legal personalities of Yung Kee and its indirect subsidiaries, the lower courts held that the ultimate holding company does not have a connection with Hong Kong.

However, the CFA held that there is sufficient connection between Yung Kee and Hong Kong for the purposes of Section 327(3)(c) based on reasons including the following:

  1. All of the shareholders and directors of Yung Kee, Long Yau and Yung Kee’s indirectly held subsidiaries are based in Hong Kong; 
  2. All of the underlying assets of Yung Kee and businesses carried on by Yung Kee’s indirectly held subsidiaries are located in Hong Kong; 
  3. All of the income of Yung Kee is derived from businesses in Hong Kong; and 
  4. All of the administrative decisions and relevant events giving rise to the dispute occurred in Hong Kong.

The CFA clarified that it is not lifting the corporate veil of the separate and distinct legal entities, but is merely giving effect to the close connection between Yung Kee and the assets of its directly and indirectly held subsidiaries. The CFA explained that its conclusion simply reflects 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.

The CFA then considered the other two core requirements and the circumstances surrounding the siblings’ falling out before it reached the conclusion to wind up Yung Kee on the grounds that it is just and equitable under Section 327(3)(c). The winding up order was, nevertheless, held to take effect 28-days later so that shareholders are given an opportunity to agree terms on which the Petitioner’s shares might be purchased as an alternative to the enforcement of the winding-up order and Yung Kee’s eventual liquidation.

Implications

The underlying factual scenario of this case is, sadly, not entirely uncommon in the context of family-run businesses. This, combined with the generally common practice for Hong Kong-based businesses to put in place corporate structures involving certain offshore jurisdictions like the BVI, means that when family members fall out and start litigating amongst themselves, complex questions of jurisdiction would inevitably arise. The various remedies available can at times lead to different claims to be litigated in different jurisdictions. This is precisely the situation in this case, where the Hong Kong courts held that shareholder buy-out issues cannot be litigated here (in this regard Section 168A does have a rough BVI equivalent in the form of section 184I of the BVI Business Companies Act 2004), but just and equitable winding up claims can still be brought in Hong Kong.

The CFA’s ruling in this case has thus highlighted the legal and practical complexities in relation to jurisdictional issues in these family business disputes. It shows how they can be made more cumbersome and expensive with multi-jurisdictional fights, and how a ruling in one jurisdiction (in this case Hong Kong with winding up) can help put pressure on outcomes in another (in this case the BVI with shareholder buy-out). As the cliché goes, when families fall out, the only real winners are armies of lawyers on all sides.