Silver Starlight Ltd v China Citic Bank Corporation Ltd (Tianjin Branch) & Ors,(1) at the time of writing, is the most recent judgment of the Court of Appeal to review the principles for the grant of an injunction to restrain the presentation of a creditor's winding-up petition.(2) In this case, the plaintiff company seeking to avoid winding-up proceedings is incorporated in the British Virgin Islands but is not a trading company – however, it held a significant 35.59% shareholding in a Hong Kong company that apparently had net assets of approximately HK$22.5 billion. Therefore, the plaintiff's shareholding had a potentially significant value. The question arose whether the Hong Kong courts should exercise their jurisdiction to grant an injunction to restrain the presentation of a winding-up petition against the plaintiff company.
The plaintiff is incorporated in the British Virgin Islands and appears to be wholly owned by one individual. It is not a trading company and its purpose appears to be to hold a 35.59% shareholding in a Hong Kong company that had delisted and gone private in August 2017. The plaintiff's shareholding represented those shares that it had acquired from public shareholders during the privatisation exercise. The other 64.41% shareholding in the Hong Kong company was held by the same individual who owned the plaintiff and by two other BVI companies owned by him.
The Hong Kong company appears to have owned some substantial commercial and residential property developments in mainland China, through various wholly owned corporate vehicles.
In order to purchase its 35.59% shareholding in the Hong Kong company (on its privatisation in August 2017) the plaintiff borrowed approximately HK$12 billion from the three defendant banks. The plaintiff executed a charge over its shares in the Hong Kong company in favour of two of the banks. One of the banks also took security over two pieces of land in mainland China owned by one of the Hong Kong company's subsidiaries.
The plaintiff appears to have defaulted on the loans in about November 2019 and, following some negotiations, the defendant banks' lawyers served a statutory demand on the plaintiff with respect to HK$8 billion of the loans. There are no statutory provisions in Hong Kong to set aside a statutory demand and, therefore, the plaintiff applied to the court in February 2021 for an injunction to restrain the banks from presenting a creditors' winding-up petition based on the statutory demand in respect of the HK$8 billion loan.
The plaintiff advanced two main grounds in order to invoke the court's inherent jurisdiction to restrain the presentation of a winding-up petition.
First, the plaintiff argued that the jurisdictional requirements for winding up a foreign company, pursuant to section 327 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) ("the ordinance") had not been satisfied. In particular, the plaintiff argued that its 35.59% shareholding in the Hong Kong company was not sufficient (as a mere presence of assets in Hong Kong) to satisfy the court's jurisdiction to wind up a foreign company (the first core requirement). The plaintiff also contended that its shareholding in the Hong Kong company did not give rise to a reasonable possibility that a winding up would be of sufficient benefit to the banks for the court to exercise its jurisdiction – the second core requirement and, in practice, often the more important one.
Second, the plaintiff argued that there was a genuine dispute as to the debt based on substantial grounds. In particular, the plaintiff claimed that a senior representative of the defendant banks' group had verbally agreed (as part of an overall agreement) that, among other things, repayments of the loans could come from the proceeds of sale of some of the land projects and that the banks would not seek to recover the loans without first exercising their security rights.
Both arguments failed at first instance before the judge, who refused to grant an injunction restraining presentation of the banks' winding-up petition. Pending their appeal, the plaintiff obtained an interim order preventing the presentation of a winding-up petition.
It was not disputed that an applicant for an injunction to restrain the presentation of a creditor's winding-up petition had a high threshold to overcome – namely, that the presentation of the petition against the company would be an abuse of process. As the Court of Appeal stated:
Great circumspection must be exercised in respect of the grant of such injunction, for the right to petition for winding‑up in appropriate circumstances is a right conferred by statute, and a would‑be petitioner should not be restrained from exercising it except on clear and persuasive grounds.(3)
On appeal to the Court of Appeal, the issue was whether the judge was correct to dismiss the plaintiff's two grounds challenging the presentation a winding-up petition. This, in turn, required the Court of Appeal to review the judge's findings while accepting that such findings were akin to an exercise of discretion whether to exercise the court's jurisdiction based on the facts of each case.(4)
The Court of Appeal dismissed the plaintiff's appeal. It also refused to grant an interim stay (as regards the presentation of a winding-up petition by the banks) pending an application for permission to appeal to the Court of Final Appeal.
Sufficient connection with Hong Kong
The Court of Appeal rejected the plaintiff company's argument that the judge had erred in considering that the mere presence of assets in Hong Kong was sufficient to satisfy the first core requirement of the courts' jurisdiction to wind up a foreign company pursuant to section 327 of the ordinance. The purpose of the exercise in relation to the first core requirement was to identify a sufficient connection between the plaintiff and Hong Kong to justify the court ordering it to be wound up, even though it is incorporated in the British Virgin Islands. As a matter of law, in the case of a creditor's winding-up petition, the Court of Appeal considered that the presence of significant assets in Hong Kong that may be made available for distribution in the liquidation will usually satisfy the first core requirement.(5) The Court of Appeal noted that the plaintiff came into existence for the purpose of acquiring the publicly held shares in the privatisation of the Hong Kong company and its principal commercial activity was undertaken in Hong Kong – namely, the acquisition of the shares in the Hong Kong company and borrowing of funds for that purpose.
The Court of Appeal appears to have had some sympathy for the general proposition that assets in the form of a significant minority shareholding in a private company in Hong Kong could satisfy the first core requirement.(6)
Would winding up benefit petitioners?
The Court of Appeal agreed with the judge that, on the facts, the plaintiff's 35.59% shareholding in the Hong Kong company represented a significant shareholding in a company that had net assets of approximately HK$22.5 billion (according to its 2020 accounts). These shares were freely transferable and, while as a block they were not enough to change the composition of the Hong Kong company's board, they were sufficient to prevent any special resolution at a general meeting of the company. The Court of Appeal also rejected the general proposition that a minority shareholding in a private company in Hong Kong could not satisfy the second core requirement where the underlying assets further down the corporate chain were located outside of Hong Kong.(7)
This part of the appeal appears to have received short shrift from the Court of Appeal, mindful that it should not disturb a first-instance court's findings of fact unless there is good reason to do so. The judge (at first instance) had noted that the court had not been referred to a single contemporaneous document that supported the existence of a verbal agreement as alleged by the plaintiff – indeed, such an alleged agreement contradicted, among other things, the provisions of the loans provided by the banks to the plaintiff.
The plaintiff's appeal was dismissed.
The Court of Appeal's judgment is not surprising given that the first-instance court's findings, regarding the exercise of its jurisdiction, were fact dependent and an appeal court would usually be reluctant to interfere with those findings. The same findings (of fact) also emphasise the primacy of the provisions of contractual loan documents, which is consistent with a pro-creditor jurisdiction in matters of commercial finance.
It is worth noting (in the context of an injunction to restrain the presentation of a creditor's petition to wind up a foreign company) the emphasis that the Court of Appeal's judgment gave to the burden being on the applicant to show that it is not reasonably arguable that the core requirements as to jurisdiction would be satisfied at the time of the hearing of the petition.(8) Whether those core requirements are met in a particular case is fact dependent. However, the courts' observations (at first instance and on appeal) regarding how the plaintiff's minority shareholding could satisfy the second core requirement (ie, benefit the petitioner) is of particular interest.
There is a suggestion in the judgment that the plaintiff might seek permission to appeal to the Court of Final Appeal on the basis that such an appeal gives rise to an important question of law – namely:
[W]hether the mere presence of a minority (35.59%) shareholding held by the plaintiff in a Hong Kong company can satisfy the first and second core requirements if the ultimate underlying assets are located in the Mainland.(9)
However, the Court of Appeal refused to grant an interim stay pending an application for leave to appeal to the Court of Final Appeal.
Finally, as a point of appeal practice, a passage in the Court of Appeal's judgment cautions parties against delay in making applications to adduce new evidence on appeal.(10)
For further information on this topic please contact Jacky Darsono, Antony Sassi or David Smyth at RPC by telephone (+852 2216 7000) or email ([email protected], [email protected] or [email protected]). The RPC website can be accessed at www.rpc.co.uk.
(2) For related background, please see "Court refuses to restrain presentation of winding-up petition and comments on ex parte proceedings".
(3)  HKCA 1248, note 1, at para 14.
(5) Supra note 1, at para 23. The judge also noted that the individual who owned the plaintiff company is a Hong Kong resident and the Hong Kong company's subsidiaries were either Hong Kong companies or registered overseas companies with principal places of business or authorised representatives in Hong Kong (para 20).
(8) Supra note 1, at paras 19 and 32.