Companies with certain specific connections to Hong Kong are increasingly likely to fall under Hong Kong jurisdiction and Hong Kong’s Companies Ordinance. Both creditors and debtors will benefit from the clarity provided by the recent judgment in the case Re Pioneer Iron and Steel Group. Hong Kong’s Companies Ordinance expressly provides for the possibility of petitioning to liquidate, or wind-up, companies incorporated outside of Hong Kong. While the Hong Kong government has noted its intention to introduce an amendment bill to reform Hong Kong’s insolvency law in 2014/15, the Hong Kong courts continue to interpret and clarify the current insolvency provisions of the Companies Ordinance.

This Client Alert examines the recent judgment in Re Pioneer Iron and Steel Group where the Hong Kong Court considered the exercise of its jurisdiction to wind-up “unregistered” companies (a defined term which includes companies incorporated outside Hong Kong) under section 327 of the Companies Ordinance.

The Hong Kong Court previously considered this subject towards the end of 2012 in Re Yung Kee Holdings Limited [2012] 6 HKC 246 (see our previous Client Alert No. 1426 “Jurisdiction of the Hong Kong Courts re Winding Up and Unfair Prejudice Petitions — Are Offshore Companies Safe?”). Last year’s Yung Kee decision looked at this subject in the context of a petition on the “just and equitable” ground. The Court noted that what suffices to satisfy the jurisdictional test may differ where a petition is presented on grounds of insolvency.

The recent Pioneer Iron decision considered that very situation, as the Hong Kong petition had been presented on grounds of insolvency, while the company was already subject to a winding-up order in its place of incorporation, the British Virgin Islands (the BVI), and BVI liquidators appointed.

Background

Pioneer Iron and Steel Group Company Limited (Pioneer Iron or the Company) was, prior to 2008, a very successful iron and steel trading company. Incorporated in the BVI in 2003, the Company declared a dividend in excess of US$1.2 billion for its 2007 financial year.

Pioneer Iron’s sole shareholder, who (until late 2009) was also the sole director, is a well-known and well-connected businesswoman originally from China, now resident in Hong Kong. She asserted the financial crisis of 2008 severely affected Pioneer Iron’s business, leaving Pioneer Iron owing considerable debts to its suppliers. In June 2010, BHP BILLITON Marketing AG entered a judgment against Pioneer Iron for a sum of over US$40 million. Pioneer Iron was also facing an imminent and similarly substantial arbitral award in favour of Mount Gibson Mining Limited (Mount Gibson). In an apparent effort to avoid an arbitration award in favour of Mount Gibson, in June 2010, the shareholder and directors passed resolutions to place Pioneer Iron into voluntary liquidation in the BVI. Liquidators were duly appointed in the BVI (the BVI Liquidators or the Petitioners).

The BVI Liquidators very quickly formed the view that Pioneer Iron’s shareholder and directors were not cooperating in providing them with documents and information about the Company’s affairs and assets. In August 2010, the BVI Liquidators therefore petitioned the Hong Kong Court to wind-up Pioneer Iron in Hong Kong which would enable the BVI Liquidators to avail themselves of the investigatory powers of a Hong Kong liquidator. The opposing creditors and the sole shareholder separately issued applications to strike out the petition in Hong Kong. As a compromise interim measure, the Hong Kong Court appointed the BVI Liquidators as provisional liquidators in Hong Kong, and adjourned the Hong Kong petition and strike out applications to allow certain matters to proceed in the BVI Court.

After the BVI Court concluded its proceedings, the Hong Kong Court restored the petition for hearing in January 2013. In its subsequent March 2013 decision, the Hong Kong Court considered, amongst other matters, its jurisdiction to wind-up unregistered companies under sections 326 and 327 of the Companies Ordinance.

Jurisdiction to Wind-Up an Unregistered Company

Referencing his earlier decision in Yung Kee, the Hong Kong Companies Judge, the Honourable Mr. Justice Harris, confirmed the Court’s discretionary jurisdiction to wind-up an unregistered company under section 327(1) and (3) of the Companies Ordinance is exercised if the following three core requirements (Core Requirements) are satisfied:

  • there is sufficient connection with Hong Kong (in the context of insolvency this is commonly indicated by the presence of assets, but this is not essential);
  • there is 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 Court indicated that the significance of each Core Requirement will vary from case to case. For example, an exceptional case may arise in which the connection with Hong Kong is so strong and the benefits of a winding-up order for the creditors of a company are so substantial that the Court would be willing to exercise its jurisdiction despite the third Core Requirement not being satisfied.

In arguing that Pioneer Iron had a sufficient connection with Hong Kong, the Petitioners submitted that:

  1.  the sole shareholder and key director of the Company from 2003 to 2009 resided in Hong Kong, had an office there and had well-established roots in Hong Kong; 
  2. the Company operated from offices in Hong Kong;
  3. at least some of the Company’s books were retained in Hong Kong; 
  4. at least two former employees of, or persons held out as representing, the Company were resident in Hong Kong; and
  5. Pioneer Iron engaged firms to provide auditing, legal, banking and corporate secretarial services in Hong Kong, had bank accounts in Hong Kong which saw a lot of activity prior to the Company’s liquidation and a large number of the documents pertaining to the Company were held in Hong Kong.

The Court determined the only sensible inference that could be drawn from the facts is that the Company’s sole shareholder / director made major business decisions concerning the Company’s affairs from her base in Hong Kong.

The Court also determined that just because a company has not established a place of business in Hong Kong does not mean the company does not have a substantial connection with Hong Kong. Pointing to paragraphs 24 to 42 of the Yung Kee decision, the Court noted that the considerations are different for these two matters.

Ultimately, in accepting the Petitioners’ submissions on the issue of “sufficient connection”, the Court stated “the fact that the controlling mind of a commercially active company … is based in Hong Kong and makes business decisions here about the company constitutes a substantial … connection with Hong Kong”.

The first of the Core Requirements was therefore satisfied. The Court made several other findings which provide helpful guidance for future cases:

  • The fact that Pioneer Iron carried out some of its activities in another jurisdiction did not dilute the substance of its connection with Hong Kong. 
  • The investigation of Pioneer Iron’s affairs, which would enable the liquidators to consider whether any actions should be taken pursuant to the Companies Ordinance for remedies that might not otherwise be available to the Company, provided a sufficient benefit to satisfy the second of the Core Requirements. In particular, the Liquidators would be able use procedures provided for in the Companies Ordinance (for example, examinations under section 221) to investigate transfers through which Pioneer Iron was divested of its beneficial interests in apparently valuable assets.
  • For the third of the Core Requirements to be satisfied the Court must be able to exercise jurisdiction over the relevant “person” who is concerned with the proper distribution of assets other than by virtue of the “person” being a creditor of the Company. The Court expressed reservations over the submission that this requirement was satisfied by a creditor registering an arbitration award in Hong Kong (this was obiter however, as the Court considered that it did not need to decide this question in Pioneer Iron).
  • In the large majority of insolvency cases, the third Core Requirement will generally be satisfied by the existence of a creditor who is an individual resident in Hong Kong or a foreign company which is registered under Part XI of the Companies Ordinance or has a place of business in Hong Kong. 
  • Insofar as substitution of a petitioner is concerned, affirming the decision of the Honourable Mr. Justice Fuad JA in Re Perak Pioneer Ltd (CACV 62 of 1985, unreported judgment of 22 May 1985), Rule 33 of the Companies (Windingup) Rules provides “a complete statement of the circumstances in which the substitution of a petitioner can be ordered”. In this case, although the Petitioners (the BVI Liquidators) did not have locus to present the Petition, this did not defeat the Petition because Mount Gibson, a creditor, had applied to be substituted as petitioner.

Ancillary Liquidations

The Petitioners had submitted that the Core Requirements did not apply with the same stringency in a case where (as here) the Petition had been issued by the liquidators of a company in liquidation in its place of incorporation. The Petitioners framed the basis for that submission in terms of judicial comity — suggesting that the Court should take into account the desirability of assisting the liquidation in the company’s place of incorporation, and order an ancillary liquidation even if the Core Requirements were not strictly met. The opposing creditors disagreed, suggesting that if the Core Requirements were not met there was no independent basis for the Court to proceed to order an ancillary liquidation.

The Court noted that it would be inconsistent with the principles discussed earlier in the judgment to make an order which commenced the statutory regime for the liquidation of companies in order to enable a foreign liquidator to use that regime’s investigatory procedures to obtain information about the affairs of a company which had little connection with Hong Kong other than the presence of one of its officers in Hong Kong. The Court concluded that there was no basis for adopting a less stringent approach in assessing whether sufficient connection with Hong Kong has been demonstrated in cases in which a petition is presented by an unregistered company which is in liquidation in its place of incorporation.

In arriving at this conclusion the Court noted as relevant the fact that Hong Kong has not enacted an equivalent to section 426 of the Insolvency Act 1986 and is not a signatory to the UNCITRAL Model Law on Cross-Border Insolvency (the Model Law). If Hong Kong had similar provisions, the Court would have been able to make orders, for the purpose of assisting the liquidators of unregistered companies, to investigate in Hong Kong matters concerning the unregistered companies’ affairs, even if the Core Requirements could not be satisfied.

Reform

While the Pioneer Iron case clarifies some specific issues relating to multijurisdictional insolvencies involving Hong Kong in the near term, creditors and companies should continue to keep a close watch on pending reforms relating to Hong Kong’s insolvency law. The Standing Committee on Company Law Reform (SCCLR) (which was formed in 1984 to advise the Financial Secretary on amendments to the Companies Ordinance) noted in its most recent Annual Report (the Twenty Eighth Annual Report) the Hong Kong Government’s intention to introduce an amendment bill reforming Hong Kong’s insolvency law by mid-2016. Aiming to rationalise the law and target outdated provisions of the insolvency regime, the SCCLR expressly recommended that the issue of cross border insolvency be considered as a part of that review, including the possible adoption of the Model Law. Creditors and companies might also benefit if that review considered the enactment of an equivalent to section 426 of the Insolvency Act 1986, so that orders for ancillary liquidations could be made in Hong Kong in appropriate cases even if the Core Requirements are not met.

On 16 April 2013, the Government launched a three-month public consultation on legislative proposals to improve Hong Kong’s corporate insolvency law, with the plan of introducing an amendment bill into the Legislative Council in 2014/15. However, the consultation paper makes no reference to cross-border insolvency issues, or the possible adoption of the Model Law.