Foreign companies are frequently used to hold assets or other investments in Hong Kong. Some of these foreign companies are not registered under Part XI of the Companies Ordinance (“CO”) (“Unregistered Companies”). There are various reasons for not registering foreign companies in Hong Kong, including confidentiality and tax benefits. However, there may be some drawbacks to this approach.
Recent Hong Kong court decisions indicate that shareholders of foreign companies that are not registered in Hong Kong may encounter difficulties in winding up these companies in the event of shareholders disputes.
In this alert, we look at the recent Hong Kong court decisions in Re Gottinghen Trading Ltd1 (“Re Gottinghen”) and Re Yung Kee Holdings Ltd2 (“Re Yung Kee”). We examine the emphasis by the courts on the Hong Kong connection of an Unregistered Company in a winding up on the just and equitable ground, and what this could mean for investors and business operators.
Game over: solvent companies sought to be wound up to untangle shareholders dispute
Both Re Gottinghen and Re Yung Kee concern shareholders disputes and the disgruntled shareholders sought to have the companies wound up.
The company sought to be wound up in Re Yung Kee is the ultimate holding company of the Hong Kong restaurant that is known for its roasted goose. It is a company incorporated in the British Virgin Islands (“BVI”) and is not registered under the CO, hence an Unregistered Company. It indirectly holds all of the group’s businesses and properties, including the Hong Kong restaurant. In the shareholders dispute, a minority shareholder sought an order from the Hong Kong Court for his shares to be bought out, or alternatively, winding up. Of noteworthy mention, that BVI company is solvent, and is therefore different from instances where court orders are sought to wind up insolvent companies.
Section 327 of the CO
Under s.327 of the CO, only 3 grounds are available to wind up an Unregistered Company in Hong Kong3:
(a) the company is dissolved or has ceased to carry on business;
(b) the company is unable to pay its debts (the “Insolvency Ground”);
(c) it is just and equitable that the company should be wound up (the “Just and Equitable Ground”).
In both Re Gottinghen and Re Yung Kee, the Just and Equitable Ground was relied on by reason of disputes between shareholders.
There’s a catch: requirements the same but applied differently for different grounds
The requirements for winding up an Unregistered Company under both the Insolvency Ground and the Just and Equitable Ground are the same (although applied differently, see below). The petitioner is required to show the following:
- sufficient connection between the company and Hong Kong (the “Sufficient Connection Requirement”);
- reasonable possibility of benefit to those applying for a winding up order; and
- the court having jurisdiction over one or more persons interested in the distribution of assets of the company.
Here’s the catch; the Sufficient Connection Requirement is applied differently under the two grounds4:
- Insolvency Ground: presence of assets in Hong Kong constitutes sufficient connection.
- Just and Equitable Ground - the court would consider the following factors:
- Where does the company carry on business?
- Where did the principal complaint occur?
- Do the shareholders have connection with Hong Kong?
- Does the company have assets present in Hong Kong? – although the courts will not give as much weight to this factor than in insolvency situations.
Yung Kee is a Hong Kong restaurant, isn’t that a sufficient connection?
The BVI holding company in Re Yung Kee does not directly hold the restaurant or other group businesses or properties in Hong Kong. That BVI company is the parent company of another BVI company which in turn holds those Hong Kong assets. As such, the judge considered the BVI holding company to be truly an investment holding company with no assets, business operations or connections with Hong Kong.
What does this mean for shareholders of an Unregistered Company?
If the Unregistered Company does not directly hold Hong Kong assets, the Hong Kong Court is unlikely to grant a winding-up order on the Just and Equitable Ground. In the event of a shareholders dispute, the petitioner should apply for winding-up in the jurisdiction where the Unregistered Company was incorporated.
Takeaways for investors thinking about investing in an Unregistered Company
Hong Kong courts may not be overly willing to exercise jurisdiction to wind up Unregistered Companies in cases of shareholders dispute. To rely on Hong Kong law, the foreign company shall be registered under the CO. From Re Gottinghen and Re Yung Kee, the further away an Unregistered Company is from its operating businesses in Hong Kong, the less likely the courts will exercise jurisdiction to wind it up on the Just and Equitable Ground.
Investors contemplating investing in an Unregistered Company should exercise caution, especially as a minority shareholder. In particular, investors should consider implications from Re Gottinghen and Re Yung Kee on their choice of corporate structure, place of incorporation, and considerations over jurisdictional clauses in the shareholders’ agreement.