Hong Kong Court of Final Appeal Confirms ‘Leverage’ Satisfies ‘Benefit’ Requirement for Liquidation of Foreign Companies
June 24, 2022
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The Hong Kong Court of Final Appeal (the “CFA”)  recently confirmed that for the purpose of the liquidation of foreign companies in Hong Kong, the requirement that the liquidation should benefit the petitioner may include commercial pressure (in other words, leverage) to obtain repayment of an undisputed debt.
The CFA’s reaffirmation of the thresholds required for the tribunal to exercise jurisdiction, and in particular its clarification regarding the benefit requirement, is welcome. It demonstrates the court’s desire to adopt a pragmatic approach to assess whether it would be useful to examine a motion for liquidation against a foreign company.
1. Factual and Historical Background to the Proceedings in the Hong Kong Courts
The appellant was a PRC company listed in Hong Kong, and the appellant and the respondent entered into a joint venture agreement. Following a dispute that resulted in an arbitration award against the Appellant, the Respondent served the Appellant with formal notice of the debt due under the award. The Appellant did not pay any part of the sums claimed and sought an injunction to prevent the Respondent from bringing a petition for liquidation as a creditor.
The appellant’s case was that the respondent could not satisfy the three basic requirements for the court to exercise its jurisdiction to liquidate a foreign incorporated company when it is unable to pay its debts. The Appellant did not admit that the 2nd condition was met, namely whether the liquidation order would benefit the Petitioner. In particular, it did not accept that leverage (i.e. commercial pressure to obtain repayment of an uncontested debt) can satisfy the 2nd requirement, since no benefit arises. “as a result of the pending winding-up order”but rather, would only be realized “if the winding-up order is rescinded or cancelled”.
At the Court of First Instance, the judge ruled that the leverage effect created by the prospect of a liquidation request constitutes a sufficient advantage for the plaintiff for the purposes of the 2nd condition. The Court of Appeal upheld the judge’s decision that there was “real possibility of profit” for the petitioner to issue a winding-up order against the appellant.
2. Nature of the three conditions for the liquidation of companies incorporated abroad
The three “basic requirements” previously approved by the CFA  which must be satisfied before a Hong Kong court can exercise jurisdiction to wind up a foreign incorporated company are as follows:
- There must be a sufficient connection with Hong Kong;
- There must be a reasonable possibility that the liquidation order will benefit those who apply for it; and
- The court must be able to exercise its jurisdiction over one or more persons in the distribution of the company’s assets.
The CFA noted that the three requirements do not arise from statutory provisions and should not be addressed by the ordinary rule of statutory interpretation. Rather, they are self-imposed judicial restrictions on the court’s exercise of jurisdiction (discretion) but not on the existence of jurisdiction (which is entirely statutory). The CFA therefore considered that it would be more appropriate to qualify these requirements as “threshold requirements” rather than “basic requirements”.
3. “Benefit” under the 2nd threshold requirement
3.1. General nature of the “benefit” under the second threshold requirement
The CFA ruled that a “pragmatic approach” should be adopted to assess whether it would be useful to consider a petition for liquidation in respect of a foreign company. While the benefit available to claimant creditors varies on a case-by-case basis, the CFA made the following observations:
- There is no doctrinal justification for narrowly limiting the relevant benefit to the distribution of assets by the liquidator on the liquidation of the company;
- It is sufficient that the benefit accrues solely to the claimant;
- Nor is there any doctrinal justification requiring that the relevant benefit come from the patrimony of the company;
- There are cases where, even if there was nothing for the liquidator to administer, the courts have found no difficulty in finding an advantage as long as a useful purpose serving the legitimate interest of the claimant can be identified;
- The benefit need not be monetary or tangible in nature; and
- The fact that a similar result can be obtained by other means does not exclude that a particular advantage can be invoked.
3.2. Leverage as a legitimate advantage
With that “pragmatic approach” looking for benefit in mind, the CFA found leverage to be a relevant benefit as it is an appropriate focus for a creditor’s liquidation petition. The advantage derives from the invocation of judicial liquidation proceedings. In concluding that leverage is a legitimate advantage, the CFA also made a few observations:
The distinction between contested debt and uncontested debt is important. The filing of a liquidation petition, where the debt is disputed, may constitute an abuse of court process since there is often a real and substantial dispute of the facts.
Legal request mechanism
In addition, the CFA observed that the legal request mechanism  offers creditors a convenient method to seek repayment of an undisputed debt by filing a petition for liquidation. Failure to comply with the legal injunction constitutes conclusive proof of the company’s inability to pay its debts (regardless of whether the company is, in fact, insolvent) for the purposes of establishing the jurisdiction of the court to grant a liquidation order, and the CFA observed that the case law recognizes the merits of using a liquidation petition as a means of exerting commercial pressure to obtain payment of an uncontested debt. Thus, there is no reason to exclude leverage as a relevant benefit under Requirement 2.
The CFA also argued that the leverage must be “real” and that its magnitude depends on the potential impact of a winding-up order. When the foreign company has no incentive to avoid a liquidation order, there is not much leverage. However, in this case, the leverage effect stemmed from the negative consequences on the listing of the foreign company that the court deemed real and significant.
4. Courtesy Argument: Forum Conveniens only a factor but not a requirement
The Appellant also raised another courtesy argument arguing that the liquidation of a foreign company is only justified when the court of incorporation cannot fulfill its function making it necessary to “fill the gap”. The FCA observed that the appellant was attempting to impose an additional requirement for the court to exercise jurisdiction and concluded that if a sufficient nexus is established under the 1st requirement, any such forum conveniens The issue should be only one factor (rather than an essential requirement) that the court can consider in deciding whether a winding-up order should be made.
It is clear from the CFA judgment that for the purposes of the liquidation of foreign companies in Hong Kong, the 2nd condition that the liquidation must benefit the claimants may include commercial pressure to obtain repayment of an uncontested debt.
On the other hand, the CLF also usefully specifies that if the judge is ready to adopt a pragmatic approach, any leverage effect must be real and significant and that contrary to the opinion of the Court of First Instance, any moderation of this 2nd requirement is not appropriate.
 Shandong Chenming Paper Holdings Limited v Arjowiggins HKK 2 Limited  CFA 11. A copy of the judgment of the Court of Final Appeal is available here. The judgment of the Court of Appeal ( HKCA 670) is available here. The judgment of the Court of First Instance (HCMP 3060/2016) is available here.
 In Kam Leung Sui Kwan vs. Kam Kwan Lai (2015) 18 HKCFAR 501, more commonly known as the “Yung Kee” Case.
 Section 327(4)(a) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap.32). Under this article, a company is deemed unable to pay its debts if the company has not responded satisfactorily to a creditor’s written demand (by way of payment or otherwise) after 3 weeks of service.
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