Many companies in Hong Kong are not incorporated there. Nonetheless, the Hong Kong court has statutory jurisdiction (under section 327 of the Companies (Winding Up and Miscellaneous Proceedings) Ordinance) to wind up a foreign company. However, recognising that the most appropriate jurisdiction to wind up a company is the place where it is incorporated, the court has imposed requirements which have to be satisfied before it will exercise that jurisdiction. These requirements are commonly known as the three core requirements, and they are:

1. there must be a sufficient connection with Hong Kong, but this does not necessarily have to consist of the presence of assets within the jurisdiction;

2. there must be a reasonable possibility that the winding-up order would benefit those applying for it; and

3. the court must be able to exercise jurisdiction over one or more persons in the distribution of the company’s assets.

In Shangdong Chenming Paper Holdings Limited v Arjowiggins HKK 2 Limited [2022] HKCFA 11, the appellant (Shangdong) was subject to an arbitral award requiring the payment of damages to the respondent (Arjowiggins), which the Hong Kong court had also granted an order to enforce. When Shangdong did not pay, Arjowiggins issued a statutory demand, followed by a winding up petition, against Shangdong in Hong Kong.

Shangdong was incorporated in the People’s Republic of China. It had no assets in Hong Kong, but it was listed on the Hong Kong Stock Exchange and was registered under the Companies Ordinance as having a place of business in Hong Kong. Although the first (and third) core requirements were not in dispute, the Court of Final Appeal (CFA) noted that these factors made it clear that Shangdong had a sufficient connection with Hong Kong. The second core requirement only came into play once a sufficient connection was established.

At issue was the second core requirement – whether a winding up order would benefit Arjowiggins. Shangdong argued that, as it had no assets in Hong Kong, there was nothing a Hong Kong liquidator could realise for the benefit of Arjowiggins.

The CFA noted that:

(1) The use of a creditor’s winding up petition as a means of applying commercial pressure to seek payment of an undisputed debt was legitimate.

(2) The possible benefits are not limited to the making of a winding up order, but include the setting in motion of the winding up procedure in Hong Kong. A benefit will exist where setting those procedures in motion results in the payment of an undisputed debt – i.e. leverage to pressure the company into paying. That benefit could continue even if a winding up order was ultimately made since the court could stay the winding up upon payment of the debts owed to the petitioning and supporting creditors.

In the present case, there was leverage – and thus benefit to Arjowiggins – given the adverse consequences of the winding up procedure on Shangdong’s listing status on the Hong Kong Stock Exchange. The second core requirement was therefore satisfied.

An important caveat to keep in mind is that the above only applies to an undisputed debt (which it was in this case since the debt was the subject of an arbitral award). Using the winding up procedure as leverage for a disputed debt is not legitimate, regardless of whether it is against a Hong Kong or foreign company, and may amount to an abuse of process.

Eugene Kwok of Prince’s Chambers regularly acts in winding up cases and shareholder disputes.