Commercial pressure to pay debt satisfies benefit requirement in winding-up

Key takeaways

Foreign companies listed in Hong Kong and their creditors should note the recent Court of Final Appeal decision in Shandong Chenming Paper Holdings Limited v Arjowiggins HKK 2 Limited [2022] HKCFA 11.

A Hong Kong court will not wind up a foreign company unless it is satisfied that, among other things, the company has a sufficient connection to Hong Kong and a winding-up order will benefit the petitioner.

The Court of Final Appeal confirmed that a relevant “benefit” includes the commercial pressure which a winding-up petition would place on the company to pay a debt.  The benefit does not need to be the distribution of the company’s assets in the Hong Kong winding-up, and as such, this requirement may be satisfied even if the company lacked Hong Kong assets.

In this case, Arjowiggins sought to use a winding-up petition to pressure the Company, a Mainland company, to satisfy an arbitral award.  This pressure was exerted by leveraging the Company’s listing on the Hong Kong Stock Exchange.  A winding-up petition could expose the Company to sanctions by the Listing Division or even jeopardise the Company’s listing status.  Importantly, the Court accepted that the commercial pressure to pay a debt satisfied the “benefit” requirement.

Background

The parties had established a joint venture in the Mainland.  Following disputes, the parties entered into arbitration, resulting in an award in favour of Arjowiggins.  Arjowiggins then served a statutory demand on the Company as a prelude to presenting a winding-up petition in the Hong Kong courts. 

Having failed to pay the statutory demand, the Company applied for an injunction to prevent Arjowiggins from presenting a winding-up petition against it.  It argued that, amongst other things, a Hong Kong winding-up would not benefit Arjowiggins.  A Hong Kong-appointed liquidator could only realise and distribute the Company’s Hong Kong assets and the Company had no assets in Hong Kong.  As such, a Hong Kong winding up would not result in any payment, and was therefore of no benefit, to Arjowiggins.  As showing a benefit from a winding-up order is a precondition to the Court making that order and Arjowiggins failed to do so, the Company contended that any winding-up petition by Arjowiggins would inevitably be dismissed.

Arjowiggins countered that it would obtain a benefit from the winding-up petition even though the Company lacked Hong Kong assets.  The Company was listed on the Hong Kong Stock Exchange and the presentation of a winding-up petition could expose the Company to sanctions by the Listing Division or even jeopardise the Company’s listing status.  Arjowiggins contended that these adverse consequences created commercial pressure on the Company to satisfy the arbitral award, and that this pressure was a relevant benefit to Arjowiggins that satisfied the “benefit” requirement.                       

The Company argued that the commercial pressure arising from a winding-up petition did not satisfy the “benefit” requirement because:

1. The requisite “benefit” must be a tangible benefit flowing from the winding-up order, rather than any pressure or leverage arising before the order is made.
2. The Hong Kong court should not overstep its territorial jurisdiction and must pay sufficient deference to the state where the foreign company was incorporated. 

Court’s reasoning

The Court, finding for Arjowiggins, held that the commercial pressure of the winding-up petition was a relevant benefit:

• The “benefit” requirement is imposed by the courts to ensure some useful purpose will be served by entertaining a winding-up petition against a foreign company.  As such, the requirement may be satisfied by benefits arising before a winding-up order is made, such as the commercial pressure imposed by the winding-up petition.  A pragmatic approach should be applied.
• The courts have long held it to be perfectly proper for a creditor to use winding-up procedures to pressure a company to repay an undisputed debt, even if the company is in fact solvent.  This is a significant benefit incidental to the possibility of a winding-up order and there is no reason why it should be excluded from the “benefit” assessment.
• The Hong Kong court guards against overstepping its territorial jurisdiction by requiring the petitioner to demonstrate that the foreign company has a sufficient connection with Hong Kong.  The connection with Hong Kong in this case was the Company’s listing on the Hong Kong Stock Exchange.  The commercial pressure in this case hinges on that listing and did not depend on a potential liquidator exercising their authority in the Mainland.