Winding-Up of a Foreign Company: Lessons from Hong Kong

[The
following guest post is contributed by Suprotik Das, a 4th year law student at the Jindal Global Law
School, Sonepat, Haryana.]
This post seeks to address some developments with regard
to the winding up of foreign companies and multiple derivative actions. On November
11, 2015, the Hong Kong Court of Final Appeal handed down a landmark decision
in the case of Kam
Leung Sui Kwan v. Kam Kwan Lai & Ors.
[1] with regard to the winding up of a holding
company registered in the British Virgin Islands. The case concerns a feud
between two brothers with regard to the operation of the famous Yung Kee
Restaurant in Hong Kong.
A simplified version
of the corporate structure is as follows: Yung Kee Holdings Limited, a BVI
registered company (YKHL) owns 100% shares in another BVI registered company
known as Long Yau Limited (LY), which owns the famous Yung Kee Restaurant in
Hong Kong.
The petitioner, also
the minority shareholder alleged that the affairs of YKHL were carried on in
such a way that it was unfairly prejudicing his interests. He prayed for the 1st Respondent
to buy his shares in the Company as per Section 168A of the former Companies
Ordinance (cap. 32). This is now s. 725(2)(a)(iv)(B) of the Companies Ordinance
(cap. 622).
However, this was rejected, as for an order under this section it was necessary
for a company to have a place of business in Hong Kong. The court found that
the company’s register of members was in the BVI, it did not have any share
transfer office in Hong Kong and had passed only eight resolutions in Hong
Kong, out of which most were paper resolutions. Accordingly, the company did
not have a ‘place of business in Hong Kong’.
However, the
petitioner was successful under Section 327(3)(c) of the Companies (Winding Up
and Miscellaneous Provisions) Ordinance. This section deals with the winding up
of unregistered companies in Hong Kong if the court is of opinion that it is
just and equitable that the company be wound up. The court used the reasoning
in an old English case – Re Real Estate Development Co.[2] to
state that a court has jurisdiction to wind up a foreign company such that:
– there must be a sufficient connection with
Hong Kong;
– there must be a reasonable possibility
that a winding up order would benefit the petitioners.
– the Court must be able to exercise
jurisdiction over one or more persons in the distribution of the relevant
company’s assets.
On paragraph 27 of the case, the Court distinguishes
creditors and shareholders’ petitions for winding up. For a creditors’ winding
up petition in respect of a foreign company, the presence of assets in a
jurisdiction is enough to prove the ‘sufficient connection’ requirement. Since
the dispute is between shareholders inter
se
, the presence of shareholders in the jurisdiction is a significant
factor to establish the ‘sufficient connection with Hong Kong’.
Further, in paragraph 32 of the case, the shareholders
and directors of the company and its subsidiaries are resident in Hong
Kong.  The Company’s underlying
assets and the business carried on by its sub-subsidiaries are all located in
Hong Kong.  The income of the Company is derived from the business in Hong
Kong. The Company’s administrative decisions as well as the relevant events
giving rise to the dispute all took place in Hong Kong
.  In the light
of these compelling factors, the Court held that the requirement of a
sufficient connection with Hong Kong is satisfied. The Court actually went into
the substantive merits of the claim for ‘just and equitable’ winding up and
found that it was the intention of brothers’ father that the business be run
together by them. However, since the respondent excluded the petitioner from
some aspects of the business, the Court then upheld winding up on the just and
equitable grounds and not on the oppression remedy.
Multiple
Derivative Claim
A derivative claim allows a disgruntled shareholder to
sue or bring legal proceedings on behalf of the company. In the judgement, the Court
refers to the famous case of Waddington Ltd. v. Chan Chun Hoo[3]
where a shareholder of a holding company was allowed to bring a derivative
action on behalf of the company’s subsidiary. The court allowed the action
because the holding company and its shareholders would suffer an indirect loss
if there was any detriment to the subsidiary’s assets. If there is a loss in
value to the assets of a subsidiary, there would be a subsequent loss in the
value of the parent company.
In this case, an interesting development has taken
place. The petitioner, being the shareholder of YKHL in the BVI is now allowed
to bring an action to wind up the company. It is pertinent to note that Long
Yau Limited owns the restaurant business and has assets in Hong Kong.
Nevertheless, this results in a unique derivative action wherein a shareholder
of foreign company (YKHL) which is a parent company of a number of subsidiaries
(LY, which owns the restaurant) which do business in Hong Kong can commence legal
proceedings on behalf of it, merely due to the presence of other shareholders.
The court’s justification behind this was that if a shareholder brings a
petition to wind up a company, he does it to realise his investment. If the
company is a holding company, the purpose of winding up is to realise the value
of its underlying assets.  
Position in India
A foreign company, as per S. 2(42) of the Indian
Companies Act 2013, is defined as –
“any company or body corporate incorporated outside
India which—
(a) has a place of business in India whether by itself
or through an agent, physically or through electronic mode; and
(b) conducts any business activity in India in any
other manner.”
It is well established that a foreign company can be an
unregistered company in India[4].
Winding up of unregistered companies in India is governed by Section 375(3)(c)
of the Indian Companies Act 2013 (Section 583 of the Companies Act, 1956). This
mirrors Section 327(3)(c) of the Hong Kong Companies (Winding Up and Miscellaneous Provisions) Ordinance.
In India, winding up
of foreign companies have mostly focused on the presence of substantial assets
or funds in India (see D.D.G. Hansa v. Bharat Aluminium Co. Ltd.[5]
and Rajah of Vizianagaram vs. Official Receiver[6]).
A foreign holding company has never been wound up due to the presence of other
shareholders in India.
Since, this represents
a rare occasion in the Commonwealth that a court has granted leave to commence
an action of such a nature, it’s implications will be interesting to note,
considering the multitude of foreign companies that do business in India that
have complex corporate structures involving holding companies and subsidiaries.
– Suprotik Das



[1] FACV 4/2015
[2]  [1991] B.C.L.C. 210 
[3] [2008] 11 HKCFAR 370
[4] In Re: Strauss And Co.
Limited
, (1936) 38 BOMLR 1080; Mohan Lal v. Chawla Bank Ltd., AIR 1949 All.
778.
[5] (1984) 55 Comp Cas 727
(Cal)
[6] AIR 1962 SC 500

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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