Winding up listcos in Hong Kong: Beware of the jurisdiction trap

We have seen an increasing number of loan defaults by listed companies in Hong Kong, and financial institutions taking steps against them through the commencement of Hong Kong insolvency proceedings.  This trend is likely to persist into the new year, as listed companies continue to grapple with the financial implications following the outbreak of the pandemic. 

Recently, in Re China Huiyuan Juice Group Limited [2020] HKCFI 2940, the Hong Kong Court of First Instance declined to wind-up a Hong Kong-listed offshore-incorporated holding company of a Mainland business group.  The Court held that the petitioner had not demonstrated a real possibility of a tangible benefit that it would gain from the appointment of a liquidator in Hong Kong over the company, thus failing to satisfy the jurisdiction hurdle.

We examine below the impact of Huiyuan Juice on future winding-up cases concerning the typical structures that are listed in Hong Kong. 

What happened in Huiyuan Juice?

China Huiyuan Juice Group Limited (the "Company") is incorporated in the Cayman Islands and was previously listed on the Main Board of the Hong Kong Stock Exchange.  The Company is registered as a non-Hong Kong company in Hong Kong, which, for the purposes of the Hong Kong insolvency legislation, is considered as an "unregistered company".  This is important because jurisdiction is generally assumed for companies which are incorporated or registered in Hong Kong.  The Company's business operations are conducted in the Mainland through subsidiaries in the Mainland, held indirectly by the Company through intermediate BVI holding companies.  

The Petitioner sought to wind-up the Company on the basis that the Company had defaulted under certain convertible bonds it had issued to the Petitioner (the "Petitioner").  The debt was not disputed.  The issue before the Court was whether it should make an immediate winding-up order against the Company.

Core jurisdiction requirements

The Court held that the Petitioner had failed to demonstrate a good reason for the Court to exercise its discretionary jurisdiction to wind-up a listed company. 

The Court recapped the three core requirements to establish jurisdiction to wind-up an unregistered company in Hong Kong:

1. there must be a sufficient connection with Hong Kong;

2. there is 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 interested in the distribution of the company's assets.

The Court found that the Petitioner had failed to satisfy the second core requirement, ie, a real possibility that a winding-up order would confer a tangible benefit to those applying for it. In doing so, the Court placed significant weight on the corporate structure of the Company and the resulting difficulties that a Hong Kong liquidator would face in seeking recognition of its appointment by the Cayman Islands, BVI and/or Mainland courts.

Of particular interest, the Court made the following comments:

• Based on the current law and practice governing the recognition and assistance of foreign liquidators in the Mainland, Cayman Islands and the BVI, any liquidator appointed by the Hong Kong court would not be able to change control of the Company's intermediate subsidiaries and obtain control of the Mainland companies.  Accordingly, winding-up the Company in Hong Kong would not yield the benefit of ultimately recovering assets from its operating indirect subsidiaries in the Mainland.

• It was highly unlikely that the listed status of the Company would have any residual value following liquidation (note: in Huiyuan Juice, the Petitioner did not adduce any real evidence of this "value").  The Petitioner had therefore failed to demonstrate that a winding-up of the Company in Hong Kong would produce a real prospect of a material financial benefit from the realisation of the Company's listed status.

• Given that Mainland courts do not recognise the appointment of liquidators in Hong Kong, it was unlikely that any meaningful investigation of claims could be carried out by any Hong Kong liquidators.

Practical Implications

It was previously thought that in order to satisfy the second core requirement, it was sufficient to rely on the realisation of the listing status as producing a benefit to creditors. Indeed, the Judge in Huiyuan Juice acknowledged that until recently the second core requirement was often not argued in previous cases.

That is no longer the case following Huiyuan Juice, which has raised the evidential bar for the second core requirement.  The Court will no longer assume that the realisation of the value of the listing constitutes a real benefit without further detailed evidence.

In light of the above, it will likely become much more difficult to wind-up offshore-incorporated companies listed in Hong Kong (which constitute a majority of listed companies in Hong Kong).  It is very common for those listed companies to have intermediary offshore holding structures which ultimately own and control Mainland operating subsidiaries.  Post-Huiyuan Juice, it could be challenging to establish that a Hong Kong winding-up order would benefit the petitioner given the general unwillingness of courts in offshore jurisdictions (eg, the Cayman Islands, Bermuda and the BVI) and the Mainland to recognise Hong Kong liquidators.

An alternative option is to take steps to wind-up the company in its place of incorporation.  However, that too could lead to practical challenges if the assets of the listed company are ultimately located in the Mainland.  Under Article 5 of the PRC Bankruptcy law, the PRC court would only recognise orders for appointment of liquidators given by courts in other jurisdictions based on treaties or reciprocity.  In the recent cases of CEFC Shanghai International Group Limited (in Liquidation in the Mainland of the People's Republic of China) [2020] HKCFI 167 and Shenzhen Everich Supply Chain Co, Ltd (in Liquidation in the Mainland of the People's Republic of China) [2020] HKCFI 965, the Hong Kong court granted recognition to administrators of PRC companies appointed by PRC Courts.  This opens the door to PRC courts recognising liquidators appointed by Hong Kong court in the future.  We are watching this with interest.