Recent judgment a reminder of Hong Kong Court’s limited jurisdiction over foreign companies

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We are reminded that shareholders of BVI holding companies may well have to look to the BVI Court to resolve unfair prejudice claims in seeking a buy-out order or other relief.
 
The Yung Kee Restaurant on Wellington Street is one of Hong Kong’s treasures. Established in the 1930s, it is famous for its scrumptious roast gooses and thousand year old eggs. Apart from being a renowned landmark restaurant, a recent judgment handed down by the Honourable Justice Jonathan Harris involving the restaurant serves as a reminder and re-affirms the Hong Kong Court’s limited jurisdiction over foreign companies in unfair prejudice claims.
 
Facts
 
Kam Kwan Sing (“Petitioner”), who was the eldest son of the founder of Yun Kee restaurant (“Kam Senior”), brought a claim against his younger brother Kam Kwan Lai (“Kwan Lai”) and several companies in which Kwan Lai owns shares. One of these companies is Yung Kee Holdings Limited, named the Fifth Respondent in the proceedings, and it is the company whose affairs are concerned (“Company”).
 
The Petitioner’s primary claim was that the affairs of the Company have been conducted in a manner that is unfairly prejudicial to him as a member, and he seeks for the Hong Kong Court, pursuant to s.168A of the Companies Ordinance (Cap.23) (“CO”), to order Kwan Lai to purchase his shares. Alternatively, he sought to purchase Kwan Lai’s shares or have the Company wound up.
 
The parties had initially agreed in principle that one of them should purchase the other’s shares. However, despite attempts to negotiate and mediate, the parties were unsuccessful and had to resort to trial and indeed proving unfair prejudice.
 
The Structure
 
The Company was incorporated on 1 December 1994, pursuant to the International Business Companies Act of the laws of the British Virgin Islands (“BVI”). Its registered office is located in Tortola. The Company was established to act as an investment holding company to hold all the issued shares in another company incorporated in the BVI, Long Yau Ltd. (“Long Yau”), which in turn was originally a trust company formed by Kam Senior for the benefit of his family members.
 
The Petitioner, Kwan Lai, Legco Inc, a BVI company controlled by Kwan Lai (“Legco”), and Everyway Holdings Limited were all shareholders of the Company. The Company had nine direct and indirect subsidiaries (together known as the “Group”).
 
The Petitioner made his claim for relief from unfair prejudice pursuant to s.168A of the CO, which pertains to “specified corporations,” defined in s.2(1) of the CO to include a “non-Hong Kong company.” Pursuant to s.332 of the CO, a non-Hong Kong company is defined as companies incorporated outside Hong Kong which establish a place of business in Hong Kong.
 
Hong Kong Court’s Jurisdiction
 
One of the issues before the Court was whether it had jurisdiction to entertain the Petitioner’s claim and whether the Company had sufficient nexus with Hong Kong. The Court held that non-Hong Kong companies will not be considered to have established a place of business in Hong Kong “unless they have business activities of some substance, which have to be undertaken sufficiently regularly to justify establishing a base in Hong Kong” (paragraph 30). Ultimately, the Company was held not to have established a place of business in Hong Kong and consequently, the Hong Kong courts did not have jurisdiction over the Company, and could not entertain the Petitioner’s claim.
 
Interestingly, the Court found that the structure of the Group reflected that there was an intention not to establish a place of business in Hong Kong, particularly in light of the fact that upon its creation, Hong Kong still had estate duty. The judge made note that the Company’s sole asset was deliberately another BVI Company Long Yau. The judge held that:
 
“What seems likely…is that in establishing a BVI company, Long Yau, to act as trustee of Kam Senior’s business interests in Hong Kong and arranging for its shareholders, Holly Join and Capital Adex to be BVI companies, she [the director of the Company] was consciously distancing ultimate ownership of the Unit Trust assets from Hong Kong.  Consistent with this, Holly Join and Capital Adex were not registered under Part XI of the Companies Ordinance.” (paragraph 23)
 
Accordingly, carrying out internal affairs within Hong Kong therefore does not necessarily indicate that a foreign company has established a place of business here. For example, the fact that directors of a company meet from time to time at a particular location and deliberate upon its affairs does not turn that location into a place at which the company has established a place of business. If a foreign holding company, carrying out a business internationally through subsidiaries, some of which operate in Hong Kong, decides to hold some of its regular board meetings in Hong Kong, that does not itself mean that it has established a place of business here, even if its subsidiaries have clearly done so (paragraph 38).
 
In concluding that that the Company had not established a place of business in Hong Kong, the Court took the following factors into account:

  •  It was an offshore investment holding company;
  •  Its sole asset was shares in another BVI company, Long Yau, and it did not have a bank account in Hong Kong;
  •  It did not trade or run any business in Hong Kong, nor did it play any role or function in the business or operations of the Group, despite the Petitioner’s suggestion that had an interest after April 2009;
  •  It had no creditors, employees or income other than dividends from a subsidiary;
  •  It had no accounts and its activities (which were directed to changing the membership of the board and the payment of dividends) did not necessitate establishing a place of business in Hong Kong;
  •  It had not entered into any agreement which allowed it to occupy any part of the Yung Kee Building, nor had it had any dealings or legal arrangements with any third parties in Hong Kong;
  •  It was not registered under Part XI of the Companies Ordinance, and none of its directors, shareholders or professional advisers had ever advanced a view or advised that the Company should be registered under Part XI of the Companies Ordinance (Cap 32).

For more information please contact Ian Mann (ian.mann@harneys.com) or Adrienne Chan (adrienne.chan@harneys.com) in the Litigation and Restructuring Department of our Hong Kong office.

Topics:  China, Foreign Corporations, Jurisdiction, Sufficient Nexus

Published In: Business Organization Updates, Civil Procedure Updates, International Trade Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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