In Silver Starlight Ltd v China Citic Bank Corp Ltd [2021] HKCA 1248, the Court of Appeal rejected the plaintiff's appeal against the Court of First Instance's (CFI) decision dismissing its application for an injunction restraining the defendant banks from presenting a petition against it. The banks had lent more than HK$80 million to the plaintiff for the purposes of financing acquisition of shares in Goldin Properties Holdings Ltd (Goldin Holdings), which was privatized and delisted in August 2017.

The Court of Appeal considered in detail how the so-called "three core requirements" must be satisfied before the court will exercise its statutory power to wind up a foreign company. The court said there was considerable force in the defendants' submission that "the court should refuse to grant an injunction restraining the presentation of a winding-up petition against a foreign company based on lack of jurisdiction unless it was plain and obvious that it would be impossible for the court to exercise its jurisdiction to wind up the company at the hearing of the petition."

The facts

The plaintiff is a BVI-incorporated company which is wholly owned by Mr. Pan Sutong. The plaintiff acquired 35.59 percent of the issued share capital in Goldin Holdings during its privatization. The plaintiff obtained loan finance in the sum of HK$78 billion from a group of banks to finance the purchase. The loans were documented in two facility agreements.

As security for the loans, Pan executed a personal guarantee, the plaintiff executed a share charge over its shares in Goldin Holdings, and Goldin Properties mortgaged two pieces of land which formed part of a substantial development project in Tianjin and which was held through four wholly-owned subsidiaries. 

The plaintiff subsequently failed to meet its repayment obligations and the banks issued a statutory demand in respect of one of the loans. The plaintiff applied for an injunction to restrain the banks from presenting a winding-up petition on two grounds: (i) the jurisdiction requirements for winding up a foreign company were not satisfied; and (ii) there was a bona fide dispute of the debt on substantial grounds.

The first ground of appeal — three core requirements

It is well established that the Hong Kong court will generally require three so-called core requirements to be satisfied before it will exercise jurisdiction to wind up a foreign company under section 327 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) (CWUMPO): (i) there must be a sufficient connection with Hong Kong, but not necessarily through the presence of assets in the jurisdiction; (ii) there must be a reasonable possibility that the winding-up order will benefit those applying for it; and (iii) the court must be able to exercise jurisdiction over one or more persons in the distribution of the company's assets (see Hogan Lovells client alert What's good for the goose – Hong Kong Court revisits iconic insolvency decision).

Restraint of presentation of petition

The applicable principles for the grant of an injunction to prevent the presentation of a winding-up petition are based on the court's inherent jurisdiction to prevent abuse of its process. 

The Court of Appeal reiterated that the right to petition is a statutory right and the ability to present a petition promptly in the case of a company believed to be insolvent is important to creditors given the significance of the date of the petition since it marks the commencement of the liquidation. As such, the Court of Appeal observed that "great circumspection must be exercised" in respect of the grant of injunctions to prevent the presentation of winding-up petitions. 

The Court of Appeal found "considerable force" in the defendant banks' submission and noted that "the injunction sought should not be granted  on the jurisdictional ground unless the plaintiff can demonstrate that it is not reasonably arguable that the core requirements would be satisfied at the time of the hearing of the petition."

The burden of proof was on the plaintiff.  There was no dispute that the third requirement was satisfied. The argument centered around the trial judge’s decision that the first and second requirements were also met.  

The Court of Appeal's finding as regards the first and second requirements

Sufficient connection

Whether a sufficient connection exists is a question of fact and degree that depends on the circumstances of the case. Previous case law had established that "the presence of significant assets in Hong Kong which may be made available for distribution in the liquidation will usually suffice for the purpose of the first requirement in the case of a creditor’s petition."

The trial judge considered that several factors — including the plaintiff's shareholding in Goldin Holdings, the fact that Pan, the sole legal and beneficial owner of the plaintiff, was a Hong Kong resident, and that valuable and substantial assets were held by subsidiaries which were either Hong Kong companies or registered non-Hong Kong companies with principal places of business and authorised representatives in Hong Kong — all pointed to the "sufficient connection" test being met. Overall, the Court of Appeal found that the plaintiff had failed to show anything requiring review in the judge's conclusion that the first requirement was satisfied.

Reasonable possibility that the winding up order will benefit the petitioner/supporting creditors

The burden of proof was on the plaintiff to demonstrate that there was no reasonable possibility that a winding up order would benefit the defendants. The plaintiff argued that there was no reasonable possibility that the shareholding in Goldin Holdings would sufficiently benefit the banks because the underlying assets were located in the mainland and a Hong Kong liquidator, as a minority shareholder of the plaintiff, would not be able to obtain control of Goldin Holdings and so would not be able to derive any direct benefit from the underlying assets.

The Court of Appeal described the plaintiff’s 35.59 percent shareholding in Goldin Holdings as "a very significant holding sufficient to preclude any special resolution in general meetings", which would entitle the holder to dividends and to wind up Goldin Holdings if proper grounds existed at the time. 

The plaintiff also placed considerable reliance on observations made in previous cases to the effect that a liquidator appointed by a Hong Kong court may not be recognized in other jurisdictions including the mainland (see Hogan Lovells client alert Managing misconceptions: Hong Kong court issues dual warning over cross-border insolvency).

The Court of Appeal said this was not an insurmountable hurdle in this case because the assets within the jurisdiction were the shares in Goldin Holdings and there was no basis to assert that it would be impossible to realize or derive benefit from those shares without taking control of the underlying assets. In the view of the Court of Appeal the second core requirement was satisfied.

The second ground of appeal — bona fide dispute on substantial grounds

It is well established from previous case law that a bona fide dispute is one that is not trivial or insubstantial, but based on solid grounds disputable both in law and on the facts of the case. The burden is on the debtor to adduce sufficiently precise factual evidence. The court must approach the debtor's evidence critically and with caution.

The plaintiff alleged that the loans were based on a supposed oral agreement between Pan and a former chairman of one of the banks, who had supposedly represented to Pan that the banks would first enforce their security over the mortgaged land for the repayment of the loans, and would only pursue the plaintiff and Pan for any outstanding amount thereafter. 

There was no contemporaneous document that supported the existence of the supposed agreement. The terms of the agreement were inconsistent with the facility agreements and Pan's personal guarantee. The Court of Appeal agreed with the CFI's conclusion that the verbal agreement did not make commercial sense.

Useful review

All in all, Silver Starlight is a useful review of the basic principles regarding a creditor's right to present a winding-up petition against a foreign company.

The court will normally refuse to grant an injunction restraining the presentation of a winding-up petition against a foreign company unless it is clear that the three core requirements have not been satisfied. To successfully resist a winding up petition, the onus is on the debtor company to put forward sufficiently precise evidence to show that there is a bona fide dispute on the debt on substantial grounds.

The case also represents an important validation of various decisions on cross-border insolvency law passed down by the Honorable Mr. Justice Harris, with several of his prior decisions being cited with approval throughout.

Authored by Jonathan Leitch, Yolanda Lau, and Nigel Sharman.