Champ Prestige International Ltd v. China City Construction (International) Co Ltd and Another

HCCW 34/2018

[2020] HKCFI 355

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 34 OF 2018

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D E C I S I O N

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1.On 1 February 2018 Champ Prestige International Limited (“Champ Prestige”) issued a petition (subsequently re-amended on 11 April 2018) seeking the winding up of the 2^nd Respondent, Dingway Investment Limited (“Company”) on the just and equitable ground. The Company is incorporated in the British Virgin Islands as is Champ Prestige. It is an investment company. Its sole business activity and asset is the development of land in Miami, Florida (“Land”). Champ Prestige is an indirect wholly-owned subsidiary of Asia Allied Infrastructure Holdings Limited, which is incorporated in Bermuda and listed on the Main Board of the Hong Kong Stock Exchange. The Company is an “unregistered company” within the meaning of Part X of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32 (“Ordinance”). Initially the sole shareholder of the Company was the 1^st Respondent, China City Construction (International) Co Limited (“China City”), which is incorporated in Hong Kong. China City is wholly owned by China City Construction Holding Group Co, Ltd, which is incorporated in the Mainland.

2.On 2 October 2015, China City and Champ Prestige entered into a share sale and purchase agreement pursuant to which China City transferred 45% of the Company’s issued and paid up shares to Champ Prestige (“SPA”). The SPA contained amongst its terms financing arrangements for the development of the Land amongst which was a put option that Champ Prestige could exercise in the event that China City did not fulfil its funding obligations. The SPA contains an arbitration clause, which provides:

“Any Disputes arising from or in connection with this Agreement shall be submitted to the Hong Kong International Arbitration Centre for arbitration which shall be conducted in accordance with the Domestic Arbitration Rules of the Centre in force at the time of applying for arbitration. The arbitral award is final and binding upon both Parties.”

3.On 5 February 2016, the parties entered into a supplemental agreement (“Supplement Agreement”), which altered the financing arrangements largely by pushing back relevant dates.  On 30 April 2016, the parties entered into a cooperation agreement (“Cooperation Agreement”) containing further terms dealing with the development of the Land.  The Cooperation Agreement contains an arbitration clause, which provides:

“Any Disputes arising out of or relating to this Agreement shall be submitted to the Hong Kong International Arbitration Centre in accordance with the Domestic Arbitration Rules of the Centre in force at the time of applying for arbitration. The arbitration shall be conducted at the Hong Kong International Arbitration Centre. The arbitral award is final and binding on all Parties.”

4.In the middle of 2016 China City began to experience financial problems.  This prevented the parties agreeing the financial matters they were required to agree pursuant to the agreements I have referred to.  On 31 March 2017 Champ Prestige exercised its put option.  China City did not pay the sums due on its exercise pursuant to clause 6.6 of the Supplemental Agreement.  On 26 June 2017 the Parties entered into a framework agreement to resolve the problems that had arisen, which provided for the sale of the loan or the sale of one party’s shares to other party (“Framework Agreement”).  Champ Prestige alleges that China City has failed to honour its obligations under the Framework Agreement.

5.In summary the complaint is that the Company is unable to progress its intended business purpose, namely, to develop land in Miami, Florida, which it owns through three mezzanine subsidiaries, which are incorporated in the British Virgin Islands and the United States, owing to the failure of China City, to fulfil its obligations pursuant to the various agreements. It is not necessary to describe the complaints in the Petition in any more detail, as the scope of the present application is quite narrow and clearly delineated.  China City applies to strike out the Petition on the grounds that it fails to satisfy or properly plead the three core requirements, which must be satisfied before the Court will exercise its jurisdiction under s327(3) of the Ordinance to wind up a foreign incorporated company, alternatively that the dispute be referred to arbitration.

6.In recent years the courts of Hong Kong have considered in a number of authorities the principles that govern the circumstances in which the discretion given to the court to wind up a foreign incorporated company should be exercised.  They have culminated in the decision of the Court of Final Appeal in Kam Leung Sui Kwan v Kam Kwan Lai [1] (“Yung Kee”), which concerned a solvent company.  In summary the principles that emerge from the decision are as follows:

(1)  The starting point is that the most appropriate jurisdiction to wind-up a company is its place of incorporation [19].

(2)   Three core requirements should usually be satisfied before the Court will exercise its exorbitant jurisdiction §20–21:

(a)   there has to be a sufficient connection with Hong Kong, but this does not necessarily have to consist in the presence of assets within the jurisdiction;

(b)   there must be a reasonable possibility that the  winding-up order will benefit those applying for it; and

(c)   the court must be able to exercise jurisdiction over one or more persons in the distribution of the company’s assets.

(3)    In a shareholders’ petition, it is necessary to establish   a “sufficient connection” between the company and Hong Kong, which requires a multi-factor analysis.  Important factors include:

(a)   The whereabouts of the shareholders [30] and the directors [32(5)];

(b)   Where the company’s subsidiaries are incorporated [32(3)];

(c)   Where the underlying assets (including the assets of its wholly-owned subsidiaries) of the corporate group are situated [32(2)];

(d)   Where the company derives its income from [32(4)]; and

(e)   Where the operations of the Company took place [32(7)].

(4)     It is essential that there is a real likelihood that the petitioner will derive some benefit from the winding-up order [35].

7.The fact that the Company’s ultimate business and asset is located in Florida is central to China City’s argument that there   is insufficient connection between Hong Kong and the Company to justify the court exercising its winding up jurisdiction if the complaints advanced in the Petition were to be proved at trial.  In [30] of the   joint judgment of Lord Millett and the Chief Justice in Yung Kee they explain that in the context of shareholders’ disputes what is relevant “is whether there is a sufficient connection between the company and the jurisdiction in which the petitioner seeks to have it wound up on the ground relied on.  In the case of a shareholder’s petition on the just and equitable ground, the question is whether, having regard to all the circumstances, including the fact that the company is incorporated in another jurisdiction, it is just and equitable that the company should be wound up in Hong Kong.  Given the nature of the dispute and the fact that it is a dispute between the shareholders, their presence in the jurisdiction is highly relevant and will usually be the most important single factor.”  In other words one looks to see whether the management and ownership have sufficient connection with Hong Kong to justify the court exercising its jurisdiction.

8.In my view in the first instance this question is to be considered in general and common sense terms.  It is not necessary to undertake a careful forensic analysis of the various components of a company’s operations and ownership if it is fairly clear that, wherever the company may have been incorporated in commercial terms, it is fairly viewed as a Hong Kong business entity.

9.In my view this is fairly clearly the case with the present Company.  Four or its five directors are resident in Hong Kong.  The fifth, Yu Lin, lives in Changchun in the Mainland.  China City is incorporated in Hong Kong and Champ Prestige, although incorporated in the British Virgin Islands, is owned by a Hong Kong listed company.  The project in Miami is dormant. Clearly, ownership and management of the Company are more closely connected with Hong Kong than they are with either the United States or the British Virgin Islands.  Particularly as this strike out application and the Petition should only be struck out if the relevant limb of the Petition is bound to fail [2] it seems to me that the application should be dismissed.  I now turn to consider the alternative application for a stay to arbitration.

10.In my decision in Re Quicksilver Glorious Sun JV [3] at   [21]–[22] I explain the correct approach to determining whether or not the complaints in a shareholders petition should be referred to arbitration if an agreement has been made between shareholders, which refers disputes arising under it to arbitration.

“21. In Fulham Football Club the Court of Appeal proceeded on the basis, which does not appear to have been contentious, that ‘legal proceedings’ included the petition[4]. The Court of Appeal held that notwithstanding this the provisions of the Arbitration Act left open the possibility of a challenge to an application to a stay on the ground of arbitrability. The Court of Appeal concluded that a petition under section 944 of the Companies Act 2006 for relief for unfair prejudice did not invoke a class right that could only be determined by the court. The difference in the wording between section 20 of the Arbitration Ordinance and section 9 of the Arbitration Act does not of itself impact materially on the issue before me as Mr. Barlow accepted that the Court has a discretionary jurisdiction to stay the Petition [5], but argued that it was not a discretion that could properly be exercised given the inalienable right which Quiksilver has to seek a winding-up order from this Court. The determinative issue arising from the way in which Mr. Barlow put Quiksilver’s case is whether or not the substantive dispute between the parties is arbitrable. By substantive dispute I mean the commercial disagreement, which they wish to have resolved. This is not the same as the relief that one party seeks.

22. I have already rejected the objection that because of its nature a just and equitable winding-up petition cannot be stayed to arbitration. I have also explained why the fact that the precise relief sought in a petition is not available from an arbitrator is not a critical consideration, although it is relevant. In my view the correct approach is to identify the substance of the dispute between the parties and ask whether or not that dispute is covered by the arbitration agreement.”

11.Mr Maurellet analyses Champ Prestige complaints as falling into four heads.  In summary they are:

(1)    China City breached the SPA and the Supplemental Agreement by failing to submit a financing proposal and not honouring the put option.

(2)    China City breached the Framework Agreement by failing to implement the agreed routes for exiting the venture.

(3)    China City is in poor financial condition and is unlikely to able to continue with its investment in the Company and the development of the land in Miami.

(4)   The breakdown of the relationship between the parties respective parent companies.

12.As I understand his submissions Mr Maurellet acknowledges that the second, third and fourth grounds do not arise under either the SPA or the Cooperation Agreement, both of which contain arbitration clauses.  Mr Maurellet sought to circumvent the obvious impediment that this puts in the way of his application by attempting to demonstrate that they are of no relevance to the determination of whether or not there has been a break down in trust and confidence.  It does not seem to me that this is a legitimate approach to resolution of an application to stay the entire Petition.  There might be cases in which part of a dispute can sensibly be hived off and referred to arbitration and perhaps the balance of the complaints stayed until the arbitration is complete following which the petition continues to determine the outstanding issues.  This does not seem to be that kind of case.  The complaints all form part of one continuing narrative and I would be reluctant to exercise my discretion to stay a petition on the grounds that some, but not all the factual matters in dispute are the subject of an arbitration clause unless it is clear and obvious (and probably the test to be applied is that in a strike out application, see [9]) that a dispute the subject of an arbitration clause would be central and probably determinative of the factual issues raised by the Petition.  This does not seem to me to be such a case.

13.Ms Chan also argues that the material obligations under the SPA and the Supplemental Agreement, were replaced by the Framework Agreement, which does not contain an arbitration clause, and the first complaint is largely a matter of background.  This seems to me, at least on the evidence that I have before me at this stage of the proceedings, probably correct.

14.I, therefore, dismiss the application and make a costs order nisi that China City pays Champ Prestige’s costs of the application with a certificate for two counsel with the costs paid forthwith.

Ms Linda Chan SC, instructed by Norton Rose Fulbright Hong Kong,  for the petitioner

Mr José Maurellet SC, Mr Alexandra Tang and Mr Chow Ho Kiu,     instructed by C L Chow & Macksion Chan,  for the 1^st respondent

The attendance of the Official Receiver was excused