Kam Leung Sui Kwan, Personal Representative of the Estate of Kam Kwan Sing,The Deceased v. Kam Kwan Lai and Others

CACV 266/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 266 OF 2012

(ON APPEAL FROM HCCW NO. 154 OF 2010)

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BETWEEN

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J U D G M E N T

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Hon Kwan JA (giving the judgment of the Court):

1.On 6 March 2014, we handed down judgment dismissing the petitioner’s appeal against the judgment of Harris J on 31 October 2012. We upheld the judge’s decision in dismissing the petition to wind up a BVI company not registered under Part XI of the Companies Ordinance, Cap 32[1], Yung Kee Holdings Limited (“the Company”), on the basis that the court’s jurisdiction under section 327(3)(c) of the Companies Ordinance[2] should not be exercised, and that the conditions necessary for jurisdiction to arise under section 168A[3] are not satisfied. We left open the question whether the affairs of the Company had been conducted in an unfairly prejudicial manner, had jurisdiction been established.

2.The petitioner seeks discretionary leave to appeal against our judgment to the Court of Final Appeal on the grounds that the proposed appeal raises questions of great general or public importance, and/or issues which otherwise ought to be determined by the Court of Final Appeal.  For this purpose, seven questions were framed in the Notice of Motion filed on 3 April 2014.  Questions 1 to 4 relate to the issue of jurisdiction under section 327(3)(c), Questions 5 and 6 relate to the issue of jurisdiction under section 168A, and Question 7 is concerned with whether a course of conduct prior to the parties becoming shareholders can be taken into account in determining if there is mutual understanding capable of giving rise to equitable considerations.

3.The petitioner made the point that none of the issues in the questions framed have been addressed by the highest appellate court in any commonwealth jurisdiction and it is desirable that guidance should be given by the Court of Final Appeal, especially given the widespread practice in Hong Kong of using complex corporate structure involving an offshore holding company with direct and indirect subsidiaries to operate the group’s business.

4.The 1^st and 2^nd respondents oppose the application on the bases that none of the questions formulated is reasonably arguable, two of them are academic, and another involves the application of well-established principles to the specific fact situation in the present case.  Further, the present case does not fall within the exceptional circumstances required for leave to be granted on the “or otherwise” ground.

5.We will consider the questions in the order as raised in the parties’ submissions.

Question 3: whether the principle of separate legal personality is engaged for the purpose of jurisdiction under s 327(3)(c)

6.The petitioner argued in the appeal that in ascertaining if the Company had sufficient connection with Hong Kong for the court to exercise its discretion to wind up this foreign company, the affairs of its BVI subsidiary and Hong Kong sub-subsidiaries should be taken into consideration.  We rejected this argument for the reasons given in §§54 to 64 of our judgment (“the Judgment”), one of them being that this would offend the principle that a subsidiary is a legal personality distinct from its parent company.

7.Mr Jat, SC[4] sought to argue for the petitioner in Question 3 that the principle of separate legal personality is not engaged, as the court is asked to look at the activities of the Company’s subsidiary and sub-subsidiaries, as opposed to the rights and liabilities of these entities.  This is not “piercing the corporate veil” but is just “peeping behind the corporate veil” to determine the nature of the Company for some particular purpose, citing Gore-Browne on Companies (45^th ed), vol 1 at §7[1], not for the purpose of treating the assets (or claims) and liabilities of a company as those of its members or vice versa.  Here, the affairs and activities of the Company’s subsidiary and sub-subsidiaries are being examined to determine whether the Company has sufficient connection with Hong Kong for the purpose of the discretionary winding-up jurisdiction under s 327(3)(c).  There is no suggestion that each of the companies within the group does not possess separate rights and liabilities.

8.He gave as examples of “peeping behind the corporate veil” three cases: Daimler Co Ltd v Continental Tyre & Rubber Co (Great Britain) Ltd [1916] 2 AC 307 (to determine whether the company was an enemy alien); Re FG (Films) Ltd [1953] 1 WLR 483 (to determine if the company was the “maker” of a film within the meaning of the relevant statutes); and Re Bugle Press Ltd [1961] Ch 270 (to determine if the transferee company was separate and distinct from its shareholders such that it could rely on a statutory power of compulsory acquisition to acquire the dissenting minority shareholding in the transferor company).

9.Mr Jat also prayed in aid that in determining whether an unregistered foreign company has sufficient connection for the purpose of exercising the winding-up jurisdiction on the ground of insolvency under section 327(3)(b), the court had in the past taken into account the activities of subsidiaries or sub-subsidiaries within the jurisdiction (Re Zhu Kuan Group Co Ltd, HCCW 874/2003, 2 August 2004 and Re Beauty China Holdings Ltd [2009] 6 HKC 352).

10.We agree with Mr Bleach, SC[5] for the respondents that the distinction between rights and liabilities on the one hand and activities on the other hand is misconceived, as the salient feature of the principle of separate legal personality is that the activities or actions of the company, as with its rights, liabilities and assets, are to be regarded as distinct from those of its shareholders, see Atlas Maritime Co SA v Avalon Maritime Ltd (No 1) [1991] 4 All ER 769 at 779f; Tate Access Inc v Boswell [1991] Ch 512 at 531G to H; and EBM Co Ltd v Dominion Bank [1937] 3 All 555 at 564H to 565A.  And as Mr Bleach pointed out, in Adams v Cape Industries Plc [1990] 1 Ch 433 at 536B to F, the activities of the defendant’s subsidiaries were relied on by the plaintiff in establishing the residence of the defendant but that argument was rejected by the English Court of Appeal.

11.Peeping behind or lifting the corporate veil, as distinguished from piercing the corporate veil, is concerned with the situation where one or more companies are interposed so as to conceal the identity of the real actors and the court looks behind the façade to discover the facts which the corporate structure is concealing.  This was termed the concealment principle in Prest v Petrodel Resources Ltd [2013] 3 WLR 1 at §28 (per Lord Sumption JSC) and would “simply involve the application of conventional legal principles to an arrangement which happen to include a company being interposed to disguise the true nature of that arrangement” (at §61, per Lord Neuberger, PSC).

12.The principle of looking behind the corporate veil was considered in Adams v Cape Industries Plc at 542A to C, but was found to afford no assistance in determining whether the presence of the company’s subsidiaries should be treated as the presence of the company.  As Mr Bleach has submitted, likewise, in the present situation, without cutting across the principle of separate legal personality to treat the assets, liabilities and activities of the Company’s subsidiary and sub-subsidiaries as those of the Company, the mere identification of them and establishing their relationship with the Company in lifting the corporate veil would not assist in determining the question at issue, namely, whether the Company itself would have sufficient connection with Hong Kong.

13.We also agree with Mr Bleach the three cases relied on as examples by Mr Jat are not to the point.

14.As for Zhu Kuan Group Co Ltd and Beauty China Holdings Ltd, they have been discussed in the Judgment at §§60 to 63.  For the reasons stated therein, we do not think they lend support to Mr Jat’s arguments.

15.We do not think the arguments encompassed in Question 3 are reasonably arguable.

Question 4: whether, if engaged, the principle of separate legal personality should be disregarded in the interests of justice and common sense and should yield to s 327(3)(c)

16.The petitioner’s argument here is that in section 168A, the court’s jurisdiction is confined to complaints concerning the “affairs of the specified corporation” and the courts have construed the affairs of a company liberally to extend to the affairs of its subsidiaries and sub-subsidiaries.  By comparison, section 327(3)(c) has no such restriction and the scope of the statutory language is much wider.  To the contrary, the juridical basis underpinning the court’s jurisdiction to wind up on the “just and equitable” ground permits the court to look behind the form and legal structure of the company and focus on the individuals behind the company and their rights, expectations and obligations.  Hence, consistent with this principle, in considering whether an unregistered company has sufficient connection with Hong Kong, the court should likewise focus on the members and their rights, expectations and obligations, including whether the affairs of its subsidiaries and sub-subsidiaries have been conducted in accordance with the rights, expectations and obligations of the members.

17.We do not think the above contention is reasonably arguable.

18.The three core requirements for the exercise of the discretionary jurisdiction to wind up an unregistered foreign company are constraints developed at common law as a pragmatic response to the exercise of a jurisdiction that is prima facie exorbitant.  It does not involve any question of statutory construction, and there is nothing in section 327(3)(c) which could be construed to enable the principle of separate legal personality to be disregarded.

19.Furthermore, the petitioner’s argument has also confused the jurisdictional question of when the discretion to wind up a foreign company should be exercised with the substantive question of the circumstances in which it is just and equitable to wind up a company.

Question 1: whether more stringent requirements are required for petitions to wind up solvent companies on the just and equitable ground under s 327(3)(c)

20.This seeks to challenge the correctness of the views in §§44 and 45 of the Judgment.

21.This question is academic in light of our conclusion in the Judgment that the affairs and activities of the subsidiary and sub-subsidiaries of the Company cannot be taken into account in determining if there was a substantial connection of the Company with Hong Kong.  So even if the requirements to wind up a company on the just and equitable ground under section 327(3)(c) are not more stringent than a creditor’s petition to wind up on the insolvency ground, the connection between the Company and Hong Kong would still be too tenuous to found jurisdiction.

Question 2: whether the presence of shareholders and directors and the activities carried on by them and their conduct giving rise to the dispute constitute “sufficient connection” between the Company with Hong Kong

22.This seeks to challenge the views in §§73 to 75 of the Judgment, which were obiter.

23.Whether shareholders’ connection and the location of the dispute would give rise to sufficient connection for winding-up jurisdiction to be exercised is a matter of judgment and discretion.  It does not seem appropriate to grant leave to appeal for this question, quite apart from the fact that the views were expressed obiter.

Question 5: whether “internal corporate activities” of the Company constitute the “business” of the Company

24.This question is concerned with the application of well established principles set out in §§82 to 85 of the Judgment to the specific fact situation in the present case.  It is not appropriate for leave to be granted.

25.In any event, even if internal administrative affairs could be considered “business” for the purpose of founding jurisdiction under section 168A, the requisite degree of permanence or regularity for establishing a “place of business” at the 5^th floor of the Yung Kee Building was not established on the facts, as found by the judge at §58 of his judgment and affirmed by us in §96 of the Judgment.

Question 6: whether the activities of the Company’s subsidiary and sub-subsidiaries constitute the “business” of the Company

26.For the reasons given in relation to Question 3, we do not think the arguments advanced in relation to this question are reasonably arguable.  Further, Adams v Cape Industries Plc is direct authority that a company is not present and does not establish a “place of business” in the jurisdiction merely by its subsidiary’s presence or carrying on business in the jurisdiction.

Question 7: whether the course of conduct between two parties prior to becoming shareholders can be taken into account in determining if there was mutual understanding capable of giving rise to equitable considerations

27.This question is also academic, as we have determined this in favour of the petitioner at §§134 to 136 of the Judgment.

The “or otherwise” ground

28.It was urged upon us that the Company has operated a well-known restaurant in Hong Kong for many years through its sub-subsidiaries, the group’s businesses are in Hong Kong, the group’s assets are here and the individuals involved are all resident in Hong Kong.  So to require the petitioner to initiate winding-up proceedings in the BVI would result in grave injustice to the petitioner, and would only cause further delay and expense.

29.The respondents argued to the contrary that any delay and expense had been self-inflicted.  And given our view that there were insufficient primary findings of fact to support a conclusion of unfair prejudice, the case would have to be remitted for retrial before a different judge.

30.We do not think the petitioner has made out exceptional circumstances for leave to be granted on the “or otherwise” ground.  Besides, the usual practice is for this court to leave it to the Appeal Committee to decide whether leave to appeal should be granted on this ground (Lau Cho Kun v Lau Siang Kok Lionel, CACV 213/2012, 16 October 2013, §17).

31.For the above reasons, we decline to exercise our discretion to grant leave to appeal.  The petitioner’s application is dismissed.  We make an order nisi that the petitioner should pay the costs of the 1^st and 2^nd respondents, with a certificate for two counsel.

Written submissions by Mr Jat Sew Tong SC, Ms Linda Chan SC and Mr Justin Ho, instructed by Tony Kan & Co, for the Petitioner (Appellant)

Written submissions by Mr John Bleach SC and Mr Victor Joffe, instructed by Minter Ellison, for the 1^st and 2^nd Respondents (Respondents)