The Goose May Be Cooked

Nathalie Ker explains the Yung Kee Restaurant saga
In Hong Kong, the name “Yung Kee Restaurant” is synonymous with good roast goose dishes. From its humble beginnings as a modest food stall in Kwong Yuen West Street to a bustling restaurant in the Yung Kee Building on Wellington Street, Yung Kee Restaurant has been tantalising both local and international taste buds for more than half a century.
However, the recent judgement of the Hong Kong Court of Final Appeal in Kam Leung Sui Kwan v Kam Kwan Lai & Ors FACV 4/2015 (“Yung Kee Case”) may signal the end of the era of the ‘Flying Roast Goose’. On 11 November 2015, the Court of Final Appeal ordered that the family business be wound up, unless the parties agree to a buyout of the petitioner’s shares within 28 days.
This long-running legal saga stems from the all too familiar story of a large family business empire crippled by disputes among the shareholders after the death of the founder. Some years before his death, Kam Shui Fai, the founder of the Yung Kee group of companies (“Founder”) took steps to create a corporate structure which would place the family’s shareholdings outside Hong Kong. This was done for estate planning purposes.
Thus, a company, Long Yau Limited (“Long Yau”), was incorporated in 1990 in the British Virgin Islands (“BVI”). The majority shareholdings in each operating company were transferred to Long Yau and Long Yau was in turn a wholly-owned subsidiary of Yung Kee Holdings Limited (“Company”), the ultimate holding company of the family business and which had also been incorporated in the BVI.
After the Founder’s death, the relationship between the Founder’s two sons, Kam Kwan Sing and Kam Kwan Lai, soured. The older brother, Kwan Sing, brought an action against his brother Kwan Lai and the Company, alleging that the affairs of the Company were being carried out in a manner unfairly prejudicial to him and sought an order to force Kwan Lai to buy out his shareholding, or alternatively that the Company be wound up on the just and equitable ground under section 327(3)(c) of the Hong Kong Companies Ordinance (which has been maintained as section 327(3)(c) of the new Cap 32, now renamed the Companies (Winding Up and Miscellaneous Provisions) Ordinance).
The Court of First Instance and the Court of Appeal held that the Court had no jurisdiction to order the winding up of the Company. Both courts held that the connection between the Company incorporated in the BVI and Hong Kong was not sufficiently strong to justify the exercise of the jurisdiction of the Hong Kong courts to wind up a foreign company.
Both courts also held that a more stringent connection was required in the case of a shareholders’ petition as compared to a creditors’ petition. In particular, the Court of Appeal noted that exercising its jurisdiction to wind up a foreign company was an “exorbitant” discretion, more so in a shareholders’ petition than in a creditors’ petition. The Court of Appeal was not swayed by the fact that the businesses of all the subsidiaries indirectly held by the Company were all based and run in Hong Kong.
The Court of Final Appeal disagreed with the analyses of the courts below and held that there was indeed a sufficiently close connection between the Company and Hong Kong. The Court first went back to the ‘core principles’ enunciated in the case of Re Beauty China Holdings Ltd [2009] 6 HKC  351, which are as follows:
(1)     There had to be a sufficient connection with Hong Kong, but this did not necessarily have to consist of the presence of assets within the jurisdiction;
(2)     There must be 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 in the distribution of the company’s assets.
The Court then stated that the starting point was that the country of incorporation is normally the most appropriate jurisdiction in which to seek a winding up order.
Shareholders’ Petition vs Creditors’ Petition
In relation to the difference between a creditors’ petition and a shareholders’ petition, the Court made the point that creditors seek a winding up order against a debtor in order to obtain payment in or towards satisfaction of their debts. Thus, the presence in Hong Kong of significant assets which may be made available to the liquidator for distribution among the creditors would usually suffice.
However, the case of a shareholders’ petition is different. Whilst a creditors’ petition is between the petitioner and the company, a shareholders’ petition is between the petitioner and the other shareholders; thus the presence of the other shareholders within the jurisdiction is an “extremely weighty factor” in establishing the sufficiency of the connection between the company and Hong Kong. Further, a shareholder’s purpose in seeking a winding up order is also different, in that a shareholder seeks to realise his investment in the company as opposed to the payment of a debt.
The Court of Final Appeal disagreed with the Court of Appeal that it was only in exceptional cases that a court should be willing to exercise its statutory jurisdiction to wind up a foreign company on the just and equitable ground. The question is the same whatever the ground: whether there is a sufficient connection between the company and the jurisdiction in which the petitioner seeks to have it wound up. In the case of a shareholders’ petition founded 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.” In light of the nature of the dispute and the fact that it was a dispute between the shareholders, “their presence in the jurisdiction is highly relevant and will usually be the most important single factor.”
Sufficiency of Connection
The Court then went on to set out the nine factors relied upon by Kwan Sing which established the relevant connection between the Company and Hong Kong:
(1)     The Company itself was merely a holding company of a group of directly and indirectly held subsidiary companies and carried on no business of any kind whether in the BVI or Hong Kong;
(2)     All the underlying assets of the Company, i.e. the assets of its wholly owned subsidiary Long Yau, were situated in Hong Kong;
(3)     The business of the group was wholly carried on by the Company’s indirectly held subsidiaries, i.e. subsidiaries of Long Yau, all of which were incorporated in Hong Kong and carried on business exclusively in Hong Kong;
(4)     The whole of the Company’s income was derived from businesses carried on in Hong Kong;
(5)     All the Company’s shareholders and directors were and had always been resident in Hong Kong and none of them had ever set foot in the BVI where the Company was incorporated;
(6)     All the directors of its directly and indirectly held subsidiaries were and had always been resident in Hong Kong and none of them had ever set foot in the BVI;
(7)     All board meetings of the Company and its subsidiaries were held in Hong Kong and all administrative matters relating to the Company were discussed and decided in Hong Kong;
(8)     Crucially the dispute was a family dispute between parties all of whom were and had always been resident in Hong Kong and the events giving rise to it and the conduct of which complaint was made all took place in Hong Kong; and
(9)     The only connection which the Company had with the BVI was that both it and its wholly owned direct subsidiary Long Yau were incorporated there. The fact that the Company’s only asset, being its shareholding in Long Yau, was located in the BVI was merely a consequence of this.
The Court of First Instance and the Court of Appeal had earlier held that there could not be a sufficient connection to enable the Court to exercise its jurisdiction because the only asset of the Company was its shares in Long Yau which was located in the BVI. Both lower courts had accepted the argument that the underlying businesses and assets of the group, which were in Hong Kong, belonged to Long Yau’s subsidiaries and not to Long Yau, while the shares in the Hong Kong subsidiaries belonged to Long Yau and not to the Company.
The Court of Final Appeal rejected the above reasoning and emphasised that although a company and its shareholders are separate and distinct legal entities, “it does not follow that there is no connection between them or that a sufficient connection of a company with a particular jurisdiction to justify the court winding it up there cannot be established through its shareholders or subsidiaries.”
It was also held that the nature of the connection would vary from case to case, and there was no “doctrinal reason” to exclude a connection through a wholly owned subsidiary. In doing so, the Court referred to its earlier decision of Waddington Ltd v Chan Chun Hoo [2008] 11 HKCFAR 370, where the shareholder of a holding company was allowed to bring an action on behalf of its sub-subsidiaries against the director of the holding company, as any depletion of a subsidiary’s assets causes indirect loss to its parent company and its shareholders.
Findings of the Court
Having decided that there was a sufficient connection for the Court to exercise its jurisdiction to wind up the Company, the Court of Final Appeal reviewed and accepted the trial judge’s findings that:
(1)     Each brother had a legitimate expectation that he could fully participate, and be properly consulted, in the running of the business of the Company and its subsidiaries and could not be excluded from that; and
(2)     Kwan Lai had acted in a manner that was prejudicial to Kwan Sing’s interests by appointing his son as a director of various companies to secure majority control of the boards of those companies, awarding higher salaries to his children as compared to Kwan Sing’s children and allowing his children to use the premises of one of the companies on a rent-free basis.  
On the basis of these findings, the Court concluded that it was just and equitable to wind up the Company.  
The judgement of the Court of Final Appeal in the Yung Kee Case is a landmark decision in favour of shareholders’ rights for redress. The decision may spur more actions in Hong Kong by shareholders who desire to wind up offshore companies which have no business activity of their own in Hong Kong but indirectly hold assets in that jurisdiction through subsidiary companies. This would relieve shareholders of the burden of having to seek redress in the foreign country of incorporation.
In the Malaysian context, the Companies Act 1965 (“CA”) has similar provisions to the Hong Kong Companies (Winding Up and Miscellaneous Provisions) Ordinance. Sections 314 and 315 of the CA provide for the winding up of unregistered companies which include foreign companies. The judgement in the Yung Kee Case will be a persuasive authority should such an action be brought before the Malaysian courts.

Subsequent to the completion of this commentary, it was reported in Channel NewsAsia on 16 December 2015 that the Hong Kong Court of Final Appeal confirmed the winding up of the Company as the shareholders could not settle the dispute within the time prescribed by the Court.