CHINA MEDICAL TECHNOLOGIES, INC. (In liquidation) v. SAMSON TSANG TAK YUNG

CACV 197/2014

[2018] HKCA 111

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 197 OF 2014

(ON APPEAL FROM HCCW 435 OF 2012)

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REASONS FOR JUDGMENT

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Hon Lam VP:

1.  I agree with the Reasons for Judgment given by Barma JA.

Hon Yuen JA:

2.  I agree with the Reasons for Judgment of Barma JA.

Hon Barma JA:

3.  This was an appeal by Mr Samson Tsang Tak Yung, an alleged contributory of China Medical Technologies, Inc. (“the Company”), a Cayman Islands company, against the winding up order made against the Company by Harris J on 1 September 2014. At the conclusion of the hearing, the appeal was dismissed with costs to the Company, which (acting through its Joint Official Liquidators appointed in the Cayman Islands) had petitioned for its own winding up in Hong Kong.  We also ordered that the liquidators’ own costs be costs in the liquidation.  These are our reasons for doing so.

4.  At an earlier stage of the appeal, the Company had sought to strike out Mr Tsang’s appeal.  That application was unsuccessful.  The reasons for that decision are, pursuant to a direction made earlier by this court, handed down at the same time as these reasons for judgment, in separate Reasons for Decision. 

5.  The relevant background to the appeal is as follows.  The Company, incorporated in the Cayman Islands, was not registered in Hong Kong.  It was the holding company of a group of companies which developed, manufactured and marketed surgical and medical equipment in China.  It was wound up in the Cayman Islands in July 2012 and placed into bankruptcy in New York in August 2012.  It appears to be massively insolvent – the deficiency in its assets exceeds US$400 million.  When the petition was presented there was only one Hong Kong creditor, with a debt of just over US$4,000.  Mr Tsang, the opposing contributory, was a director of the Company between 2007 and 2011, and was also its Chief Financial Officer.

6.  The petition to wind up the Company in Hong Kong was, as noted above, brought by the Company itself, acting through its Cayman Islands Joint Official Liquidators.  This was with a view to seeking orders for examination in Hong Kong pursuant to section 221 of the Companies Ordinance (now the Companies (Winding Up and Miscellaneous Provisions) Ordinance) (“the Ordinance”) against Mr Tsang and others.  According to the Joint Official Liquidators the company appeared to have dissipated its assets by entering into various transactions with entities connected with its main beneficial shareholder, Chairman and Chief Executive Officer, a Mr Wu Xiaodong. Information obtained by Joint Official Liquidators after the presentation of the petition (referred to further below) suggested that two major acquisitions of technology known as FISH and SPR were bogus and resulted in the extraction from the Company of some US$355 million.

7.  As a contributory of the Company, Mr Tsang’s views on the appropriateness of making a winding up order could be of no weight, given the extent of the Company’s insolvency.  He clearly could have no interest in the liquidation qua contributory. However, he just as clearly did have an interest (as the judge found) in avoiding an investigation into his involvement in the transactions which appeared to have been the substantial cause of the Company’s insolvency. Although mindful of Mr Tsang’s likely motivation for seeking to resist the Company’s winding up in Hong Kong, the judge took the view that Mr Tsang should be allowed to appear and make submissions, limited to the question of whether or not the court had jurisdiction to wind up the country, and if it did, whether it should exercise its discretion to do so, having regard to the strength (or lack of strength) of the relevant connections to Hong Kong.

8.  Having heard the petition in June and August 2013, the judge dismissed the petition on 5 September 2013, handing down his reasons for doing so on 9 April 2014.  The judge held that the court had jurisdiction to wind up the Company pursuant to section 327(3) of the Ordinance, but that it should not exercise its discretion to do so.  In coming to this view as to how the discretion should be exercised, the judge referred to the three “core requirements” identified in Re Real Estate Development Company [1991] BCLC 210 at 217c, namely:

(1) that there must be a sufficient connection with [Hong Kong] which may, but does not necessarily have to, consist of assets within the jurisdiction;

(2) that there must be a reasonable possibility if a winding-up order is made, of benefit to those applying for the winding-up order; and

(3) one or more persons interested in the distribution of the assets of the company must be persons over whom the court can exercise a jurisdiction.

The judge regarded these as going to the exercise of discretion rather than the jurisdiction to wind up, but held that the third core requirement was not, in his view, satisfied, and that the strength of the first two core requirements was not so overwhelming as to justify the making of a winding-up order notwithstanding the absence of the third.  The order dismissing the petition had however not been sealed.

9.  Before the judge handed down the reasons for his decision to dismiss the petition, the Company drew his attention to further evidence that it had obtained after the hearing of the petition, which it said demonstrated that the connection with Hong Kong was in fact much stronger than appeared from the originally available evidence.  This led to an application by the Company (made in June 2014, after the handing down of the reasons for dismissal of the petition) for the trial to be re-opened and permission to be given to the Company to adduce the further evidence.

10.  The evidence appeared to show that a large number of fund movements by which the Company’s assets were allegedly dissipated had taken place in Hong Kong, and that these movements had been based on instructions given by persons in Hong Kong (including Mr Tsang).  Having considered the additional evidence, the judge decided on 28 August 2014 that the trial should be re-opened and the new evidence allowed to be deployed as it would have a decisive effect on the outcome of the proceedings by strengthening the first two core requirements to such an extent as to justify the making of a winding up order notwithstanding that the third core requirement remained unsatisfied.  In essence, the judge considered that the evidence now showed that Hong Kong was central to the way in which the Company had been operated, making the connection of the Company to Hong Kong very significantly more substantial than previously had been appreciated.

11.  Having decided to re-open the proceedings, the judge restored the winding up petition for hearing on 1 September 2014, when he made the winding up order which is the subject of this appeal.

12.  Aggrieved with that decision, Mr Tsang brought this appeal.  Mr Anson Wong SC, appearing for Mr Tsang before us (but not in the proceedings below) relied on two grounds of appeal:

(1) That the judge had erred in principle in winding up the Company when (as the judge accepted) the third core requirement had not been satisfied.

(2) That the judge had erred in holding that the benefits of making an ancillary winding up order in Hong Kong were so great as to justify the winding up of the Company here when it had already been wound up in its place of incorporation, and the court had extensive common law powers, which it had actually exercised, to recognise and give assistance to the Joint Official Liquidators.

13.  The Company has filed a respondent’s notice seeking to affirm the decision below on two additional or alternative grounds:

(1) that the judge was wrong to conclude that the third core requirement needed to be satisfied before the court could wind up an unregistered company; and

(2) that the judge was wrong in concluding (in the original reasons for dismissing the petition) that the third core requirement was not satisfied, by holding that a creditor in Hong Kong who was owed US$4,139 was “too small” and a fund manager in Hong Kong with an interest in the outcome of the liquidation was “too remote” to satisfy that requirement.

14.  Mr Wong’s principal contention was that the judge was wrong to have made the winding up order notwithstanding that he had concluded that the third core requirement was not satisfied.  In other words, each of the three core requirements was a necessary condition that had to be met before the court would (or could) make a winding up order in respect of an unregistered company.  Mr Wong submitted that the judge had erred in concluding that the court’s jurisdiction to make a winding up order in respect of an unregistered company was defined solely in section 327 of the Ordinance, and that the three core requirements were simply guidance as to the circumstances in which the court could exercise that jurisdiction, so that their application could be moderated where the situation called for that to be done, for example (as in this case) by not insisting on the third core requirement where the first two were satisfied in a way which demonstrated very strong connections between the Company and Hong Kong, and very clear benefits to be gained from the making of a winding up order.

15.  Mr Wong submitted that the overwhelming weight of authority was to the effect that the three core requirements were more than mere guidance, and had to be satisfied in every case before the court could make a winding up order in respect of an unregistered company incorporated overseas.  He submitted that jurisdiction should be understood in two senses.  The first was the narrow or strict sense, in which it connotes the limits placed on the court’s power to hear and determine issues: here, that was defined by the terms of section 327. The second was the wider sense, which extends to the settled practice of the court as to how it will exercise the powers, or grant the relief, falling within its jurisdiction in the first, strict, sense to exercise or grant: here, that was represented by the three core requirements, which acted as constraints adopted by the court itself to limit the circumstances in which it would exercise its power to wind up in the case of unregistered overseas companies.

16.  It is fair to say that different views have been expressed in the English authorities as to whether the three core requirements should be regarded as going to the jurisdiction of the court to make a winding up order in respect of an unregistered overseas company, or as going to the exercise of its discretion whether or not to do so.  The judge, for the reasons he explained in his judgment, preferred the view that they were discretionary, rather than jurisdictional, in nature.  In Hong Kong, it seems to me that the matter must be regarded as being settled in favour of the view that the three core requirements go to discretion, in the light of the judgment of the Court of Final Appeal in Kam Leung Sui Kwan v Kam Kwan Lai (2015) 18 HKCFAR 501, a shareholder’s petition in respect of Yung Kee Holdings Limited, a BVI company, which through subsidiaries operated a well-known restaurant in Hong Kong.  There, Ma CJ and Lord Millett NPJ said, at paragraph 21 of their joint judgment (with which the other members of the court agreed):

“21. Some courts have treated these core requirements as going to the jurisdiction of the court under s.327(3)(c). In our view, it is better to treat them as going to the court’s discretion. …”

17.  While acknowledging this, Mr Wong maintained that the three core requirements should be regarded as necessary conditions which must be satisfied before the court would exercise its discretion under section 327.  In support of this, he relied on the statement of Ma CJ and Millett NPJ at paragraph 20 of Kam v Kam that:

“… the courts have adopted some necessary self-imposed constraints on the making of a winding up order against a foreign company. …As the law has developed … the courts have laid down three so-called core requirements which must be satisfied before the court will exercise its statutory jurisdiction to wind up a foreign company. …”

Mr Wong suggested that the statement that the core requirements “must be satisfied” indicated that the Court of Final Appeal was of the view that even if properly regarded as going to discretion, the requirements were nonetheless conditions that had to be met before a winding up order could properly be made in respect of a foreign company.

18.  With respect, placing that degree of emphasis on this part of paragraph 20 is a misreading of the judgment.  Paragraph 20 is introductory in nature, setting out the current state of the law as the background to the discussion that follows, in which the Court of Final Appeal restates the approach to the winding up of foreign companies to make it clear not just that the core requirements are matters that go to the court’s discretion, but also that it is not strictly necessary for every one of them to be satisfied in every case in which a winding up order is to be made against a foreign company.  That this is so appears from other parts of the judgment, which are considered below.

19.  Having explained, in paragraphs 22 and 23 of the judgment that in creditors’ petitions to wind up on the ground of insolvency, there is likely to be an overlap between the core requirements (particularly where the company has assets in Hong Kong which will be available for distribution to its creditors), and reiterating that presence of assets within the jurisdiction is not essential, Ma CJ and Millett NPJ say, at paragraph 24, that:

“24. In our view, the question in the case of a creditor’s petition is whether there is a sufficient connection between the company and this jurisdiction to justify the court in ordering a company to be wound up despite the fact that it is incorporated elsewhere; and that in deciding that question the fact that there is a reasonable prospect that the petitioner will derive a sufficient benefit from the making of a winding up order, whether by the distribution of its assets or otherwise, will always be necessary and will often be sufficient.”

20.  This passage indicates that, when considering a creditor’s petition to wind up a foreign company, the court should approach the exercise of its discretion to do so by reference to a single overarching question – whether there is a sufficient connection between the company and Hong Kong that would justify the winding up of the company in Hong Kong, thereby putting in motion the full machinery of winding up in respect of it, notwithstanding that the company was incorporated elsewhere.  The three core requirements may thus, I suggest, be best understood as aspects of the enquiry into the sufficiency of the connection between the company and this jurisdiction.  In that context, it is notable that the second requirement, that of likelihood of benefit to the petitioner from the making of a winding up order in Hong Kong, is described as a condition that is always necessary, and often sufficient.  This indicates, to my mind, that there can, as the judge held, be cases in which the failure to satisfy the third condition will not be fatal to the making of a winding up order.

21.  This point is reiterated by paragraph 36 of the judgment, where it is said that:

“36. It must be remembered that the so-called core requirements are not statutory but self-imposed constraints adopted by the courts. In elucidating their meaning no question of statutory interpretation arises. The question is whether the connection of a company with Hong Kong is sufficient to justify the Hong Kong court in exercising its jurisdiction to wind that company up, and that is a question of degree. The nature of the connection will vary from case to case and is always a matter for the court. …”

22.  Kam v Kam was not, of course, concerned with a creditor’s petition to wind up on the ground of insolvency.  It was a petition by a shareholder to wind up on the just and equitable ground.  Not surprisingly, the Court of Final Appeal expressed the view (in paragraphs 26 and 27 of the judgment) that the factors that would be relevant to establish the connection required to justify the making of a winding up order in respect of the foreign company subject to the petition would be different, because the nature of the dispute and purpose for which the winding up order is sought are different.  In the case of a creditor’s petition, it is usually to recover a debt owed by the company to the creditor by the distribution of the company’s assets to its creditors through the winding up process, while in the case of a shareholder’s petition, it is usually to extricate the shareholder from his relationship with and release his investment in the company back to him through the winding up.  However, what is, to my mind, important is that the broad question to be asked when considering whether or not to wind up an overseas company remains the same – are the connections with Hong Kong sufficient to justify the making of a winding up order against it.

23.  Mr Wong sought to suggest that the discussion in the Court of Final Appeal judgment after paragraph 20 was concerned only with the first of the core requirements, as it had been noted at the end of that paragraph that the parties in Kam v Kam had focused on only the first of those requirements.  I do not think that this is right.  It is clear from the discussion between paragraphs 21 to 30 and paragraphs 35 and 36, that the court was concerned with the wider question of how the discretion to wind up a foreign incorporated company should be exercised, looked at this from the point of view of both creditor’s and shareholder’s petitions, and expressed itself in terms apt and intended to provide general guidance going forward.  It is also evident from the discussion of creditor’s petitions that the court was examining other core requirements as well.  Paragraph 22 of the judgment illustrates this, by observing that the various requirements to some extent overlap, and paragraph 24 does the same by focusing on the second core requirement of benefit to the petitioner, which was regarded as always necessary and often sufficient.

24.  In the present case, it is pertinent to note that while the winding up order sought is in respect of an insolvent company, the petition is not in fact brought by a creditor, but by the Company itself, acting through its liquidators appointed in its home jurisdiction, by the courts of its place of incorporation.  In such a case, the considerations which the Hong Kong court should bear in mind when enquiring whether the company has a sufficient connection with Hong Kong to justify the making of a winding up order, may well be to some extent different from those in the case of an ordinary creditor’s petition based on insolvency.  What the connections required may be will depend on the circumstances, and the purpose for which the foreign liquidators seek a winding up order in Hong Kong.  For example, if a substantial portion of the company’s assets are located here, it may well be thought to be more convenient for there to be a liquidation here, as well as in the place of incorporation. The same may be true if the company has a large number of creditors in Hong Kong.  But even where the company has neither significant assets or creditors here, there may still be good reason for thinking that it would be desirable for there to be a winding up in Hong Kong, if (as the judge has found to be the case here) there are significant inquiries to be made which are centred on the Company’s activities in Hong Kong, which will involve the examination of a potentially large number of persons or entities in Hong Kong, that may lead to the identification of avenues of recovery (by the bringing of misfeasance or or other claims, or otherwise) for the benefit of the Company’s creditors, wherever they may be.

25.  I am therefore of the view that the judge was correct to come to the conclusion that it was, in an appropriate case, not necessary to insist that all three of the core requirements had to be satisfied, and in particular, that it was open to him to make a winding up order in respect of the Company if the Company’s connection with Hong Kong was sufficiently strong, and the benefit of making a Hong Kong winding up order was sufficiently significant, to justify that course being taken notwithstanding that there were no creditors of significance located here, or over whom the court had jurisdiction.  I would also agree with the judge that this was such a case.  This is not to say that the three core requirements will not generally need to be satisfied – in the typical creditor’s petition they will still be factors that need to be present, as they all bear on the closeness of a company’s connection with Hong Kong, and it is, as the judge said, likely only to be in exceptional cases that the third requirement may be dispensed with.  

26.  This leads on to the second ground of appeal advanced by Mr Wong on behalf of Mr Tsang, namely that the benefits of a Hong Kong liquidation were not sufficiently great to justify the making of a winding up order, particularly when it was borne in mind that the Hong Kong court could assist the Company’s foreign liquidators in their investigation of the Company’s affairs here, and had in fact already made some orders for that purpose.

27.  This ground of appeal seeks to challenge the judge’s assessment of the strength of this particular factor, and his consequent exercise of discretion based upon it.  That is not fertile ground for an appeal.  It is trite that an appellate court will be slow to interfere with a judge’s assessment of the strength of factors that go into the discretionary balance, and with the striking of the balance thereafter.  It will only be in cases where the assessment, or balancing exercise, can be seen to be plainly wrong that this court would intervene.

28.  In the present case, I am unable to see any error in the judge’s assessment and exercise of discretion.  The judge was well aware of his powers to afford assistance to the Company’s liquidators appointed by the Cayman Island court, not least because he had already done so.  However, the fresh evidence placed before him on the re-opened hearing of the petition satisfied him that the Company’s connections with Hong Kong, particularly in relation to the events and transactions by which a substantial part of its assets were lost to it, were very much more significant than he had appreciated on the basis of the earlier evidence at the first hearing of the petition.  The liquidators’ evidence also explained why they considered that it was worthwhile to proceed by way of a Hong Kong liquidation, rather than seek assistance on an ad hoc basis for every investigation that needed to be carried out in Hong Kong.  The alternative to a Hong Kong liquidation would have involved the making of multiple applications to the Cayman courts for letters of request, with a separate application for each occasion on which it was desired to enlist the assistance of the Hong Kong court to facilitate the examination of a particular person or entity.  It was considered substantially more convenient to avoid the need for this process to be gone through each time by putting the Company into liquidation here, and making direct use of the section 221 examination procedure.  The judge accepted this argument, and in my view it was clearly open to him to do so.  I would therefore reject this ground of appeal.

29.  For the foregoing reasons, both grounds of appeal raised by the appellant failed.

30.  In these circumstances, it is not strictly necessary to deal with the points raised in the respondent’s notice, and I shall therefore do so only briefly.

31.  I do not think that the first ground, that the judge erred in concluding that the third core requirement needed to be satisfied, is made out.  In fact, in all of his decisions, having concluded that the debt of US$4,000 odd of the only Hong Kong creditor was too insignificant to be regarded as satisfying the third requirement, the judge proceeded on the basis that there could be exceptional cases in which the connection of the Company with Hong Kong was so strong, and the benefit to be gained from making a winding up order was so substantial, that the third requirement could be dispensed with.  The difficulty was that the judge did not regard the evidence placed before him on the initial hearing of the petition as being sufficient to make out a case for dispensing with the third requirement.  I do not think that he could be said to have been wrong to do so.  As for the suggestion that the third requirement should simply be dispensed with, I would agree with the judge that there is, in the majority of creditor’s petitions, good reason for seeking a real connection with Hong Kong both on the part of the company the subject matter of the petition, and in terms of creditors who would benefit from a winding up order, when considering whether or not a winding up order should be made in respect of a foreign company.

32.  As to the second point, when it is appreciated that the overall inquiry is directed at the question of whether the connections with Hong Kong are such as to justify the making of a winding up order over a foreign company, it must follow that the exercise is not of a “tick box” nature, so that any connection, however small, will satisfy the relevant requirement.  This is evident from the first core requirement, which speaks of a “sufficient connection” between the Company and Hong Kong.  It is also implicit in the need for a reasonable prospect of benefit that the benefit should be sufficiently significant to justify the making of a winding up order.  In the same way, it seems to me that the existence of creditors or other persons over whom the court has jurisdiction must similarly import a threshold of significance that should be met.  What that threshold might be in any particular case will depend on the circumstances, and at the end of the day, it seems to me that all that the judge was saying (in my view, correctly) was that in this case, the existence of a single creditor within the jurisdiction (and one other party whose interest was at best indirect) was not sufficient to justify the making of a winding up order when it would not otherwise have been appropriate to do so.

33.  In my view, therefore, neither of the points made in the respondent’s notice assists the Company.  However, as neither of the appellant’s grounds of appeal were successful, it followed that the appeal should be dismissed with costs.