RE CHINA MEDICAL TECHNOLOGIES, INC.

HCCW 435/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 435 OF 2012

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REASONS FOR DECISION

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Introduction

1.  I have before me a petition to wind up China Medical Technologies Inc. (“Company”), which is incorporated in the Cayman Islands.  It was listed on NASDAQ on 10 August 2005.  It was delisted in February 2012.  The Company was the holding company of a group, whose principal business was developing, manufacturing and marketing advanced surgical and medical equipment in the Mainland.  It held its operating subsidiaries through a company incorporated in the British Virgin Islands.

2.  On 27 July 2012 the Company was wound up in the Cayman Islands.  Cosimo Borrelli of Borrelli Walsh Limited in Hong Kong and Kenneth Krys of KRyS Global in Grand Cayman were appointed liquidators. On 31 August 2012 the Company filed a bankruptcy petition in the United States Bankruptcy Court for the Southern District of New York and on 31 August 2012 Judge Robert E Gerber made a bankruptcy order.  On 26 November 2012 the Company issued a petition under each of section 327(1)(a), (b) and (c) of the Companies Ordinance for an order for its winding-up in Hong Kong.  On 29 November 2012 I made an order appointing Cosimo Borrelli and Yuen Lai Yee as provisional liquidators of the Company (“Provisional Liquidators”).  The principal purpose for seeking a winding-up order is to enable the liquidators of the Company to use section 221 of the Companies Ordinance to examine Tsang Tak Yung Samson, who was until 21 December 2011 a director of the Company and until December 2011 its chief financial officer, and possibly other persons with knowledge of the Company’s affairs.

3.  At the hearing of the Petition in June and August 2013 the Company was represented by Roxanne Ismail SC and Jason Karas and an opposing contributory, Tsang Tak Yung Samson, who is a shareholder, was represented by William Wong SC, Jose Maurellet and Justin Ho.

4.  The procedural history of the Petition has not been satisfactory.  At the three hearings of the Petition between 18 February and 20 March 2013 I was urged to make an immediate winding‑up order.  Particularly in the case of the hearings on 25 February and 20 March this was on the basis of extravagant submissions as to the scope of the Court’s jurisdiction under section 327(1) which demonstrated a failure to appreciate the difficulty jurisdiction issues that this Petition raises.  The Petition was set down for an one day hearing in June 2013 which proved to be inadequate with the result that it had to be adjourned for a further two day hearing in August 2013.  On 5 September 2013 my clerk wrote to the parties informing them that I would make an order dismissing the Petition and setting aside the appointment of the Provisional Liquidators.  The written reasons were to follow.  However, the order was not drawn up and sealed.  On 4 November 2013 Lipman Karas wrote asking that the handing down of reasons should be deferred for 28 days pending an application to adduce new evidence.  Rather than issue an application for leave to adduce new evidence the Provisional Liquidators issued a summons in these proceedings against the Commissioner of Police for an order that he release certain documents.  The intention was apparently that the documents would form a significant part of the new evidence that the Provisional Liquidators wished to put before the Court.  At the hearing of the summons on 24 January 2014 the Commissioner of Police withdrew his objection to the application for reasons which are not relevant.  I made it clear at the hearing that the situation was unsatisfactory.  Mr. Tsang’s solicitors had not been informed of the  developments since 5 September 2013 and presumably were proceeding on the basis that the Petition had been dismissed.  It was also inconvenient for the Court as I was waiting to finish the reasons.  I made it clear that if the Provisional Liquidators intended to apply to reopen the trial of the Petition they had to apply within 7 days. 

5.  On 30 January 2014 the Provisional Liquidators issued a summons seeking leave to further amend the Re-Amended Petition, adduce a further affidavit of Mr. Borrelli on behalf of the Provisional Liquidators and for a further hearing of the “Re-Amended Petition”.  At the hearing of the summons on 21 February 2014[1] Mr. Wong submitted that in order for Mr. Tsang’s legal team to properly assess the Provisional Liquidators applications it was necessary for them to know the basis upon which the Court had determined in September 2013 to dismiss the Petition and he asked that the written reasons for that decision be handed down before the substantive hearing of the Provisional Liquidators’ summons.  I agreed that this was the correct course and these are the reason for my decision of 5 September 2013.  The reasons have been prepared without reference to any evidence filed with the Court after that date.  I also made directions for the filing of evidence and the substantive hearing of the summons which is fixed for 21 July 2014.

The Jurisdiction Issue

6.  The Company acknowledges in its Petition that it is an unregistered Company.  The Petition recognises that in order to satisfy the Court that it should exercise its jurisdiction to wind up the Company, the Company must demonstrate that it has sufficient connection with Hong Kong to justify what is an unusual order.  As the Company is massively insolvent the opposing contributory has no tangible interest in the winding-up of the Company and normally the Court would have no regard to his views[2]. As it seemed to me that the issue of jurisdiction needed careful consideration I allowed Mr. Tsang to file evidence and be heard through counsel in order to assist me consider the issue.

7.  I have most recently considered the circumstances in which the Court will exercise its discretionary jurisdiction to wind up an insolvent unregistered company in Re Pioneer Iron and Steel Group Company Limited [3] in which I said this:

“27. Section 327(1) and (3) give the Court a discretionary jurisdiction to wind up an unregistered company. As I explain in my judgment in Re Yung Kee Holdings Ltd [4] this jurisdiction is exercised if the following three core requirements are satisfied:

(1) There is sufficient connection with Hong Kong. In the context of insolvency there is commonly the presence of assets, but this is not essential;

(2) There is 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 interested in the distribution of the company’s assets[5].

28. The significance of each requirement will vary from case to case. An exceptional case may arise in which the connection with Hong Kong is so strong and the benefits of a winding-up order for the creditors of a company so substantial that the Court will be willing to exercise its jurisdiction despite the third criteria not being satisfied, but that is not a matter of principle that I need to decide here.

29.    Understanding how these requirements are to be applied involves understanding the legal framework within which the Court's discretionary jurisdiction under section 327 arises…”

8.  This is a summary of the orthodox view of the way in which the Court approaches an application to wind up an unregistered company.  In the present case the Company argued that it is, however, wrong and that there is no independent third core requirement.  My statement in paragraph 27 of Re Pioneer Iron and Steel Group Company Limited also assumes that where the criteria specified in section 327 are satisfied the decision by the Court of whether or not to wind up a company involves the exercise of a discretion.  This view has been uncontroversial in the other cases in which I have had to consider a petition to wind up an unregistered company and I have proceeded to approach them on this basis[6]. In those cases nothing turned on whether or not the three core requirements had to be satisfied before Court’s jurisdiction was engaged or the jurisdiction was engaged if the criteria expressly referred to in the Ordinance were satisfied and the three core requirements were relevant only to discretion. 

9.  In the present case Mr. Wong argued that the three core requirements go to the existence of jurisdiction and that as a result if they were not satisfied the Court had no discretion to wind up the Company.  This argument is relevant in the present case for the following reason.  In paragraph 28 of my judgment in Re Pioneer Iron and Steel Group Company Limited I suggested that it may not be essential to satisfy the third core requirement if the connection with Hong Kong is sufficiently strong and the benefits to creditors substantial.  Mr. Wong argued that if the three core requirements go to jurisdiction, not just discretion, this approach is wrong.  If the third core requirement is not satisfied the Court has no jurisdiction.  Alternatively, Mr. Wong argued, if I disagreed with this submission (but accepted that the third core requirement is not satisfied) the connection between Hong Kong and the Company is not sufficiently strong to justify the Court treating the present case as sufficiently exceptional and make a winding-up order regardless.

10.  The issues that I have to determine, in the order that in my view it is best to address them given the way in which the arguments have developed, are as follows:

(1) Do the core requirements, whatever they may be, go to jurisdiction or discretion?

(2) Is there a third core requirement and if so what exactly is it?

(3) Is the third core requirements satisfied in the present case?

(4) If it is not satisfied is the connection with Hong Kong sufficiently substantial to justify the Court exercising its discretion regardless?

(5) Is the second core requirement satisfied?

(6) If the third requirement has been satisfied is the connection with Hong Kong sufficiently substantial to justify the Court exercising its discretion?

(7) If the court is to make a winding-up order whether an order should be made for the examination of Mr. Tsang pursuant to section 221?

11.  Before turning to address these issues I will set out the relevant background in detail and explain the reasons why a winding‑up order is sought.

Background

12.  The Company was incorporated in the Cayman Islands on 6 July 2004.  The Company was the ultimate holding company of a group of companies including three indirectly wholly-owned Hong Kong subsidiaries (“Hong Kong Subsidiaries”) which were themselves subsidiaries of companies incorporated in the British Virgin Islands.  The  Hong Kong Subsidiaries, in turn, directly held three subsidiaries, which were incorporated under the laws of the PRC (“Mainland Subsidiaries”).  The principal business of the Group was purportedly the development, manufacture and marketing of advanced surgical and medical equipment in the Mainland such as in-vitro diagnostic products using enhanced chemiluminescence (“ECLIA”) technology, fluorescent in situ hybridisation (“FISH”) technology and surface plasmon resonance (“SPR”). The Mainland Subsidiaries operated the Company’s ECLIA, FISH and SPR businesses. 

13.  On 10 August 2005 the Company was listed on the NASDAQ.  Its shares were traded on the NASDAQ through American Depositary Shares until it was delisted in February 2012.  The Company did not carry on any business in the Cayman Islands or in the USA other than, in the case of the latter, raising funds.  Between August 2005 and December 2010, the Company raised a total of US$677 million (“the Fundraising Proceeds”) by way of two share offerings and three offerings of unsecured senior convertible notes (“Notes”).  In December 2011, the Company failed to make the required interest payments on its outstanding Notes in accordance with the terms of their respective indentures.  Such failures constituted events of default under the indentures.  The indenture trustee for the Notes petitioned for the winding up of the Company in the Cayman Islands.

14.  The Company is insolvent with a shortfall of approximately US$417 million consisting principally of amounts owed to holders of the Notes.  The noteholders include ASM Co-investment Term Trust 1 (“COTT”) and ASM Co-investment Opportunity Trust 1 LP (“COPT”) which hold US$13.4 million and US$18.6 million of Notes respectively.  These are offshore funds managed by Argyle Street Management Limited (“ASM”) which carries on business in Hong Kong and is registered under Part XI of the Companies Ordinance.  I address their significance later in this decision.  There is one creditor in Hong Kong, Walkers, which is a law firm advising on British Virgin Island and Cayman Islands law, and is owed US$4,139.

15.  The Company had at about the time the provisional liquidators were appointed bank accounts in Hong Kong with Bank of China and Morgan Stanley.  There was approximately US$11,000 in the Bank of China account.  In addition the Company’s Hong Kong and Mainland indirectly owned subsidiaries had accounts with Standard Chartered Bank in Hong Kong and at the time the provisional liquidators were appointed approximately US$15,800 was in those accounts.  However, somewhere in the region of US$631 million of the Fundraising Proceeds had passed through the Company’s accounts in Hong Kong between 2006 and 2010.

16.  As I have already mentioned the Company has an indirect interest in the Hong Kong Subsidiaries. One of the Hong Kong subsidiaries, CMED (HK) Limited, rented an office in Wanchai, Hong Kong.  CMED (HK) Limited and other Hong Kong Subsidiaries employed nine people in Hong Kong, although not all at the same time, between May 2007 and March 2011.  The Provisional Liquidators suggest that it is likely that some of the Company’s books and records were kept in Hong Kong although the Provisional Liquidators do not suggest in their evidence that such documents as may at one time have been in Hong Kong are still here.

17.  One of the persons employed in Hong Kong was Winnie Yam.  Ms. Yam was the Company’s investor relations manager between July 2009 and November 2009 and its investor relations manager between April 2010 and March 2011.  A number of the Company’s press releases gave contacts details for Ms. Yam and Mr. Tsang which included Hong Kong telephone numbers.

18.  The Company says that two of its directors were resident in Hong Kong.  The first is Mr. Tsang. Mr. Tsang does not dispute that he is a Hong Kong permanent resident and that he currently resides here.  He does say that during the time he was the Company’s chief financial officer and a director of the Company he spent most of his working week in the Mainland where the Company carried out its principal operations.  In my view this is credible evidence.  It is not contradicted by the Company’s evidence.  The second is Mr. Iain Bruce who was an independent non-executive director.  It is not suggested by the Provisional Liquidators that he has been uncooperative in their dealings with him or that he may possess information critical to their investigations.

19.  It is not in dispute that the Company carried out certain activities in Hong Kong.  Between 4 November 2005 and 8 August 2011 the Company held five physical board meetings here and three telephone board meetings in which some of the participants were in Hong Kong.  The Hong Kong office of KPMG were its auditors and it used the Hong Kong office of a number of international law firms for legal advice.

20.  The Company suggests that it is also relevant that two directors of Molecular Diagnostic Technologies Limited and Supreme Well Investments Limited property are also resident in Hong Kong.  The Company allegedly acquired technology and intellectual property rights from these two companies in circumstances which the Provisional Liquidators wish to investigate.

The need for an order

21.  The reason why the Company seeks an order that it is wound up is because the Provisional Liquidators wish to investigate various matters and they take the view that this can only be done effectively if they are able to exercise the powers available under section 221 of the Companies Ordinance.

22.  The Company explains that the need for investigation arises as follows.  The Company is now hopelessly insolvent, with a deficit in excess of US$417 million.  The Company told investors that the Fundraising Proceeds were to be invested in the Mainland Subsidiaries in accordance with the relevant prospectuses for the Company’s various fundraising activities.  The Provisional Liquidators say that their inquiries indicate that the large majority of the Fundraising Proceeds did not reach the PRC Subsidiaries.  The Provisional Liquidators’ principal concerns about how the Fundraising Proceeds were used and the matters which they wish to investigate are set out in paragraphs 20 to 36 of the Re‑Amended Petition[7]:

“20. The investigations of the JOLs make it clear that:

20.1 the Company had a close connection with Hong Kong (as summarised at paragraph 15 above);

20.2 the Company’s creditors will benefit from a thorough investigation into the Company’s assets and affairs through the use of the powers available to liquidators under the Companies ordinance; and

20.3 there are persons in Hong Kong concerned with and interested in the winding‑up of the Company.

21. Set out below is a summary of the past and present directors of the Company:

Directors	Country of Residence	Date of Appointment	Date of Resignation
Xiaodong Wu (吳曉東) (“Mr Wu”)	PRC	24 July 2014	-
Ting Zheng	PRC	1 February 2005	1 June 2006
Lawrence Arthur Crum	United States	3 February 2005	16 December 2011
Iain Ferguson Bruce	Hong Kong	3 February 2005	3 July 2012
Minshi Shen	PRC	28 February 2005	5 June 2006
Cole R Capener	USA	1 June 2005	16 November 2007
Ruyu Du	PRC	1 June 2005	30 September 2007
Mr Tsang	Hong Kong	11 June 2007	21 December 2011
Yuedong Li	PRC	1 October 2007	15 December 2011
Guoming Qi	PRC	16 November 2007	5 January 2012

22. The JOL’s enquiries and publicly available information indicate that Mr Wu was at all times the Chairman and Chief Executive Officer of the Company immediately prior to the appointment of the JOLs.  Mr Wu was the primary promoter of the Company and is also (directly and indirectly through an entity which is wholly‑owned by Mr Wu) the beneficial owner and controller of 23 % of the Company’s total outstanding common shares.

23. The JOLs’ investigations to date indicate that by virtue of Mr Wu’s position as the Company’s Chairman and Chief Executive Officer and his 23 % shareholding in the Company, Mr Wu exercised dominant control over the Company’s affairs and assets, including the affairs and assets of the subsidiaries of the Company.

24. The JOLs’ investigations, including their enquiries of Dr Crum and Mr Bruce (two of the former independent non‑executive directors of the Company) and of the Company’s former lawyers, indicate that Mr Tsang was also substantially involved in the affairs of the Company including its fundraising events as described in paragraph 16 above.  Mr Tsang joined the Company in 2004 and he held the following roles with the Company and its subsidiaries:

24.1 Chief Financial Officer of the Company between January 2005 and December 2011;

24.2 director of the Company between June 2007 and December 2011;

24.3 director of the Hong Kong Subsidiaries, CMT Diagnostics (Singapore) Pte Ltd (“CMT”), a Singapore incorporated subsidiary of the Company, and all the Company’s subsidiaries which are incorporated in the British Virgin Islands between January 2006 and December 2011; and

24.4 authorized signatory of the bank accounts of (at least) the Company and the Hong Kong Subsidiaries.

25. Mr Tsang resigned from the above roles on or around December 2011 and since that time he has actively avoided the JOLs’ attempts to contact him for the purpose of securing his valuable assistance.

26. The information available to the JOLs (much of which has been obtained since the appointment of the PLs) indicates that Mr Tsang was Mr Wu’s “right‑hand‑man” and that he was the Company’s primary point of contact with its investors, legal advisers, independent directors, auditors and Noteholders.  Much of the Company’s contact with these persons appears to have taken place from the Company’s office on the 14th floor of the Allied Kajima Building in Wanchai and, in many instances, at the direction of Mr Wu.  The information available to the JOLs includes:

26.1 the minutes of the Company’s board and audit committee meetings, some of which took place in Hong Kong including at the JW Marriott Hotel at Pacific Place, at the Hong Kong office of Simpson Thacher & Bartlett LLP, at the Hong Kong office of PwC and via telephone conference held “Hong Kong Time” with participants (seemingly including Mr Tsang) in Hong Kong, which show that Mr Tsang attended most (if not all) of the board meetings of the Company between 4 November 2005 and 8 August 2011.  The minutes also show that Mr Wu and Mr Tsang were (at all times) authorized by the Company’s board of directors to undertake key activities including finalising the Company’s audited financial statements and negotiating and arranging debt and equity financing;

26.2 the responses of Dr Crum and Mr Bruce, of former lawyers from Shearman & Sterling (the Company’s former legal advisers) and of certain Noteholders to the enquiries of the JOLs, which indicate that Mr Tsang was substantially involved in the Company’s business and affairs including the fundraising activities and that he was Mr Wu’s primary assistant;

26.3 crossed receipts signed by Mr Tsang in respect of the issuance of the 4 % Notes and 6.25 % Notes;

26.4 remittance documentation for bank transfers by Mr Wu to his wife, Ms Bi Xiaoqiong (“Ms Bi”) which show that Mr Wu used the addresses of Mr Tsang’s own companies and the flat of Mr Tsang’s wife, Ms Chui Sai Kuen (“Ms Chui”), as his correspondence address, including when Mr Wu transferred a total of US$13 million to Ms Bi, in the United States between January 2006 and July 2009;

26.5 power point slides prepared by Protiviti Consulting, a global consulting firm who undertook an internal control review of the Company in 2007, which state that the Chief Financial Officer, Mr Tsang, is “responsible for both financial and operational transactions, and is very hands‑on for [sic] the daily operation of CMED”; and

26.6 several of the Company’s press releases which indicate that Mr Tsang was the Company’s primary contact for media and investors.  A number of those press releases state that Mr Tsang was contactable on a Hong Kong telephone number.

27. Moreover, the JOLs have reason to believe that Mr Tsang remains in close contact with the directors of the PRC Subsidiaries because:

27.1 during their meetings with Mr Han Jiaming (“Mr Han”), the current director of the PRC Subsidiaries and also a former director of the BVI Subsidiaries and Hong Kong Subsidiaries (ie immediately prior to the appointment of JOLs), it was obvious that Mr Han had been apprised of the actions being taken by the JOLs against Mr Tsang and in respect of the Company in Hong Kong. Mr Han also told the JOLs that Ms Chui had complained to him about the JOLs’ actions in Hong Kong in respect of Mr Tsang; and

27.2 Mr Tsang was able to obtain information on demand from the PRC Subsidiaries regarding his purported shareholding in the Company.  The ease with which Mr Tsang was able to request information relating to the Company is in stark contrast to the total lack of assistance provided by the PRC Subsidiaries to the JOLs.

28. The information available to the JOLs indicates that the proceeds raised from the issuance of the 6.25 % Notes were used to repay the 3 % Notes.  Other than that repayment, the Fundraising Proceeds were supposed to be invested in the PRC Subsidiaries in accordance with the relevant prospectuses for the fundraising events described in paragraph 16 above.

29. However, the JOLs’ investigations to date indicate that the vast majority of the Fundraising Proceeds do not appear to have been invested in the PRC Subsidiaries and the JOLs highlight the following:

29.1 the JOLs’ enquiries with the current directors of the PRC Subsidiaries indicate that the PRC Subsidiaries never received any Fundraising Proceeds.  The JOLs’ enquiries with the State Administration of Foreign Exchange (“SAFE”) also indicate that the Fundraising Proceeds were not remitted to the PRC Subsidiaries with the approval of SAFE. Pursuant to the laws of the PRC, any remittance of foreign currency to a PRC company requires prior approval of SAFE;

29.2 the registered capital of the PRC subsidiaries is as follows:

PRC Subsidiaries	Registered Capital US$
Yuande	49,583,871.00
Beijing GP	5,000,000.00
BBE	5,966,242.00
Total	60,560,112.00

In light of the laws of the PRC, it is highly unusual for any investment in a PRC company to be made other than by way of increasing its registered capital.  This implies that the Company likely invested only approximately US$60 million into the PRC Subsidiaries;

29.3 in addition, the audited financial statements of CMED Diagnostics and CMED ECLIA (the shareholders of GP Medical and Yuande respectively) indicate that they invested only approximately US$55 million in GP Medical and Yuande which is similar to the total registered capital of those companies; and

29.4 the JOLs’ observations of the premises of the PRC Subsidiaries during their site visits indicate that the premises are clearly not worth nearly US$400 million.

30. Furthermore, the information available to the JOLs indicates that on 4 February 2009, an anonymous letter was sent to KPMG, the former auditor of the Company, alleging, inter alia, the following:

30.1 On 6 February 2007, the Company acquired certain technology from Molecular and Supreme Well for US$135.8 million in cash with a further US$40 million to be paid by way of deferred consideration.  The upfront payment accounted for approximately two‑thirds of the Company’s cash balance of US$217 million as of 31 December 2007 (“Technology Acquisition”);

30.2 On 7 October 2008, the Company acquired certain intellectual property rights from Molecular for US$345 million.  This transaction was highly unusual and suspicious (“IPR Acquisition”);

30.3 Molecular and Supreme Well have no apparent business operations and were owned by certain parties in the PRC who were related to the Company’s management; and

30.4 there are grounds to believe that the Company might have used the Technology Acquisition and the IPR Acquisition to channel monies out of the Company in the form of acquisition consideration and then funnelled those monies back to the Company through third parties as purported revenues from distributors of the Company’s products.

31. The information available to the JOLs also indicates that:

31.1 it is likely the anonymous letter triggered the resignation of KPMG as the auditor of the Company; and

31.2 in response to the anonymous letter, the Company’s audit committee engaged Paul, Weiss, Rifkind, Wharton & Garrison LLP (“Paul Weiss”) and AlixPartners LLP (“AlixPartners”) to carry out an independent internal investigation into its business and affairs.

32.   …

33. The JOLs have made requests for the Company’s books and records to KPMG, Paul Weiss and AlixPartners.  However, those firms (save for KPMG to a limited extent after the appointment of the PLs) have refused to cooperate with the JOLs.

34. The JOLs are now also taking steps to investigate the Technology Acquisition and IPR Acquisition.  The JOLs’ searches and investigations in respect of Molecular and Supreme Well indicate that:

34.1 Molecular and Supreme Well were both incorporated in the BVI.  Molecular is wholly owned by Supreme Well and Supreme Well is owned by the following BVI entities equally:

34.1.1 Ally Brilliant Investments Limited (“Ally Brilliant”);

34.1.2 Charm Health Investments Limited (“Charm Health”);

34.1.3 Kahtani International Limited (“Kahtani”);

34.1.4 Sharp Pearl Limited (“Sharp Pearl”); and

34.1.5 Takashi Investments Limited (“Takashi”).

The JOLs are now conducting searches in respect of the above 5 entities.  The information available to the JOLs indicates that the registered agent of the above 5 BVI entities is Offshore Incorporation Inc.

34.2 the directors of Molecular and Supreme Well and Mr Chan Kwan Yan and Ms Chong Kam Chu, both of whom are resident in Hong Kong;

34.3 US$304 million of the Fundraising Proceeds was paid by the Company from its BOCHK bank account to Supreme Well between 3 November 2006 and 4 December 2008;

34.4 the registered agent of Molecular is Overseas Management Company Trust (BVI) Limited and that the registered agent of Supreme Well is CCS Management Limited; and

34.5 Molecular and Supreme Well were struck‑off on 1 November 2012.  Ally Brilliant and Charm Health were struck‑off on 2 May 2011, Kahtani, Sharp Pearl and Takashi were struck‑off on 1 May 2012.  Each of the companies was struck‑off for failing to pay their annual fees to the BVI Companies Registry.

35. The JOLs have made demands for the books and records of Molecular, Supreme Well and the 5 BVI entities listed in paragraph 34.1 above from their registered agents in order to establish their ownership, the financial position of Supreme Well and Molecular and the transactions undertaken by them (including the Technology Acquisition and the IPR Acquisition).

36. The findings described above suggest that the apparent use of the Fundraising Proceeds is highly suspicious and warrants further investigation.”

23.  The Provisional Liquidators suggest that the Company appears to have dissipated its assets through the sale of 60% of its equity interests in the Mainland Subsidiaries to parties controlled by Mr Wu for little or no consideration and to have acquired one of the Mainland Subsidiaries, BBE, for a higher consideration than its value from a party closely related to Mr Wu.  The Provisional Liquidators suggest that if they are able to investigate such matters with the assistance of the tools provided by the Hong Kong insolvency regime they may be able to identify and realise assets and identify possible causes of action in Hong Kong and elsewhere which could lead to the recovery of additional assets for the benefit of the Company’s creditors.  What in practice this boils down to is that they wish to use section 221 to examine Mr. Tsang and probably the Hong Kong based directors of Molecular and Supreme Well.

Do the core requirements go to jurisdiction or discretion

24.  Section 327(1) to (3) provides:

“(1) Subject to the provisions of this Part, any unregistered company may be wound up under this Ordinance, and all the provisions of this Ordinance with respect to winding up shall apply to an unregistered company, with the exceptions and additions mentioned in this section.

(2) No unregistered company shall be wound up voluntarily under this Ordinance.

(3) The circumstances in which an unregistered company may be wound up are as follows-

(a) if the company is dissolved, or has ceased to carry on business, or is carrying on business only for the purpose of winding up its affairs;

(b) if the company is unable to pay its debts;

(c) if the court is of opinion that it is just and equitable that the company should be wound up.”

25.  The section states the court may wind up an unregistered company if one of the circumstances referred to in sub-section (3) applies.  This language confers a discretion on the court if it is satisfied that one of the circumstances is engaged. 

26.  The authorities demonstrate that different courts have taken differing views on whether the core requirements referred to in paragraph 7 above go to jurisdiction or discretion although the point has rarely been crucial.  In Re Real Estate Development Co [8] Knox J held that “the jurisdiction simply does not exist” to make a winding up order if there is insufficient connection between a company and England.  In Stocznia Gdanska SA v Latreefers Inc (No 2) ^[9] Morritt LJ in giving the judgment of the Court of Appeal said this at paragraph 30:

“30. There was some debate before us whether the three core requirements were pre-conditions for the existence of the statutory jurisdiction or principles to be observed in considering its exercise. Sir Richard Scott’s reference to jurisdiction ‘in the broad sense’ suggests that he did not draw any such distinction. Nor do we for there seems to be no reason so to do. It is common ground that if a winding‑up order is to be made then, at least, the three core requirements must be satisfied. The issue is whether, in addition, the petitioner must demonstrate that the company has sufficient assets within the jurisdiction to provide a reasonable possibility of benefit to either the petitioner or the general body of creditors.”

27.  As I have already mentioned this issue in not normally crucial but it was in Re Drax Holdings Ltd ^[10].  It is convenient to quote the relevant paragraphs from the judgment of Lawrence Collin J, as he then was:

“21. The jurisdictional requirements of what is now s 221(1) have been considered in a line of decisions since 1950: see Banque des Marchands de Moscou (Koupetschesky) v Kindersley [1950] 2 All ER 549 [1951] Ch 112; Re Compania Merabello San Nicholas SA [1972] 3 All ER 448, [1973] Ch 75; Re Eloc Electro-Optieck and Communicatie BV [1981] 2 All ER 1111, [1982] Ch 43; International Westminister Bank plc v Okeanos Maritime Corp [1987] 3 All ER 137, [1988] Ch 210; Re a company (No 003102 of 1991), ex p Nyckeln Finance Co Ltd [1991] BCLC 539; Re Real Estate Development Co [1991] BCLC 210; Re Titan International Inc [1998] 1 BCLC 102; Banco Nacional de Cuba v Cosmos Trading Corp [2000] 1 BCLC 813; and Stocznia Gdanska SA v Latreefers Inc (No 2) [2001] 2 BCLC 116.

22. In the Latreefers case [2001] 2 BCLC 116 at 140 the Court of Appeal confirmed that the presence of assets of the company in England was not a precondition to the exercise of jurisdiction (although the presence of assets would constitute good reason in the normal case), and that (approving the formulation of Knox J in Re Real Estate Development Co [1991] BCLC 210 at 217) before a foreign company could be wound up in England, three core requirements had to be fulfilled: (1) there must be a sufficient connection with England which may, but does not necessarily have to, consist of assets within the jurisdiction; (2) 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 assets of the company must be persons over whom the court can exercise jurisdiction.

23. It was not necessary in that case (or in the other cases which led to, or followed, the formulation of the three preconditions) to decide whether these requirements were preconditions for the existence of the statutory jurisdiction of the court, or principles to be observed in considering the discretion to exercise the jurisdiction. The latter approach was favoured (obiter) by Sir Donald Nicholls V-C in Re Paramount Airways Ltd [1992] 3 All ER 1 at 12, [1993] Ch 223 at 240.

24. In most cases the distinction will not matter. The English court will not wind up a foreign company where it has no legitimate interest to do so, for that would be to exercise an exorbitant jurisdiction contrary to international comity, and for that purpose it does not matter whether the pre-conditions are couched in terms of the existence of jurisdiction or the exercise of jurisdiction.

25. But in the present case it may make a difference, because the question is one of the jurisdiction to approve a scheme of arrangement, and the second and third conditions may not be relevant because they were formulated in the context of winding up. If they go to the jurisdiction to order a winding up, the words ‘any company liable to be wound up’ in s 425(6) may require those conditions to be fulfilled even in the case of schemes of arrangement. If they go to the discretion to wind up, then they do not have to be fulfilled in the case of a scheme of arrangement, although the first condition would plainly be relevant in any event.

26.    The question therefore is whether (as was assumed in the present matter by the companies) the combined effect of s 425(6) of the 1985 Act and of s 221(1) of the 1986 Act, and the cases on the winding up of foreign companies, is that the three conditions must be satisfied before the court can exercise its powers under s 425. In my judgment the three conditions go to the discretion of the court, and not to the existence of its jurisdiction. If that is right, then the conditions do not have to be satisfied for the purposes of s 425, because they do not go to the question whether a company is ‘liable’ to be wound up under the 1986 Act. So also it is not necessary for the purposes of s 425 that the grounds for winding up in s 221(5) exist.”

28.  The issue has not been material in any cases in Hong Kong in which jurisdiction has been considered.  I agree with Collins J that the core requirements go to discretion rather than the existence of the jurisdiction.  In my view the jurisdiction is engaged if one of the matters specified in section 327(1) is present.  If the jurisdiction is engaged the court has to consider whether or not to exercise its discretion to wind up an unregistered company and the core requirements are relevant to that determination.  I now turn to consider whether there is third core requirement.

Is there a Third Core Requirement

29.  In my view it has generally been understood since the decision of Knox J in In Re Real Estate Development Company [11] that the three core requirements referred to in paragraph 7 have to be satisfied before the court will exercise jurisdiction to wind up an unregistered company.  The Company recognises this and identified in its submissions a long list of authorities in both Hong Kong and England[12], including two decisions of the English Court of Appeal[13], in which this had been assumed to be the case.  I will refer to this as the “orthodox view”.  However, Ms. Ismail submitted that the orthodox view is wrong.  Her criticism was based on a close reading of cases prior to In Re Real Estate Development Company supra and Knox J’s judgment itself.  Ms. Ismail took me to:

(1)   Banque des Marchands de Moscou (Koupetschesky) v Kindersley [14] and in particular the passage of Evershed MR’s judgment at pages 125 to 126 in which the Master of the Rolls describes the conditions to be satisfied before the court would consider exercising its jurisdiction including that “… There must be … persons subject, or at least submitting, to the jurisdiction who are concerned or interested in the proper distribution of the assets…”.

(2)   Re Compania Merabello San Nicholas SA [15] in which Megarry J develops what was said in Banque des Marchands de Moscou (Koupetschesky) but prefaces the principles he identifies at page 88C to G with the phrase “must normally go on and show”.  Curiously that expression is absent from the version of the report in the All England Reports.  I shall assume that the version in the Chancery Reports is correct.  Ms. Ismail’s point is that the use of the word “normally” suggests that the matters to which Megarry J refers, which include that “the company has assets of some sort here, and that there are claimants for those assets over whom there is jurisdiction”, do not necessarily have to be established in each case.  Ms. Ismail also points out that in his summary of the essentials of the relevant law relating to the existence of jurisdiction to make a winding up order in normal cases in respect of a foreign company at pages 91G to 92B Megarry J makes reference to a requirement that “a proper connection with the jurisdiction must be established by sufficient evidence to show (a) that the company has some asset or assets within the jurisdiction, and (b) that there are one or more persons concerned in the proper distribution of the assets over whom the jurisdiction is exercisable”.  Subsequent cases establish, and this is not in dispute, that it is not necessary for there to be assets in the jurisdiction.

(3)   In Re Eloc Electo-Optieck and Communicatie BV [16] Nourse J treated Megarry J’s summary of the requirements in Re Companie Merabello as being for “normal cases”.

(4)   In International Westminister Bank plc v Okeanos Maritime Corp [17] in his summary of the relevant principles at page 148h Peter Gibson J held that “In my judgment, provided a sufficient connection with the jurisdiction is shown, and there is a reasonable possibility of benefit for the creditors from the winding up, the court has jurisdiction to wind up the foreign company.”  There is no reference to a requirement that a person interested in the winding up is subject to the jurisdiction.  This is, of course, correct, but this requirement, which is referred to at page 145b of the judgment, was not in issue.

30.  Ms. Ismail argues that having reviewed Banque des Marchands, Re Companie Merabello and Okeanos supra Knox J simply refers to the petitioner’s submissions that there were 3 core requirements, which were not seriously contested by the respondent, and then sets them out.[18] However, says Ms. Ismail, Knox J quoted from the All England version of Megarry J’s judgment in Re Companie Merabello (although as can be seen from the list of cases referred to in the judgment he was probably given both versions) and did not apparently have the benefit of argument about how precisely the requirements might be framed.  At pages 217d to 218a ‑ b he said this:

“The proposition that there has to be a sufficient connection with this jurisdiction prompts the question, sufficient for what? The perhaps rather circular answer I would give to that question is, sufficient to justify the court setting in motion its winding‑up procedures over a body which prima facie is beyond the limits of territoriality. That has two significant consequences in the context of the present case. First, it seems to me to be necessary, where there is no asset within the jurisdiction at the presentation of a petition, to establish a link of genuine substance between the company and this country. In the absence of assets, that will normally have to consist of activities carried on by the company within the jurisdiction although in common with Nourse J in the Eloc case I do not find it necessary to hold that is an essential. The second result is that the reference in Lord Evershed MR’s judgment ([1950] 2 All ER 549 at 556, [1951] Ch 112 at 125) to persons subject or at least submitting to the jurisdiction, who are concerned or interested in the proper distribution of the assets, which is echoed in the passage I have read from Megarry J's judgment in the Merabello case ([1972] 3 All ER 448 at 460, [1973] Ch 75 at 91), is not primarily directed at ensuring that the court will be able to control the winding-up process. The court can do that through the control that it always has over the liquidator who is subject to its directions. The primary need for that connecting factor is, in my judgment, to establish that persons exist who are likely to benefit from the making of the order and who qualify for one reason or another as persons on whose behalf it would be right to set in motion the winding-up petition over a foreign company. Throughout the investigation into whether the court has jurisdiction, the aim is to discover a sufficient connection with this jurisdiction and that is as true in relation to the potential beneficiaries as it is in relation to the company which it is sought to wind up. I therefore reject the submission made to me by Mr Pelling, in reply to the point that if there is a winding-up petition presented, there will always be someone submitting to the jurisdiction, that what this requirement was aimed at in practice was a foreign litigant acting in person. That is much too narrow a view. It is a matter of judgment in each case whether the potential beneficiaries from the winding-up process establish their case for the jurisdiction to be exercised. In the Eloc case the petitioners were citizens of the United States, but the jurisdiction was exercised, so there is no question of a rule that foreign petitioners do not qualify. In their case it was, I venture to suggest, exercised and arose because they had been employees in this country of the company against whom the order was made and that Nourse J treated as one of the important factors founding the jurisdiction.”

31.  Ms. Ismail submits that properly understood Knox J’s judgment was primarily concerned with sufficiency of connection with the jurisdiction to justify setting in motion the domestic insolvency regime in respect of a foreign company.  Ms. Ismail put it this way in her written submissions: “.. the primary need for that connecting factor is to establish that persons exist who are likely to benefit from the making of the order and who qualify for one reason or another as persons on whose behalf it would be right to set in motion the winding-up over a foreign company.”  She says that in subsequent cases the three requirements referred to at page 217c have been adopted although the third requirement does not appear to have been in issue.  In conclusion she says that the authorities do not establish that there is a third requirement which must in each case be satisfied.

32.  In my view there can be no serious dispute that in each of Banque des Marchands, Re Compania Merabello and Okeanos the courts envisaged three separate requirements for the court’s jurisdiction to wind up an unregistered company.  In Banque des Marchands, the English Court of Appeal was concerned with, inter alia, whether there was jurisdiction to wind-up a Russian bank which had substantial assets in England but no place of business there. In considering the principles giving rise to the court’s jurisdiction, Evershed MR stated (at 125):

“As a matter of general principle, our courts would not assume, and Parliament should not be taken to have intended to confer, jurisdiction over matters which naturally and properly lie within the competence of the courts of other countries. There must be assets here to administer and persons subject, or at least submitting, to the jurisdiction who are concerned or interested in the proper distribution of the assets. And when these conditions are present the exercise of the jurisdiction remains discretionary.”

33.  As I have already noted subsequent authorities establish that the presence of assets in the jurisdiction is merely a sufficient, not a necessary condition for the Court’s jurisdiction.[19] The importance of Banque des Marchandslies in the recognition by Evershed MR that a fundamental and separate precondition for the Court’s jurisdiction is that there are persons interested in the proper distribution of the company’s assets, in the case of insolvent companies it will normally be creditors, who are “subject, or at least submitting” to the Court’s jurisdiction.  Plainly, it was upon this phrase which Knox J in In Re Real Estate Development Company supra placed reliance when he laid down the third core requirement.  Such a requirement is unsurprising.  If a winding up order is made it engages the entire domestic insolvency regime and one would not expect, other than perhaps in an unusual case, an issue to which I return later, a winding up order to be made unless there is somebody within the jurisdiction who benefits from it.

34.  Similarly, in Re Compania Merabello supra, Megarry J (again summarising the previous authorities) concluded (at 88C) that:

“Accordingly, in my judgment jurisdiction under section 399 can be established without showing either that the company ever had a place of business within the jurisdiction, or that the company has ever carried on a business within the jurisdiction, though from the latter case there is the obvious exception of a case in which the petition is founded upon a past or present carrying on of a business within the jurisdiction. However, a petitioner who can satisfy section 399 must normally go on and show that the company has assets of some sort here, and that there are claimants for those assets over whom there is jurisdiction: but that is all.”

35.  The language chosen by Megarry J makes it clear, as does that adopted by Evershed MR in the passage from the Master of the Rolls judgment quote above, that the two requirements of “assets within the jurisdiction” and “claimants for those assets over whom there is jurisdiction” are disjunctive and separate requirements.

36.  It seems to me that little turns on Megarry J’s use of the term “normally”.  In my view this simply suggests that Megarry J was mindful of the fact, as judges commonly are when formulating principles, that there may be exceptional cases in which the exercise of the court’s jurisdiction is justified by factors which do not satisfy precisely the “essentials of the relevant law” which he goes on to summarise at the bottom of page 91 of his judgment.  It certainly does not follow that Megarry J was somehow downplaying the importance of establishing a sufficient connection between both the company and the forum; and the creditors and the forum any more than it can sensibly be suggested he was downplaying the importance of the other matters to which he refers.  Neither does it follow that the inclusion of the third core requirement by Knox J at page 217 of his judgment in Re Real Estate Development supra was wrong or that the subsequent authorities which have adopted it were wrong.

37.  In my view Re Eloc Electro-Optieck and Communicatie BV supra, is consistent with this view.  In Re Eloc, the court was concerned primarily with the question of whether it was a necessary precondition of the court’s jurisdiction that assets were within the jurisdiction.  Nourse J held that “assets within jurisdiction” was merely a sufficient precondition, and that the precondition could also be satisfied where, amongst other things, the company carried on business in England and where the winding up of the company would benefit the creditors of the company.  In coming to this conclusion, Nourse J made substantial reference to Megarry J’s judgment in Re Compania Merabello supra.  In particular, after citing Megarry J’s “fourth and fifth essentials”, he concluded (at 48G):

“That shows, first, that the assets can be of any nature and, second, that the consequential benefit accruing to a creditor or creditors need not be channelled through the hands of the liquidator. To my mind that confirms that the ownership of the assets by the company is not a matter of crucial importance. I must again observe that Megarry J’s summary of the essentials was directed to normal cases.”

In my view this indicates that Nourse J considered that Megarry J’s reference to the “normal” case was a reference to cases where assets of the company were within jurisdiction.  In other words, the “normal” case is one in which sufficient connection between the company and the forum is demonstrated by showing that there are assets within the jurisdiction.  In my view the judgment cannot be read as suggesting that there is no need to demonstrate a connection between a creditor and the jurisdiction.  It does not appear to have been an issue in the case: Nourse J at 46G:

“There is no difficulty about (b),[20] because the petitioners are persons over whom the jurisdiction is exercisable. But there is clearly a difficulty about (a)[21]”.

38.  In Okeanos supra, the court was also concerned exclusively with the sufficiency of the connection of the company with the jurisdiction and not the sufficiency of the connection of the creditors with the jurisdiction.  The petitioning creditor bank was a resident in England and therefore no issue was taken (by either party) as to the question of whether the court could exercise jurisdiction over “one or more persons interested in the distribution of the assets of the company”. That being the case, Peter Gibson J (much like Nourse J in Re Eloc) proceeded to consider the question from the perspective of whether a sufficient connection of the company with the jurisdiction could be shown where there were no assets within the jurisdiction.  This in my view does not suggest that Peter Gibson J was departing from the approach taken in Banque des Marchands or Re Compania Merabello supra, namely that it was necessary in every case to be satisfied of the sufficiency of the connection of the creditors with the jurisdiction. On the contrary, his Lordship cited both cases in his judgment with approval.[22]

39.  In my view the pre-In Re Real Estate Development Company authorities support the existence of the third core requirement and Re Eloc and Okeanos supra do not support the Petitioners’ submission that this is wrong.  It is clear that Knox J rightly summarised the state of the law as it was then, namely, that three separate core requirements must be satisfied before the Court exercises its jurisdiction to wind up an overseas company.  The question becomes: should the Court in Hong Kong depart from that approach?

40.  As noted by Knox J, whilst both the first and third core requirements deal with “sufficiency of connection”, the two requirements serve entirely different objectives with entirely different rationales. The passage at 217d-h of his judgment is particularly significant:

“The proposition that there has to be a sufficient connection with this jurisdiction prompts the question, sufficient for what? The perhaps rather circular answer I would give to that question is, sufficient to justify the court setting in motion its winding-up procedures over a body which prima facie is beyond the limits of territoriality. That has two significant consequences in the context of the present case. First, it seems to me to be necessary, where there is no asset within the jurisdiction at the presentation of a petition, to establish a link of genuine substance between the company and this country. In the absence of assets, that will normally have to consist of activities carried on by the company within the jurisdiction although in common with Nourse J in the Eloc case I do not find it necessary to hold that is essential. The second result is that the reference in Lord Evershed MR’s judgment at ([1950] 2 All ER 549 at 556, [1951] Ch 112 at 125), to persons subject or at least submitting to the jurisdiction, who are concerned or interested in the proper distribution of assets, which is echoed in the passage I have read from Megarry J’s judgment in the Merabello case ([1972] 3 All ER 448 at 460, [1973] Ch 75 at 91), is not primarily directed at ensuring that the court will be able to control the winding‑up process. The court can do that through the control that it always has over the liquidator who is subject to its directions. The primary need for that connecting factor is, in my judgment, to establish that persons exist who are likely to benefit from the making of the order and who qualify for one reason or another as persons on whose behalf it would be right to set in motion the winding-up petition over a foreign company. Throughout the investigation into whether the court has jurisdiction, the aim is to discover a sufficient connection with this jurisdiction and that is as true in relation to potential beneficiaries as it is in relation to the company which it is sought to wind up.

41.  This passage makes it clear that sufficiency of connection with the jurisdiction has two separate elements.  The first concerns the company’s connection to the jurisdiction. The second concerns whether or not there is sufficient connection between a creditor or creditors subject to the English Court’s jurisdiction to justify an order engaging the English insolvency regime.

42.  Ms. Ismail cited a number of authorities for the proposition that, and I quote from her written submissions, “the connection of the petitioner or other creditors to the jurisdiction should not be relevant to whether the Court has jurisdiction to order a winding-up of a foreign company if sufficient connection to the jurisdiction and potential benefit of an order can be established[23]”.

43.  As Mr. Wong correctly submitted these arguments are normative in nature.  They are not stating the law as it currently stands, they are arguing for a change to it.  I would be hesitant, particularly as Hong Kong’s insolvency regime is currently the subject of revision, to depart from the orthodox view.  I am also not convinced that the third requirement is inappropriate.  It seems to me that the suggestion that it can be proper to engage the entire Hong Kong insolvency regime in circumstances in which there is nobody subject to the jurisdiction who would benefit materially from it is debatable.

44.  There is one final objection to the third requirement that Ms. Ismail raised, namely that it is difficult to apply in practice[24].

45.  A foreign non-resident creditor can petition to wind up a company under section 327 of the Companies Ordinance[25] and having done so he “will always have invoked the jurisdiction and therefore be subject to it in some sense” [26].  If this satisfied the third requirement it would render the third requirement meaningless as it would be satisfied simply by the presentation of a petition.  This suggests that the third requirement has a different meaning.

46.  In Re Pioneer Iron and Steel Group Company Limited, I took the view, that where the petitioner is also a creditor, “something more” is required to satisfy the third requirement:

“As I have already discussed above, once a winding up order is made in Hong Kong against an unregistered company its liquidator should, absent direction from the court, proceed to liquidate its assets for the benefit of all its creditors wherever located. In this sense any creditor of a company becomes subject to the jurisdiction of the Hong Kong Courts in relation to the distribution of a company’s assets, and in my view it must follow that something more than this is required. In the large majority of insolvency cases the requirement will be satisfied by a creditor who is an individual resident here or a foreign company which is registered under Part XI of the Companies Ordinance or which has a place of business here. In my view what the authorities from which this requirement emerge intended is more accurately described as a person who is concerned with the proper distribution of assets and over whom the Court can exercise jurisdiction other than by virtue of him being a creditor of the company.”

47.  A creditor cannot satisfy the third requirement by simply presenting the petition.  The creditor must be subject to the court’s jurisdiction by doing virtue of “something more”, such as by being an employed or otherwise resident within the jurisdiction,[27] by virtue of obtaining the benefit of a judgment debt within the jurisdiction,[28] by being registered under Part XI of the Companies Ordinance and having a place of business within the jurisdiction.[29]  I, therefore, reject the submission that the third requirement should not be adopted because it is too difficult to ascertain whether it has been satisfied.

What exactly is the third core requirement?

48.  In conclusion in my view there is a third core requirement.  In my view the third core requirement is this: There are persons with sufficient connection with the jurisdiction (other than by being the petitioner or a creditor who would become subject to the court’s jurisdiction if a winding up order were to be made and he submitted a proof of debt) and sufficient economic interest in the winding up of the company to justify making an order which will engage the Hong Kong winding-up regime.  Generally this requirement will be satisfied by the presence of a creditor or a number of creditors holding a material portion of the debt. Whether or not the amount of the debt held locally is material will depend on a combination of the amount of the total debt of the company and the amount of the debt held by local creditors.

49.  There may be cases, although they will be rare, in which the third core requirement is satisfied by the presence of a person in the jurisdiction who has an indirect but substantial economic interest in the liquidation, for example, the owner of a foreign company, which is a major creditor of the subject company.  However, I do not accept, as was argued by Ms. Ismail, that a person who has a more general commercial interest in the outcome of the liquidation can satisfy the third core requirement.  This is relevant in the present case because the Company has sought to argue that in considering whether the third core requirement is satisfied the court should have regard to the fact that ASM, which manages COTT and COPT, is registered in Hong Kong under Part XI of the Companies Ordinance and manages the funds from Hong Kong.  There is now no suggestion (although it was suggested, wrongly, at the time of the application to appoint provisional liquidators) that ASM itself is a creditor of the Company.  Its interest is limited to its commercial interest in seeing that the funds it manages perform satisfactorily.  In my view this is too remote an interest to satisfy the third core requirement.

50.  As I explained in paragraph 27 of my judgment in Re Pioneer Iron and Steel Group Company Limited in my view there may be cases in which the connection with Hong Kong is sufficiently strong and the benefits of a winding-up order sufficiently substantial that a court considers it a proper case in which to exercise its discretion despite the third core requirement not being satisfied.  The core requirements constitute guidance as to the circumstances in which the discretion should be exercised and their application can be moderated if the circumstances clearly call for it.

51.  An example would be an unregistered company whose operations are carried out substantially in Hong Kong and involve exclusively exporting products sourced in the Mainland to overseas customers.  Its management is based in Hong Kong, it has assets and its records located here.  The company may be part of a group which operates in such a way that the company does not have any trade or utility creditors in Hong Kong at the time a petition is presented for it to be wound up.  The connection with Hong Kong would be extremely strong and the benefits of liquidating the company here and appointing liquidators to investigate its affairs obvious.  It seems to me that in such circumstances it would be a proper exercise of the Court’s discretion to wind up an unregistered company and engage the Hong Kong insolvency regime.  The underlying reason why it would be proper in my view is because the winding up in Hong Kong would have most of the features of a normal domestic liquidation other than for the fact that the liquidators would be calling for the submission of proofs from creditors who were exclusively based overseas.  Therefore it would be perfectly proper to make an order that engaged the Hong Kong insolvency regime.

52.  The further removed are the facts from those of the type of case described above the less likely it is that it can properly be said that the connection with Hong Kong is sufficiently strong to justify making a winding up order when there is no creditor in Hong Kong with a material debt, who will benefit from it.  Whether the connection is sufficiently strong will depend on both the nature of the individual matters relied on and also the significance of the company’s Hong Kong connection to it activities viewed as a whole, in other words: the court will ask how does Hong Kong fit into the overall scheme of the company’s activities viewed in their entirety.  Matters constituting the Hong Kong connection may represent a significant part of one company’s activities but similar matters may form a small part of those of a larger, multinational company with offices or factories in many different jurisdictions.  This in my view is relevant.

Is the third core requirement satisfied?

53.  The Re-Amended Petition refers to 2 creditors in Hong Kong.  By a re-amendment which introduced paragraph 86 it is alleged that a Hong Kong company, Lion Rock Investment Limited, is the registered owner of notes with a face value of US$500,000.  The re-amendments did not state when Lion Rock became the holder of these notes.  It became clear during the hearing that it was after the presentation of the Petition and the transfer was artificial and had been made in an attempt to bolster the Company’s case on the third requirement.  Quite properly Ms. Ismail did not persist in arguing that Lion Rock’s position was relevant in determining whether the third core requirement is satisfied.

54.  In fact the Company has only one creditor in Hong Kong, the solicitors firm Walkers, which is owed US$4,139.  In my view this is too small to satisfy the third requirement in the context of a company with liabilities of in excess of US$400,000,000. 

55.  It follows that the third requirement is not satisfied and, therefore, unless the connection with Hong Kong is very strong and the benefits to creditors substantial the Petition fails.  I now turn to consider the extent of the connection between the Company and Hong Kong.

Connection between the Company and Hong Kong

56.  In my view the matters described in paragraphs 14 to 20 of this decision do demonstrate a sufficient connection with Hong Kong to justify making a winding up order if the other two core requirements are satisfied.  I accept for the reasons given in the next section of this decision that there is a reasonable possibility that a winding-up order, if made, would benefit those applying for it, however, given my conclusion that the third core requirement is not satisfied the determinative issue is whether the connection goes beyond that required in the normal case and is sufficiently strong to justify making an order, which involves the court exercising, to  the use the language of Morritt LJ in Re Latreefers (No 2) supra, an exorbitant jurisdiction. 

57.  The Company is incorporated in the Cayman Islands and listed in New York where it issued the Notes and incurred nearly all its debt.  Its operations took place in the Mainland.  The Company and its subsidiaries’ major activities were conducted in other jurisdictions and this presumably explains why action was taken to liquidate the Company first in the Cayman Islands and then in New York.  The Company’s connection with Hong Kong is first, its use of Hong Kong banking services for certain significant banking transactions, secondly, instructing the Hong Kong offices of a number of international professional service providers, thirdly, having some board meetings here, fourthly, having, through a subsidiary, a small office in Hong Kong and on occasions giving Hong Kong contact details to investors and, fifthly, the fact that two of its directors were residents of Hong Kong, although it would appear that Mr. Tsang may have spent half it not more of his time in the Mainland and consequently limited weight can be placed on his presence here.  None of these activities concern directly the Company’s principal business, carried  out through its operating subsidiaries, namely, developing, manufacturing and marketing advanced medical equipment.  For example, although KPMG were instructed to audit the Company through their Hong Kong office the audit work was carried out in the Mainland by their Mainland associated entity and the audit was, as one would expect, conducted in accordance with the Public Company Accounting Oversight Board (United States) not Hong Kong accounting standards.  The critical question is, therefore, whether or not the fact that the proceeds of the Note issues were deposited in Hong Kong bank accounts and payments made in connection with certain corporate acquisitions which have a Hong Kong component, is sufficient either of itself or taken cumulatively with the other matters I have referred, to justify treating the Company as having a very close connection with Hong Kong assessed with regard to its overall activities?  In my view it does not. 

58.  I accept that the presence of an office in Hong Kong and staff here, albeit leased and employed by a subsidiary, a certain amount of investor relations activities, occasional board meetings and, most significantly, the use of Hong Kong accounts for a substantial amount of its banking activity is sufficient connection to satisfy the first core requirement.  But it is clear that Hong Kong was peripheral to the Company’s principal activities such as research and development, manufacturing and equity and debt fund raising.  In my view the court would only be justified in ordering a winding up if the third core requirement is not satisfied if the court is satisfied that Hong Kong was clearly central to the Company’s principal activities and in my view it is not.

59.  The Company puts much emphasis in its argument on the presence of bank accounts.  However, the bank accounts had only US$11,000 in them at the time the Petition was presented, although as I have already explained in earlier periods they had considerably more.  However, it does not seem to me that the fact that the Company chose to deposit the proceeds of its fund raising in Hong Kong bank accounts is as significant as the Company contend.  As Morritt LJ noted in paragraph 32 of his judgment in Latreefers Inc (No 2) supra, when rejecting the argument that the presence of assets in the jurisdiction was necessary for the first core requirement to be satisfied, “as counsel for the Yard observed liquid assets may be moved from one jurisdiction to another at the entry of a computer command anywhere in the world ”.  The significance of their domicile in determining the degree of a company’s connection with a particular state is less important than it would have been at a time when there was a far greater personal and physical element to the banking process.

60.  In considering the substance of the connection with Hong Kong and whether or not it is sufficient to justify making a winding‑up order it is important to have regard to what is being sought and its consequences.  As I have explained, a winding-up order engaged the whole of the winding-up regime.  The regime is designed for the liquidation of Hong Kong companies, whose assets and creditors are largely located here.  It is extended to an unregistered company in a case in which there is justification for subjecting it to that regime and the formulation of the three core requirements reflects this.  The Company’s emphasis on the desirability of making a winding-up order in order to allow the Provisional Liquidators to apply for a section 221 order against Mr. Tsang demonstrates the weakness of the Petition.  The court should not make a winding-up order simply to allow foreign liquidators to avail themselves of the section 221 process.  The court should only make a winding-up order where the reasons for liquidating an unregistered company in Hong Kong are more extensive.

61.  At times during the hearing of the Petition, particularly the early hearings, the Company suggested that the court should not apply the orthodox approach in determining the Petition because it was presented by the liquidators of the Company and that considerations such as comity and universalism in cross-border insolvency were engaged.  I was referred to Bell Group Finance (Pty) Ltd (in liq) v Bell Group (UK) Holdings Ltd and Re Mid East Trading Ltd ^[30].  I do not read either of these cases as support for such an approach.  For the reasons explained in Re Pioneer Iron and Steel Group Company Limited supra in my view the three core requirements apply with the same stringency regardless of who the petitioner is and whether or not the unregistered company is in liquidation in its State of incorporation or elsewhere.

The second core requirement – benefit to creditors

62.  The second core requirement is that a winding-up order will be of benefit to those seeking it. This requirement is not expressly addressed in the Petition, however, paragraphs 33 to 44 of the Petition state that the Petitioner believes Mr. Tsang will be able to assist them in obtaining information about the Company’s affairs and the apparent misappropriation or misapplication of the Company’s assets namely, the proceeds of the note issues.  I accept that there are matters, which the Petitioner’s liquidators quite properly wish to investigate and that examining Mr. Tsang forms part of those investigations.  These matters are capable of constituting a benefit although they are not of themselves a reason for the court to exercise its discretionary jurisdiction to grant a winding‑up order. 

Conclusion

63.  I will dismiss the Petition and set aside the appointment of the Provisional Liquidators.  It follows that it is not necessary to consider whether it is appropriate to make an order under section 221 for the examination of Mr. Tsang.

64.  I will make a costs order nisi that Mr. Tsang’s costs are paid by the Company/Petitioner. If either party wishes to challenge that order they can do so by filing a summons within ten clear days of the handing down of these reasons.