RE ZHU KUAN GROUP CO LTD

HCCW 874/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO. 874 OF 2003

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J U D G M E N T

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1. This was an application by Zhu Kuan Group Company Limited ("ZK Group") by Summons dated 14 November 2003 to strike out a winding up petition presented against it by Standard Chartered Bank ("SCB") on 12 August 2003, on the ground that the court has no jurisdiction to wind it up and/or that there is a more appropriate forum (namely, Macau) in which it can be wound up. As an alternative to striking out, ZK Group sought an order varying the powers of provisional liquidators who were appointed in respect of it on 13 August 2003 so that such powers were restricted to ascertaining and taking possession of its books, records, properties and other assets within Hong Kong, on the grounds that the court has no jurisdiction over its assets located outside Hong Kong.

2. ZK Group is incorporated in Macau, and is an unregistered company for the purposes of the Companies Ordinance (Cap. 32) ("the Ordinance"). It has a wholly owned subsidiary registered in Hong Kong known as Zhu Kuan (Hong Kong) Company Limited ("ZK HK"), in respect of which provisional liquidators were also appointed on 13 August 2003.

3. It appears to be common ground that ZK Group and ZK HK are "window companies" for the Zhuhai Municipal Government ("the ZMG"). They have been described in a letter of undertaking issued by the ZMG to SCB dated 19 August 1995 as economic and trading entities representing the ZMG in Macau and Hong Kong respectively. ZK Group has been described in an affidavit filed on behalf of SCB as an investment holding company, which does not operate any business in its own right, conducting its business through a number of subsidiary companies.

4. Since at least 1995, ZK Group and ZK HK have borrowed substantial funds from a number of banks to finance their operations and those of their subsidiaries. However, it appears that from about 1998 or 1999 onwards, there began to be defaults in the payment of instalments of principal and interest as they fell due. It seems that initially, the various banks who had lent money to ZK Group, ZK HK or their subsidiaries undertook individual negotiations with the borrowers. As little was achieved through such individual negotiations, from September 2000 onwards, the banks formed an informal group with a view to maximising their bargaining power by acting together. SCB was a member of a steering committee made up of a number of creditor banks, which represented the interests of the creditors. Thereafter, meetings and discussions were held with the companies and representatives of the ZMG with a view to agreeing on a debt restructuring programme that would enhance the recovery that might be available to the creditors. In March 2001, PricewaterhouseCoopers ("PwC") in Hong Kong was appointed as financial advisers to ZK Group and its subsidiaries, and was instructed to prepare a report on their financial position. The legal advisors to ZK Group were Koo & Partners, a Hong Kong firm of solicitors.

5. Between about September 2000 and about June 2003, negotiations between the creditors and ZK Group, the ZMG and their advisers continued. Various restructuring proposals were put forward on behalf of ZK Group, and considered by the creditors. By about June 2002, a proposal had been put forward which offered an estimated recovery for the creditors of between 40% and 61%, which was accepted in principle by the majority of the creditors. This proposal was based on the value of certain land parcels in the Zhuhai area over which ZK Group had acquired land use rights for commercial or industrial use.

6. However, in January 2003, it seems that an attempt was made by ZK Group and the ZMG to alter such proposed terms to the detriment of the creditors. Following further correspondence and negotiations, a revised set of proposals was put forward by PwC on 12 June 2003, which the creditors regarded as significantly worse than those which they had accepted in principle, offering as they did a return of about 18% to unsecured creditors. After further discussions and meetings in June and July 2003, culminating in a meeting with ZK Group and a senior official of the ZMG on 15 July 2003, failed to produce any better offer, SCB served a statutory demand on ZK Group demanding repayment of HK$14,768,490.36 and US$21,612,829.31 which was due to SCB under banking facilities granted by SCB to ZK Group.

7. Also in about June or July 2003, the creditors took steps to investigate the position in relation to the land over which ZK Group had, as the creditors understood the position, valuable land use rights, with a view to seeing what steps needed to be taken to obtain a transfer of title to such property, instructing Messrs RSM Nelson Wheeler ("Nelson Wheeler") to instruct lawyers in the PRC to conduct such investigations. Nelson Wheeler reported to the creditors on 6 August 2003. Their report indicated that two parcels of land belonging to ZK Group, which were part of the land which formed the basis of the June 2002 proposal (and which had been valued at RMB 320 million in June 2001) had been partially forfeited by the ZMG on 14 July 2003, although the forfeiture was said to be subject to compensation to be negotiated between ZK Group and the ZMG.

8. This discovery caused the creditors great concern. Enquiries were made of ZK Group, which resulted in confirmation being obtained that the land use rights in question had been forfeited, and that land use rights in respect of another part of the land which had formed the basis of the June 2002 proposal (with a value of some RMB 691.5 million as at June 2001) had been forfeited as well. ZK Group indicated that it intended to challenge the forfeiture, and to seek substantial compensation.

9. However, SCB says that as a result of this discovery, such trust as the creditors had previously had in ZK Group and the ZMG to negotiate with them in good faith was shattered, particularly because there had been no mention of the forfeiture at the last meeting on 15 July 2003, notwithstanding that the forfeiture had apparently taken place just the previous day. This was regarded as demonstrating a serious lack of good faith on the part of ZK Group and the ZMG in the conduct of the negotiations. The forfeiture was also regarded as an indication that the ZMG no longer intended to support ZK Group, as the creditors had hitherto believed it would.

10. Shortly after this discovery, SCB presented its petitions against ZK Group and ZK HK on 12 August 2003, and applied ex parte on notice the next day for the appointment of provisional liquidators in respect of ZK Group and ZK HK. Following a contested hearing, Hartmann J. appointed Messrs Cosimo Borelli and David Kennedy to be provisional liquidators of ZK Group and ZK HK on 13 August 2003. Since their appointment, the provisional liquidators have tried to take steps to investigate the affairs and secure so far as possible the assets of ZK Group and ZK HK. However, it seems that they have received little cooperation from the directors of either company. According to the reports and affidavits filed by Mr Borelli with the court, he has been told that the records of ZK Group and ZK HK are not available, as they have been transferred to Zhuhai where they are being held by the ZMG's Department of Audit.

11. One of the steps taken by the provisional liquidators was to present a petition for the winding up of Pioneer Investment Ventures Limited ("Pioneer"), a wholly owned Hong Kong subsidiary of ZK Group on 30 August 2003. Following the presentation of this petition, the provisional liquidators obtained an order from Kwan J on 3 September 2003 appointing them as provisional liquidators of Pioneer as well. Pioneer's only asset in Hong Kong is a 42% shareholding in Zhu Kuan Development Company Limited ("ZK Development"), a company listed on the Stock Exchange of Hong Kong. However, it appears that on 9 June 2000, Pioneer charged this shareholding in favour of a company called Longway Services Group Limited ("Longway"), which is said to be ultimately controlled by the ZMG. Also on 9 June 2000, ZK Group charged its shareholding in Pioneer to Longway. Both of these share charges were apparently executed as security for a debt said to be owed by ZK Group to Longway. The provisional liquidators have expressed the view that the validity of these charges merits investigation.

12. The provisional liquidators have also issued a number of summonses under section 221 of the Ordinance in the provisional liquidations of ZK Group and ZK HK, seeking to obtain information as to their affairs from various persons or entities who have had dealings with them.

13. Since the hearing of this summons, I have been informed by the provisional liquidators (with the consent of the parties) that ZK Group was made the subject of a winding up order in Macau on 2 June 2003. However, I am also given to understand that that order is the subject of an appeal in Macau, which has yet to be determined.

14. Although ZK Group is not registered under the Ordinance, it is nonetheless susceptible to being wound up unhder the provisions of section 327 of the Ordinance, which provides as follows:-

"(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. ..."

15. Section 327(3) goes on to set out the circumstances in which an unregistered company may be wound up, which include (pursuant to subsection (3)(b)) inability to pay its debts, and section 327(4) sets out the manner in which inability to pay debts may be proved in relation to an unregistered company - these include failure to make payment within three weeks in response to a statutory demand served on the company at its principal place of business.

16. Mr Tong, appearing for ZK Group, did not suggest that it was able to pay its debts. However, he submitted that the court should not exercise its jurisdiction to wind up ZK Group under section 327 of the Ordinance because:-

(1) It had no assets of any value in Hong Kong, and had no other sufficient connection with Hong Kong;

(2) SCB could not show that a winding up in Hong Kong would be likely to produce any benefit to it or any other person who might be interested in such a winding up;

(3) Even if I considered that ZK Group had a sufficient connection with Hong Kong, and that there were persons who might reasonably be thought likely to benefit from a winding up in Hong Kong, it remained necessary for me to be satisfied that this was an appropriate case in which I should exercise the jurisdiction to wind it up under section 327, and that I should not be so satisfied because:-

(a) ZK Group was not the subject of any winding up in Macau, and therefore continued to trade, such that it would not ordinarily be a proper exercise of the Hong Kong court's discretion to make a winding up order in respect of it;

(b) It would in any event be more appropriate for any winding up in relation to ZK Group to take place in Macau, its place of incorporation, since:-

(i) Macanese law provided the courts of Macau with exclusive jurisdiction to wind up Macanese companies, and any provisional liquidator or liquidator appointed by the Hong Kong courts would not be recognised in Macau or China;

(ii) there was no reason why SCB should not have commenced winding up proceedings against ZK Group in Macau earlier, rather than proceeding in Hong Kong as it had done. Mr Tong suggested that there was an element of forum shopping SCB's decision to commence proceedings in Hong Kong, but he went on to submit that even if there was not any such motive, SCB could not rely on the absence of any winding up in Macau as a factor in favour of permitting the petition in Hong Kong to continue, since it was itself the author of that situation by choosing not to move against ZK Group in Macau earlier.

(iii) Mr Tong also suggested, I think, that the court should decline jurisdiction since Macau was an available alternative forum for a winding up, in which there were just provisions for the distribution of assets to the creditors.

17. Finally, Mr Tong submitted that even if I were against him and declined to strike out the petition on any of these grounds, I should limit the powers of the provisional liquidators as indicated in the summons, since any winding up in Hong Kong should be treated as ancillary to a winding up in Macau, and be restricted to the getting in of Hong Kong assets, with a view either to their distribution in Hong Kong, or perhaps more appropriately, to being handed over to such liquidators as might eventually be appointed in Macau for distribution in accordance with Macau's laws, which (like those of Hong Kong in respect of Hong Kong liquidations) provide for pari passu distribution of assets among the unsecured creditors of companies in liquidation there.

18. I shall consider each of these points, and the responses to them by Mr Bunting, who appeared for SCB, in turn. Before doing so, however, I shall deal first with the legal principles that have been developed in relation to the circumstances in which the court should exercise its jurisdiction under section 327. Most of the relevant authorities to which I was referred are decisions of the English courts under the equivalent provisions appearing in various enactments of the English Companies Acts. The starting point is the decision of the English Court of Appeal in Banque des Marchands de Moscou (Koupetschesky) v Kindersley [1951] 1 Ch 112, where the Master of the Rolls, Lord Evershed, said (at p.125-6) that:-

"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 llie 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. Prima facie if the local law of the dissolved foreign corporation provided for the due administration of all the property and assets of the corporation wherever situate among the persons properly entitled to participate therein, the case would not be one for interference by the machinery of the English courts."

19. In Re Compania Merabello San Nicholas S.A. [1973] 1 Ch 75, Megarry J. summarised what he described as the essentials of the relevant law relating to the existence of jurisdiction to make a winding up order in respect of a foreign company in the following terms (at p.91G):-

"(1)	There is no need to establish that the company ever had a place of business here.
(2)	There is no need to establish that the company ever carried on business here, unless perhaps the petition is based upon the company carrying on or having carried on business.
(3)	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.
(4)	It suffices if the assets of the company within the jurisdiction are of any nature; they need not be "commercial" assets, or assets which indicate that the company formerly carried on business here.
(5)	The assets need not be assets which will be distributable to creditors by the liquidator in the winding up: it suffices if by the making of the winding up order they will be of benefit to a creditor or creditors in some other way.
(6)	If it is shown that there is no reasonable possibility of benefit accruing to creditors from making the winding up order, the jurisdiction is excluded."

20. The apparent requirement for it to be demonstrated that there existed assets of the company within the jurisdiction was examined by Peter Gibson J. in Re a Company (No. 00359 of 1987) [1988] 1 Ch 210, in which, following a review of the relevant authorities he held (at p.225H) that:-

"... the presence of assets in this country is not an essential condition for the court to have jurisdiction in relation to the winding up of a foreign company. 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."

In that case, although there appeared to be no evidence of English assets at the time of the presentation of the winding up petition, Peter Gibson J. concluded that a sufficient connection with England was shown by reference to evidence showing that the debt on which the petition was based was owed to an English company, under an English loan agreement negotiated and executed in England, and requiring performance in England and that the company sought to be wound up had carried on business in England, with directors and officers resident there for some time, and several instances of business being conducted in England.

21. Peter Gibson J. also indicated that it was appropriate for the court to consider whether any other jurisdiction was more appropriate for the winding up of the company, and concluded that no such alternative jurisdiction had been identified. He therefore made an order for the company's winding up.

22. The next relevant case to which I was referred was Re Real Estate Development Co [1991] BCLC 210, in which Knox J. held that in order for the English court to have jurisdiction to wind up a foreign (in that case, Kuwaiti) company, three core requirements had to be satisfied, namely:-

(1) There had to be a sufficient connection with England, but this did not necessarily have to consist in the presence of assets within the jurisdiction;

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

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

23. In that case, the only links relied upon as establishing a connection with England were, first, a judgment registered in England under the Foreign Judgments (Reciprocal Enforcement) Act 1933 in respect of a French loan transaction between a French Bank and a Kuwaiti borrower; secondly, an English asset in the form of shares in an English company, whose directors, business and assets were not located in the United Kingdom; and, finally, the possibility of an action in the English courts to set aside a transfer of the shares in that English company, which had already taken place. There was no evidence that the company which was the subject of the petition had ever carried on business in England.

24. Knox J. considered that the last of the connecting factors relied on could not properly be regarded as a factor at all, since it consisted of a prospective action by a liquidator, which could not be regarded as an asset existing at the time of the presentation of the petition. Having regard to the nature of the first factor, and the limited connection with England provided by the second, it is not surprising that Knox J. was not satisfied that the evidence disclosed any sufficient connection with England such as would justify the court in putting into motion its machinery for the winding up of companies, and that the petitioners therefore fell at the first hurdle.

25. The approach of Peter Gibson J. and Knox J. was endorsed in Hong Kong by Rogers J. (as he then was) in Securities and Futures Commission v MKI Corp Ltd [1995] 2 HKC 79 in which he concluded (at p.84D-G) that the jurisdiction to wind up a foreign company was a flexible one, which did not require the presence of assets within the jurisdiction, the important considerations being that there was a sufficiently close connection with the jurisdiction and that there was a reasonable possibility of benefit to the creditors from a winding up.

26. In my view, the correct approach to adopt to the question of whether or not the court has jurisdiction to wind up an unregistered foreign company, such as ZK Group, is to consider whether or not the three core requirements identified by Knox J. in Re Real Estate Development Co (supra) exist in the particular case before the court. I do not think that Mr Tong seriously suggested in this case that the third of these requirements, as to the courts ability to exercise jurisdiction over one or more persons interested in the distribution of the company's assets, was not satisfied. That leaves the first two requirements. As will be apparent from my summary of Mr Tong's submissions above, the question of whether or not either of these requirements was satisfied was very much in issue.

27. I deal first with the first requirement identified by Knox J. - that there should be a sufficient connection with the jurisdiction. In this case, Mr Bunting points to the following connections with Hong Kong:-

(1) The existence of a number of assets within the jurisdiction, consisting of:-

(a) a 100% interest in ZK HK;

(b) a 100% interest in Pioneer;

(c) through ZK HK, an indirect interest in at least 16 (and possibly as many as 31) other Hong Kong companies;

(d) through Pioneer, 337 million shares (representing a 42% interest) in ZK Development, which were worth some HK$129 million in November 2003;

(e) a 9% interest in a Hong Kong company called China Point Finance Limited ("China Point");

(f) a 50% interest in another Hong Kong company called Kong Zhu Freight Pier Limited ("Kong Zhu");

(g) accounts receivable in the form of a debt of HK$560,927,736 owed to ZK Group by ZK HK and a debt of HK$3,785,937 owed to it by China Point; and

(h) a bank account with Rabobank in Hong Kong;

(2) ZK Group has carried on business in Hong Kong in the following ways:-

(a) its loan account with SCB has since July 1999 been handled by SCB's Hong Kong office;

(b) it has borrowed substantial amounts of money from 34 banks, 12 of which are located in Hong Kong;

(c) the loan documentation in relation to three of the loans (with an aggregate value of HK$1.35 billion) and one corporate guarantee were executed in Hong Kong and governed by Hong Kong law;

(d) it has since late 2001 been negotiating in Hong Kong with the creditors in respect of the restructuring proposals; and

(e) it has since 2001 retained Hong Kong firms (i.e. PwC and Koo & Partners) as its advisors in relation to such restructuring proposals;

(3) Three of ZK Group's directors were also directors of ZK HK and had an address in Hong Kong as their residential address; and

(4) ZK Group may have maintained its books and records in Hong Kong, prior to their removal to Zhuhai.

28. Mr Tong contended that none of these matters constituted sufficient connection with the Hong Kong jurisdiction.

29. In relation to the assets relied upon, he suggested that:-

(1) the shares in the four companies directly held by ZK Group, namely the interests in ZK HK, Pioneer, China Point and Kong Zhu were, for one reason or another, worthless, or of illusory value;

(2) the indirectly held companies (the subsidiaries of ZK HK) were of similarly illusory value, or added nothing, since ZK HK was itself in provisional liquidation and the subject of a winding up petition through which they could be administered and dealt with for the benefit of its creditors, including SCB;

(3) the indirect interest in Pioneer's stake in ZK Development was of no value, as it had been charged to Longway to secure a debt of in excess of HK$250 million, which was considerably in excess of the value of such shareholding;

(4) the receivables were, like the shares in the companies in which they were held, worthless and unlikely to provide any recovery for ZK Group or its creditors; and

(5) the bank account at Rabobank had been closed some time previously, and was no longer in existence.

30. In my view, the existence of assets in the jurisdiction and their value, if any, to potential creditors of the company which is the subject of the winding up petition are two separate matters, which relate to different aspects of the core requirements identified by Knox J. in Re Real Estate Development Co. It seems to me that the existence of assets within the jurisdiction may, depending on the nature of the assets in question, serve to demonstrate a real connection between the company whose winding up is petitioned for and Hong Kong, thus satisfying the first core requirement - that there should be shown to be a sufficient connection with Hong Kong. This connection could, in my view, be shown to exist even if the assets were to prove ultimately (for whatever reason) to be worthless, since they might well nonetheless demonstrate a substantial commercial or other connection with Hong Kong. If it could be shown that the assets in question were in fact worthless, this would, however, bear on the second core requirement, since that might suggest that there would be no benefit to the creditors from a winding up in Hong Kong, notwithstanding the existence of a connection between the company and Hong Kong.

31. Further, it seems to me that while the existence of assets within the jurisdiction will (as is apparent from the earlier cases) often suffice to establish the necessary connection between the company which is the subject of the petition and Hong Kong, quite apart from not being a necessary condition (as Peter Gibson J. held in Re a Company (No. 00359 of 1987), this condition is not one which will in every case necessarily be sufficient either. There may well be cases in which the nature of the asset or assets relied upon is insufficient to establish an adequate connection with Hong Kong such as would justify the court here in putting its winding up machinery in motion in respect of that company. Thus, for example, I would venture to suggest that even if the shares in the English company which were identified in Re Real Estate Development Co had not been transferred away from the company prior to the presentation of the petition against it, those shares, being as they were shares in an company which, although English in the sense of being incorporated in England, had no English assets, no English directors or officers, and which carried on no business in England, might well not have been regarded as affording, in themselves, a sufficient connection with the English jurisdiction.

32. Considered from this perspective, it seems to me that ZK Group's direct shareholdings in ZK HK, Pioneer, China Point and Kong Zhu do demonstrate a substantial and certainly sufficient connection between ZK Group and Hong Kong. In the case of ZK HK, quite apart from being incorporated in Hong Kong, it has a substantial number of subsidiary companies which are incorporated here, at least some of which, according to the draft report prepared by PwC in respect of the financial position of ZK Group and its subsidiaries, were involved in holding and developing properties in Hong Kong. The same report suggests that undeveloped properties in Hong Kong were worth some HK$108 million on an adjusted basis, and developed properties in Hong Kong were worth some HK$56 million. Notwithstanding that these properties appear to have been substantially pledged to support borrowings, their existence does in my view demonstrate a substantial connection on the part of ZK Group with Hong Kong through ZK HK and its subsidiaries. Similarly, Pioneer's only known asset is its substantial shareholding in ZK Development, which, although incorporated in Bermuda, is listed on the Stock Exchange of Hong Kong, and thus similarly demonstrates a significant connection with Hong Kong on the part of ZK Group. China Point is described as a company that, through its subsidiaries, is involved in the provision of financial services and stock broking services, and there is nothing to indicate that these activities are not carried out in Hong Kong. Although ZK Group's stake in China Point is a relatively small one of 9%, it seems to me that the holding of this interest is a further connection with Hong Kong. So far as Kong Zhu is concerned, it is suggested in the evidence filed on behalf of ZK Group that Kong Zhu is a HK$2 company, which has never undertaken any business, but little else appears to be disclosed in relation to it. No accounts were provided in respect of Kong Zhu, nor was any explanation given of what the purpose of the investment in Kong Zhu was. No explanation was given for the failure to deal with these matters. In these circumstances, I am not prepared to disregard ZK Group's interest in Kong Zhu entirely. While it may not, on its own, necessarily have provided a particularly strong connection with Hong Kong, it seems to me that the existence of this shareholding does, on balance, add to the connections that ZK Group has with Hong Kong, since it appears to have chosen to enter into a relationship with another investor through the use of a Hong Kong incorporated company.

33. While the size of ZK Group's interests in Hong Kong through these companies may seem relatively small compared to its interests in Zhuhai and Macau, it seems to me that they are nonetheless sizeable and significant in themselves, and demonstrate an adequate connection with Hong Kong for the purposes of the first core requirement.

34. So far as the indirect interests of ZK Group in the subsidiaries of ZK HK and the block of ZK Development shares held by Pioneer are concerned, I do not consider that these add anything further to the connection which I consider to exist by virtue of ZK Group's interests in ZK HK and Pioneer themselves, as I have already taken these indirect interests into account in assessing the strength of that connection. Nonetheless, for the reasons which I have set out in the previous paragraph, it seems to me that they do demonstrate a close connection between ZK Group and Hong Kong.

35. So far as the receivables are concerned, given that they are due from ZK HK and China Point, they tend in my view to strengthen the connection with Hong Kong through these companies, as they appear to show that ZK Group provided funding in significant amounts to each of these companies for their operations.

36. On the other hand, the existence at one time of a single bank account in Hong Kong might not, without more, have been enough to show a sufficient connection with Hong Kong. Had the account contained substantial funds during its existence, or had there been significant numbers of transactions in Hong Kong through the account, this might have supported a suggestion that the existence of the bank account showed a sufficient connection with Hong Kong, but as it is, little is known about this account, and I would not regard it as adding anything of moment to the other assets which are relied on, and which to my mind demonstrate a clear connection between ZK Group and the Hong Kong jurisdiction.

37. So far as the other connecting factors relied upon by Mr Bunting are concerned, it seems to me that of the various matters relied upon as showing that ZK Group has carried on business in Hong Kong, the strongest connection is demonstrated by the borrowings from Hong Kong financial institutions and in particular the three loans which were obtained under loan agreements entered into in Hong Kong and which were subject to Hong Kong law. These loans were for very substantial amounts, and the raising of funds of this magnitude does suggest that Hong Kong was a significant centre for the raising of funds by ZK Group, which is a further, and not insubstantial, connection.

38. I would, however, regard the engagement by ZK Group of PwC and Koo & Partners as being of somewhat less significance, since their engagement related to the restructuring negotiations, in relation to which it is perhaps understandable that Hong Kong advisers should have been engaged, when most of the creditor banks seem to have been based in or operating from Hong Kong, with their own Hong Kong legal advisers apparently being closely involved in such negotiations.

39. I would place little weight on the fact that SCB handled ZK Group's accounts from its Hong Kong office after 1999. This fact would seem to suggest that these accounts were initially handled from some office outside of Hong Kong, which would not demonstrate a connection with Hong Kong. If this is right, I do not see how the decision to transfer the monitoring and handling of the ZK Group's accounts and facilities to SCB's Hong Kong office can properly be regarded as a factor which gives rise to a connection with Hong Kong, when there does not appear to be any suggestion that ZK Group requested or initiated such a transfer.

40. So far as the question of where ZK Group's directors resided is concerned, the evidence on this appears to be somewhat conflicting, since although the records of ZK HK at the Hong Kong Companies Registry indicate that three individuals who were directors of both ZK Group and ZK HK gave as their residential address an address in Hong Kong, records in Macau in respect of ZK Group appeared to give an address for the same individuals in Macau. Mr Tong suggested that the address in Hong Kong was simply the address of ZK Group's quarters in Hong Kong. This may well be right. Given the state of the evidence in relation to this matter, I do not think it possible to conclude that these directors were so clearly resident in Hong Kong as to render this a significant or strong connecting factor with this jurisdiction.

41. Finally, in relation to the suggestion that ZK Group had previously kept its books and records in Hong Kong, it seems to me that Mr Tong was right in submitting that this was not borne out by the evidence. Although there was evidence to suggest that the books of ZK Group and of ZK HK had been removed to Zhuhai, and it is fair to infer that the books of ZK HK, at least, were maintained in Hong Kong, there does not appear to be any clear evidence to suggest that ZK Group's books were ever kept in Hong Kong. That being so, I would not regard this supposed connecting factor as being established.

42. Nonetheless, for the reasons which I have given, I am satisfied that SCB has demonstrated a sufficient connection between ZK Group and the Hong Kong jurisdiction so as to satisfy the first of the three core requirements which must be satisfied if the Hong Kong court is to have jurisdiction to wind up ZK Group.

43. I turn now to the second core requirement, that there must be a reasonable possibility that a winding up order would benefit those applying from it.

44. Mr Tong submitted that the assets which had been identified were of no real value.

45. So far as ZK Group's shareholding in ZK HK was concerned, he submitted that since ZK HK was the subject of a winding up petition in Hong Kong, and it was common ground that ZK HK was seriously insolvent, there could be no prospect of ZK Group obtaining any return on its investment in ZK HK qua shareholder. It seems to me that this is right, and I did not understand Mr Bunting to seriously dispute this. In these circumstances, I do not see that there is any real possibility of benefit to the creditors of ZK Group arising in a liquidation in Hong Kong so far as this asset, at least, is concerned.

46. The position in relation to ZK Group's shareholding in Pioneer, however, was hotly disputed. Mr Tong suggested first that this, too, was worthless, since Pioneer was itself in provisional liquidation. However, the position in relation to Pioneer is, as Mr Bunting pointed out, quite different from that in relation to ZK HK. ZK HK is in provisional liquidation on a creditor's petition, and there is no doubt but that it is insolvent. So far as Pioneer is concerned, however, the position is that it is in provisional liquidation at the application of the provisional liquidators of ZK Group, and it is not suggested that Pioneer itself is insolvent, subject to the resolution of the position in relation to the share charges in favour of Longway.

47. Mr Tong went on to argue that as ZK Group's shareholding in Pioneer had been charged to Longway, it could not be expected that anything would be recovered by ZK Group in respect of its interest in Pioneer. He also contended that in any event, Pioneer having charged its interest in ZK Development to Longway as well, there was no value in Pioneer itself, since the value of its shareholding in ZK Development was much less than the debt for which it stood charged. Mr Tong submitted that there was no reason to think that either of the share charges could successfully be challenged or set aside, but that even if there was such a possibility, this was something that could be dealt with by the provisional liquidators in their capacity as provisional liquidators of Pioneer pursuant to Kwan J.'s order of 3 September 2003.

48. Mr Bunting, however, contended that it was clear from the provisional liquidators' report that they regarded both share charges to Longway as being matters which merited investigation, particularly having regard to the time at which they were entered into, in June 2000, when ZK Group had begun to default on its loan obligations to its banking creditors. Moreover, said Mr Bunting, the provisional liquidators had also reported that they were unable to locate much of the documentation or records that they would have expected to exist in relation to the underlying debt allegedly owed to Longway, giving further grounds for their desire to investigate, as it might prove to be the case that the underlying debt was open to question. Concerns also arose from the fact that Longway appeared to be a company controlled by the ZMG.

49. It seems to me that in these circumstances, an investigation into the circumstances of the share charges might produce some benefit for creditors of ZK Group. I do not regard Mr Tong's suggestion that since Pioneer is already in provisional liquidation it is unnecessary for ZK Group to be put into liquidation in Hong Kong as well to have merit, given that the existence of provisional liquidators in respect of Pioneer is dependent on there being provisional liquidators in respect of ZK Group, since it was in reliance on the powers granted to them as provisional liquidators of ZK Group that Messrs Borelli and Kennedy were able to obtain their appointment as provisional liquidators of Pioneer. If the petition in respect of ZK Group were struck out, and the provisional liquidation in respect of it terminated, there would no longer be any basis for the presentation of the petition in respect of Pioneer, with the consequence that it would have to be dismissed and its provisional liquidators discharged, thereby putting an end to any investigations as to the validity of the share charges.

50. In these circumstances, it seems to me that in this respect, at least, the making of a winding up order in respect of ZK Group should be regarded as giving rise to a reasonable possibility of benefit for such of its creditors as might prove in Hong Kong.

51. So far as ZK Group's shareholding in China Point is concerned, Mr Tong sought to demonstrate by reference to its audited accounts as at 31 December 2002, which were qualified as to information available to enable the auditors to form a view as to the value of certain investments and receivables, that there was no real prospect of any recovery from this shareholding. He also drew attention to the fact that ZK Group only had a minority interest of 9% in this company, which might be difficult to turn to account. Mr Bunting countered that the audit qualifications were only made because of a lack of information, and that it was illegitimate to simply seek to deduct the amount of the assets in respect of which reservations were expressed and thereby suggest that provisions (which were not in fact made) should be made so as to reduce the company's asset value to a negligible or even negative figure. It seems to me that on a fair reading of the auditors' report, the auditors were expressing reservations as to the recoverability of at least the receivables, since they observed that no repayments or settlements had been made in respect of them. However, it is not possible to say from the accounts what, if any, provision might have to be made in respect of the receivables, or in respect of the carrying value of the investment project in respect of which a qualification had been expressed owing to a lack of information in relation to the project's progress. While recognising that there might be questions as to the recovery, if any, that may arise from this asset, it seems to me that there is at least a possibility that it may provide some return to ZK Group's creditors.

52. Finally, in relation to the shareholding in Kong Zhu, although it has been asserted that this was only a HK$2 company which never carried on any business, there has been, as I have noted, no evidence put forward by ZK Group as to Kong Zhu's financial position or purpose. That being so, I am disinclined to reject the possibility that there may be some recovery from this source also.

53. So far as the receivables from ZK HK and China Point are concerned, Mr Tong submitted that neither of these could be said to be worth anything, since ZK HK was by common consent insolvent, and China Point should be regarded as insolvent on the basis of Mr Tong's analysis of its accounts.

54. So far as ZK HK is concerned, it may be that it is insolvent, but it is at present uncertain what level of dividend would be available to its unsecured creditors. As long as some dividend were to be paid to ZK HK's unsecured creditors, there would seem to be a benefit flowing to ZK Group and through it to its creditors in the event of its liquidation. Although it was asserted in evidence filed on behalf of ZK Group that its claim against ZK HK was subject to a set off, no particulars of the amount of the set off and the circumstances in which it arose appear to have been provided, and I therefore decline to take it into account for present purposes.

55. As for China Point, quite apart from questions as to the legitimacy of concluding that it is insolvent on the basis of a forensic exercise in relation to its accounts, which I have considered above, it does not follow that even if insolvent, no dividend would be payable in respect of debts owed by it to its creditors. As with ZK HK, any dividend paid in respect of the receivable owing by China Point to ZK Group would flow through to ZK Group's creditors on its liquidation. Also as with ZK HK, there is an unparticularised allegation that this receivable is subject to a set off of some sort. However, for the same reasons as I have given in relation to ZK HK, I decline to take this supposed set off into account.

56. Finally, Mr Bunting submitted that a further benefit to the creditors of ZK Group from the making of a winding up order in respect of it would consist of the ability of its liquidators to undertake investigations in Hong Kong in relation to various matters, both by their own efforts and through the use where necessary of private examinations under section 221 of the Ordinance. Mr Bunting drew attention to the provisional liquidators' view that there might be further undiscovered assets which might come to light on further examination and investigation, and suggested that investigations might also shed light on the position in relation to Kong Zhu and China Point's financial position and activities, and to obtain further information as to ZK Group and its affairs generally. Although recognising that the provisional liquidators and any liquidators that might be appointed would not have their status recognised in Macau or the Mainland, Mr Bunting suggested that there was still a useful investigative role to be played in Hong Kong given the lack of information that was available in relation to ZK Group and its affairs.

57. In my view this is a legitimate factor to take into account. It seems likely that there is (or at least may be) information in Hong Kong which may be obtained through the use of the powers of the provisional liquidators or liquidators, which may well be of benefit to ZK Group's creditors, whether such powers result in the obtaining of information that leads to recoveries in Hong Kong, or of information that leads to recoveries in Macau or elsewhere by the liquidators whom I understand have now been appointed in Macau. Given the apparently uncooperative stance adopted by the former directors and management of ZK Group, the existence and use of such powers may prove to be of real benefit to ZK Group's creditors.

58. I am therefore satisfied that there would be a reasonable possibility of benefit to SCB or other creditors in Hong Kong if a winding up order were to be made in respect of ZK Group, and that the second core requirement identified by Knox J. is established in this case.

59. As I have noted, it was not disputed that the third core requirement was present. I conclude, therefore, that the Hong Kong court has jurisdiction in this case to wind up ZK Group, if it thinks it right to do so.

60. Mr Tong submitted however, that even if the court had jurisdiction to make a winding up order in respect of ZK Group under section 327 of the Ordinance, it should exercise its discretion by declining to make a winding up order, on the grounds which I have summarised at paragraph 16(3) above.

61. So far as the first ground relied upon by Mr Tong in relation to the exercise of the court's discretion is concerned, this was based on the decision of the English Court of Appeal in Banco Nacional de Cuba v Cosmos Trading Corporation [2000] 1 BCLC 813, in which it was held that the making of a winding up order against a foreign company with no assets within the jurisdiction and no trading connection, which was continuing to trade in its country of incorporation and elsewhere worldwide, was highly undesirable. I have no doubt that this is right. But in this case, I consider that there are assets within the jurisdiction, and that there is a trading or business connection with Hong Kong, for the reasons which I have already given. Further, little evidence was put forward as to the extent of the trading activity of ZK Group, which is after all an investment holding company rather than one which actively carries on trading operations, and these would appear to have been at best fairly limited. In any event, subsequent events in the form of the winding up order which has recently been made against ZK Group in Macau would seem to render this point irrelevant for present purposes.

62. As for the suggestion that Macau laws assert exclusive jurisdiction over the liquidation of companies incorporated in Macau, I do not regard this as a reason for the Hong Kong court to decline jurisdiction if it were otherwise satisfied that it should exercise its winding up jurisdiction in respect of ZK Group. While it does appear to be the case that the relevant Macau laws are couched in such terms, they do not apply in Hong Kong, where the court's jurisdiction, arising from section 327 of the Ordinance, cannot be in doubt. It seems to me that the point really comes to no more than that a liquidator (or provisional liquidator) appointed by the Hong Kong court would not be recognised in Macau and thus would not be able to take any effective steps there in relation to the company. This is not surprising. However, so long as there are matters which the liquidator can effectively do or achieve in Hong Kong, it seems to me that it would be open to the court here to exercise its jurisdiction in an appropriate case.

63. As I have noted, Mr Tong also submitted that the court in Hong Kong should decline to exercise its jurisdiction because SCB was guilty of forum shopping by proceeding in Hong Kong rather than in Macau. This submission provoked a flurry of evidence in relation to Macau law, the upshot of which, to my mind, was inconclusive, other than to show that there existed a difference of opinion between the respective Macanese legal advisers of SCB and ZK Group as to the amount of material that was required in order to launch winding up proceedings in Macau, and as to the possibility of supplementing such evidence after presentation of a petition. The view of SCB's legal adviser was that the process of obtaining a winding up order in Macau was one which could be time consuming, because it was desirable to put forward as much evidence as possible at the time that the petition was lodged, as there were doubts as to whether and to what extent it might be possible to supplement such evidence later. ZK Group's Macanese legal adviser, however, expressed the view that these concerns and difficulties were overstated. Despite Mr Tong's urgings, I am unable to conclude that the views expressed by SCB's legal adviser in Macau were otherwise than genuinely held, and in the light of that conclusion, it seems to me that SCB were entitled to rely on such advice, and to withhold the presentation of a petition against ZK Group in Macau until such time as they were advised to do so, with best prospects of success. I therefore do not consider that the Hong Kong court would have been at all likely to have declined to exercise its jurisdiction under section 327 of the Ordinance on the basis of any behaviour on the part of SCB in the nature of forum shopping.

64. Mr Tong's remaining point was that Macau was a clearly available alternative forum for the winding up of ZK Group, and that it was more appropriate for ZK Group to be wound up there, since Macau was its place of incorporation. While I have no doubt that a fair regime for the distribution of the estate of an insolvent company exists under the laws of Macau, and there is no reason to think that SCB and other creditors of ZK Group would not obtain a fair adjudication of their claims from a Macanese liquidator, it seems to me that there remain potential valuable benefits to the creditors in a winding up in Hong Kong, principally in the form of the powers available to a liquidator here to obtain information pursuant to section 221 of the Ordinance. These powers would not be available in respect of information sought to be obtained from persons in Hong Kong otherwise than in a winding up in Hong Kong. Thus, while the Hong Kong courts would undoubtedly recognise the Macau liquidator of ZK Group as entitled to act on its behalf following his appointment by the Macau courts, he would not be able to exercise the powers of a liquidator in Hong Kong, himself, but would have to rely on a liquidator appointed in winding up proceedings in Hong Kong to do so.

65. Similarly, it is far from clear that a Macau liquidator would be able to investigate and if necessary to take steps to challenge the validity of (or resist attempts to enforce) the share charges over ZK Group's interest in Pioneer and Pioneer's interest in ZK Development without liquidators being appointed in respect of both those companies in Hong Kong.

66. In these circumstances, it seems to me that given the lack of information as to ZK Group, and the apparent lack of cooperation from its former directors and officers, it cannot be said that the Hong Kong court would inevitably feel bound to dismiss a winding up petition brought in Hong Kong in respect of ZK Group on the basis that a winding up in Macau would do just as well.

67. Thus, for the reasons which I have given, I do not think it appropriate to strike out this petition. It follows that the appointment of Messrs Borelli and Kennedy as provisional liquidators of ZK Group will remain undisturbed.

68. I turn finally to consider Mr Tong's fall back position, that the powers of the provisional liquidators of ZK Group should be confined to ascertaining and taking possession of assets, books and records of ZKG in Hong Kong. This submission was based on the line of authority to the effect that where there a winding up in the place of a foreign company's incorporation, a liquidation in Hong Kong will normally operate as an ancillary liquidation, in which the principal function of the liquidator will be to collect in the local assets with a view to assisting the liquidation in the place of incorporation (see e.g. North Australian Territory Company v Goldsbrough, Mort & Co [1889] 61 LT 716; Re Bank of Credit and Commerce International S.A. [1997] Ch 213).

69. I do not doubt that this is so, but bearing in mind the matters to which I have referred in paragraphs 64 and 65 above, in relation to obtaining information from persons in Hong Kong in respect of all aspects of ZK Group's affairs, whether in Hong Kong or elsewhere, I am of the view that it would be an undue and unnecessary limitation on the functions to be performed by a liquidator in an ancillary liquidation in Hong Kong to restrict such functions to the collecting in of local assets (including, if necessary, the taking of steps to investigate and challenge or resist enforcement of the share charges in respect of the shares of Pioneer and ZK Development (held by Pioneer)) and to omit from such functions the obtaining of information that might be available in Hong Kong in relation to assets outside the jurisdiction that might be of assistance to a liquidator in Macau. I therefore decline to restrict the powers of the provisional liquidators in the manner suggested by Mr Tong.

70. For these reasons, I would dismiss ZK Group's application, and make an order nisi that ZK Group should pay to SCB the costs of the application in any event, to be taxed on the party and party basis if not agreed, with certificate for two counsel.