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Winding Up Foreign and Mainland Companies in Hong Kong: Chenming Paper Holdings Ltd v Arjowiggins HKK 2 Ltd [2020] HKCA 670

Enterprises with international and cross-border operations are justifiably concerned about the risk of winding-up proceedings being commenced, and winding-up orders made, in respect of companies outside their “home” jurisdictions, i.e. outside the jurisdictions in which they have been incorporated.  Given Hong Kong’s position as an international financial centre, the listing of foreign and Mainland Chinese companies on the Hong Kong Stock Exchange (HKEX), and the not uncommon use of offshore vehicles in complex trust and company structures, the matter is one of considerable practical significance for a wide range of actors. In a recent judgment, the Hong Kong Court of Appeal (CA) in Shandong Chenming Paper Holdings Ltd v Arjowiggins HKK 2 Ltd [2020] HKCA 670 (“Shandong Chenming”) has clarified the current state of the law (subject, of course, to any further potential appeal to the Hong Kong Court of Final Appeal (CFA)) in a decision that is likely to be of interest to international and cross-border businesses (and those advising them) at the same time as it raises certain intriguing questions.

The Facts

Shandong Chenming Paper Holdings Ltd (“Chenming”) is a Mainland Chinese company listed on the Shenzhen Stock Exchange with a dual listing of H-shares on the Hong Kong Stock Exchange. Chenming has only one class of shares. They are, for listing purposes, divided into A-shares listed on Shenzhen Stock Exchange (domestically owned shares), B-shares listed on the Shenzhen Stock Exchange (internationally owned shares), and H-shares listed on HKEX. Following the breakdown of Chenming’s joint venture in Mainland China with Arjowiggins HKK 2 Ltd (“Arjowiggins”), arbitration proceedings were commenced which resulted in the arbitral tribunal rendering its award in favour of Arjowiggins. Arjowiggins obtained leave to enforce the award and Chenming’s application to set aside the award was dismissed. There was no appeal from this decision.

Arjowiggins served a statutory demand on Chenming in respect of the sums payable in relation to the award. However, Chenming did not pay any part of the amount demanded, and instead applied (inter alia) for a declaration that Arjowiggins would not be able to satisfy the requirements for the Hong Kong court to exercise its jurisdiction to wind it up in Hong Kong. Chenming argued that its only connection with Hong Kong was its listing and that a liquidator appointed in Hong Kong would achieve nothing of any value in the Mainland, such that a winding-up order made in Hong Kong would be an exercise in futility. It further argued that the proper course was for Arjowiggins to enforce the award in the Mainland. Arjowiggins, however, was concerned that this course would enable Chenming to reopen the merits of the arbitration. At first instance, Harris J dismissed Chenming’s application, and Chenming appealed to the CA.

The Winding-Up Jurisdiction

Under section 327 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32), Hong Kong courts have a discretionary jurisdiction to wind up a foreign company.  There are three self-imposed “core requirements” for exercising the discretion, as identified in the judgment of Kwan J (as she then was) in Re Beauty China Holdings Ltd [2009] 6 HKC 351 and approved by Ma CJ and Lord Millett NPJ in their joint judgment in the CFA decision in Kam Leung Siu Kwan v Kam Kwan Lai (2015) 18 HKCFAR 501, namely: (1) there had to be a sufficient connection with Hong Kong; (2) there must be a reasonable possibility that the winding-up order would benefit those applying for it; and (3) the court must be able to exercise jurisdiction over one or more persons in the distribution of the company’s assets.

In Shandong Chenming, the focus was on the 2nd core requirement, Chenming having accepted that the 1st and 3rd of the requirements were met in the current case.

There were two particular questions addressed by the CA on the appeal: the “moderation” question and the “leverage” question.

The “Moderation” Question

The CA, per Barma JA (Chu JA and W Chan J agreeing), first considered whether the judge had been correct to hold that the 2nd core requirement was one that could be moderated (i.e. dispensed with) where this was justified by the circumstances of the case. While acknowledging (at §22) that there would be a “certain attraction” to the approach, in that it would appear to provide the court with greater flexibility when considering how the discretion conferred on it by section 327 should be exercised, the CA concluded that this was not a course that was open for it to take. As the CFA had previously confirmed in Kam Leung Sui Kwan v Kam Kwan Lai (2015) 18 HKCFAR 501, the 2nd core requirement was always essential, and may indeed often be sufficient.

The CA observed that to insist on this 2nd core requirement being met is clearly sensible, in that there would seldom be circumstances in which it would be justified to set in motion the court’s winding-up machinery where to do so could provide no reasonable prospect of benefit of any kind to the petitioner. Having said that, the CA went on to express the view (at §27) that the overarching nature of the “benefit enquiry” – the purpose of which was to ascertain whether it would be appropriate to put into motion the winding-up machinery in respect of a particular overseas company – would allow some flexibility as to the nature or extent of the likely benefit to the petitioner that should be shown in order to satisfy the 2nd core requirement, as long as the benefit could be said to be a real possibility, rather than a merely theoretical one.

The “Leverage” Question

The second question was whether the benefit identified by the judge was sufficient to satisfy the 2nd core requirement. Specifically, the CA considered whether the benefit to a creditor described by Harris J (see [2017] 4 HKLRD 84) as “the leverage created by the prospect of a winding-up petition, or the appointment of a liquidator and the steps a liquidator may take to recover assets even if such steps are problematic” was sufficient to satisfy the 2nd core requirement so as to justify the court in exercising its section 327 jurisdiction over a solvent foreign or Mainland company refusing out of intransigence to pay an undisputed or undisputable debt, it having been argued by Chenming that this was logically an impermissible benefit, since it was the prospect of the winding-up order, rather than the winding-up order itself, that gave rise to the benefit, and if the creditor did obtain the benefit (of payment of the debt owed to it), the winding-up petition would necessarily be dismissed (if a winding-up order had not yet been made) or the winding-up order (if it had been made) would be rescinded.

The CA agreed with Harris J. There was, the CA considered, a real possibility of benefit to the creditor in making a winding-up order against the company, and it was not affected by the possibility that the creditor might obtain payment at an earlier stage (at §34). The CA highlighted that there was no evidence to suggest that the creditor was not really seeking the winding-up order and was merely attempting to put pressure on the company to pay, or that the creditor was other than genuine in its desire to obtain a winding-up order (at §32). Further, the CA reiterated that in an appropriate case, where the debt was undisputed or indisputable, the petitioner was entitled ex debito justitiae to present a winding-up petition and thus could not be said to be acting improperly. This was so even where the effect would be that the debtor company would be pressured to pay, or would realize that its best interests would lie in making or procuring payment.


The CA judgment in Shandong Chenming provides greater predictability in the application of the law in this area. In his decision at first instance, Harris J had held that the 2nd core requirement (the “reasonable possibility that the winding-up order would benefit those applying for it”) could be dispensed with where this was “justified by the circumstances of the case”. The judge had looked with obvious disapproval upon Chenming’s intransigence in failing to satisfy the arbitration award and considered that there was “a public interest in steps being taken to remedy this conduct and to disabuse other Mainland companies of the idea that they can take the benefits of access to Hong Kong’s financial system without the burden of complying with our law”. In requiring that the 2nd core requirement be satisfied before a foreign or Mainland company can be wound up, however, the CA has in effect curtailed what may otherwise have evolved into a broader discretion to exert jurisdiction to wind up foreign companies when the justice of the case seemed to demand it.

The CA decision, however, raises intriguing questions of its own. The CA asserted that “the making of the winding-up order would have produced a real and substantial benefit to the defendant [creditor], by resulting in the payment to it of the significant sums that it was owed” – but precisely how this benefit would be effected remains undeveloped. The CA appeared not to be troubled by the problems that might be faced by liquidators in realizing repayments when suggesting that it was clear that Harris J had in mind that the making of a winding-up order (rather than the mere prospect of one) would be of benefit to the creditor. Insofar as the anticipated benefit is considered to derive from “leverage”, it is hard to see what additional leverage would arise from the actual winding-up order in and of itself (over and above that caused by the prospect of such), or why a recalcitrant debtor or related third parties would be inclined to procure payment of the debt upon or after the winding-up order had been made, when they had been unwilling to do so all the way up until the making of it.

Finally, the CA decision is likely to be of interest to the international arbitration community. Pursuant to sections 84, 87, 92, and 98A of the Arbitration Ordinance (Cap. 609), if the court grants leave to enforce an arbitral award, it may enter judgment in terms of the award and the award will be enforceable in the same manner as a judgment of the court, i.e. as a judgment debt. The CA reiterated that in an appropriate case, where the debt is undisputed or indisputable, a creditor is entitled ex debito justitiae to present a winding-up petition and thus could not be said to be acting improperly. In considering the making of the winding-up order itself to be capable of giving rise to a benefit in such cases sufficient to satisfy the 2nd core requirement, the CA has therefore effectively sanctioned the engagement of the Hong Kong courts’ winding-up machinery – in appropriate cases and subject to satisfaction of the stated requirements – in favour of creditors under arbitration awards made against non-Hong Kong companies.

Andrew Lynn and Adrian Lo

Gilt Chambers

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