By Eliot Simpson, Appleby

The recent decision of Mr Justice Harris in the case of re Yung Kee Holdings Ltd, [2012] 6 HKC 246, in the Court of First Instance in Hong Kong has highlighted some of the issues that can arise in resolving shareholder disputes where offshore companies are used to hold assets and businesses elsewhere. In particular, and subject to what the Hong Kong Court of Appeal may decide, it demonstrates that in many cases where corporate disputes arise, those disputes should be determined in the jurisdictions of incorporation and not in the jurisdictions where the underlying assets or principals are located.

Yung Kee is a famous restaurant in Hong Kong’s Central district (particularly renowned for its goose), founded by Kam Shui Fai (“Kam Senior”), who died in 2004. Prior to his death Kam Senior arranged for the business to be held through two BVI companies, Yung Kee Holdings Ltd and Long Yao Limited. Long Yao was originally the trustee of a unit trust holding interests in the business, but in 2006 this was distributed to members of Kam Senior’s family and they became shareholders in Yung Kee Holdings Ltd, which held Long Yao Limited which, in turn, held the operating companies of the business.

Kam Senior had three sons, two of whom (Kam Kwan Lai and Kam Kwan Sing) were alive at the time of the issue of the proceedings, and a daughter, Kelly Kam. A dispute arose between the two surviving brothers, who had both been involved for many years in the business and had the largest individual shareholdings. In 2010 Kwan Sing commenced the action seeking a winding–up order or alternative relief from the Hong Kong court. By this time, Kwan Lai was in effective control of 55% of the shares of Yung Kee Holdings Ltd.

Kwan Sing’s petition under sections 168A and 341 of the Companies Ordinance sought relief under the unfair prejudice remedy or alternatively the winding- up of the company on the just and equitable ground. It is common in Hong Kong to seek the two remedies in the alternative. Mr Justice Harris dealt with the substantive claim in the second half of his judgment, deciding that the business amounted to a quasi partnership, that Kwan Sing had been treated unfairly, and that Kwan Lai should buy out Kwan Sing’s shares.

Jurisdiction

In the first half of his judgment Harris J dealt with the question of jurisdiction. Section 168A, which provides the unfair prejudice remedy, applies to a “specified corporation” which is defined in Section 2(1) of the Ordinance to include a “non-Hong Kong company”. A non-Hong Kong company is defined in Section 332 as a company “incorporated outside Hong Kong which… has established a place of business in Hong Kong”. Harris J determined that Yung Kee Holdings Ltd did not have such a place of business. He set out a list of 20 factors that pointed to this conclusion, but underlying this was the fact that Yung Kee Holdings was simply a holding company holding shares in Long Yao (another BVI company), which in turn held shares in group trading companies.

In relation to the petition for a winding-up order, and whilst the court could have accepted jurisdiction to wind up a foreign unregistered company, Harris J found:

“In my view, there is insufficient connection between the Company and Hong Kong to justify the Hong Kong Companies Court exercising its discretion and accepting jurisdiction over a dispute between the Company’s shareholders. They are shareholders in a BVI company and they can take their dispute to the courts of the jurisdiction in which the Company is incorporated.”

Following the judgment, Kwan Sing’s counsel filed an appeal against the decision of Harris J and the outcome of that appeal will be awaited with interest.

An alternative, however, might have been to bring the claim afresh in BVI, where the findings of Harris J on the merits might have successfully been relied upon as creating an issue estoppel as against the respondents, even though Kwan Sing had not succeeded in his action in Hong Kong.

Issue Estoppel

BVI has a sophisticated Commercial Court, established in 2009, which is presided over by Mr Justice edward Bannister QC. It deals expeditiously with commercial and trust cases, with judgments typically produced within two weeks from hearing. Appeals go to the Court of Appeal of the eastern Caribbean Supreme Court, which sits in BVI three times per year, and from there to the Privy Council in London.

Section 184I of the BVI Business Companies Act 2004 provides a modern unfair prejudice remedy in terms similar to Section 168A of the Companies Ordinance:

“(1) A member of a company who considers that the affairs of the company have been, are being or are likely to be, conducted in a manner that is, or any act or acts of the company have been, or are likely to be oppressive, unfairly discriminatory, or unfairly prejudicial to him in that capacity, may apply to the Court for an order under this section.”

In addition, the BVI Insolvency Act 2003 provides jurisdiction for the court to wind up a company on the just and equitable ground. The courts have applied English cases and principles in determining when it is just and equitable to do so.

The position in other offshore jurisdictions is comparable. In Jersey, for example, the Companies (Jersey) Law 1991 contains equivalent provisions in Articles 141 to 143. Article 141 provides:

“(1) A member of a company may apply to the court for an order under Article 143 on the ground that the company’s affairs are being or have been conducted in a manner which is unfairly prejudicial to the interests of its members generally or of some part of its members (including at least the member) or that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.”

Article 155 of the Companies (Jersey) Law 1991 gives jurisdiction to the royal Court to wind up a company on the just and equitable ground.

In the Cayman Islands there is not a discrete remedy for unfair prejudice. However, the grand Court has jurisdiction to wind up a company on the just and equitable ground under Section 92 of the Companies Law (2011 revision). Where a petition is presented by members of the company on this ground, the court has jurisdiction to make orders as an alternative to a winding-up order, including an order for the purchase of shares of any members of the company by other members or by the company itself.

Internal Disputes

Businesses that structure their affairs through offshore companies or other structures may not be able to resolve internal disputes in their home courts, but this should not be a cause for concern. The more established offshore jurisdictions have developed effective and efficient court systems to deal with these sorts of cases and the remedies available are generally similar if not identical.

Contact:

Eliot Simpson Partner Hong Kong Practice group Head Litigation & Insolvency +852 2905 5765 [email protected]