The judgment arises from the long-running cross-border insolvency of Up Energy Development Group Ltd. The Company is a Bermuda-incorporated coal mining business previously listed in Hong Kong. From early 2016, it experienced financial distress. By mid-2016, this led to different creditors presenting winding up petitions in Hong Kong (its place of listing) and Bermuda (its place of incorporation).

The Company subsequently attempted a restructuring, which failed. It was then wound up by the Bermuda court in March 2022. Shortly afterwards, in May 2022, the Hong Kong court also ordered that the Company be wound up.

The Hong Kong court’s jurisdiction to wind up foreign companies is governed by well-established common law principles. A petitioner must satisfy the court that the case meets three jurisdictional thresholds, before the court will exercise its jurisdiction to wind up a foreign company:

1. Sufficient connection to Hong Kong;
2. Reasonable possibility that the winding up will have a “real” – as opposed to “theoretical” – benefit to the petitioner; and
3. Jurisdiction over person(s) involved in the distribution of the company’s assets.

At first instance, the Hong Kong court held that all three thresholds were satisfied.

Of particular relevance, the Hong Kong court held that the second threshold was satisfied given that (within Hong Kong) the powers of a Hong Kong-appointed liquidator were more extensive than those of a Bermuda liquidator following recognition in Hong Kong.
The Hong Kong court held that this fact conferred a real – as opposed to a theoretical benefit – even in the absence of any evidence that these wider powers were in fact needed or likely to be used. In other words, the court held that the need under the second threshold for a real benefit was satisfied on the basis that the wider powers available to a Hong Kong liquidator were only potentially necessary or useful.

One creditor appealed to the Hong Kong Court of Appeal, arguing that benefits relied upon by the earlier Hong Kong judge under the second threshold were “either non-existent or theoretical rather than real.”

In setting aside the winding-up order against the Company, the Court of Appeal held that while the second threshold test is low, the requirement was not satisfied because:

• There was no prima facie evidence of valuable Hong Kong assets to benefit creditors in a local winding-up; and
• The mere availability of the broader liquidator powers under Hong Kong law alone is insufficient: for the Court to accept only a theoretical or speculative advantage would render the second threshold redundant because it would be automatically satisfied in all cases. With regard to decisions such as Re China Huiyuan, the Court clarified that petitioners must demonstrate a factual basis for a real possibility of some discernible benefit (eg targeted asset or claim investigations) in respect of the second threshold, not theoretical legal advantages.

This decision emphasises the important role Hong Kong’s jurisdictional thresholds for winding up foreign companies play in cross-border insolvencies. Of course, the Hong Kong court will not wind up a foreign company where it has no legitimate interest to do so as that would be an exercise of exorbitant jurisdiction contrary to international comity. In respect of the second threshold, it is important to note that while flexibility exists regarding the required benefits to the petitioner, assertions must be grounded in specific, plausible facts rather than purely theoretical or abstract legal advantages.

Harneys, while not advising on Hong Kong law, assists clients with offshore insolvency and restructuring matters in Bermuda, the British Virgin Islands and the Cayman Islands, often with cross-border elements.