Winding Up of a Company on Just and Equitable Grounds in Hong Kong Business Formation


Section 177(1)(f) of Cap. 32 which exclusively has the provisions related to the winding up of company, as per the script of this section courts are allowed to make orders related to the winding up of company, provided court is of the opinion that this winding up would be on the grounds of justice and equity.

Understanding the term Just and Equitable

Legal battles demand perfection and clarity in the arguments so for this perfection and clarity there is the need to define the terms just and equitable in its true sense. One reference in this regard could be the remarks of Lord Wilberforce in the case of Ebrahimi where Lord Wilberforce stated those considerations to be just and equitable, through which personal considerations between two individuals, which subsequently would make it unjust if insistence on exercise of those legal rights in the particular way amounts to unjust or inequitable on the part of the victim. After Hong Kong limited company registration equitable considerations of this kind do not arise in the situation where the company is being operated on purely commercial basis because in such organisations superimposition of equitable considerations requires something more and on the grounds that company is a small corporation such consideration does not hold sufficiency. However, companies in quasi partnership enjoys immunity in this regard and for such companies, equitable considerations of this kind do arise. Lord Wilberforce depreciated the need to underline the circumstances, where such equitable or any sort of equitable consideration would arise. It must be noted that companies in quasi partnership are more prone to these equitable considerations. It does not means that company who are not in the quasi partnership are free from this obligation thus, just and equitable remedy is equally applicable on them.

Basically, the definition of term “just and equitable” has the wider definition for the Hong Kong limited company registration and thus it cannot be left upon the discretion of court to define this term and court also should not limit its discretion to the situations of case just as to justify the making of orders. Instead justice demands that its jurisdiction should be invoked and explained whenever the justice and equity demand. Just as the instructions for the judge and the court implies in case of unfair prejudice remedy that court should not move forward with the individual judge’s discretion or definition of the unfairness in subjected matter, same rule applies here, and justice demands that definition should be made in the principle manner and court shall not proceed solely on the assessment and definition of one individual judge. The term “just and equitable” needs to be interpreted in the pure commercial context and subsequently it must clearly be noted that award of just and equitable remedy shall not be limited and is not limited to the mala fides situations.

The question that should the company be wind up on just and equitable grounds is of principle importance and has the standing of an important fact. Thus there is the need to properly examine the circumstances and obligations of the justice in each presented case, of such type. A petitioner is required not to remain restricted on the circumstances which affects him or her as the shareholder of the company instead he/she is required to foresee the circumstances where justice and equity is evident and so he/she must rely on the circumstances which affects his/her relations with the company or other fellow members of the company.

Legal References

The case of Ebrahimi underlines the circumstances where equitable considerations may arise, and it is quite possible that such happening may be due to the existence of these elements:

  • An association was either formed or being continued on the basis of personal relationship which involves mutual confidence, but this shall not be certain in the situations where pre- existing partnership has been converted into the limited company.
  • Any such agreement or understanding, under which some or all members are supposed to be take part in the conduct of business of the company. Possibility exist that mentioned members could be “the sleeping members”.
  • Any provision or understanding which restricts member to transfer his/her interests in the company. For example, if due to any reason member has lost confidence and trust or if he/she has been removed from the management of the company then he/she would not be entitled to take out his/her possessed stakes/ shares out of the company and move somewhere else.

The House of Lords accepts that wherever such features exist in the operations or provisions of company then winding up of such company should be done on just and equitable grounds, especially in the situation where one or more members has been excluded from the management of the company despite of understanding between the parties. Not only just exclusion from the management would entitle victim to apply for the just and equitable remedy instead any breakdown in the relationship of trust and confidence between the parties in quasi partnership would also entitle to apply to the court on the grounds of provisions of Section 177(1)(f) of Cap. 32. For example, the circumstances where exercise of legal rights resulted in breakdown of relationship and this breakdown is proved to be misconduct on the part of those, who are in the control of the company.

The case of Kam Leung Sui Kwan presents the situation where the restaurant named Yung Kee Restaurant was being operated by the holding company of a subsidiary in Hong Kong holding company formation. Later on, Court of Final Appeal accepted the following settings in this particular case:

  • Court accepted that company was basically a family run company on the basis of relationship of trust and confidence.
  • There was the common understanding that Kam senior shall be the controller of the company so as to have intention to run business for his two sons named Kwan Sing and Kwan Lai.
  • Breach of understanding occurred when Kwan Lai consciously took over the control of the company and its subsidiaries by appointing his son in the company’s board of director because this appointment was made without the consultation of the Kwan Sing and he was neither informed nor consulted in procuring this appointment.

Having established these circumstances court ascertained that in the existence of these scenarios, it is just and equitable to wind up the company. It must be noted that the fact in this case that company which was operating the business of the restaurant was in fact the holding company of the subsidiary in the scenario of Hong Kong holding company formation does not actually bars the legal authorities to wind up the company on just and equitable grounds.
Understanding between the shareholders of the company regarding involvement of holding company in the corporate affairs of subsidiary has actually the same status as of any corporate understanding in any other businesses of corporate world. Hence, this agreement or understanding is itself the subject of the understanding between the shareholder, so equity would definitely uphold the essence of Section 177(1)(f) of Cap. 32.

Now consider the situation in HK company registration services where there occurred the failure of the substratum of the company. You may be wondering that what does the word “substratum” implies? Let’s explain whole of the situation in its complete essence. Substratum of the company is defined as the foundations and the basis upon which company was formed. Thus, in the circumstances where company is found to be lost the basis upon which it was formed then it would be just and equitable to wind up the company. Substratum depends solely on the general intentions and memorandum of understanding between the company and the members of it, on which they basically became the members of the company. For example, if company was established on the basis of the common understanding that company shall be engaged in this particular module of business and thus failure of substratum shall occur if final and conclusive scenario reveals that company abandoned this understanding, failure of substratum shall occur even in the situation where it seems impossible to attain the essence of this founding understanding.

One may confuse this and tends to apply it for the companies in quasi partnership. But in fact, doctrine of loss of substratum does not provides enough grounds to wind up the company for those in quasi partnership although it seems that general intention and common understanding for such companies stands same as what for those who lost their substratum.

Other examples in HK company registration services where winding up of company on just and equitable grounds is legitimate includes the following situations:

  • Where there is deadlock in the management of the company.
  • On account of lack of confidence and understanding between the parties regarding the business of the company because there is the situation where grave misconduct is being observed by those who are in control of the company and such grave misconduct is foreshadowed in the future.
  • Where serious breaches of agreement are being carried pertaining to the joint ventures.
  • Where there is speculation that fraud or irregularity of some kind is being prevailed and thus scrutiny is required from some independent resources to properly investigate this fraud and provide grounds for the winding up of company.
  • Where the loss incurred by the company is of such extent that there is no hope that trading of company’s objects shall result in some profitable arrangement.

One key factor that must be determined by the court is the conduct of the petitioner. Possibility exist that petition is entitled to grant the order of winding up on just and equitable grounds, but court shall reject such winding up if it senses that petitioner didn’t came to the court with clean hands. This is not mandatory requirement and merely on the ground that petitioner didn’t came to the court with clean hands does not generally bars the order to wind up company, but court shall only decline such order if it is sure that conduct and intention of petitioner is unjust and that it would be unjust if sought remedy is granted. Decline may also be due to the reason that if in any case order shall be granted such entitlement would be against the principles of equity.

Relationship of Winding Up with other Remedies

Section 180 (1A) of the Cap. 32 states that, if circumstances of the petition indicate that it would be just and equitable to order winding up of company then court should not refuse the sought order of winding up unless court sees that petitioner is acting unreasonably and there is other alternate remedy available to address the grievances of the petitioner. Otherwise court should order to wind up company on just and equitable grounds, where the company is profitable, and its corporate prospects are so charming that court has the standing to remain reluctant to grant order of winding up of the company. For example, it would not be legitimate neither appropriate for the petitioner if he/she deems to wind up the listed company instead it would be fairer if alternate remedy such as selling of shareholder’s stakes at the nominal value be made to occur in the Stock Exchange.

There can be situation where the petition to wind up company could be considered, and that situation would be the one where petitioner is the majority shareholder of the company and hence he/she has the entitlement to address the grievances by calling general meeting or by altering the composition of company’s board of directors.

It must be remembered that proceedings of winding up of company does not falls within the provisions of Section 20 of Arbitration ordinance (Cap. 609). Thus, these provisions shall not be referred to the proceedings of winding up on the basis of any arbitration agreement between the parties. But court has the discretionary power to stay a winding up petition and arbitrator does not have the legitimate power to make an order of winding up but if the disputed matter is subjected to some arbitration agreement then arbitrator is required to stay a winding up petition so that final decision could well be made after ascertaining relevant facts of the disputed matter. If after this determination, arbitrator concludes that grievances of the petitioner are correct then petitioner may apply to lift the stay on the winding up petition.