Case update: Winding-up following assignment of debt in Hong Kong

Introduction

Does the court have the jurisdiction to grant or uphold a winding-up order where the petitioner has assigned its debt to a third party without notice?  Should the directors, funders and instigators of an unsuccessful appeal brought solely in the name of an insolvent company bear costs?  Does the Court of Final Appeal (CFA) have the power to order, on the consent of the parties, security for costs beyond the statutory ceiling against non-parties?  These were some of the questions which the CFA answered in the affirmative in China Properties Group Ltd v JIC Trust Co Ltd [2026] HKCFA 34.

The CFA’s Reasons for Judgment contain important points of broad significance, namely that: -

1. An equitable assignor of a debt keeps its standing to present a winding-up petition without joining the assignee
2. Whether a petitioner is a creditor goes to its standing, not to the court’s jurisdiction to make a winding-up order
3. Non-party directors, instigators, and funders of failed appeals by insolvent companies may be made personally jointly and severally liable for a successful respondent’s costs

This update summarises the CFA’s judgment and analyses its reasoning and key points.  It also provides practical guidance to petitioners, debtor companies, and those behind them, both before and after the institution of winding-up proceedings.

Facts

JIC Trust Co Ltd (Petitioner) lent RMB1.2 billion to Shanghai Jingan Concord Real Estate Co Ltd (JAC), a subsidiary of China Properties Group Limited (Company”, which in turn acted as guarantor for the loan.  JAC failed to repay the loan when it fell due, and the Petitioner brought proceedings in the Zhejiang High People’s Court against both JAC and the Company to recover the debt.  Following mediation, a consent judgment was entered under which the Company acknowledged that it was jointly and severally liable for the debt, interest, and specified litigation fees and expenses (Consent Judgment).

The Petitioner then issued a statutory demand against the Company and, when it remained unsatisfied, presented a winding-up petition before the Hong Kong Court of First Instance (CFI). The Company, in response, sought unsuccessfully to set aside the Consent Judgment.  In the interim, the Petitioner’s parent company, China Jianyin Investment Ltd, announced that the Petitioner had assigned the debt to a third party – a point that would later become central to the Company’s arguments.

After the announcement, and when the petition was actually heard, the Company sought to resist the winding-up proceedings by advancing restructuring proposals and the sale of large real estate developments to generate cash.  The CFI however noted that all previous restructuring proposals had failed and the proposed sale had not attracted a single bid, and therefore ordered that the Company be wound-up.

On appeal, the Company sought to set aside the winding-up order on the basis that the Petitioner had no standing to present the petition following its alleged assignment of the debt to the third party. To make good this point, the Company had to adduce fresh evidence on appeal.  However, the Court of Appeal (CA) refused to admit this new evidence, as it could have been obtained and presented before the CFI.  As there was no evidence of any assignment, the CA dismissed the appeal.

The Appeal Committee of the CFA, however, granted leave to the Company to appeal on whether the court had jurisdiction to grant or uphold a winding-up order where the petitioner had assigned the debt to a third party in the Mainland without notice to the debtor, despite no challenge to locus standi when the proceedings were commenced or when the winding-up order was made.

Ruling

Main reasoning

The CFA held that the petition debt in the present case was constituted by the debt arising out of the Consent Judgment and not the underlying loan debt.  The Consent Judgment was entitled to recognition in Hong Kong as a final and conclusive foreign judgment, and it conclusively established that the petition debt was owed to the Petitioner.  In such circumstances, it was not open to the Company, which was bound by the Consent Judgment, to go behind it, and therefore the Petitioner as a creditor of the Company had locus to present the petition (at [26]-[37]).

Additionally, there was no admissible evidence before either the CFI or the CA establishing that an assignment had occurred, or showing its nature and effect.  The Company could not rely on the categorisation of its argument as a jurisdictional challenge to bypass the refusal to admit fresh evidence under the Ladd v Marshall [1954] 1 WLR 1489 test (at [19]-[23], [38]-[40]).

Standing and jurisdiction

However, the CFA explained that, had there been an assignment of the debt by the Petitioner to the third party without notice, it would have taken effect as an equitable assignment, which would not have affected the Petitioner’s locus to present the petition.  This was because one had to distinguish between the enforcement of an assigned debt on the one hand, and the locus to present a winding-up petition on the other (at [44]-[49]).

In short, while an equitable assignor must join the equitable assignee to bring proceedings for the enforcement of a debt in view of the insufficiency of the former’s title, a creditor’s locus to present a winding-up petition does not involve enforcing the debt in question. A winding-up order does not affect the legal rights of the creditors of the company, and only puts into effect a process of collective execution against the assets of the company for the benefit of all creditors, with no determination of the rights of the creditors themselves necessary at the stage when the order is made.  This approach also accorded with both local and English authorities (at [49]-[53]).

Further, the CFA also drew a distinction between locus standi and a lack of jurisdiction.  Though the Company contended that the CFI lacked jurisdiction to make the winding-up order as the Petitioner, as an assignor of the debt, did not have the status of a creditor, this contention was wrong.  Section 176 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) confers jurisdiction on the CFI to wind-up any company generally.  The fact that there is a dispute as to whether the petitioner is a creditor only goes to standing, with the court retaining the discretion to make a winding-up order even during the subsistence of such a dispute (at [54]-[61]).

Costs

As for costs, the CFA held that where an appeal against a winding-up order brought in the sole name of an insolvent company is dismissed, the CFA has the power to order the costs of and occasioned by the appeal to be paid by the instigators and/or funders of the appeal rather than out of the company’s assets.  The CFA has the power to exercise any powers of the court from which the appeal lies under section 17(2) of the Hong Kong Court of Final Appeal Ordinance (Cap 484) (HKCFAO), which would include the power to award costs against a non-party under section 52A(2) of the High Court Ordinance (Cap 4) (at [94]-[95]).

In the present case, it was in the interests of justice that the costs of the appeal should not be thrown upon the assets of the Company, which was already heavily insolvent, to the prejudice of the creditors.  Certain named individuals and entities, as well as the members of the board of the Company at the time of the appeal, were therefore joined as parties to the appeal for the purposes of costs, and made jointly and severally liable subject to them showing cause to the contrary (at [94]-[100], [115]).

Additionally, the CFA considered it reasonably arguable that it had the power to order security for costs against non-parties, including as a condition of allowing the appeal to proceed, but likely only up to the statutory limit of HK$400,000 imposed by section 25 of the HKCFAO, noting that it would be timely for legislative amendments to significantly increase this cap, which has not been increased since it was set in 1997 (at [105]-[111]).

Finally, the CFA also noted that there was no objection in principle to it granting an order by consent that a third party should provide security for costs in any agreed amount, even beyond the statutory maximum, as section 25 of the HKCFAO was not engaged when a non-party voluntarily consents to the provision of additional security without compulsion, and where such payment is not made to satisfy a condition for leave to appeal (at [112]-[114]).

Analysis

At the outset, it bears emphasising that the ratio decidendi of the CFA’s judgment is very narrow, and that many of the points which have emerged are strictly obiter dicta.  The CFA’s principal reasoning rests on two core pillars. First, the conclusiveness and finality of the Consent Judgment giving rise to the petition debt.  Second, the fact that there was no admissible evidence before the court as to the existence or nature of the assignment.  These points were sufficient to address the Company’s arguments as to the court’s supposed inability to grant or uphold a winding-up order on a petition brought by the Petitioner and substantively dispose of the appeal, without even the need to hear from those representing the Petitioner.

However, the obiter dicta of the CFA are strong persuasive authority and, in any event, in the circumstances of the case were delivered with the benefit of full argument from the parties.  It would therefore be difficult, in the absence of clear authority to the contrary, for example from other common law jurisdictions, to persuade lower courts that the CFI cannot grant a winding-up order upon a petition brought by an equitable assignor of the underlying petition debt. Substantively, the clarifications on the questions of enforcement of debt, locus standi to present a winding-up petition, and the statutory jurisdiction of the CFI to wind-up companies should be welcomed, particularly on two points.

First, on the court’s statutory jurisdiction to wind-up companies, it has long been established that the court has broad discretion which should not be unreasonably or oppressively fettered: Perak Pioneer Ltd v Petroliam Nasional Bhd & Ors [1988] 1 HKLR 209 (PC) at 214F-G per Lord Brightman.  The court can and should have jurisdiction to determine all issues bearing on whether discretion should be exercised to make a winding-up order.

In fact, as the CFA rightly noted, even where the frequently invoked defence that the petition debt is bona fide disputed on substantial grounds is successful, the court’s typical dismissal of the petition is simply “a rule of practice and not a rule of law” (at [57]).  Indeed, the courts have exceptionally permitted a petitioner to proceed with the winding-up of a company even where the underlying debt has been disputed on substantial grounds, where the effect of the dismissal would be to deprive the petitioner of a remedy or where injustice would otherwise result: Alipour v Ary [1997] 1 WLR 534 at 546; Re Russian and English Bank [1932] 1 Ch 663; and Re Claybridge Shipping Co SA [1997] 1 BCLC 572.

Accordingly, even an error made on the issue of whether the petitioner has standing to bring the petition does not render a winding-up order made on that basis a nullity.  It is only one of the factors bearing on the court’s exercise of its jurisdiction and does not deprive the court of jurisdiction.  A true jurisdictional defect, as the CFA noted, which would render the decision a nullity would be where the court itself is not validly constituted, such as in the case of Hip Hing Timber Co Ltd v Tang Man Kit (2004) 7 HKCFAR 212 where the court purported to issue a final order without the statutory number of presiding judges required.

Second, as a winding-up order does not substantively decide rights, but simply puts the company into a state of administration for the collective benefit of creditors, an equitable assignor can still have sufficient interest for locus even without joining the assignee.  No question of enforcement is involved at that stage, with the rights of all interested parties only determined after investigation and adjudication of the debts of all creditors.  This may be particularly relevant to Mainland creditors, as distressed debt is often transferred under asset-management or securitisation structures, sometimes without notice to the debtor, and the CFA’s judgment now means that a heavily insolvent debtor will not be able to defeat the petition simply by pointing to an unnotified transfer.

Additionally, the CFA’s judgment also serves as a caution to the instigators and funders of failed appeals by heavily insolvent companies that they may bear personal costs exposure even where they attempt to hide behind the company’s name.  This was a response to the potential injustice and prejudice such large expenditure would cause to the creditors of the heavily insolvent Company, and confirmed that the CFA’s statutory power to exercise any power of the court from which the appeal before it lies includes the power to make non-party costs orders if it is satisfied that it is in the interests of justice to do so.  The CFA drew the net widely in terms of who would be made jointly and severally liable for costs.  This covered instigators, funders and the members of the Company’s board of directors at the time the appeal was mounted.

The CFA did, however, ensure that those individuals would have a proper right to be heard, and joined them all to the appeal and gave them liberty to lodge submissions in writing showing cause as to why any of them should not be made so liable.

Finally, the CFA has left the door open for parties to obtain consent orders for additional security for costs beyond the statutory maximum prescribed as part of the conditions for granting leave to appeal, where the security is provided without compulsion and not to satisfy a condition for leave to appeal.  In any event, the CFA’s further call for the Chief Executive in Council “to increase significantly” the statutory cap of HK$400,000, and for amendments to be made to make clear that it can require security for costs to be provided by non-parties, may also prompt swift reform of the HKCFAO and result in significant changes to the practical costs calculus in final appeals, which has not changed since 1997.

Practical guidance

There are a number of points of practical guidance for those involved in corporate insolvencies, whether on the side of the petitioner, debtor company, those behind them or their legal advisers.  In particular: -

• Creditors and petitioners should address any standing, assignment and joinder issues at first instance and seek timely disclosure of any alleged assignment and of persons who have funded or instigated a subsequent appeal
• Where a creditor relies on a foreign or Mainland judgment which can be recognised in Hong Kong, it can expect the court to treat the judgment as final and conclusive unless a proper basis for non-recognition is established; debtors’ attempts to go behind the judgment will be treated with caution
• For appeals by insolvent companies against winding-up orders, petitioners should consider seeking security for costs and orders requiring disclosure of funders and instigators, while preserving the basis for a later non-party costs application 
• Petitioners should consider negotiating a consent order for additional security above HK$400,000 after the leave condition has been satisfied, because the statutory cap does not apply to a voluntary top-up that is not imposed as a condition of leave 
• Debtor companies and their directors should raise any standing or debt challenge at first instance and put forward all relevant evidence then.  A later attempt to introduce evidence on appeal may fail under Ladd v Marshall, particularly where the issue was known before the winding-up order.
• Directors, instigators and funders of an insolvent company’s appeal should not assume that, in proceedings instituted solely in the name of the company, they will escape personal liability for costs.  On the contrary, they may face personal, joint and several liability for the successful counterparty’s costs, and not be protected by the company’s assets.
• Funders and directors should maintain clear records of who authorised and financed the appeal and should expect disclosure, joinder for costs purposes and a show-cause process.  The CFA’s reasoning also suggests, without finally deciding, that security from non-parties may be available under a parallel non-statutory power and may be constrained by the HK$400,000 ceiling.
• The statutory cap on the quantum of security for costs may now be substantially raised to bring it more in line with realistic present levels of likely legal costs.  Those intending to bring appeals to the CFA should closely monitor any amendments to the HKCFAO, and those advising clients on the costs of appeals to the CFA should no longer assume that the low cap will subsist for long.