Re Leading Holdings Group Limited [2023] HKCFI 1770 represents the first instance in which the Hong Kong Court has had to decide the issue of the locus of an investor of a global note to present a winding-up petition as a contingent creditor. It was held that beneficial holders of debt in the form of widely available global notes do not have the standing to bring a petition for winding up against the issuing company as a contingent creditor.

Background

A Hong Kong listed Cayman company, Leading Holdings Group Limited, issued 12% senior notes due 2022 pursuant to a New York law governed indenture. The indenture was entered into with The Bank of New York Mellon as trustee. The company’s books only showed one registered global note and the global note was registered in the name of the Bank of New York Mellon as the common depository.

By petition, dated 27 September 2022, the Petitioner sought a winding up of the company on the ground that it was indebted to the Petitioner in the sum of US$1.3 million plus interest. The company subsequently applied for the petition to be struck out as an abuse of process as the Petitioner had no standing to present the petition.

The court's analysis focused on two key questions: (i) whether the Petitioner, as a beneficial bondholder, possessed the requisite standing, and (ii) whether the Petitioner could be classified as a contingent creditor of the company, so as to have a direct claim against the company.

The CFI’s Ruling

Global note structure: limiting claims by indirect bondholders

When considering whether investors with book-entry interests have direct rights against the issuing company, the court considered in depth the structure of a global note. In a typical global note structure with a "no action clause"¹, the trustee represents and protects the bondholders, who are treated as forming a class, and the bondholders must rely on the trustee as the exclusive channel of enforcement because, in consenting to the "no action clause", bondholders waive their individual rights to bring claims that are common to all bondholders, and are therefore only exercised by the trustee on behalf of the bondholders as a collective. The system operates on the basis of a "no-look-through" principle, whereby each party has rights only against their own counterparty.

Arguments were advanced by the Petitioner relying on section 6.07 of the global note which provided:

"Rights of Holders to Receive Payment.

Notwithstanding anything to the contrary, the right of any Holder to receive payment of the principal of, premium, if any, or interest on, such Note, or to bring suit for the enforcement of any such payment, on or after the due date expressed in the Notes, which right shall not be impaired or affected without the consent of the Holder."

The Petitioner submitted that section 6.07 granted it the right to enforce its right to receive payment pursuant to the global note by way of a winding-up petition. This is a view that some legal practitioners have shared in the past to suggest that, for example, parallel schemes of arrangement were necessary to prevent a bondholder from exercising its right under section 6.07 and wind up the company in a foreign jurisdiction such as in the company’s jurisdiction of incorporation. These arguments were rejected by the court on the basis that this was contrary to the "no action clause" and inconsistent with the Cayman Islands decision in Re Shinsun Holdings (Group) Co Ltd FSD 192 of 2022 (DDJ) (21 April 2023) (unreported).

Whether the Petitioner had standing as a beneficial holder

The Petitioner contended that as a beneficial owner of part of the underlying debt of the note, he had standing to petition for winding up of the company. In support of this stance, the Petitioner drew upon the precedent set by Harris J's ruling in Re China Cultural City Limited [2020] 4 HKLRD 1, which suggested that a beneficiary of a debt trust had the right to file a winding-up petition.

In delivering his judgment, DHCJ Suen SC rejected the Petitioner’s arguments and held that holders of bonds are not creditors: they are cestuis que trust of a charge, merely having a right to put their trustees in motion. Drawing from cases such as Re Uruguay Central and Hygueritas Railway Co of Monte Video (1879) 11 ChD 372, DHCJ Suen SC held that there was a lack of any direct contract or covenant between the Petitioner and the company. The Petitioner was therefore not entitled to present a winding-up petition.

Whether the Petitioner was a contingent creditor

The Petitioner sought to argue that their debt was a contingent one as the Petitioner was owed a debt that would become due in the future upon the occurrence of a future event – in this case, the issuance of definitive notes in favour of the Petitioner.

However, in applying the Cayman Islands decision in Re Shinsun, DHCJ Suen SC ruled that an essential element to a contingent liability was an existing obligation, such as a prevailing contractual relationship or directly enforceable right, against the company. Notably, the Petitioner conceded that it possessed neither an existing contractual relationship nor a directly enforceable right against the company.

Relying on Re William Hockley and a number of other English authorities, Boyle J in Re Shinsun found that the meaning of contingent creditor required an existing contractual obligation from which a contingent liability may arise. Obligations only existed between the Petitioner and the holder/trustee and not vis-à-vis the Petitioner and the issuing company. Boyle J found arguments that contingent liability arose because of the Petitioner’s right to require the immediate delivery of certificated notes confused and conflated the concept of contingent creditor with contingent standing. It was not until the Petitioner obtained notes in its name that it would be able to establish it was a creditor to the company at all, whether actual or contingent. The Petitioner’s standing itself was therefore contingent and not its debt.

Finally, as a matter of policy, allowing beneficial holders to present petitions may lead to multiple identical actions being commenced by the holder/trustee and a number of the beneficial holders in relation to the same debt.

Commentary

The decision in Re Leading Holdings Group is significant in clarifying the Hong Kong Court’s approach in dealing with beneficial holders of securities and brings consistency in applying the sensible approach of the Grand Court of the Cayman Islands in Re Shinsun and other English authorities. Beneficial bondholders are not contingent creditors and cannot present petitions to wind up a company.

However, this does not mean that all doors are closed to beneficial bondholders. DHCJ Suen SC makes clear that it is still open to them to act through the trustee/holder. Taking action through or causing the trustee/holder to take action will tend to be more a more cost-effective approach. The time and cost of acquiring definitive notes can be disproportionate to the amount claimed and taking legal action against the issuing company, without the collective backing of fellow bondholders through a trustee, will likely lead to higher costs.

In any event, bondholders must understand and be mindful of the terms of their debt agreement, particularly in following express enforcement procedure. Acting contrary to the terms of the agreement and potentially contrary to the wishes of other bondholders will bring about little result to enforce the debt if Re Leading Holdings continues to be an authority in Hong Kong.

Jacky Cheung, a trainee solicitor is one of the authors, his email address is jacky.cheung@dentons.com.

1. No one besides the registered holder of the bond, i.e. the common depository and the trustee, can bring an action against the issuing company.↩