Vol 21 (2024) - Issue 1

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Issuers Take Note: Can a Noteholder, Acting Independently, Present a Petition against an Issuer?

Synopsis
The ability of an investor in a global note structure to petition for the winding-up of an issuer has been a hot topic in international debt capital markets circles.
More investors will undoubtedly be considering the enforcement options available to them, given the rise in US Dollar-denominated high yield bond defaults, particularly within the beleaguered Chinese property developer market.
In 2023, conflicting decisions have been handed down by the courts of Hong Kong (Re Leading Holdings Group Limited),1 the Cayman Islands (In the matter of Shinsun Holdings (Group) Co., Ltd)2 and the British Virgin Islands (In the Matter of Haimen Zhongnan Investment Development (International) Co. Ltd) on the question of the standing (or locus standi) of a beneficial holder of a global note (governed by New York law) to present a winding-up petition against an issuer as a contingent creditor.
This is a rapidly developing, unsettled area of law. As at the date of writing, the position in Hong Kong and the Cayman Islands is that a beneficial holder of a note (who, through an intermediary, holds a book-entry interest in a global note through a clearing system) does not have standing as a creditor or contingent creditor to petition for the winding-up of the issuer. Unless or until it obtains definitive notes in its name, it cannot establish that it is an actual or contingent creditor because there is no existing contractual relationship and obligation between it and the issuer.
This has become a point of major controversy which has led to some more intrepid creditor groups on an interjurisdictional excursion to 'unlock' the path to their recognition as a creditor of an insolvent issuer.
We saw this unfold in the recent Hong Kong, BVI and New York proceedings concerning Tunghsu Group – more on that later.
The Eastern Caribbean Supreme Court ('ECSC'), as the superior court of record in the British Virgin Islands, has taken a different approach to the courts in Hong Kong and the Cayman Islands. In the recent decision in Haimen Zhongnan, the ECSC ruled that the ultimate beneficial owner in a global note structure does have standing to enforce a claim against the issuer and can be considered a contingent creditor of the issuer for the purpose of presenting a winding-up petition. This decision was heavily influenced by the judgment of the Supreme Court of the United Kingdom in In the Matter of Nortel GmbH (in administration); In the Matter of Lehman Brothers International (Europe) (in administration), which the ECSC interpreted as making it plain that the modern trend is to accept an expanded definition of 'contingent' obligations.
This article will examine these recent decisions and analyse the conflicting positions in Hong Kong, New York, the Cayman Islands and the British Virgin Islands in this field of law.