Foreword:

According to the Hong Kong Stock Exchange announcement on April 12, 2024, Zhenro Properties Group Limited (6158.HK) (“Zhenro Group”) announced that its notes totaling USD 290 million at 7.875% per annum issued in January 2020 would not be repaid at maturity on April 15, 2024, due to “liquidity紧张 and significant financial pressure.”

According to不完全 statistics, excluding Zhenro Group, among USD bonds issued by Chinese real estate companies maturing in 2024, no fewer than 19 bonds had been declared in default by the first quarter of this year, involving 11 mainland real estate companies including China Evergrande, Greenland Holdings, and Shimao Group, with a total amount of USD 9.6878 billion.

Most of the above bond issuers are Hong Kong Stock Exchange listed companies using offshore structures. Issues such as “what can bond investors do when sino-offshore bonds default” have increasingly drawn practitioners’ attention. In light of this, the author cites representative 2023 cases from the Cayman Islands, Hong Kong, and BVI to briefly analyze the rights enforcement issues bond investors may encounter after default, particularly for global notes governed by New York law, as a starting point for discussion.

Conclusion

According to judgments issued by the Cayman Islands and Hong Kong in April and July 2023 respectively: (i) if investors invest by purchasing beneficial interests in notes through intermediaries (see below) following general global note trading practices; and (ii) after default, if investors have not obtained authorization from the registered holder of the notes and have not initiated the note acceleration process per the issuance documents, investors will have “no right” to file a compulsory winding-up petition against the issuer company due to debt default.

Interestingly, only one day after the Hong Kong judgment, the BVI court reached a completely opposite conclusion on substantially identical facts, supporting investors’ standing to file winding-up petitions directly against the issuer company solely as beneficial owners.

As the Cayman case came first, and the Hong Kong case largely followed the Cayman case on the focal issues, and the BVI case frequently cited the Cayman case when explaining why “different judgments were reached on the same case,” the author will primarily discuss the relevant facts of the Cayman case below.

Grand Court of the Cayman Islands - Shinsun Case[1]

As is well known, to facilitate the trading of notes on the international market, the customary practice is for the issuer to first issue global notes to securities clearing and settlement systems such as Euroclear and/or Clearstream (“Clearing Platforms”), which then designate banks, custodians, or other intermediaries holding accounts with the clearing platform (“Intermediaries”) as common depositories. The intermediary itself or its designee serves as the registered holder of the notes. Any settlement, principal, or interest payments are made directly by the issuer to the common depository or its registered holder, with no direct legal relationship with the actual investor.

In the Shinsun case, Shinsun Holdings (Group) Co., Ltd. (“Shinsun” or “Issuer”) adopted this structure. The company was incorporated in the Cayman Islands and listed on the Hong Kong Stock Exchange, issuing notes totaling USD 200 million in 2021, maturing in 2023, with an annual interest rate of 12%. China Construction Bank (Asia) Corporation Limited (“CCB Asia” or “Common Depository”) was appointed as the common depository for the notes, and CCB Asia designated CCB Nominees Limited (“CCBN” or “Registered Holder”) as the registered holder. The investor was Shenwan Hongyuan Strategy Investment (Hong Kong) Limited (“Shenwan HK”), which subscribed for a USD 50 million interest in the notes in 2021 through its account with the Hong Kong Monetary Authority.

On February 18, 2022, Shinsun failed to pay the note interest due. On March 21, 2022, Shenwan HK instructed CCB Asia to issue an acceleration notice to Shinsun pursuant to Section 6.02 of the issuance document “Indenture.” CCB Asia issued the notice on April 1, 2022, and Shinsun publicly announced on the HKEX three days later that the note principal and accrued interest were immediately due. On September 16, 2022, Shenwan HK filed a winding-up petition against Shinsun in the Cayman Islands, its place of incorporation.

As described above, due to the global note trading structure[2], Shenwan HK had no direct contractual rights or obligations with Shinsun. This meant Shenwan HK could not even directly sue Shinsun. So how did Shenwan HK file the winding-up petition against Shinsun? The Shinsun case revolved around this issue of Shenwan HK’s standing.

[1] Re Shinsun Holdings (Group) Co., Ltd FSD 192 of 2022 (DDJ)

[2] The global note trading structure is designed so that the physical note certificate remains with the registered holder without movement, while intermediaries holding clearing platform accounts can conduct numerous, multiple trades of the notes. Because the registered holder remains unchanged, investors can only participate in investment activities through intermediaries with platform accounts by subscribing for beneficial ownership interests in the notes. In other words, even if the investor has actually subscribed for the notes and paid the transaction price, they still cannot become the registered holder and have direct contractual rights against the issuer. This structural feature is the direct and primary reason why investors’ standing to file petitions was disputed across the Cayman, Hong Kong, and BVI courts.

Focal Issue 1:

Can a petitioner who may become a creditor upon satisfying certain conditions (i.e., at a future point in time) be deemed a “contingent creditor” and thereby obtain standing to file a petition?

In this case, since the Indenture provided that only the registered holder is entitled to take action against the issuer, and Shenwan HK was not the registered holder of the notes, it naturally had no standing to file the petition. Shenwan HK argued that although it had not yet obtained “creditor status,” under the Indenture terms, it could obtain creditor status through a series of operations. Therefore, Shenwan HK claimed standing as a “contingent creditor”[3] to file the petition.

The court did not accept Shenwan HK’s argument, even finding its expert witness “stoically stubborn” and that Shenwan HK “confused and conflated two distinct and separate issues” because of the term “contingent.”

The court’s core view was that “whether one has creditor status” and “whether one has standing to file a petition” are two independent issues to be treated separately. There is no situation where a party proves its “contingent” standing to file a petition. In other words, a party either has standing or does not; there cannot be a situation where a party is “very likely” to have standing. “Contingent” relates to creditor status, not the petitioner’s standing. Therefore, a party must have actually obtained the standing and qualifications to file a petition at the time of the court’s adjudication (the petition hearing date) before proceeding with their claim as a “contingent” creditor.

Regarding whether Shenwan HK qualified as a “contingent creditor,” the court strictly adhered to “originalism,” using the issuance document the Indenture[4] to determine whether Shenwan HK had satisfied the relevant conditions. By the hearing date, the court found that Shenwan HK had not obtained certificated securities under the Indenture and therefore had no rights against the issuer. Since there was no direct contractual relationship, its status as a creditor or contingent creditor was unfounded.

[3] Due to space constraints, the author does not provide a detailed explanation of “contingent creditor.” Simply put, per the understanding of the judges in the Shinsun case and the Leading Holdings case below, both creditor and contingent creditor status require a direct contractual relationship between the obligee and obligor as the fundamental basis for determination. The difference is that a creditor can currently claim against the debtor, while a contingent creditor can only exercise rights upon the occurrence of a future event.

[4] Under Indenture Sections 2.05(c) and 2.06(b), the issuer only recognizes the registered holder of the notes as the owner and obligor. If the registered holder transfers beneficial interests and/or a default event under Sections 6.01 or 6.02 and acceleration of the notes occurs, changing the registered holder, the procedures under Section 2.04(e) must be followed, including: (i) the registered holder must provide written notice to the issuer; (ii) the issuer issues certificated securities; and (iii) the issuer delivers an officer’s certificate to the common depository CCB Asia, instructing certification and delivery of the certificated securities. Only after completing all these procedures can the investor obtain creditor status and standing to directly file a winding-up petition against the issuer.

Focal Issue 2:

Can the petitioner be deemed the registered holder’s “agent or authorized representative” to file a winding-up petition on behalf of the registered holder against the issuer?

Shenwan HK’s other core argument was that under the Indenture, the registered holder could authorize a third party to exercise its contractual rights[5]. Shenwan HK argued that it had obtained an “Enhanced Consent Letter” from Euroclear, constituting authorization from the clearing platform. Because the registered holder trades on the clearing platform, it is bound by the platform’s operating rules. Therefore, according to Shenwan HK’s logic, the registered holder, through the clearing platform’s operating rules, mandatorily授权 to the clearing platform, which then sub-authorized to Shenwan HK via the Enhanced Consent Letter. Thus, the authorization chain was complete: Shenwan HK filed the winding-up petition as the registered holder’s agent and authorized representative.

However, the court did not accept this explanation, strictly adhering to the Indenture text. The Indenture required authorization to come directly from the registered holder of the notes, and the “chain” authorization argued by Shenwan HK was not direct from the registered holder, regardless of the legal nature the clearing platform assigned to such authorization.

[5] Indenture Section 2.06(d)

The Leading Holdings Case[6] Followed Shinsun

and Further Explained Its Reasoning

In the Shinsun case, what impressed the author most was paragraph 143 of the judgment:

‘The Petitioner appears to have fundamentally misunderstood the legal position in respect of its investment and the terms of the Indenture.’

In Shinsun, after the court successively rejected its core arguments, Shenwan HK questioned whether the Indenture’s contractual条款 design could simply prevent Shenwan HK, as beneficial owner, from exercising its investment rights. Was this a “lacuna”? The court cited Judge David Richards’ definition of “lacuna” in Secure Capital[7], namely: a contract only has a so-called “lacuna” when one party cannot pursue the other’s breach of contract under the contractual provisions and obtain substantive damages. Here, the investor simply failed to act in accordance with the Indenture requirements, preventing it from exercising its rights—this constitutes following procedures, far from a “lacuna.”

Similarly, three months after the Cayman Shinsun case, the Hong Kong High Court Court of First Instance in the Leading Holdings case adopted the main views and reasoning of Shinsun, further affirming that the basis for determining “contingent creditor” status must be an existing legal relationship between the obligee and obligor. “Contingent” only concerns the timing of exercise of rights.

Additionally, the Court of First Instance further affirmed Shinsun and clarified its reasoning: under the global note trading structure, investors obtain “economic interests,” not “contractual rights,” and explained the legal considerations behind this structure. The Indenture’s terms were designed to treat all investors as a whole, allowing them to act uniformly through the common depository or its designee. In other words, releasing the power to exercise rights to the common depository was aimed at protecting investors, enabling the common depository/registered holder to file winding-up petitions to protect investors even before the notes matured.

[6] Re Leading Holdings Group Limited [2023] HKCFI 1770

[7] Secure Capital SA v Credit Suisse AG [2017] EWCA Civ 1486

Different Voice - BVI Zhongnan Case[8] after Noting

Several Differences from Cayman Shinsun, Ruled Investors Had Direct Standing

Unlike the Cayman Islands and Hong Kong, the BVI Eastern Caribbean Supreme Court (“BVI High Court”) in the Zhongnan case sided with the investor on both focal issues: finding that the investor was a “contingent” creditor and that through the platform operating rules, the investor had obtained standing to directly file a winding-up petition against the issuer via the “chain” authorization.

Regarding the determination of contingent creditor status, the BVI High Court acknowledged that, unlike Shinsun which was based on different legal provisions, one reason for recognizing the investor’s status was the broader definition of “creditor” under the BVI Insolvency Act[9], giving the court discretion to interpret “creditor” broadly. Additionally, the court found that the broader definition of “creditor” under the BVI Insolvency Act not only aligns with practices in England, Wales, etc.[10] and current judicial trends, but also reflects commercial reality and accommodates the rights of investors holding only economic interests. The court therefore held that the absence of a direct contractual relationship between the obligee and obligor does not affect the determination of the obligee’s creditor status. Notably, this decision fundamentally differs from the Cayman court’s approach in Shinsun, which, to maintain transactional certainty, adopted a restrictive, originalist interpretation of “creditor” and the Indenture terms. This also reveals the different stances of BVI and Cayman on issues such as passive investor protection, commercial order, and contractual certainty.

On whether the investor obtained authorization through the platform operating rules, the BVI High Court relied on Indenture Section 2.06[11] to complete the authorization chain. Curiously, Shinsun did not discuss such an important similar provision. The BVI High Court speculated that the Indenture drafting differed between the two cases, so Shinsun’s Indenture lacked a similar provision; otherwise, the court could not have omitted citing such an important clause[12].

Furthermore, the Zhongnan investor did not face other issues that arose in Shinsun, such as challenges by the issuer regarding whether the note acceleration process was properly completed under the Indenture, and the衍生 issue of whether Shenwan HK was entitled to receive certificated securities. Thus, while Shinsun and Zhongnan appear to involve substantially identical facts, they actually differ materially. The combination of multiple factors led to Zhongnan reaching a completely different conclusion from Shinsun.

[8] Cithara Global Multi-Strategy SPC v Haimen Zhongnan Investment Development (International) Co. Ltd. (Claim No. BVIHC(COM) 2022/0183)

[9] BVI Insolvency Act 2003 (Revised 2020), s. 162 (2)(b): Appointment of liquidator by Court (2) Subject to subsections (3), (4) and (5), an application under subsection (1) may be made by one or more of the following — (b) a creditor;

[10] Judge Webster in Jinpeng Group Limited v Peak Hotels and Resorts Limited (BVIHCMAP2014/0025) (ECSC Court of Appeal); and In Re Nortel GmbH [2013] UKSC 52

[11] Indenture at Section 2.6 (“Participants must rely on the procedure of Euroclear and Clearstream and indirect participants must rely on the procedures of the participants through which they own book-entry interests in order to transfer their interest in the Notes or to exercise any rights of Holders under this Indenture”)

[12] The court also speculated whether the different “focus” during case preparation and trial led to such important clauses not being primarily addressed. See [Para 181] It also appears that in Shinsun the Indenture may have been worded differently or the case was argued differently, or the focus was different, than it has been in the case before me. I say this because I do not see where there has been reference in the judgment to any article or clause of the relevant Indenture equivalent to Section 2.6 of the Indenture in the instant case, which expressly refers to the Euroclear Procedures—see paragraph [5] of the judgment.

Implications for Practitioners

Looking across the three cases, although the judges in the three jurisdictions reached different understandings in following precedents or made different judgments based on different considerations, they all undertook meticulous, clause-by-clause, even word-by-word analysis of the issuance documents including the Indenture and platform operating rules. After仔细 reviewing the three cases, the author believes that although the surface conclusions differ, the basic facts are similar yet关键 facts differ subtly, providing precise guidance for future同类 cases.

The most direct警示 from the three cases for practitioners may be the different adjudicative directions in Cayman, Hong Kong, and BVI regarding investors and issuers in note defaults, such as: (i) for potential investors, conducting前期 due diligence on global notes issued by Cayman and Hong Kong note issuers should be more prudent, carefully reviewing issuance documents before closing and understanding the authorization chain; (ii) for BVI-incorporated issuers that have issued global notes, if the company anticipates liquidity crises that may affect payment of issued notes, it should better prepare contingency plans for potential direct winding-up petitions from investors.

Additionally, regarding the three cases, the author believes that the Hong Kong Leading Holdings case merits further observation for two reasons. First, although the BVI Zhongnan case was the last to be issued, it was only one day after Leading Holdings. Both were decided after comparing with and referencing Shinsun. This meant that facts common to both Leading Holdings and Zhongnan but differing from Shinsun were not argued—particularly Shinsun’s focal issue two (whether the investor obtained standing as the registered holder’s agent and authorized representative through the authorization chain).

Second, as noted, Shinsun and Zhongnan differed not only because the BVI Insolvency Act affected focal issue one, but also because Shinsun lacked a clause similar to Indenture Section 2.06[13], affecting the outcome of focal issue two. In other words, it is possible that if Zhongnan’s Indenture Section 2.06 had appeared in Shinsun, Shinsun might not have reached the conclusion of a missing authorization chain. However, without Section 2.06, the Cayman court’s opinion on this issue remains unknown.

However, in the Hong Kong Leading Holdings case, despite having the same Indenture Section 2.06 as Zhongnan, the Hong Kong High Court did not analyze this fact or compare it with Shinsun on focal issue two, nor provide any opinion. Consider: if Zhongnan had been decided before Leading Holdings, and Zhongnan’s opinion on Section 2.06 had been available for the Hong Kong High Court’s reference, the Hong Kong High Court might have reached a different conclusion in Leading Holdings.

[13] See Leading Holdings, paragraph 9: Further, the following provisions of the Indenture are of particular relevance (and hence quoted here for ease of reference): “Section 2.06. Book-entry Provisions for Global Notes. … So long as the Notes are held in global form, the Common Depositary (or its nominee) will be considered the sole holder of the Global Notes for all purposes under this Indenture and ‘holders’ of book-entry interests will not be considered the owners or ‘Holders’ of Notes for any purpose. As such, participants must rely on the procedures of Euroclear and Clearstream and indirect participants must rely on the procedures of the participants through which they own book-entry interests in order to transfer their interests in the Notes or to exercise any rights of Holders under this Indenture …