Does an ultimate beneficial noteholder have the standing to present a winding-up petition?
In Re Shinsun Holdings (Group) Co., Ltd. FSD 192 of 2022 (DDJ) (unreported), the Grand Court of the Cayman Islands, for the first time, dismissed a winding-up petition on the ground that the ultimate beneficial noteholder did not have the legal standing and failed to obtain authorization from registered noteholder under the indenture to commence winding up proceedings. The decision underlines the importance and serves as a reminder for creditors to review their governing documents to ensure that they have proper standing to present winding-up petition.
Facts of the case
Shinsun Holdings Group Co., Ltd. (Company) was a holding company of a Chinese real estate developer. Pursuant to an indenture governed by New York Law (Indenture), the Company issued 12% senior notes due 2023 (Notes). The Indenture was entered into between the Company, various subsidiary guarantors and the China Construction Bank (Asia) Corporation Limited (Trustee) which also acted as the Common Depository of the Notes.
The Notes were registered solely in the name of CCB Nominees Limited and traded through Euroclear. Through the Hong Kong Monetary Authority (HKMA) which was a participant of Euroclear, Shenwan Hongyuan Strategic Investment (H.K.) Ltd (Petitioner) acquired 25% interest in the Notes. However, the Petitioner was not a party to the Indenture.
After the Company defaulted in making interest payments due in respect of the Notes, the Petitioner instructed the Trustee to issue a Notice of Acceleration. When the Company failed to pay the outstanding debt which became due and payable as a result of the acceleration, the Petitioner filed a petition in the Cayman Islands to wind up the Company in September 2022.
Issues in dispute
The two primary issues before the Court were:
- Whether the Petitioner had the legal standing (as a contingent creditor) to progress the winding-up petition against the Company; and
- If the Petitioner did not have the requisite legal standing, whether the Petitioner was authorized to progress the winding-up petition against the Company.
- Whether the Petitioner had the legal standing to progress the winding-up petition
- The Petitioner was not a contingent creditor. The Petitioner was not a party to the Indenture and there was no contractual relationship between the Petitioner and the Company. Therefore, there was no obligation owed by the Company to the Petitioner.
- The Petitioner failed to prove that it had actual standing to progress the winding-up petition. While the Petitioner did have a right under the Indenture to request delivery of Certificated Notes, the Petitioner’s ability to procure delivery of Certificated Notes in the future was only contingent upon the direction of the registered holder of the Notes. It did not give rise to any existing right to the Petitioner against the Company.
- Unless and until the Petitioner obtained Certificated Notes in its own name and brought itself into a direct contractual relationship with the Company, the Petitioner could not establish that it was an actual or contingent creditor of the Company.
- Whether the Petitioner was authorized to progress the winding-up petition
Under Section 94(1)(b) of the Companies Act (2023 Revision), it is well-established that any creditors (including contingent or prospective creditors) shall have the standing to pursue a winding-up petition. In this case, the Petitioner claimed that it had the standing as a contingent creditor to pursue the winding-up petition as the Petitioner had a right under the Indenture to demand delivery of the Certificated Notes. This allowed the Petitioner, as an underlying beneficial noteholder to become a registered holder of the Notes and thus a creditor of the Company.
The Court rejected this argument and held that as a matter of law, the Petitioner must demonstrate that there is an existing obligation owed by the Company to the Petitioner which may or will result in liability. However, the Court held that the Petitioner was unable to prove that because:
Alternatively, the Petitioner sought to rely on the statement of account letter issued by Euroclear to the HKMA to argue that even if it had no requisite legal standing to pursue a winding-up petition as a contingent creditor, it was duly authorized to progress the winding-up petition.
However, the Court dismissed this argument and held that that the statement of account letter did not constitute an authorization as the statement of account letter was issued by Euroclear which was not a registered holder of the Notes under the Indenture.
In the absence of proxy or other authority from registered holder of the Notes under the express terms of the Indenture, the statement of account letter did not grant any authority to the Petitioner to enforce the rights of the holder of the Notes under the Indenture. Therefore, it was insufficient to confer requisite authority and standing to the Petitioner to commence winding-up proceedings.
It is also worth noting that while the Petitioner was given opportunities to arrange valid substitution, the Petitioner did not do so. As a result, considering that the Petitioner did not have the legal standing as contingent creditor nor authorization from registered holder of the Notes to bring winding-up proceedings, the Court dismissed the winding-up petition against the Company.
This decision illustrates that the Court will likely apply a strict approach in determining whether the petitioner has the legal standing to pursue a winding-up petition. Notably, this case has been applied recently in Re Leading Holdings Group Limited  HKCFI 1770, where the Court of First Instance for the first time held that an investor with indirect beneficial interest in the notes issued by a company had no standing to present a winding up petition against the issuer as there was no existing contractual relationship between the investor and the issuer based on the terms of the indenture. As such, the investor was not a contingent creditor and did not have the locus to petition for winding up of the issuer. In light of the approach taken by the Hong Kong Court, before commencing a winding-up petition or enforcing the right for payment, it is vital for creditors, in particular ultimate beneficial holders of the notes, to carefully review the terms of their governing documents to ensure that there is an existing obligation owed by the company to the petitioner or alternatively necessary authorization has been given to present the winding-up petition.