When Interests Alone Don’t Cut It: Global Note investors have no standing to present winding-up petition against Note issuer

In Re Leading Holdings Group Limited [2023] HKCFI 1770, the Hong Kong Court for the first time decided on the issue of standing of an investor of a global note (‘Global Note’) who was not a registered holder to present a winding-up petition against the note issuer as a contingent creditor. In his comprehensive 66-page judgment handed down on 18 July 2023, DHCJ Suen SC dismissed the petition.

Before delving into the legal issues, it is important to note the legal structure of the Global Note which is commonplace for this type of debt securities:

  1. The Global Note was constituted by an indenture (‘Indenture‘) between Leading Holdings Group Limited (‘Company‘) and the Bank of New York Mellon, London Branch (‘BNYM‘).
  2. The Company, as the note issuer, has no contractual relationship with the ultimate beneficial investors of the Global Note (one of which is the petitioner (‘P‘)).
  3. BNYM is the sole holder and trustee of the Global Note. As for P, it purchased a portion of the indirect beneficial interests in the Global Note via its intermediary, DBS Bank Ltd, which had accounts with Euroclear which maintained a book-entry system. Transfers of these indirect beneficial interests by the investors may only be effected through such book-entry system.
  4. Section 6.06 of the Indenture is the so-called ‘No-Action Clause‘ which provides that the ultimate beneficial investors may not institute any proceeding unless they have, among other things, of at least 25% in aggregate principal amount of outstanding Global Note, made a written request to the trustee in pursuing the remedy. In other words, it is for the trustee to enforce these beneficial investors’ rights in the case of a default.

It is with the above intermediated structure in mind, and in particular, the absence of contractual relationship between P and the Company, that DHCJ Suen SC formulated the following two legal issues in light of parties’ submissions:

  1. First, whether a beneficial owner of a debt has standing to present a winding-up petition?
  2. Secondly, is P a ‘contingent creditor’ within its meaning in Section 179 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) who has standing to present a winding-up petition?

Beneficial Owner of a Debt

The proper approach is to decide whether there is a direct debt (or direct debtor-creditor relationship) between the Company and P in order for P to qualify as a creditor to have standing. In this regard, DHCJ Suen SC relied on Re Uruguay Central and Hygueritas Railway Co of Monte Video (1879) 11 ChD 372 (a case which also featured a bond structure resembling that of the Global Note) to say that (i) P and other beneficial investors do not have any independent right to sue (as opposed to a collective right to make a request to the trustee), (ii) P should not get a judgment in priority to other beneficial investors, and (iii) there should be no duplicity of actions by the trustee and the beneficial investors.

The general position, as noted by DHCJ Suen SC at [75] is that ‘the beneficiary of a trust property has no personal right to sue‘. Since trustees administer the trust fund as principals and not as agent for the beneficiaries, trustees are normally the proper plaintiffs (in this case, proper petitioner) in proceedings against third parties. Of course, there would be cases where the securities instrument expressly confer a direct right of enforcement on the trust beneficiaries, but this is not the case here, especially in light of the ‘No-Action Clause‘ mentioned above.

Contingent Creditor

Under certain specified events, P may be entitled to request the issuance of definitive notes whereupon P could directly enforce its claims against the Company. Thus, P argues in the alternative that it is a contingent creditor as the Company’s liability is contingent on the event of the issuance of definitive notes.

To begin with, the rationale to initially include contingent creditor in the winding-up regime is to address the potential lacuna and abuse whereby a company may be able to dispose of its assets or contract new liabilities even though the company is plainly insolvent upon taking into account not only its current but

also contingent liabilities. On such basis, a contingent creditor should be afforded standing to present a winding petition to protect its interests. Here, what is important is that a contingent creditor denotes ‘a person towards whom under an existing obligation, the company may become subject to present liability upon the happening of some future event. Such formulation requires an existing obligation, even though the liability to pay may only be triggered upon the happening of some future event‘ ([98]).

Citing a number of authorities and especially relying on the recent Cayman decision of Re Shinsun Holdings (Group) Co., Ltd FSD 192 of 2022 (DDJ) (unreported, 21 April 2023), DHCJ Suen SC posits that an existing obligation would provide a legal nexus between a person and a company, such that any liability which will or may arise in a future event under such nexus could be taken into account as contingent liability. Without the requirement of such legal nexus, the test would become unduly wide and far-fetched,

‘For instance, if a company is negotiating a loan with a bank and if there is no need for an existing obligation, it would be open to the bank to claim that it is a contingent creditor in the event of the bank agreeing to advance a loan and the company failing to repay, even though there is at present no legal nexus between the two. That simply cannot be right’ ([108]).

Coming back to our present case, it is P’s standing rather than the liability owed to it which is contingent, upon it succeeding in bringing itself into a direct contractual relationship with the Company (upon the issuance of definitive notes). However, this is not the test. The test is that P must prove, on a balance of probabilities, that it is a contingent creditor. And in doing so, it must show that there is an existing obligation owed by the Company to P which may result in a liability – P simply failed to do so.


A number of policy considerations have come into play in this case. Notably, the Court recognised that the purpose of the Global Note regime is to ensure that the class of ultimate beneficial investors all act through the trustee (which is typical). If an individual beneficial investor was free to pursue a claim based on a loss caused to the investors as a class, then either there is the potential for multiplicity of actions (hence floodgate) or for duplication of actions brought by the trustee on one hand and individual beneficial investors on the other, not to mention the potential of double counting if both the debt owed to the investors and the same amount of debt owed to the trustee are to be taken into account in considering the solvency of a company.

By agreeing to the Indenture which includes the ‘No-Action Clause‘, the investors effectively waived their rights to bring claims by themselves, whilst enjoying the increased liquidity and ease of trading offered by the Global Note structure and the intermediation that comes with it. Before a Court of Appeal’s decision to the contrary, ‘one may say that P knowingly traded in interests, not in the underlying securities, and hence should be taken to know and accept the consequence of the global bond structure as a result‘ ([128]).

See the full judgment of Re Leading Holdings Group Limited here: legalref.judiciary.hk/lrs/common/search/search_result_detail_frame.jsp?DIS=153858&QS=%28%7Bleading+holdings%7D+%25parties%29&TP=JU

Our trainee solicitor Alan Sham assisted in preparing this article.

18 August 2023
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