28 July 2023
Under the Euroclear or Clearstream system, companies which issue so-called “global notes” do not have direct contractual relationship(s) with the ultimate beneficial investors in those notes. Rather, the company’s books will show only one registered global note, and only one registered holder of the global note holding the note on behalf of the investors. Typically, pursuant to the terms of such global notes, only the holder (and the trustee) of the global note can exercise any rights under the global note, whereas “holders” of book-entry interests and ultimate beneficial investors will not be considered the owners or holders of the global note for any purpose.
In Re Leading Holdings Group Limited  HKCFI 1770, the petitioner claimed to be the beneficial owner of certain senior notes (the “Notes”) issued by a listed company (the “Company”) which were subject to the Euroclear or Clearstream regime. DHCJ Suen SC held that the petitioner, as a trust beneficiary of a debt under the Notes, did not have standing to petition for winding-up. The winding-up petition was accordingly struck out.
In a detailed judgment, the Court affirmed the distinction between the position of a beneficiary under a trust and that of an equitable assignee of part of a debt. There are well-established authorities that the former cannot sue in general, whereas the latter may sue on the debt, albeit subject to the procedural requirement to join the equitable assignor when suing. Whilst an equitable assignee of a debt may petition for winding-up without joining the equitable assignor, a beneficiary under a trust has no entitlement to petition for winding-up without joining the trustee.
The Court proceeded to analyse the contrasting positions of an equitable assignee of a debt and a beneficiary of a debt under a trust, as follows:-
(1) An equitable assignee of part of a debt is required to join all parties interested in the debt in an action to recover the part assigned to him because the Court cannot adjudicate completely and finally without having such persons before it; but this rule does not apply to a winding-up petition which only puts into effect a process of collective execution for the benefit of all creditors. In the course of that process, the rights of creditors may have to be determined, but such determination is not necessary at the stage of making winding-up order. Therefore, an equitable assignor (or assignee) has a sufficient interest to present a winding-up petition without joining the other.
(2) Such reasoning does not apply to a trust beneficiary because (i) whilst a trust beneficiary cannot petition for winding-up, a trustee (who can represent all beneficiaries) can petition for winding-up alone, and (ii) unlike the case of an equitable assignee, joinder of the trustee is a substantive as opposed to a mere procedural requirement.
(3) The Court disagreed with the decision of Harris J in Re China Cultural City Limited  4 HKLRD 1, which had held that an assignee of a beneficial interest under a trust had standing to petition for winding-up without joining the trustee. In the view of DHCJ Suen SC, Harris J had conflated the position of a beneficiary under a trust with that of an equitable assignee of a debt. As such, notwithstanding Re China Cultural, it would not be right to ignore authorities indicating that, unlike an equitable assignee, a trust beneficiary is not entitled to present a winding-up petition if suing on its own.
Moreover, DHCJ Suen SC rejected the argument that the petitioner was a contingent creditor. In essence, it was held, there must be an existing obligation owed by the company for a party to qualify as a contingent creditor. As a matter of construction of the Notes and the indenture which constituted those Notes, the petitioner did not have an existing contractual relationship with the Company, or directly enforceable rights against it. Therefore, the petitioner was not a creditor of the Company (whether contingent or otherwise).
This conclusion is borne out by the framework of the typical global note structure. Various authorities demonstrate that under such structure, only the trustee is entitled to take enforcement action against the issuer of the note. The purpose of the Euroclear and Clearstream regime is to ensure that the class of bondholders all act through the trustee as the exclusive channel of enforcement and that bondholders cannot proceed directly against the issuer unless the trustee fails to take action in accordance with the note documentation. It would be wrong to allow the petitioner, as a mere trust beneficiary of a debt under the Notes, to circumvent this regime by petitioning for the winding-up of the Company.
Re Leading Holdings is set to be a leading decision on the issue of standing of an investor of a global note to petition for winding-up. Such a detailed guidance from the Court of First Instance on this highly technical topic is to be welcomed. The case also provides valuable support for the contention that a beneficiary under a trust does not have standing to petition for winding-up. Nonetheless, how the law will develop in light of the apparent conflict between Re Leading Holdings and Re China Cultural remains to be seen.