The Cayman Islands Grand Court recently delivered its judgment in Re Shinsun Holdings (Group) Co., Ltd. FSD 192 of 2022 (DDJ) (21 April 2023) (unreported) (the “Shinsun Judgment”) in which the court determined the ultimate beneficial owner of bonds, held through Euroclear, did not have standing or authority to progress a winding up petition as a contingent creditor. In this article, we explore similar cases in other offshore and common law jurisdictions.
Shinsun Judgment and the Cayman Position
The court considered (a) whether the Petitioner has legal standing to progress a winding up petition (b) whether the petitioner is a contingent creditor; and (c) whether the Petitioner was authorised to progress a winding up petition.
The Court held that the Petitioner did not have standing or authority to progress the proceedings and the Petition was dismissed.
In dismissing the Petition, the Cayman Court made the following findings and key takeaways:
- The burden of proof is on the Petitioner to prove on a balance of probabilities that it is a “contingent creditor” within Section 94(1)(b) Companies Act (2023 Revision) (“the Act”).
- Contingent creditor is not defined in the Act; therefore, the court must refer to the case law.
- As it relates to the context of scheme creditors in a scheme of arrangement, the judge noted that “…beneficiaries have an absolute right to require the Bank to issue definitive notes directly…they are contingent creditors for the purposes of the relevant provision of the Act”. 1 He cautioned that this conclusion was case specific and confined to its context. 2
- Unless or until the Petitioner obtains Certified Notes in its name, it cannot establish that it is a creditor, either actual or contingent, to bring itself into a direct contractual relationship with the Company, whether the debt is also properly treated as contingent.
- With regard to the requisite legal standing to progress a winding up petition, the Petitioner must have actual standing at the date of the determination of the petition.
More recently, Justice Kawaley considered the standing hurdle to bring a creditor’s winding up in his judgment, In the Matter of Atom Holdings FSD 54 of 2023 (IKJ) (18 May 2023) (“Atom Holdings Judgment”).
The Petitioners were both retail investors in Atom Holdings and did not have a direct contractual relationship with the company itself, as the company conducted its business solely through a network of global subsidiaries. The Petitioners relied on their standing as contingent creditors (which was accepted by the Court) and the Court held that it was clearly established under Cayman Islands law that non-contractual claims, such as damages claimed for fraud, qualifiy as sufficient proof under section 139(1) 3 of the Act. The Court did recognise that “…it is true that…conclusions about the threshold a qualifying contingent claim had to reach was not supported by any authority directly addressing the standing of a contingent creditor” 4 and the decision taken was “…as a matter of principle.” 5 As with scheme creditors cases, we take the view that such matters that involve fraud should also be confined to its facts and the position for bondholders remain as set out in the Shinsun Judgment.
United Kingdom and the “No look through principle”
This principle limits an investor holding a beneficial interest in immobilised notes to have a direct claim against the issuer of those notes for breach of contract (unless expressly provided by contract).
In Secure Capital SA v Credit Suisse AG  EWCA Civ 1486 the Court of Appeal considered whether an investor with an interest in Notes issued in bearer form and held through the Clearstream system has a direct claim for breach of contract against the issuer of the Notes, in respect of an alleged breach of the misleading statements term.
Secure Capital’s particulars of claim assert, “…in breach of the express terms of the Notes, Credit Suisse failed to ensure that it had disclosed material facts. As a result, Secure Capital is entitled to damages…” 6
The Court of Appeal held that if the issue in the case was properly characterised as contractual, the only party to have directly enforceable contractual rights against the issuer was the bearer. The court stated that, as supported by extensive literature, the purpose of immobilised securities is to prevent a direct link between investors and the issuer, so that investors have no contractual recourse against the issuer, unless there is a default in the payment of principal, as the common depositary will never commence proceedings on its behalf.
The legal issue in Business Mortgage Finance 6 Plc v Greencoat Investment Limited and others  EWHC 2128 (Ch), was whether an injunction could be granted to restrain a defendant from interfering with a securitization structure, even if the defendant claims to have standing as a noteholder. The judge stated, on a non-binding basis, that “the “holder of the beneficial interests” in the Notes, for the purposes of the definition of Instrument holder, means only those persons in whose name the Notes are held in the records of the clearing systems (i.e. the account holders at Clearstream and Euroclear).” 7
The abovementioned principle relating to securities held through a clearing system and the power of receivers is analogous to that of a bondholder progressing a winding up petition as a contingent creditor. As notes are in global form, the holder of the legal title is the common depositary. If there is no evidence from clearing systems that the position has been transferred, the holder does not have beneficial interest and does not have standing, as for example, a contingent creditor, as in the case of Shinsun judgment.
The Hong Kong position is demonstrated in the recent case of Leading Holdings Group Limited  HKCFI 1770. The Company successfully obtained an order to strike out a winding-up petition, as the Petitioner did not qualify as a contingent creditor. The following important considerations were made by the court. 8
- Referencing the Shinsun judgment, there is a need for an existing obligation as a contingent creditor;
- Consistent with the framework of the global note structure, a class action is to be pursued by the trustee exclusively. Individual bondholders cannot act on their own. If the bondholder cannot sue the Company to enforce the debt, it would appear inconsistent if the bondholder can sidestep such constraint by petitioning for winding up instead;
- Duplicity of actions is a risk that must be safeguarded against, in that both the Trustee/Holder and individual bondholders (such as the Petitioner) could pursue winding up relief against the Company at the same time;
- If every individual bondholder is a contingent creditor and can petition for winding up before the Notes have matured with the lack of directly enforceable rights against the Company, this might lead to floodgates and defeat the purpose of the global note structure; and
- As recognised in the Shinsun judgment, the judge noted that cases on schemes of arrangement are different, as “they concern voting rights on schemes which may affect economic interests, as distinct from locus to present petition which is a more draconian right than a mere voting right for schemes.”
The position in Bermuda is consistent with the United Kingdom and Hong Kong. The case of Bio-Treat Technology Limited v Highbridge Asia Opportunities Master Fund LP and Highbridge International LLC  Bda L.R. 29 is a good example.
The investor did not dispute that it was not the legal owner of its share of the global bond. It was argued that the term “holder” appearing in the global bond is broad enough to include an “economic interest in the bond….and that such equitable interest is sufficient to constitute as a creditor.” 9 The judge did not accept this and held that the global bond did not afford rights to the end investor 10 and that the investor cannot be said to have the requisite contractual relationship with the Company, as is necessary to found the status of contingent or prospective creditor. 11 The investor did not have the necessary locus to present a winding-up petition against the Company by reason of being a creditor; whether contingent or prospective.
The judge noted in the Shinsun judgment that the facts in this Bermuda case were different, but that nonetheless the issue on standing was “plainly on point”; the petitioner had no direct rights against the company.
In Cithara Global Multi-Strategy SPC v Haimen Zhongnan Investment Development (International) Co Ltd. 12 Justice Mangatal dealt with a liquidation application and a strike out application on the basis “that the Applicant is not a “Holder” as defined in the Indenture, being a person in whose name a Note is registered in the Note of Register.”
Justice Mangatal took the view that, as decided by the UK Supreme Court in Re Nortel, 13 it is “plain that the modern trend is to give an expanded definition of contingent obligation…A contingent obligation can arise under statute as a separate matter”. 14
The fact pattern is similar to the Shinsun judgment, however the facts in the Cithara case can be distinguished, as the Notes matured and Cithara had the right to become the registered shareholder. Additionally the judge found that the interpretation of standing as “contingent creditor” under BVI statute is a separate matter. Given the width of the BVI Insolvency Act provisions, this court took the view that Scheme cases were relevant.
Justice Jenkin Suen SC accurately summarises the position in the case Leading Holdings Group Limited:
“It must be borne in mind that the purpose of the regime of the global note structure is to ensure that the class of bondholders would all act through the trustee as an exclusive channel. Therefore, it does not accord with such design to allow individual bondholders to be at liberty to petition for winding-up when it is accepted that they could not bring any action to directly enforce their debt. More importantly, the position of such bondholders is already safeguarded under the global note structure. Indeed, even in the event where the Notes have not yet matured, their position would be safeguarded by the holder/trustee who may present a winding up petition (whether as actual or contingent creditor) on their behalf. Thus it does not follow from the rationale of the aforesaid Report that bondholders such as P must be afforded standing to present a winding-up petition.” 15
The decision and reasoning in the Shinsun judgment reaffirms the long-standing position in the offshore and common law jurisdiction. There is a clear line of authorities that confirm, before an account holder becomes entitled to a direct interest in the notes; the only party with a right to sue the issuer is the holder of the notes. As such, account holders must look solely to Clearstream or Euroclear (as the case may be) for their share of each payment and in relation to all other rights arising under the global note.
We believe that the Shinsun judgment is an important reminder to advocates that the conventional position remains; bondholders do not have legal standing or authority to bring proceedings against a company. Nonetheless, this is a first instance judgment, and with the contradictory judgment of Justice Mangatal, recently handed down in the BVI, it will be interesting to see whether appeals will be issued and how this area develops in offshore and common law jurisdiction in the future.
1 Paragraph 40 of the Shinsun Judgment.
2 Paragraph 98 of the Shinsun Judgment.
3 “All debts payable on a contingency and all claims against the company whether present or future, certain or contingent, ascertained or sounding only in damages, shall be admissible to proof against the company and the official liquidator shall make a just estimate so far as is possible of the value of all such debts or claims as may be subject to any contingency or sound only in damages or which for some other reason do not bear a certain value”.
4 Paragraph 40 of the Atom Holdings Judgment. Justice Mangatal in Re Exten Investment Fund and Others FSD 96 of 2017 (IMJ), Unreported 23 June 2017 found standing in a supervision order on her views as to the contingent creditor’s right to petition to wind-up under the Companies Act.
6 Paragraph 25 of judgment.
7 Paragraph 35 of judgment.
8 Paragraphs 42 – 49 of judgment.
9 Paragraph 11 of judgment.
10 Paragraphs 28 and 33 of judgment.
11 Paragraph 50 of judgment.
12 BVIHC(COM) 2022/0183. Judgment dated 19 July 2023.
13  UKSC 52.
14 Paragraph 153 of judgment.
15 Paragraph 91 of judgment.