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A recent decision the Supreme Court of the State of New York has
determined that the beneficial owners of bonds have standing to
bring claims against the bond issuer and guarantors.
In April 2023, Hong Kong based hedge fund, BFAM Asian
Opportunities Master Fund, LP, and several other investors filed
proceedings in New York against deeply indebted Chinese property
developer, Glory Health Industry Limited and its guarantors. The
investors sought to recover over US$200 million in missed payments
on notes issued by Glory Health.
Glory Health filed a motion to dismiss the proceedings arguing
that the investors, as neither the trustees nor registered holders
of the notes, lacked legal capacity or standing to maintain the
suit.
In response the investors argued that Euroclear Bank SA/NV, the
clearing system for the notes, had authorised them to bring the
suit or alternatively that they had standing under the terms of the
indenture pursuant to which the notes were issued.
Glory Healthâs motion to dismiss was denied. The Judge
held that a beneficial owner who lacks standing may receive
authorisation from a registered holder, even after filing of suit.
Moreover authorisation may be sought even where it is not
specifically anticipated by the terms of the underlying contract:
as a matter of New York law, contracts are freely assignable absent
language prohibiting it.
This decision will provide welcome clarity to beneficial owners
of bonds on their standing to pursue issuers and guarantors for
non-payment of New York law governed notes in the face of
international judicial divergence on the issue.
In April 2023, the Grand Court of the Cayman Islands determined
that a beneficial owner of notes did not have standing to present a
winding up petition against the note issuer. The petitioner had
failed to establish that it was a âcontingent creditorâ
absent an existing contractual obligation owed to it by the issuer
which may or will result in a liability (see Re Shinsun Holdings
(Group) Co., Ltd (unreported, 21 April 2023)).
The reasoning in Shinsun was subsequently adopted by the Hong
Kong Court of First Instance in Leading Holdings, which similarly
held that beneficial holders of notes do not have standing to
petition to wind up the issuing company as a contingent
creditor.
One day following delivery of the judgment in Leading Holdings,
the BVI Commercial Court in Cithara Global declined to follow
Shinsun and determined that a contractual relationship is not
necessary for a party to be a contingent creditor. Rather, the
debtor must take steps that may make it liable to a creditor,
subject to a contingency.
In Cithara the contingent liability owed to it pursuant to its
notes was determined to be sufficient to make it a creditor of the
issuer with standing to commence liquidation proceedings.
The development of this area of law will be of great interest to
all players in global notes, from financial institutions, clearing
house, issuing companies, insolvency and restructuring
professionals to investors. It will be interesting to see whether
the jurisdictions will maintain their differing approaches, and how
these authorities may influence future wording of indentures and
note documentation.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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