Hong Kong Court dismisses trustee's petition to wind up XJ International Holdings as debt was found to be disputed

In Re XJ International Holdings Co Ltd [2024] HKCFI 1378, the Hong Kong Court dismissed a trustee's petition to wind up XJ International Holdings (the "Company"), a Chinese education firm, on the basis that there was a bona fide dispute in respect of the debt.  The debt was an unmet statutory demand arising from the exercise of a put option for a note issued under a global note structure by the subsidiary of XJ International Holdings. The global note structure is commonly seen in the bond market and similar to the one considered in Re Leading Holdings Group Limited [2023] 4 HKLRD 71 (which we blogged about in our previous blogpost). 

Background

The trustee of the global note was the petitioner (the "Petitioner"), as well as the common depositary and principal agent, in connection with the US$350 million zero coupon convertible bonds due in 2026 issued by the Company's subsidiary and guaranteed by the Company's parent (the "Bonds").  The Petitioner claimed that a put option was duly exercised, resulting in the Bonds being due and payable on 4 March 2024.  The Company disputed this on the basis that there was no proper exercise of the put option.

Discussion

In deciding whether there was a bona fide dispute on substantial grounds with regards to whether the put option was validly exercised, the Court had to consider (amongst other things) a point of construction, namely who was the proper entity entitled to give notice in respect of the put option.

Of relevance is a particular clause in the trust deed which stated (emphasis added in bold):

"Bonds would initially be represented by the Global Certificate which shall be registered in the name of a nominee of the Common Depository and deposited with the Common Depository and the registered holder of any Bond would be treated as its absolute owner for all purposes."

The preamble on the global certificate stated that:

"The Issuer certified that the [nominee company] (“Registered Holder”) as nominee of the Common Depository is entered in the register of Bondholders as the holder of Bonds in the principal amount of US$350 million."

The contention arose from these provisions on the global certificate (emphasis added in bold):

"Bondholder's Redemption

The Bondholder's redemption option in Condition 8(D)… may be exercised by the holder of this Global Certificate giving notice to the Principal Agent of the principal amount of Bonds in respect of which the option is exercised in presenting this Global Certificate for endorsement or exercise (if required) within the time limits specified in the Conditions."

"Trustee's Powers

In considering the interests of Bondholders while this Global Certificate is registered in the name of a nominee of a common depository for a clearing system, the trustee may, to the extent it considers it appropriate to do so in the circumstances, but without being obligated to do so, (a) have regard to any information as may have been made available to it by or on behalf of the relevant clearing system or its operator as to the identity of its accountholders (…) with entitlements in respect of the Bonds and (b) consider such interests on the basis that such accountholders were the holders of the Bonds in respect of which this Global Certificate is issued."  (Italics supplied)

(i) The Company's position

It was the Company's case that the "holder" of the global certificate entitled to give notice to the principal agent must be the registered holder, in this case the nominee company, as that was expressly stated in the trust deed and the preamble of the global certificate. 

The Company submitted that there was no evidence of the nominee company ever giving any notice to the principal agent as required by the provisions of the global certificate.

(ii) The Petition's position

The Petitioner, however, argued that the "holder" of the global certificate should mean the "accountholders" who gave economic value, and submitted that the global certificate must be looked at as a whole.  In particular, the words "holder of the Global Certificate" under "Bondholder's Redemption" should be read together with "Trustee's Powers" where the trustee is permitted to consider the interests of the bondholders "on the basis that such accountholders were the holders of the Bonds". 

The Petitioner submitted that since the accountholders gave instructions via the clearing systems to exercise the put option (and those instructions were subsequently incorporated into an email from the Petitioner to the issuer), the requisite notice for redemption was given. 

(iii) The Court's analysis

The Court held that the Petitioner's reliance on "Trustee's Powers" was not sufficient to dispose of the construction issue.  The wording marked in italics ("may" and "but without being obligated to do so") is merely permissive and does not impose any obligation on the trustee.  The Court also held that the Petitioner's interpretation of "holder" was inconsistent with the meanings expressly given in the trust deed. 

The Court further commented that the very purpose of the structure of the global certificate (as opposed to a definitive certificate given to individual investors) is to achieve the "no look through" principle.  Under this principle, the accountholder (i.e. those who gave economic value) has a relationship exclusively with its own intermediary (i.e. the trustee) and cannot assert rights against higher-tier intermediaries or the issuer. 

Under the trust deed in question, the accountholders have no specific right to redeem the Bonds directly against the issuer.  It follows that there can be no legal basis for saying the accountholders can exercise the put option. 

In light of the above, the CFI was satisfied that the debt was disputed on substantial grounds. 

Comment

This case serves as a reminder that the underlying documentation is unique to each bond, and extra care must be given when reviewing the terms to determine the rights of the parties. 

Holders of notes issued under a global note structure should also be cognisant that the Hong Kong Court has recognised the "no look through" principle in a number of recent cases and will likely continue to respect that the ultimate investor of an intermediated security will only have rights against its own intermediary, and not the issuer.

For more information, please contact Jojo Fan, Managing Partner, Rachael Shek, Partner, Sara Troughton, Professional Support Lawyer or your usual Herbert Smith Freehills contact.