In our previous blogpost, we discussed the Hong Kong Court's dismissal of a trustee's petition to wind up XJ International Holdings, on the basis that there was a bona fide dispute regarding the debt. The debt was an unmet statutory demand arising from the exercise of a put option for the redemption of bonds in a "global note structure" issued by a subsidiary of XJ International Holdings.
The Court of Appeal has recently given its decision in Re XJ International Holdings Co Ltd [2025] HKCA 481, upholding the lower court's decision to dismiss the winding up petition and providing clarity on the core features of a "global note structure" in registered form, including the identity of the "holder" of the global certificate.
Terms defined in our previous blogpost will be adopted here.
The meaning of "holder of this Global Certificate"
To recap, the contention arose from this provision in the global certificate (emphasis 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."
The Petitioner submitted in the lower court that "holder" should mean accountholders i.e. the party giving economic value to the Bonds. As the accountholders gave instructions via the clearing systems to exercise the put option, the Petitioner argued that the requisite notice for redemption was given, resulting in the Bonds being due and payable.
The Petitioner's principal argument on appeal, however, departed from that at the lower court. It argued that the lower court had erred in law by concluding that "holder" means "registered holder" (in this case, the nominee company) because upon a true construction of the extract above, "holder" should in fact be the person having physical custody of the global certificate i.e. the common depository (in this case, the Petitioner). The Petitioner argued that this interpretation makes the most commercial sense because the global certificate may need to be physically presented for endorsement or the exercise of rights, and the common depository is the only entity that has physical custody of the global certificate and that could present it for endorsement. This is in contrast to the nominee company, that does not have physical custody of the global certificate and, according to the Petitioner, cannot make the global certificate available for endorsement.
The Company submitted again at the appeal that the "holder" entitled to give notice of redemption must be the registered holder (in this case, the nominee company) because it is the registered holder that has the right to direct the common depository to present the global certificate for endorsement or exercise. The Company submitted that the Petitioner's interpretation that physical custody is required for the presentation is based on practicality rather than principle, and would also effectively turn the global bond from registered form to bearer form (which is contradictory to the terms of the global certificate in this case).
The Court of Appeal's analysis
The Court of Appeal considered the authoritative Hong Kong and English decisions, in which the salient features of a classic "global note structure" have been explained, including Re Jinro (HK) International Ltd (No 2)[2003] 4 HKC 637 and Re Leading Holdings Group Limited [2023] 4 HKLRD 71 (see our previous blogpost on Re Leading Holdings).
The Court of Appeal expressed that understanding these salient features are relevant to interpreting the roles of the different parties involved. In particular, the Court of Appeal observed that global notes in bearer form are issued to and held by a common depository on behalf of electronic trading platforms such as Euroclear and Clearstream. Global notes in registered form (as in the present case), although physically held by a common depository, are registered in the name of a nominee of the common depository, making the nominee company the registered holder.
More importantly, the Court of Appeal went on to state that the correct identification of the "holder" would depend largely on a proper reading of the specific documents that constitute the bond.
- In this case, the trust deed, conditions and global certificate contained terms such as "Bondholder", "holder of the Bonds" and "holder" (in respect to a Bond) which are all expressly defined as the registered holder of the Bonds.
- In any event, it was not necessary to reach a definitive view on the true construction. In a creditor's winding up petition, if the Court concludes that the debt is bona fide disputed on substantial grounds, the petition ought to be dismissed, leaving it to the petitioner to establish the existence of the debt in ordinary civil litigation.
- In this case, the Court of Appeal found that it is at least reasonably arguable that, upon true construction of the extract above, the "holder" of the global certificate refers to the registered holder of the Bonds, i.e. the nominee company. The absence of any evidence that the nominee company ever gave notice of exercise of the put option to the principal agent would mean that there was no valid exercise of the put option. It follows, therefore, that the lower court was correct to conclude that the debt was bona fide disputed on substantial grounds.
- The Court of Appeal did not give weight to the Petitioner's submission that the nominee company does not have physical custody of the global certificate. Under the trust deed, the registered holder (i.e. the nominee company) is the absolute owner for all purposes, and therefore plainly has the right to control and direct the physical custody of the certificate.
In light of the above, the Court of Appeal concluded that the lower court was correct to conclude that the debt was bona fide disputed on substantial grounds and that the winding up petition should be dismissed.
Comment
As we can see, the Hong Kong Court has in recent years addressed the issue of the meaning of "holder" of notes issued under a "global note structure" in several cases, distinguishing readily between notes issued in bearer form and registered form. These rulings have significant implications for determining who can exercise certain rights under a global note (such as the party entitled to exercise a put option or the party who has standing to petition for the issuer's winding up) and how these rights can be validly exercised.
As the Court of Appeal stated in the decision, the correct identification of the party to be regarded as the "holder" largely depends on a "proper reading" of the provisions of the collection of underlying documents which set out the rights and obligations amongst the various parties to the bonds. Each case will hinge on its specific set of documents, which should be carefully read together and as a whole to determine the scope of enforcement in each individual instance.
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.
