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 Health’s 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 “contingent creditor” 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.