Evergrande: "Ultimate holders" of global notes not eligible to be appointed to the Committee of Inspection

The Hong Kong Court has previously held in Re Leading Holdings Group Limited [2023] HKCFI 1770 that an end investor who does not have legal title to a note in the global form has no standing to issue a winding-up petition (see our blog post here).  A related issue arose before the Hong Kong Court  in the ongoing China Evergrande liquidation, Re China Evergrande Group [2025] HKCFI 1638, as to whether such note holder, despite not having standing to issue a winding-up petition, may be appointed as a member of the Committee of Inspection ("COI") when a regulating order is made against the company.  This issue is significant as it is usually such note holder (as opposed to the legal holder or the note trustee) who has real economic interest in the winding-up of the company.  Whilst the note trustee may be eligible to be appointed as a member of the COI, it has indicated that if it sits on the COI, it will not express any opinion or vote on any proposed resolutions but would simply relate the same to the ultimate holders to decide. The liquidators considered that this approach would be unworkable given there are many matters that the COI must consider and decide in a timely manner.

After considering the legislative background and intention, Justice Linda Chan confirmed that such note holders do not qualify as "creditors" within the meaning of section 206(5) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) ("CWUMPO") and are therefore ineligible for appointment as a member of the COI.

Background

A regulating order can be made under section 227A of the CWUMPO where it appears to the Court that the winding up of the company should be regulated specially by the Court.  A reason may be that there is a very large number of creditors or contributories where it would be difficult to follow the normal procedure for holding creditors' meetings.  Once a regulating order is made, the winding up of the company will be governed by sections 227B to 227E of the CWUMPO.

Section 227B provides that, as regards the COI, the Court may appoint "any qualified persons" to be a member.  However, section 206 of the CWUMPO (a section that governs the eligibility of membership of all COIs, whether or not a regulating order is made) refers to "creditors" and "contributories" as members of the COI.

The liquidators of China Evergrande (who held a neutral stance) sought directions from the Court in respect of whether a person holding an economic interest in any bond, note or similar instrument in global form ("Ultimate Holder"), for which the company is alleged to be liable, may be eligible for appointment as a member of the COI ("Eligibility Issue").

Discussion

Eligibility for appointment as member of COI

In determining the Eligibility Issue, the Court held that it is essential to consider the intention of the legislation and examine the provisions governing the appointment and constitution of a COI when sections 227A o 227E were enacted. The Court found that the legislature did not intend to modify or disapply the requirement that a COI shall only consist of creditors or contributories when a regulating order is made.  Further, the only provisions which may be displaced by a regulating order are the procedural requirements of holding first meetings of creditors and contributories and holding subsequent meetings for the purpose of removing or appointing members to fill any vacancy in the COI. 

In the context of section 227B, the reference to "any qualified persons" must therefore be a reference to persons who meet the qualification stipulated in section 206(5) i.e. that they shall be creditors or contributories of the company.

Meaning of "creditor"

The Court held that a "creditor" under section 206(5) refers to a person holding a legal right over a debt or liability owed by a company in liquidation as at the date of the commencement of winding-up.  This interpretation is based on the general principle that insolvency law operates on legal rights, not beneficial or economic interests.  A person holding a beneficial or economic interest in a debt or obligation cannot take any action against the company as they are not privy to the contract and can only take action through the person holding the legal right.   

Further, "creditor" does not include a contingent creditor whose debt has not been ascertained or become payable as at the relevant date.  The Court held that the intention of the legislature is to allow only non-contingent creditors to vote on the appointment of the COI.  If "creditor" included contingent creditors, it would lead to an absurd result that a contingent creditor who has no right to vote on the appointment of a COI would be eligible for appointment as a member of the same COI.

As the Ultimate Holders in this case have no direct right to prove and receive distribution in the liquidation of the company, they do not qualify as "creditors" for the purpose of section 206(5) and therefore are not eligible for appointment as members of the COI.

Comment

The Court has arrived at this decision through ascertaining the legislative intention as a matter of statutory interpretation.  It is interesting to note that the legislative intention appears to differ with the current market expectation, as conveyed by the liquidator to the Court, that the Ultimate Holders, who have been the most active community involved in the attempts to restructure the company's indebtedness and in the petition which led to the winding-up of the company, should be eligible for appointment as members of COI.  As things stand, it seems that the Ultimate Holders having real economic interest in the liquidation will not be able to directly participate in supervising the liquidation of the company.

For more information, please contact Jojo Fan, Managing Partner, Paul Quinn, Partner, Rachael Shek, Partner, Truman Mak, Partner, Sara Troughton, Knowledge Lawyer or your usual Herbert Smith Freehills contact.