Public policy, “No-Action” and arbitration clauses, and the substitution of petitioners
This Case Report was authored by Yang-Wahn Hew
Bonds that are traded via clearing houses, such as Euroclear and Clearstream, often contain terms providing that there will be a trustee for the issue, who may be appointed by the participants in the relevant clearing system or by the beneficial owners.
Quite often, the terms of the bonds will contain so-called “no-action clauses”, pursuant to which the trustee may be accorded certain rights and powers to take action on behalf, and instead, of the beneficial bondholders.
Regular readers may also be aware that the Court of Appeal has yet to grasp the opportunity to endorse, or otherwise modify/disagree with, the 2 approaches to arbitration clauses in winding-up proceedings as set out in Re Southwest Pacific Bauxite (HK) Ltd.  2 HKLRD 449 (sub nom Lasmos): see But Ka Chon v Interactive Brokers LLC  4 HKLRD 85 (CA) and similarly obiter discussion in Asia Master Logistics Ltd.  HKCFI 311.
Finally, Rule 33 Companies Winding-Up Rules sets out the various circumstances in which one petitioner may be substituted for another.
Proceedings before the Court of First Instance
In REXLot, the Company had defaulted on nearly HK$3.3 billion worth of bonds held via Euroclear. Several beneficial bondholders, who collectively held a substantial amount of the bonds, petitioned for the Company to be wound up. They relied on their status as contingent creditors, citing the reasoning used in relation to schemes of arrangement as set out in Re Mongolian Mining Corporation  5 HKLRD 48 and Re Enice Holding Co. Ltd.  4 HKLRD 736.
The Company did not dispute insolvency or the status of the bondholders as contingent creditors. However, it sought to resist the proceedings on the basis of the argument, inter alia, that there was a “no-action clause” which deprived the beneficial bondholders of locus standi to wind-up the Company.
The beneficial bondholders naturally demurred. They argued that on its true construction, the so-called “no-action” clause did not exclude their statutory rights to petition to wind up the Company, citing inter alia Re Greater Beijing Region Expressways Ltd.  4 HKC 807 (CA), Re Sit Kwong Lam (Debtor)  2 HKLRD 924, But Ka Chon, supra, and Asia Master, supra.
In the alternative, the beneficial bondholders submitted that the clause was unenforceable as it would constitute a fetter on their statutory right to present the petition to wind up the Company on the grounds of insolvency, and was hence contrary to Hong Kong public policy. As the issue had never been decisively determined in Hong Kong, submissions were made by the parties with reference to various commonwealth authorities, including those immediately above, Re Colt Telecom  EWHC 2815 (Ch.), A Best Floor Sanding  VSC 170, and Re Team Y&R Holdings Hong Kong Ltd., unrep., CACV 6/2017, 21 July 2017.
Alternatively, the beneficial bondholders suggested that either the “traditional approach”, or the “exceptional circumstances approach” to arbitration clauses (both of which had been analysed in Lasmos, supra) could be applied by analogy so as to enable the Companies Court to make a winding-up order.
At the hearing of the Petition, Deputy High Court Judge Maurellet S.C. did not delve into such matters as the Trustee had applied – pursuant to Rule 33 Companies Winding-Up Rules and without opposition from the Company – to be substituted as petitioning creditor in place of the beneficial bondholders. His Lordship hence granted the order for substitution and, after argument, an order winding-up the Company on the ground of insolvency: see  HKCFI 2212.
The upcoming appeal
The matter did not end there. A different legal team has been instructed, presumably by the Company’s former management, to file an appeal (CACV 488/2020) against his Lordship’s orders.
The hearing before and judgment of the Court of Appeal should be of considerable interest as it is likely to deal with both the issues raised at first instance between the Company and the beneficial bondholders (as the original petitioning creditors), and whether the jurisdiction to order that the Trustee be substituted as petitioning creditor only exists if the beneficial bondholders had locus to present the petition.
– There is every reason the Hong Kong Companies Court should adopt and apply the reasoning from schemes of arrangement in relation to the question of locus of a beneficial bondholder.
– Investors should be aware of the potential ramifications of so-called “no-action clauses” in widely traded instruments, such as bonds.
– Public policy considerations will continue to play an important role in winding-up proceedings, given inter alia the collective nature of winding-up proceedings.
Rachel Lam SC acted for the Trustee in this case
Yang-Wahn Hew acted for the beneficial bondholders in this case.