Introduction

In the recent case of Re China Evergrande Group (in liquidation) [2025] HKCFI 1638, the Court of First Instance addresses the issue of whether a person holding merely an economic interest (as opposed to a legal right) in a note or bond in the global form is eligible for appointment as a member of a committee of inspection (“COI”) under the winding-up regime in Hong Kong.

Background

On 29 January 2024, the Court of First Instance ordered that China Evergrande Group (中國恒大集團) (“Evergrande”) be wound up and, concurrently, issued a regulating order governing the winding-up process. Prior to its liquidation, Evergrande was indebted under ten series of USD-denominated senior secured notes and one series of HKD convertible bonds (collectively, the “CEG Notes”), with aggregate outstanding principal totalling US$14,233 million. The majority of these notes are listed on the Singapore Stock Exchange.

The CEG Notes are held in global form by a single holder acting as nominee for the common depository (“Holder”) within a clearing system, with a trustee (“Trustee”) responsible for administering the rights and obligations of parties interested in the CEG Notes pursuant to the relevant indenture. Both the Trustee and the Holder, as financial institutions, do not possess any actual economic interest in the CEG Notes. None of the ultimate holders of the CEG Notes, namely, the persons holding an economic interest in the CEG Notes (“Ultimate Holders”), have exercised their right to have the CEG Notes transferred to, or registered in, their own names.

Upon the winding-up, the liquidators applied to the Court for directions regarding the appointment and composition of a COI. The central issue was whether these Ultimate Holders, whose interests are economic and beneficial, but not legal (as they do not appear on the register of the notes and are not direct parties to the indenture), could be appointed as members of the COI.

Relevant provisions

Sections 206 and 227A to 227E of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) (“CWUMPO”) are relevant to the issue in this case.

Section 206(5) of the CWUMPO provides that a committee of inspection appointed under this Ordinance must consist of creditors and contributories:

1.      in a proportion agreed on by the meetings of creditors and contributories; or

2.      in the event of a difference, in a proportion determined by the court.

Sections 227A to 227E of the CWUMPO relates to the regulating order regime, which provides for an alternative procedure in liquidation involving a large number of creditors. Section 227B(1A)(a) of the CWUMPO provides that the Court may, on the application of the liquidator, by order appoint any qualified persons that the Court thinks fit as a committee of inspection.

Court’s decision

The Court held that the Ultimate Holders are not eligible to be appointed as members of the COI.

The Court held that section 206(5) governs the eligibility requirement of members of the COI, whether or not formed under a regulating order pursuant to sections 227A to 227E. Accordingly, only creditors and contributories are eligible to be members of the COI.

The Court is of the view that the word “creditor” in section 206(5) refers to a person holding a legal right over a debt or liability owed by the company as at the date of the commencement of winding up. The legal right may arise out of a contract, arrangement or an obligation which is binding upon the company and the person holding the legal right. A person holding a beneficial or economic interest in a debt/obligation cannot take any action against the company and can only do so through the person holding the legal right in that debt/obligation for the following reasons:

1.      A person holding a beneficial or economic interest in a debt/obligation is not privy to the contract, arrangement or obligation and, therefore, cannot assert any right under such contract, arrangement or obligation as against the company;

2.      A person holding a beneficial or economic interest in a debt would not be without recourse. It may direct the person holding the legal right to take action in respect of the debt or require the debt to be assigned or transferred to it in accordance with the terms governing their relationship;

3.      If a person holding a beneficial or economic interest in a debt/obligation were allowed to take action against the company in its own right, this would give rise to challenges regarding identification and verification of the person who claims to have beneficial or economic interest in the debt/obligation.

In this case, since the Ultimate Holders do not hold a legal right over the CEG Notes, the court concluded that they are not eligible to be members of the COI.

Conclusion

This case provides useful guidance on the eligibility for appointment as members of COI. It should be noted that only “creditors” who have a legal right, rather than a beneficial or economic interest, in the relevant debt/obligation are eligible to serve as members of the COI.