The principles guiding the court’s discretion in constituting a COI are well established, and the main goal is to ensure that the composition of the COI is fair, balanced, and conducive to the efficient supervision of the liquidation.
The Hong Kong Court recently handed down a decision (Re China Evergrande Group (in liquidation) [2025] HKCFI 1638) concerning the formation of a COI in the liquidation of China Evergrande Group (CEG). As at its liquidation, CEG was one of the world’s most indebted property developers—its main offshore liabilities included over USD14 billion outstanding principal under notes issued by CEG (CEG Notes) and private debts of over USD4bn.1
The decision not only puts under the spotlight the issue of eligibility of those holding economic interests in a note or bond to serve on the COI in the context of modern debt structures involving global notes—it also serves as a timely reminder for insolvency practitioners and creditors who are interested in securing a seat in a COI about the fundamental principles concerning its composition.
Principles for formation of a COI
As a starting point, the principles of formation and composition of a COI in Hong Kong compulsory liquidations are well established in the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) (CWUMPO), the Companies (Winding Up) Rules, and case authorities. These principles, which were explored in detail in the Re China Evergrande Group judgment, can be summarized as follows.
- A COI "must consist of creditors and contributories" in proportions agreed by meetings of creditors and contributories, or as determined by the court in case of disagreement.2 In doing so, it is a matter for the court’s discretion, and it shall not be necessary for the court “to ascertain the wishes of the creditors or contributories” in this regard.3
- The court will “consider whether or not the views expressed [by the creditors] can be regarded as fairly representative of the class in question.”4
- More specifically, in a COI, there should be a “balanced representation of the creditors on the committee” such that it would be “fairly representative of the general body of creditors.”5
- When a regulating order is made, the requirement to hold meetings of creditors and contributories is dispensed with and the court is instead empowered to "appoint any qualified persons that the court thinks fit" as members of the COI.6
Factual background
On January 29, 2024, CEG was ordered to be wound up by the Hong Kong Court, with its winding-up subject to a regulating order.7 The central issue arising in this case was whether “beneficial owners with an economic interest (as opposed to a legal right) in the CEG Notes (Ultimate Holders) could be appointed as members of the COI.
One of the Ultimate Holders for the CEG Notes had indicated its intention to serve on the COI. However, this raised a question as to whether Ultimate Holders were indeed eligible to sit on the COI as a matter of law, given the structure of the CEG Notes.
The CEG Notes were held in global form through a clearing system (as is typical in issuance of debt securities), meaning that a single global note for each issuance was produced and represented the entire issuance rather than each investor receiving a physical note certificate. The global notes for each issuance of CEG Notes were deposited with a common depositary, with a trustee appointed to administer the rights and obligations of those interested in the CEG Notes. Although the economic interests were widely dispersed among numerous noteholders, it was the common depositary as holder of the global note who was considered the legal owner. None of the Ultimate Holders had exercised their right to have the CEG Notes be transferred to and registered in their names and it was acknowledged that it was “almost impossible” for Ultimate Holders to undertake the process of issuing definitive notes given practical difficulties.
Further, under the CEG Notes, it was the trustee who had the right to prove in the liquidation of CEG, but the trustee made clear that it had no intention to take any active role even if appointed as a member of COI.
In the circumstances, the liquidators applied to the court for directions on the appointment and composition of a COI, and in particular seeking directions on the eligibility of Ultimate Holders to sit on a COI. Given that the Ultimate Holders formed one of the most active groups involved in CEG’s restructuring and the petition that led to the winding-up of CEG, as well as the general market expectation that Ultimate Holders should be eligible for membership of a COI, the liquidators considered that it was necessary to put forward the market expectation for consideration by the court.
The liquidators also sought a direction to exclude shareholders of CEG from serving as members of the COI on the basis of the company’s gross insolvency and that a number of the former management (many of which are shareholders) were involved in serious misconduct.
The legal issues
The issue of whether Ultimate Holders may be appointed as a COI member has never been considered or decided by the court and the legal position was far from clear. This is because, under Hong Kong law, Ultimate Holders are not considered “creditors” of a company for the purposes of presenting a winding-up petition8 or filing a proof of debt for voting in the first creditors’ meeting.9 This is to be contrasted with the practice that Ultimate Holders are nevertheless permitted to vote in a scheme of arrangement.10
The Ultimate Holder who expressed willingness to sit on the COI advocated in favor of including Ultimate Holders in any COI to be formed. The Ultimate Holder’s position, in gist, was as follows:
- Ultimate Holders represent CEG’s largest creditors as a class and it would be desirable for any COI to be formed to include representation from that class of creditors.
- Where a regulating order has been granted (as was the case in the CEG liquidation), the court may appoint “any qualified persons that the court thinks fit,” which includes persons other than creditors and contributories.
- In any event, Ultimate Holders are contingent creditors who would fall within the meaning of “creditors” for the purposes of section 206(5) of CWUMPO.
On the other hand, the official receiver’s position was that only creditors are eligible for membership of a COI (whether formed under a regulating order or not) and Ultimate Holders did not fall within the meaning of “creditors” under section 206(5) of CWUMPO.
The court’s decision
With the benefit of submissions from the liquidators, the official receiver and an Ultimate Holder, the court ruled that Ultimate Holders do not have standing to become a member of the COI for the following reasons.
- Despite the broader language of "qualified persons," the eligibility requirement remains that only creditors and contributories may be appointed to the COI. The phrase "qualified persons" is interpreted as referring to persons who meet the qualification stipulated in section 206(5) of CWUMPO, i.e., creditors or contributories.
- For the purposes of COI membership, a "creditor" must be 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. This excludes those with only a beneficial or economic interest, such as Ultimate Holders who have not had the CEG Notes registered in their own names and cannot take any action against the company and can only do so through the person holding the legal right in that debt.
- Contingent creditors (those whose claims are not ascertained or are subject to a contingency) are not eligible for appointment to the COI. Only "non-contingent creditors," whose debts are quantified, ascertained, and not subject to contingency, are eligible.
- The Ultimate Holders in this instance do not qualify as contingent creditors. The “contingency” refers to a situation where the company is already under an existing obligation to pay a debt, although the debt will only become payable upon the occurrence of an event which may or may not happen. It does not extend to a situation where an Ultimate Holder merely possesses a right exercisable against a third party, with the expectation that the third party may request the company to issue a definitive note to the Ultimate Holder, as was the case here.
The court also permitted the liquidators to exclude shareholders of CEG from serving as members of the COI, on the basis that the majority of shares are held by the chairman of CEG (who was found to have committed serious misconduct) and/or his (former) spouse. There were also substantial difficulties in identifying other unconnected shareholders. Furthermore, CEG’s gross insolvency means there is a lack of any realistic prospect of a distribution to shareholders.
Key takeaways
The Re China Evergrande Group judgment does not just provide clarity on the question of eligibility of Ultimate Holders to serve on the COI in Hong Kong liquidations. It also serves as a timely reminder that, in the formation of a COI, the overriding objective is to ensure there is a balanced and fair representation of the general body of creditors that is conducive to the efficient supervision of the liquidation, having regard to the creditor constituency such as size of debt and interests involved. This will no doubt be different in each liquidation.
It remains to be seen whether courts in other common law jurisdictions will adopt a similar approach. Notably, the legal position in the British Virgin Islands (BVI) is different in that the BVI Court has held that an Ultimate Holder of such a note structure can be considered as contingent creditor of the company—in doing so, it considered that a contractual relationship is not necessary, and the debtor must simply take steps to become liable to a creditor, subject to a contingency.11 The UK Supreme Court has similarly held that an arrangement other than a contractual one can give rise to an “obligation” for the purpose of Rule 13.12(1)(b) of the English Insolvency Rules 198612, and that in determining whether a contingent obligation had been incurred by the company, the pertinent question is whether what the debtor company had done was sufficient to have committed itself to a contingent liability.13
On the other hand, both the Bermuda and the Cayman Courts have rejected arguments that an Ultimate Holder has standing as a contingent creditor. They have held that an Ultimate Holder must demonstrate that there is an existing obligation owed by the company to the Ultimate Holder that may or will result in liability—contending that in the absence of a contractual relationship, no obligation would be owed by the company to an Ultimate Holder.14 15
Given this uncertainty, and in circumstances where many cross-border financing structures involve obligors from these jurisdictions, market participants should take heed of the evolving legal landscape when structuring and negotiating transaction documentation. Meanwhile, market participants have responded to the judgment by seeking to update bond documentation to address the question of standing, for example by defining "holder" to afford Ultimate Holders the right to enforce.
A&O Shearman acted for the Ultimate Holder in Re China Evergrande Group (in liquidation) [2025] HKCFI 1638. If you have any questions or would like to discuss these issues further, please contact the team.
Footnotes
1. Re China Evergrande Group [2024] HKCFI 363, paragraphs 9 to 11.
2. Section 206(5) CWUMPO.
3. Re Wah Nam Group Ltd [2002] 2 HKLRD 369, paragraph 14.
4. Re Planet Toys (HK) Ltd [2011] 2 HKLRD 101, paragraph 4(5).
5. Ibid, paragraph 21.
6. Section 227B(1A) of CWUMPO.
7. A regulating order is an order that the winding-up of the company shall be regulated specially by the court.
8. Re Leading Holdings Group Limited [2023] 4 HKLRD 71, paragraph 79.
9. Re Jiayuan International Group Limited [2024] HKCFI 1113, paragraph 5.
10. Re Mongolian Mining Corp [2018] 5 HKLRD 48, paragraphs 9 and 10; Re Enice Holding Co Ltd [2018] 4 HKLRD 736, paragraph 33.
11. Cithara Global Multi-Strategy SPC v. Haimen Zhongnan Investment Development (International) Co., Ltd (BVIHC(Com) 2022/0183.
12. Rule 13.12 of the English Insolvency Rules 1986 concerns the meaning of “debt” and provides that a debt in relation to the winding-up of a company included “any debt or liability to which the company may become subject after [the date on which the company went into liquidation] by reason of any obligation incurred before that date”.
13. Re Nortel GmbH [2014] AC 209, paragraphs 76 and 81.
14. Bio-Treat Technology Ltd. V. Highbridge Asia Opportunities Master Fund [2009] Bda. L.R. 29.
15. Re Shinsun Holdings (Group) Co. Ltd. (FSD 192 of 2022).
