Does a bondholder have standing to petition for winding up? In the landmark decision of Cithara Global Multi-Strategy SPC v
This briefing discusses the Decision, how it squares up against the position in other offshore jurisdictions, and takeaways for investors and issuers alike.
The Background
In
The structure involved 'global notes' being delivered to and registered in the name of the
The Notes were due on
The Decision
The Honourable Justice Mangatal (the "Judge") considered the question of whether Cithara was a "creditor" to be a mixed question of
The key aspects of the Judge's reasoning are set out below:
- First, applying principles of construction to the documentation, Cithara was a contingent creditor under
New York law. Cithara had the right to receive the Certificated Note2 and become the registered holder itself. - Second, a contractual relationship between Cithara and Haimen was not the only basis upon which contingent obligations could arise. The Judge referred to the decision of the
UK Supreme Court in ReNortel 3 closely and opined that the modern trend is to give an expanded definition to a contingent obligation. - Third, the express provisions of the Act made it clear that a contingent liability is capable of giving rise to a claim in liquidation proceedings, which consequently makes the person to whom the debt will be owed as a result of the contingency a creditor for the purposes of section 162(2)(a) of the Act. A wide approach to the provisions of the Act fit with "commercial reality" and gave "due regard to the important underlying rights of those with the real economic interests."
Interestingly, the Judge distinguished the
In
The
The BVI Court in Re Cithara distinguished Bio-Treat on the facts, such as dissimilarities in contract terms, and on the legislative provisions as it was not apparent from the Bio-Treat judgment whether the Bermuda Companies legislation had sections equivalent to the wide and express statutory provision in the BVI Act that set out the meaning of "creditor".
In
The company defaulted on an interest payment which triggered Shenwan to instruct the trustee to issue a notice of acceleration. After the company also failed to settle the outstanding debt, Shenwan proceeded to file a winding-up petition directly against the company. The Cayman Court similarly held that Shenwan was not a contingent creditor as there was no obligation upon the company to Shenwan whether in contract, tort, equity or otherwise. The principle of privity of contract and the "no look through" principle, where each party has rights only against their counterparty such that an investor's rights are exercisable only through and against its own intermediary, were in play.
The BVI Court in Re Cithara considered that a distinguishing feature in
Conclusion
The Decision is an important reminder that the terms of the indenture and ancillary documents must be examined closely together with the applicable insolvency laws. How the principles in the above cases will be applied will be subject to the exigencies of the peculiar factual circumstances of each case. Bondholders should be mindful of whether they are likely to have any direct recourse against an issuer in the relevant jurisdiction.
It remains to be seen how this area of law will continue to develop in both offshore and onshore jurisdictions8, as different courts have diverged in approach in recent years.
Footnotes
1. BVIHC(COM) 2022/0183.
2. Defined in §1.1 of the Indenture as "the Notes (with the Parent Guarantee endorsed thereon), in certificated, registered form, executed and delivered by the Issuer (and the Parent Guarantor) and authenticated by or on behalf of the Trustee in exchange for the Global Notes, upon the occurrence of the events set forth in the second sentence of Clause 2.4.5..."
3. [2013] UKSC 52.
4. [2009] Bda. L.R. 29.
5. FSD 192 of 2022.
6. [2009] Bda. L.R. 29.
7. FSD 192 of 2022.
8. For example, in In
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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