Cautionary tale for individual actions against senior note issuers

Debt Recovery Caution: Senior Note Issuers

A recent judgment concerning Leading Holdings Group highlights the importance for individual investors in notes to strategise in the recovery of underlying debts.

Investors should be aware of the collective enforcement regime under the terms of notes of this nature. Typically, only the trustee is entitled to take enforcement action against the issuer, and holders of the notes cannot proceed directly against the issuer unless the trustee fails to do so. If the investor holds an indirect interest in the notes through an intermediary, their rights will be even more indirect.

In this case the petitioner was an individual investor with indirect beneficial interest of USD1.5 million in the notes. It held the indirect interest through a bank (acting as an intermediary), which in turn held the interest via Euroclear, and ultimately through the trustee of the notes (acting as the holder of the notes).

The notes were constituted by an indenture between the issuer of the notes, the trustee and the guarantors. The indenture governed all rights and obligations concerning the notes. The issuer did not have a direct contractual relationship with the ultimate beneficial owners of the notes.

Rather, the issuer executed one global note registered in the name of the trustee, acting as the common depository for accounts under the Euroclear and Clearstream systems. Each individual investor acquired an indirect beneficial interest in the global note through intermediaries, being banks or brokers. Under this structure, only the holder of the global note and the trustee had rights under the global note.

The terms of the indenture further included a “no action clause”, which specified that a holder of the notes may not institute any proceedings against the issuer unless holders of at least 25% in the aggregate principal amount of the outstanding notes request the trustee to pursue the remedy, and the trustee fails to take action.

The Court of First Instance in Hong Kong found that the investor had no standing to wind up the issuer. It put emphasis on there being no existing contractual relationship between the investor and the issuer. The investor did not have directly enforceable rights against the issuer.

The system operated on the basis of a “no look through” principle, where each party had rights only against its own immediate counterparty. This was also consistent with the framework of the global note structure, which was premised on class action to be pursued by the trustee exclusively. Allowing individual investors to pursue claims would lead to duplicity of actions.

The court further rejected the argument that the investor was a contingent creditor with standing to sue. To qualify as a contingent creditor, the investor must show that there was an existing obligation owed by the issuer to the investor, which may or will result in a liability. The investor failed to establish this, as it had no existing contractual relationship with the issuer.

Business Law Digest is compiled with the assistance of Baker McKenzie. Readers should not act on this information without seeking professional legal advice. You can contact Baker McKenzie by e-mailing Howard Wu (Shanghai) at