Background Information: Capital Investment Entrant Scheme
Before the Hong Kong Immigration Department stopped the Capital Investment Entrant Scheme (“Scheme”) on 25th January 2015, many investment immigration applicants bought private placed bonds from some Hong Kong listed companies upon the recommendation of their immigration consultants. The Scheme has been terminated for several years, but the termination does not affect the eligibility of the bonds bought for the purpose of the Scheme. Up till now, some of the listed companies bonds bought by the investment immigration applicants are not matured while some already did. Some investment immigration applicants have already resided in Hong Kong for more than 7 years and obtained the permanent resident ID card while some haven’t.
Hong Kong Listed Company’s Bonds Default Issue
Recently, there has been a phenomenon of bonds default by some Hong Kong listed companies. When some listed companies are unable to redeem the bonds they mature, and some are unable to pay prescribed interest on time according to the terms of the bonds. There are also some court cases where listed companies are petioned for winding up by bond holders for such defaults.
Hong Kong Listed Company’s Bond Default: How can the investors protect their interest
When the default event happens to the listed company’s bonds, investors should first carefully peruse the legal terms of the bonds they bought, and check whether the bonds are matured, or whether the investors have right to request the bond issuers to immediately redeem the bonds according to the terms of the bonds. If it is possible, the investors should write a letter to the issuing company to demand immediate redemption of the bonds with principal and interest.
If the listed company refuses or is unable to repay the bond’s principal and/or interest, the investors usually have 2 ways to deal with it. The first way is to take a civil litigation and obtain a judgment against listed company and then apply to the Court for enforcement of the judgment by way of Garnishee Order or other appropriate Orders issued by the Court. The second way is to petition to the Court for winding up of the listed company. If the company is still unable to repay the bond’s principal and/or interest, the court may in proper cases make an order that the comapny be winding up.
Winding Up as a Strategy Against the Listed Company for its Default
For the second method, i.e. winding up petition against the listed company, it has the advantage of quickly putting huge pressure on the listed company, and therefore is often adopted by the investors.
Once the investors petition to the Court for winding up of the listed company, according to the relevant insolvency law, no person possessing property of the petitioned company can dispose such property, otherwise it may be treated as a void disposal action, and the person disposing such property may bear responsibility to compensate to the liquidator if the company is finally wound up. The practical effect is that once there is a winding up petition against the listed company, the listed company’s bank will usually freeze the company’s bank accounts. Unless there is a Court Order ordering such account to be unfrozen, the bank is unlikely to unfreeze the account, and that creates immense pressure on the listed company. Also, the existence of winding up petition is an event that the listed company needs to disclose, the company’s reputation will be damaged.
Listed Company usually needs to negotiate a deal with the winding up petitioner by paying full or part of the outstanding sum, so that its asset and bank account can be unfrozen. When there is a settlement reached, the petitioner (investor) can apply to the Court to withdraw the petition. If parties cannot settle the dispute, then the Court may order the company to wind up. Then the liquidator appointed will take over the company, collect the company’s assets, and distribute all the company’s assets in accordance with the priority of the creditors prescribed by law.
Winding Up Petition raised by multiple Debtors
There are often multiple investors investing in a listed company’s bonds. Once there is a default, the listed company often defaults multiple investors. In this situation, the first person to petition to the Court to wind up the listed company will become the petitioner of the winding up proceedings. After that, other investors, holding defaulted bonds, who also wish to petition to the Court to wind up the listed company can only join to the proceedings to become creditors” tentatively. If the petitioner would like to withdraw his winding up petition, the creditor can immediately apply to the Court to replace the withdrawed petitioner’s place and become the new petitioner of the winding up proceedings. The practical effect is the listed company needs to reach a settlement with all the creditors in the winding up petition (including the petitioner and those who join into the petition as creditors) in order to discontinue the winding up petition.
Suspension of Trading of the Listed Company’s Shares and Its Effect on Investment Immigration and Eligibility of Investment Products
If the shares of listed company are suspended from trading, the shares of the listed company and its bonds will no longer be eligible as eligible investment products for investment immigration. The corresponding question is whether the investment immigration applicant needs to purchase other eligible investment products to make up his eligible invest products. In the recent judicial review case HCAL 2091/19 ruled by the High Court, an investor invested into shares of a listed company named Long Success International (Holdings) Limited in 2013 as eligible investment products for investment immigration. The listed company was delisted in 2016 and wound up in 2018. The Immigration Department believed that after the trading of the shares of the listed company was suspended, the investors should purchase other eligible investment products with the same value at the time it was suspended to make up the deficiency of the requisite value of eligible investment products. The Court ruled that the Immigration Department’s calculation was unreasonable and held that the Immigration Department could not refuse the investment immigration applicant did not need buy other eligible investment products to replace the delisted shares. The original case (in English) can be viewed here.
Our firm has assisted clients to handling listed company’s bond default and winding up cases. Kindly consult out solicitors of litigation team for problems in this aspect.