But as Warren Buffett famously said, “only when the tide goes out do you discover who’s been swimming naked”. In the economic downturn of the last few years, cashflow dwindled and the overleveraged were weeded out. Bond defaults became rampant, and so were recovery actions by gutted bondholders.

 Recovery of bond debt was once thought straightforward. A more conservative claimant would choose to commence a civil action against the issuer company to obtain a summary judgment first. Others would either seek to petition for winding-up directly, or join in as supporting creditors.

The case below reveals how a recalcitrant issuer could complicate and drag the proceedings on for months on end.

Winding-up at First Instance

On 8 June 2023, a winding-up petition was presented by a CIES bondholder against China Zenith Chemical Group Ltd (“Company”) based on a summary judgment. After coming to terms with the Company, the original petitioner dropped out.

Several other CIES bondholders immediately applied to substitute as the petitioner. Stevenson, Wong & Co. represents one of the bondholders who have, up to the date of this article, tirelessly pursued their claims against the Company.

Rather than putting forward a scheme of arrangement / proposal for debt-restructuring (as is fashionable), the Company vigorously disputed all claims of bond default (currently 10+ and counting) in the winding-up proceedings.

The Company’s approach resulted in the Court exercising case management power to hear the (substituted) petition and the substitution applications at once. At the hearing on 3 June 2024, Hon Linda Chan J adjourned the petition together with the claims of 3 supporting creditors for substantive arguments. The substantive hearing took place before Recorder Suen SC on 19 September 2024.

Our client’s case is that he subscribed to a CIES bond through an intermediary. He adduced evidence of full payment of the subscription price to the intermediary, the bond certificate signed and sealed by the Company, and letters from the Company to the Immigration Department year after year confirming our client’s status as a bondholder.

The Company argued that it had only received partial payment of the subscription price from the intermediary, and that the bond was cancelled by some private agreements between the Company and the intermediary.

The Court criticized the Company for how its defence evolved over time (i.e. that our client agreed to extend the maturity, that the Company had received no payment of the subscription price at all, and then finally that it and the intermediary had agreed to cancel the bond). The absence of the intermediary from the proceedings did not lend credibility to the Company’s. As a result, the learned Recorder found no bona fide dispute as to the debt on substantial grounds on 10 October 2024.

The Company bargained for time to pay the debt before a winding-up order is pronounced, and the Learned Recorder allowed as such on 18 October 2024.

At this point, the creditors may think they were at the finishing line, but they would be sorely mistaken.

The Witching Hour

One has to admire the Company’s tenacity and ingenuity. In the next few months, the Company

• • • sought an extension of time to pay; and yet argued that it ought not to pay.

• • • applied for an expedited appeal on the ground that it expected to raise sufficient fund to avoid a winding-up; and then (at the polar opposite) applied for an expedited appeal on the ground that it could not raise sufficient fund to avoid a winding-up.

• • • announced a placement of shares, and procured its Financial Adviser to affirm the market’s interest; and then ironically extended the “long-stop” date of the placement when none is shown.

• • • adduced support letters from “bondholders” that further fundraising was preferred to immediate winding-up, but opted not to produce the register of bondholders or the relevant bond documents.

All these were to seek adjournments of the winding-up petition.

Fortuitously for the Company, the Court of Appeal finally ordered an expedited appeal, and while Hon. Anthony Chan J. criticized the Company’s ploy at the hearing of the Companies Court on 2 December 2024, he reluctantly adjourned the hearing of the winding-up petition until after the disposal of the appeal.

The Court of Appeal’s decision and beyond

The appeal was heard on 20 February 2025 before Hon Kwan VP, Cheung JA, and Barma JA, and judgment was handed down on 11 March 2025.

The appeal was largely an appeal on facts. The Court of Appeal found that the Company was rehashing its arguments at the Court below, and found no palpable errors in the learned Recorder’s assessment of evidence.

At the hearing before the Companies Court on 17 March 2025, DHCJ Gary Lam made a usual winding-up order against the Company despite the Company’s submission that it was carrying out yet another round of fundraising activities. It remains to be seen what tactics will be deployed to keep the bondholders at bay even in the Company’s winding-up.

Implication to bondholders

In a typical winding-up proceedings where the original petitioner drops out, it is understandable that a supporting creditor may want to defer to other creditors to apply for substitution in order to save legal costs.

As demonstrated in the present case, however, where there is sufficient commonality among the claims (all being bond defaults), the Court may exercise its case management power to hear the petition and multiple substitution applications together. This helps to exert maximum pressure, which is particularly important in a case against a recalcitrant debtor.

Our Partner Mr. Dominic Lau, solicitor advocate, appeared in the Court of First Instance on behalf of one of the bondholders / supporting creditors as sole advocate. On appeal, Counsel Mr Jeff Yau appeared on our instruction. The team was also assisted by associate Mr. Harold Chiu and trainee solicitors Ms. Kayla Yu and Ms. Selina Tsang.

Please contact our Partner Dominic Lau for any enquiries or further information.

This news update is for information purposes only. Its content does not constitute legal advice and should not be treated as such. Stevenson, Wong & Co. will not be liable to you in respect of any special, indirect or consequential loss or damage arising from or in connection with any decision made, action or inaction taken in reliance on the information set out herein.

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