The Claimant asserted that China Travel (Cargo) Logistics Centre Limited (the “Company“) engaged in direct discrimination against her as a pregnant woman, treating her less favourably due to her pregnancy and/or maternity leave.  This discrimination was manifested through the Company’s refusal to (i) renew her employment contract and (ii) pay her the yearly bonus she had been receiving, contrary to sections 8(a) and 11(2)(c) of the Sex Discrimination Ordinance (Cap. 480).

For discrimination claims, the burden is on the claimants to prove discrimination on the balance of probabilities.  Since direct evidence is rare, the claimants may rely on inferences from primary facts. If employers can provide genuine, albeit unjustified reasons without showing discrimination, the inference of unlawful discrimination is usually not made.

The Court determined that the Company’s claims of “organizational restructuring” and “business downsizing” to justify denying the Claimant’s contract renewal in November 2017 lacked evidence. Documents revealed the Company urgently hired a new employee in April 2017, after the Claimant informed them of her pregnancy in March 2017, potentially to replace the already pregnant Claimant. Additionally, while the Company did experience a decline in profits, they failed to demonstrate that this decline was a result of the Claimant’s poor performance. These factors indicated that the non-renewal of the contract was due to the Claimant’s pregnancy, constituting discrimination. The Court also ruled that refusing the year-end bonus was further pregnancy discrimination.

The Court ordered the Company to pay the Claimant a total of HK$306,680 for lost income and HK$498,500 for the year-end bonus, along with interest and legal fees. Additionally, damages for injury to feelings were assessed at HK$130,000, and if the Company fails to issue a written apology or reference letter to the Claimant, the Court may impose exemplary damages.

The Claimant also requested that the Company establish an internal anti-discrimination policy and to handle complaints. However, the Court acknowledged the complexity of the matter and instructed both parties to negotiate and report back to the Court on whether a consensus could be reached.

In conclusion, this case emphasizes the importance of eliminating pregnancy discrimination in employment and urges employers to promote inclusive workplaces.

For further details, the full judgement can be found here.

Harris J’s judgment in Re Shandong Chenming Paper Holdings Limited gives a new perspective on a line of cases regarding the effect of exclusive jurisdiction clauses and arbitration clauses in the context of bankruptcy or winding-up proceedings.

For background, please refer to the decision of Re Guy Kwok-Hung Lam [2023] HKCFA 9 (“Guy Lam“) (see our news update), where the Court of Final Appeal (the “CFA“) affirmed the Court of Appeal (the “CA“)’s decision to dismiss a bankruptcy petition in light of an exclusive jurisdiction clause. After the CFA decision, in Re Simplicity & Vogue Retailing (HK) Co., Limited [2023] HKCFI 1443 (see our news update), the Court of First Instance remarked (obiter) that the ratio of Guy Lam applies only to exclusive jurisdiction clauses, but not to arbitration clauses.

In Re Shandong Chenming Paper Holdings, the subject company sought a dismissal or adjournment of the winding-up petition which relied on the ground of insolvency for non-payment of an arbitral award. The company then commenced another arbitration against the petitioner, which was a cross-claim in excess of the first arbitral award. The substantive hearing of the arbitration was fixed to take place soon in less than one year.  This was its basis for seeking a dismissal or adjournment of the winding-up petition.

The issue before the Court of First Instance was whether Guy Lam would apply where the debtor relies on a cross-claim and not a disputed debt. If it did apply, the debtor would not have to show that the cross-claim was based on substantial grounds, and that it exceeds the debt. If Guy Lam did not apply, then to dismiss the winding-up petition, the company would have to rely on the ground that there is a bona fide dispute of the debt on substantial grounds. In that case, the company would have to show that the cross-claim is genuine, serious, and of substance.

Harris J held that the Guy Lam approach would apply to arbitrable cross-claims . The Judge stated in his judgment that it was clear from the reasoning of both the CA and CFA in Guy Lam that in bankruptcy and winding-up proceedings, the existence of exclusive jurisdiction clauses and arbitration clauses would be a reason to dismiss such applications, unless there were countervailing factors such as risk of insolvency affecting third parties and a dispute that borders on the frivolous or abuse of process.. It was further interpreted that in the application of Guy Lam, there is no difference between disputed debts and cross-claims when considering whether there is a defence to a winding-up petition – in other words, the court would dismiss a petition for bankruptcy or winding-up subject to an arbitration based on either a disputed debt, or a cross-claim.

Given the long history of the matter, instead of dismissing the winding-up petition, the Judge stayed the petition.

For further details, the full judgement can be found here.

Following PRC regulation amendments announced by the China Securities Regulatory Commission (the “CSRC”) in February 2023, the Stock Exchange of Hong Kong Limited (the “Exchange“)  has issued consultation paper in February 2023.

On 21 July 2023, the Exchange published consultation conclusions on Listing Rules amendments following PRC regulation updates and other proposed rules amendments for PRC issuers. The Exchange has adopted all the proposals outlined in the consultation paper with minor modifications.

The Exchange amended the Listing Rules following the consultation conclusions. Such amendments took effect on 1 August 2023, and have the following effect:

I. Rule amendments in response to the PRC regulation updates

1. Remove the class meeting requirements for the issuance and repurchase of shares by PRC issuers;
2. Remove the requirements of using arbitration to resolve H shareholders disputes;
3. Remove the requirements for PRC issuers’ articles of association to include the Mandatory Provisions and other ancillary provisions (which require PRC issuers to (i) deem holders of domestic shares and H shares as different classes of shareholders; and (ii) use arbitration to resolve disputes involving H shareholders); and
4. Amend the documentary requirements for new listing applications to reflect the PRC’s new filing regime for all direct and indirect overseas listings by Mainland-based companies.

II. Other rule amendments

1. Set the limits on (a) general mandate for issuance of new shares at 20% of the total issued shares of a PRC issuer; and (b) scheme mandate for share schemes in each case, at 10% of the total issued shares of a PRC issuer (instead of referencing to each of domestic shares and H shares);
2. Remove the requirements for directors, officers and supervisors of PRC issuers to provide undertakings to the issuers and their shareholders to comply with the PRC Company Law and the articles of association;
3. Align minor requirements on compliance advisers under Chapter 19A (for PRC issuers) with those in Chapter 3A (for all issuers); and
4. Remove certain requirements in Chapter 19A relating to (a) online display or physical inspection of documents and (b) disclosure in listing documents of new applicants.

Please note that a PRC issuer must still comply with its existing articles of association until the amendments to such articles of association (reflecting the above) become effective. In this regard, PRC issuers should still obtain approvals from domestic shareholders and H shareholders at separate class meetings to amend their articles of association.

In Re Leading Holdings Group Limited [2023] HKCFI 1770, the Hong Kong Court for the first time decided on the issue of standing of an investor of a global note (‘Global Note’) who was not a registered holder to present a winding-up petition against the note issuer as a contingent creditor. In his comprehensive 66-page judgment handed down on 18 July 2023, DHCJ Suen SC dismissed the petition.

Before delving into the legal issues, it is important to note the legal structure of the Global Note which is commonplace for this type of debt securities:

1. The Global Note was constituted by an indenture (‘Indenture‘) between Leading Holdings Group Limited (‘Company‘) and the Bank of New York Mellon, London Branch (‘BNYM‘).
2. The Company, as the note issuer, has no contractual relationship with the ultimate beneficial investors of the Global Note (one of which is the petitioner (‘P‘)).
3. BNYM is the sole holder and trustee of the Global Note. As for P, it purchased a portion of the indirect beneficial interests in the Global Note via its intermediary, DBS Bank Ltd, which had accounts with Euroclear which maintained a book-entry system. Transfers of these indirect beneficial interests by the investors may only be effected through such book-entry system.
4. Section 6.06 of the Indenture is the so-called ‘No-Action Clause‘ which provides that the ultimate beneficial investors may not institute any proceeding unless they have, among other things, of at least 25% in aggregate principal amount of outstanding Global Note, made a written request to the trustee in pursuing the remedy. In other words, it is for the trustee to enforce these beneficial investors’ rights in the case of a default.

It is with the above intermediated structure in mind, and in particular, the absence of contractual relationship between P and the Company, that DHCJ Suen SC formulated the following two legal issues in light of parties’ submissions:

1. First, whether a beneficial owner of a debt has standing to present a winding-up petition?
2. Secondly, is P a ‘contingent creditor’ within its meaning in Section 179 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) who has standing to present a winding-up petition?

Beneficial Owner of a Debt

The proper approach is to decide whether there is a direct debt (or direct debtor-creditor relationship) between the Company and P in order for P to qualify as a creditor to have standing. In this regard, DHCJ Suen SC relied on Re Uruguay Central and Hygueritas Railway Co of Monte Video (1879) 11 ChD 372 (a case which also featured a bond structure resembling that of the Global Note) to say that (i) P and other beneficial investors do not have any independent right to sue (as opposed to a collective right to make a request to the trustee), (ii) P should not get a judgment in priority to other beneficial investors, and (iii) there should be no duplicity of actions by the trustee and the beneficial investors.

The general position, as noted by DHCJ Suen SC at [75] is that ‘the beneficiary of a trust property has no personal right to sue‘. Since trustees administer the trust fund as principals and not as agent for the beneficiaries, trustees are normally the proper plaintiffs (in this case, proper petitioner) in proceedings against third parties. Of course, there would be cases where the securities instrument expressly confer a direct right of enforcement on the trust beneficiaries, but this is not the case here, especially in light of the ‘No-Action Clause‘ mentioned above.

Contingent Creditor

Under certain specified events, P may be entitled to request the issuance of definitive notes whereupon P could directly enforce its claims against the Company. Thus, P argues in the alternative that it is a contingent creditor as the Company’s liability is contingent on the event of the issuance of definitive notes.

To begin with, the rationale to initially include contingent creditor in the winding-up regime is to address the potential lacuna and abuse whereby a company may be able to dispose of its assets or contract new liabilities even though the company is plainly insolvent upon taking into account not only its current but

also contingent liabilities. On such basis, a contingent creditor should be afforded standing to present a winding petition to protect its interests. Here, what is important is that a contingent creditor denotes ‘a person towards whom under an existing obligation, the company may become subject to present liability upon the happening of some future event. Such formulation requires an existing obligation, even though the liability to pay may only be triggered upon the happening of some future event‘ ([98]).

Citing a number of authorities and especially relying on the recent Cayman decision of Re Shinsun Holdings (Group) Co., Ltd FSD 192 of 2022 (DDJ) (unreported, 21 April 2023), DHCJ Suen SC posits that an existing obligation would provide a legal nexus between a person and a company, such that any liability which will or may arise in a future event under such nexus could be taken into account as contingent liability. Without the requirement of such legal nexus, the test would become unduly wide and far-fetched,

‘For instance, if a company is negotiating a loan with a bank and if there is no need for an existing obligation, it would be open to the bank to claim that it is a contingent creditor in the event of the bank agreeing to advance a loan and the company failing to repay, even though there is at present no legal nexus between the two. That simply cannot be right’ ([108]).

Coming back to our present case, it is P’s standing rather than the liability owed to it which is contingent, upon it succeeding in bringing itself into a direct contractual relationship with the Company (upon the issuance of definitive notes). However, this is not the test. The test is that P must prove, on a balance of probabilities, that it is a contingent creditor. And in doing so, it must show that there is an existing obligation owed by the Company to P which may result in a liability – P simply failed to do so.

Analysis

A number of policy considerations have come into play in this case. Notably, the Court recognised that the purpose of the Global Note regime is to ensure that the class of ultimate beneficial investors all act through the trustee (which is typical). If an individual beneficial investor was free to pursue a claim based on a loss caused to the investors as a class, then either there is the potential for multiplicity of actions (hence floodgate) or for duplication of actions brought by the trustee on one hand and individual beneficial investors on the other, not to mention the potential of double counting if both the debt owed to the investors and the same amount of debt owed to the trustee are to be taken into account in considering the solvency of a company.

By agreeing to the Indenture which includes the ‘No-Action Clause‘, the investors effectively waived their rights to bring claims by themselves, whilst enjoying the increased liquidity and ease of trading offered by the Global Note structure and the intermediation that comes with it. Before a Court of Appeal’s decision to the contrary, ‘one may say that P knowingly traded in interests, not in the underlying securities, and hence should be taken to know and accept the consequence of the global bond structure as a result‘ ([128]).

See the full judgment of Re Leading Holdings Group Limited here: legalref.judiciary.hk/lrs/common/search/search_result_detail_frame.jsp?DIS=153858&QS=%28%7Bleading+holdings%7D+%25parties%29&TP=JU

Our trainee solicitor Alan Sham assisted in preparing this article.

In preparation for the new dual licensing regime for virtual asset trading platform operators (“VATP Operators”) under the Securities and Futures Ordinance (Cap. 571) and the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615) which came into effect on 1 June 2023, the SFC published its Consultation Conclusions on the Proposed Regulatory Requirements for Virtual Asset Trading Platform Operators Licensed by the Securities and Futures Commission on 23 May 2023 in respect of the regulatory requirements applicable to VATP Operators.

Please see our article for more details.