RE JINRO (HK) INTERNATIONAL LTD

HCCW 1352/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 1352 OF 2001

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J U D G M E N T

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1. This is a creditor's petition presented by Goldman Sachs International ("GSI") and Goldman Sachs (Asia) Finance ("GSAF") (collectively "the petitioners") to wind up Jinro (HK) International Limited ("the Company") under section 177(1)(d) of the Companies Ordinance, Cap. 32, on the ground that the Company is unable to pay its debts. The debt in the re-amended petition is in the sum of US$31,427,934.03, calculated up to 8 November 2001. It is alleged that the principal sum of US$23 million is owed to GSI with interest accrued due up to the aforesaid date of US$5,913,669.31 and that US$2 million is owed to GSAF with interest accrued due up to the same date of US$514,234.72. The petition herein was presented on 14 December 2001, after a demand for the debt was served on the Company on 12 November 2001.

2. The Company initially opposed the petition on a number of grounds. At the close of the petitioners' case, Mr Bleach, SC indicated on behalf of the Company that only one broad ground is relied on in opposition, in that the locus of each of the petitioners as creditors is disputed. There is no need to be further concerned with the grounds abandoned or the new matters raised, whether by the Company or by the petitioners, until I come to deal with the question of costs.

3. The only witness for the petitioners is Mr Jeffrey Fergus, who is currently an executive director of Goldman Sachs (Asia) LLC. For the Company, only two witnesses were called in the end. They were Mr Walter Yanghoon Kim ("Mr Walter Kim"), the legal counsel to the Jinro group of companies, and Mr Tae Sub Kim ("Mr TS Kim"), a director of the Company. All three were cross-examined on their affidavits or affirmations, which were adopted as their evidence in chief. The resolution of the main issue in dispute does not turn on any conflicting evidence as to fact. The issue to be resolved is entirely a question of law and the proper construction of documents. As examples of cases in which the courts have had to do a similar construction exercise to determine whether the petitioner in a creditor's petition to wind up a company had the necessary locus, Mr Strachan for the petitioners has referred me to In re Uruguay Railway Company (1879) 11 Ch D 372 (in which it was held that the petitioner, being the holder of a mortgage bond, was not a creditor, upon the terms of a trust deed) and In re Olathe Silver Mining Company (1884) 27 Ch D 278 (in which it was held that the petitioner, being the holder of some debentures, was a creditor, upon the terms of the debentures and a trust deed).

The Company and its parent

4. There is no issue when it came to the hearing of the petition that the Company is insolvent. I will just give a brief description of the Company and its parent.

5. The Company was incorporated in Hong Kong on 28 February 1996. It has an authorised and issued share capital of US$9,450,000.00, divided into 9,450 shares of US$1,000.00 each. 9,449 of these shares are held by Jinro Limited ("Jinro Korea"), a company established in the Republic of Korea. The Company has been engaged in the trade of soju (a distilled spirit popular in Korea) in the markets of Hong Kong and Mainland China. Jinro Japan Inc. ("Jinro Japan") is a wholly owned subsidiary of the Company and is mainly engaged in the sale and distribution of soju in Japan.

6. Jinro Korea was founded in 1924 with the traditional business of trading in soju. It is the flagship company in the Jinro group of companies, which has a diversified range of businesses. The shares of Jinro Korea have been listed on the Korea Stock Exchange since 1973 until they were delisted in January 2003.

7. On 7 September 1997, Jinro Korea filed an application for composition with the Seoul District Court under the Korean Composition Act, which I am given to understand, is similar to the Chapter 11 procedure in the United States that provides a moratorium from creditor action to allow a company in financial difficulties to re-organise its affairs and to improve its position. The composition plan was sanctioned by the Korean Court on 19 March 1998. As a result, the creditors of Jinro Korea have been prevented from enforcing their claims so long as there is compliance by Jinro Korea with the composition plan.

8. As for the Company, the latest audited accounts for the year ended September 2001 showed the Company to be insolvent. The net liabilities according to these accounts stood at HK$266 million odd.

The debt in the petition

9. The debt to the petitioners is said to arise in this way. Four months after its incorporation and in June 1996, the Company issued Guaranteed Floating Rate Notes ("the 2001 Notes") in bearer form in denominations of US$100,000.00 and US$500,000.00 with an aggregate value of US$50 million, for the purpose of raising finance in the international capital markets. The 2001 Notes were guaranteed by Jinro Korea, with interest payable in arrears at six monthly intervals in June and December commencing December 1996 and the principal repayable on the maturity date of 27 June 2001. Chuo Trust Asia Limited was appointed the fiscal agent and the fiscal agent and other financial institutions were appointed paying agents for the Company in relation to the 2001 Notes.

10. The 2001 Notes were issued pursuant to documentation dated 14 June 1996 and 24 June 1996 ("the issue documentation"). The main issue documentation I will be concerned with consists of the following:

(1) the terms and conditions of the 2001 Notes, set out in the fourth schedule to the Fiscal Agency Agreement;

(2) the Permanent Global Note (" the PGN"); and

(3) the Deed of Covenant executed by the Company as the issuer of the 2001 Notes in favour of the "Accountholders" as defined therein ("the Deed of Covenant").

11. It is expressly provided in the issue documentation that the 2001 Notes are governed by and shall be construed in accordance with English law. The Deed of Covenant also contains a similar provision on the governing law of the Deed. It is accepted that there is no difference between English law and Hong Kong law in respect of the petitioners' locus as founded upon the issue documentation.

12. It is apparent from the issue documentation that the Company intended to, and did in fact, issue the 2001 Notes into the Euroclear system, which is a securities clearing and settlement system that provides a means of trading in and making payments in respect of internationally traded securities. The practice and procedure of the Euroclear system are of importance here and I will go into details in subsequent paragraphs.

13. The 2001 Notes were all initially represented by a "temporary global note" in bearer form, which was then exchanged for the PGN in bearer form issued on 24 June 1996. The PGN was duly deposited with Deutsche Bank, Hong Kong branch, for Morgan Guaranty Trust Company of New York, Brussels office, as operator of the Euroclear system. Under the terms of the PGN, the PGN would be exchangeable for notes in definitive form ("Definitive Notes") against surrender of the PGN if, inter alia, an event of default under the terms and conditions of the 2001 Notes should occur.

14. There is no dispute that when Jinro Korea filed an application for composition in the Korean Court on 7 September 1997, this had constituted the first event of default under the terms and conditions of the 2001 Notes.

15. It is also not in dispute that the Company had only paid interest under the 2001 Notes for the periods up to and including 24 December 1997, and that interest for the six-month period ending December 1997 was paid late on 15 February 1998. No further interest payments were made thereafter, nor was the principal paid on the maturity date. The successive failure to pay principal and interests constituted further events of default under the terms and conditions of the 2001 Notes.

16. Under clause 7 of the PGN, it is provided that the Definitive Notes shall be issued within 45 days of the delivery of the PGN becoming exchangeable. The material part of this clause continued as follows:

"If Definitive Notes have not been issued by 5.00 p.m. London time on such forty-fifth day, then this Permanent Global Note, including the obligation to issue and deliver Definitive Notes, will become void and the bearer hereof will have no further rights under this Permanent Global Note (but without prejudice to the rights which the bearer hereof or others may have under [the Deed of Covenant], a copy of which may be inspected (and certified copies obtained) at the specified office from time to time of the Fiscal Agent)." (emphasis supplied)

17. Whether Definitive Notes were to be issued was entirely a matter for the Company. No such notes were issued in this instance, by the expiry of 45 days from 7 September 1997, i.e. 22 October 1997. Thus, by virtue of clause 7, as from 22 October 1997, the PGN has become void.

18. It was only after 22 October 1997 that the petitioners have acquired "rights" in the 2001 Notes by way of trading in the Euroclear system. On 28 October 1998, GSAF purchased 2001 Notes with a face value of US$2 million for its own account. Between 4 June 1999 and 7 November 2000, GSI purchased 2001 Notes with a face value of US$23 million on behalf of ASO I Delaware LLC, which is a corporate vehicle for a Goldman Sachs investment fund managed by affiliates of the petitioners. What rights, if any, have been acquired by the petitioners in the purchases is the crux of this dispute.

19. The petitioners' pleaded case of their claim to be creditors of the Company went through several changes. Initially, it was pleaded that they are the holders of the 2001 Notes. Then the petition was amended to plead that they are the "Accountholders" under the Deed of Covenant. In the latest amendment, which was made with leave granted on the first day of trial, it is pleaded that as a result of the petitioners' purchase of the 2001 Notes, they are "successors and/or assigns [of the Accountholders] and/or equitable assignees of the rights under the Deed of Covenant".

20. The previous assertions that the petitioners are holders of the 2001 Notes as well as Accountholders have not been abandoned in the latest amendment. It is however accepted by the petitioners that they cannot be Accountholders under the Deed of Covenant, having regard to the definition of this expression in the Deed, which is dealt with below. As for the rights of holders under the 2001 Notes, the Notes were represented by the PGN which has become void.

21. The Company has accepted that undoubtedly it is liable to someone under the Deed of Covenant in respect of the 2001 Notes which the petitioners believed they were acquiring, but contends that the petitioners have failed to establish that they have acquired any valid rights which could be enforced against the Company.

The Deed of Covenant

22. As the Deed of Covenant is the document upon which the petitioners' rights are founded as alleged, I shall set out the material provisions.

23. Clause 2 of the Deed of Covenant provides as follows:

"2. Direct Rights

2.01 Creation: If the Permanent Global Note becomes void in accordance with its terms, each Accountholder shall have against the Issuer [i.e. the Company] all rights ("Direct Rights") which such Accountholder would have had in respect of the Notes if, immediately before the Relevant Date, it had been the holder of Definitive Notes, duly executed, authenticated and issued, in an aggregate principal amount equal to the Principal Amount of such Accountholder's Entries including (without limitation) the right to receive all payments due at any time in respect of such Definitive Notes as if such Definitive Notes ... had been duly presented and ... surrendered on the due date in accordance with the Conditions.

2.02 No further action: No further action shall be required on the part of the Issuer or any other person:

for the Accountholders to enjoy the Direct Rights; and

for each Accountholder to have the benefit of the Conditions as if they had been incorporated mutatis mutandis into this Deed of Covenant;

provided that nothing herein shall entitle any Accountholder to receive any payment in respect of the Permanent Global Note which has already been made."

24. A number of expressions in clause 2 have been defined in clause 1.01 and the relevant ones are as follows:

"Accountholders" means "any accountholder with a Clearing System which at the Relevant Date has credited to its securities account with such Clearing System one or more Entries in respect of the Permanent Global Note ...";

"Clearing System" means "each of Euroclear and Cedal Bank";

"Conditions" means "the terms and conditions of the Notes (as scheduled to the Fiscal Agency Agreement and as modified from time to time in accordance with their terms) ...";

"Entry" means "any entry which is made in the securities account of any Accountholder with a Clearing System in respect of Notes represented by the Permanent Global Note";

"Relevant Date" means "the date on which the Permanent Global Note becomes void in accordance with its terms".

25. Hence, under clause 2.01, the Deed accords to each Accountholder, who has entries in respect of the PGN credited to its account on the date when the PGN becomes void in accordance with its terms, Direct Rights against the Company, being essentially the rights which would have been possessed by a holder of Definitive Notes. Since the petitioners had only purchased the 2001 Notes after the Relevant Date, they cannot be Accountholders under the Deed.

26. Clause 6 however extends the category of persons who can take the benefit of the Deed of Covenant beyond Accountholders and it provides as follows:

"6. Benefit of Deed of Covenant

6.01 Deed poll: This Deed of Covenant shall take effect as a deed poll for the benefit of the Accountholders from time to time.

6.02 Benefit: This Deed of Covenant shall enure to the benefit of each Accountholder and its (and any subsequent) successors and assigns, each of which shall be entitled severally to enforce this Deed of Covenant against the Issuer.

6.03 Assignment: The Issuer shall not be entitled to assign or transfer all or any of its rights, benefits and obligations hereunder. Each Accountholder shall be entitled to assign all or any of its rights and benefits hereunder."

27. It is asserted by the petitioners that as purchasers of the 2001 Notes in the Euroclear system, they are "successors and assigns" of Accountholders or downstream purchasers from Accountholders, and are therefore creditors within the meaning of section 178(1)(a) of Cap. 32. Further or alternatively, they also have locus to petition for winding up of the Company by virtue of sections 178(1)(c) and 179(1) as a creditor in equity of the Company, as they are equitable assignees of the Direct Rights in respect of the 2001 Notes granted to Accountholders under the Deed of Covenant.

28. The Company's contention is that neither the PGN nor the Deed of Covenant envisages any trading through the Euroclear system after the PGN has become void and the Direct Rights are triggered under the Deed. Once the Definitive Notes are issued, the relevant securities exit the Euroclear system. As the Direct Rights are to be the same rights as if Definitive Notes were issued immediately before the PGN becomes void, it is contended that the Direct Rights must exit the Euroclear system upon the PGN becoming void. Hence, there can be no valid assignment of the Direct Rights by virtue of a change of account entries by way of trading through Euroclear.

29. There are two other material provisions in the Deed of Covenant relating to evidence and the deposit of the Deed. I set out the full terms below:

"3. Evidence

3.01 Records: The records of the Clearing Systems shall be conclusive as to the identity of the Accountholders and the respective amounts credited to their securities accounts and a statement issued by a Clearing System setting out

(a) the name of the Accountholder in respect of which it is issued; and

(b) the Principal Amount of any Entry credited to the securities account of such Accountholder with such Clearing System on any date,

shall be conclusive evidence for all purposes of this Deed of Covenant.

3.02 Relevant Date: If a Clearing System determines the Relevant Date, such determination shall be binding on all Accountholders with such Clearing System.

4. Deposit of Deed of Covenant

This Deed of Covenant shall be deposited with and held by the Fiscal Agent until the date on which all the obligations of the Issuer under or in respect of the Notes (including, without limitation, its obligations under this Deed of Covenant) have been discharged in full. The Issuer hereby acknowledges the right of every Accountholder to the production of this Deed of Covenant."

The Euroclear system

30. I turn to the practice and procedure of the Euroclear system, as they form an important part of the factual matrix for the purpose of construing the provisions in the Deed of Covenant. The following account is taken from the evidence of Mr Fergus, who has practical experience with the procedures as part of his work, and from various publications of Euroclear exhibited to his 3rd affidavit.

31. The Euroclear system is the world's largest clearance and settlement system for internationally traded securities. It also provides a custodian service for securities and is an international central securities depositary ("ICSD"). The majority of participants in the system are banks, brokers, dealers, custodians, and other institutions professionally engaged in managing new issues of securities, market making, trading or holding the wide variety of securities accepted in the system. The participants trade in the system as principals, notwithstanding that they may trade on their own behalf or on behalf of an underlying investor. GSI was, at all relevant times, a participant in Euroclear and had operated three Euroclear securities clearance accounts. GSAF had its own Euroclear securities account since October 1999.

32. Prior to the acceptance of a new issue of securities for trading in the system, various criteria would have to be met. The important ones for present purpose, as set out in the "Guide to acceptance of securities in the Euroclear system" ("the User Guide"), are as follows.

(1) Immobilization of securities

33. To be accepted for trading in the system, securities must be deposited with one of the Euroclear depositaries and a depositary is appointed by the Euroclear Operations Centre ("EOC") for each issue accepted in the system. Securities designed for the ICSD are generally issued in the form of a temporary global note which is subsequently exchanged for a permanent global note. Where securities are represented by a global note, these are lodged with a common depositary authorised by Euroclear. Where securities are represented by definitive notes or other certificates, these are lodged with a specialised depositary, generally located in the country in whose currency the notes or certificates are denominated, or where the issuer is located. In this way, the physical documents which represent the securities traded in the system are "immobilized" in the Euroclear depositary network. The immobilization of securities enables a high volume settlement to take place without the movement of the underlying physical certificates. The settlement of transfers is done electronically, sales and purchases of such securities are recorded by book entries in the accounts of participants who are recognised as accountholders in respect of the securities. Payments due in respect of the securities are made by the issuer via the paying agents to the common depositary and thence into the Euroclear system. There is no registry maintained by or under the control of the issuer which records the legal ownership of the securities.

34. In the present case, when GSI or GSAF acquired the 2001 Notes, each acquisition is represented simply by an entry in the respective securities clearance account of GSI or GSAF. And when payment of interest for the six-month period ending December 1997 was effected on 15 February 1998 (this was after the first event of default and before the petitioners had begun to acquire the 2001 Notes), the payment was remitted to Euroclear and paid by Euroclear to those who had account entries at that time in respect of the 2001 Notes. At the request of the petitioners, Euroclear has provided a certification by letter dated 5 March 2002 that the petitioners were holding the 2001 Notes in their respective accounts at Euroclear in the respective principal amounts of US$2 million and US$23 million at all times since 12 November 2001, being the date of the statutory demand in these proceedings.

(2) Fungibility

35. For securities to be accepted in the system, it must be possible to hold them on a fungible basis. Amongst other things, this means that all securities of a same issue must be treated as equivalent. It is provided in clause 4(a) of the "Terms and conditions governing use of Euroclear" ("the Euroclear Terms") that no accountholder has entitlement to any specific securities but each will be entitled to transfer (by book entry), to deliver or to repossess from Euroclear an amount of securities of any issue equivalent to the amount credited to any securities clearance account in its name. It is further provided in the Euroclear Terms that a security "shall be deemed to be held in the Euroclear System" if it is standing to the credit of a securities clearance account (clause 4(d)(i)(v)) and that a security held in the Euroclear system "shall be deemed to be held by the holder of the Securities Clearance Account" to which it is standing to the credit (clause 4(d)(ii)(v)). Hence, accountholders have a co-ownership right in the notional pool of securities of each category held on their behalf by Euroclear and this intangible right is represented solely by a book-entry record in the securities clearance account of the participant, see "Operating procedures of the Euroclear System" ("the Euroclear Operating Procedures") clause 3.2.

(3) Transferability

36. Securities deposited in the system must be freely transferable between participants, without further reference to or communication with the issuer. Transfer restrictions are acceptable only if they require the standard certification procedures described in the User Guide. As a general rule, EOC handles certifications only in relation to the exchange of temporary global securities, the payment of income or redemption proceeds, or the exercise of certain custodian operations. Other restrictions on the transfer of beneficial ownership or registered title can only be enforced outside the Euroclear system and participants are solely responsible for complying with such restrictions. It is also provided in clause 10.3.1(c)(ii) of the Euroclear Operating Procedures that each participant is solely responsible "for informing itself of the characteristics of the securities it holds, or it intends to hold, or to be recorded on any Account through the Euroclear System including without limitation ... holding or transfer restrictions ...".

(4) Disclosure

37. EOC does not accept securities of which the terms and conditions require EOC to disclose information about the participants' holdings of the issue. EOC is generally prevented, without a participant's authorization, from disclosing ownership of securities held in the system by applicable law. Moreover, EOC has no knowledge of the beneficial ownership of securities held by participants, which often hold securities of their own clients in the system.

38. In November 1999 (this was two years after the first event of default and after the petitioners had started to purchase the 2001 Notes), the Company by its fiscal agent issued a notice into Euroclear for distribution to accountholders. By the notice, the Company requested disclosure of the identities of "the current holders of the Notes", since the Company would like to consider convening either a noteholders' meeting or meeting with noteholders on a one to one basis to discuss the future treatment of the 2001 Notes in view of the composition plan of Jinro Korea confirmed by the Korean Court on 19 March 1998. The request was made subject to the noteholders' consent to declare their identity to Euroclear. As accountholders with credit entries in respect of the 2001 Notes, the petitioners received the notice from Euroclear.

(5) Enforcement of holders' rights

39. Neither EOC nor its depositaries will enforce the terms of securities against an issuer or guarantor on behalf of persons holding such securities through the Euroclear system. The beneficial owners of the securities must be able to enforce their rights under the terms of the securities against the issuer and/or the guarantor and specific arrangements may be necessary to achieve this when the securities are represented by permanent global certificates. If there is no trustee for the issue (who will be responsible for enforcing beneficial owners' rights against the issuer in the case of default) and the issue is evidenced by a global certificate, there should be a "clearly documented procedure" in place whereby either:

* Euroclear participants or the beneficial owners can appoint a trustee; or

* the issuer exchanges the global certificate into individual certificates that can be delivered out of the Euroclear system; or

* if the issuer cannot issue definitive certificates, a Deed of Covenant or similar provision included in the terms and conditions should state that the issuer will recognise statements of account, issued by EOC to participants, as evidence of beneficial ownership.

40. A full description of an event of default should also be included in the terms and conditions of the securities, for example a declaration of default on the request of a beneficial owner to a fiscal agent or other agent, or as to an automatic default. Euroclear requires that in a default situation the issuer must recognise the beneficial owner's rights in the securities. It is expressly provided in the User Guide at page 27 that "securities in default" can be held in the Euroclear system.

41. In issuing the 2001 Notes into the Euroclear system, the Company had sought to structure the issue of the securities to comply with the acceptance criteria described above. It is provided at page 35 of the User Guide that when a new securities issue is submitted to Euroclear for consideration of acceptance, the issuer's advisers and agents are required to specifically draw to Euroclear's attention "any unusual, innovative or non-standard features which are not immediately identifiable from a routine review of the documentation". In particular, Euroclear requires the issuer to highlight any feature in the terms of security issue where "beneficial ownership certification [by Euroclear] does not conform with the standard certification". If unusual or non-standard features are not discussed and agreed to by Euroclear prior to acceptance, such special features may not be serviced by Euroclear. There is nothing in the issue documentation of the 2001 Notes to indicate that there is any unusual or non-standard feature about the securities issued into the Euroclear system.

42. The petitioners have also obtained a letter dated 19 April 2002 from the Legal Division of Euroclear confirming that securities held under the system are to be handled on a book-entry basis and that "subject to any agreement to the contrary between the transferor and the transferee, each and every transfer within the Euroclear System (other than, of course, transfers for the purpose of providing collateral) is a complete transfer of all rights to and interest in the subject instrument in that a transferor transfers all of its rights to the transferee including, if applicable, enforcement rights against the issuer". It was further confirmed in that letter that Euroclear "continues to receive and process settlement instructions with respect to certain securities for which [Euroclear has] received a notice of an event of default."

43. It would appear from the certification mentioned earlier provided by Euroclear regarding the petitioners' holdings of the 2001 Notes in the petitioners' securities clearance accounts that notwithstanding successive events of default in these securities, Euroclear still maintains account entries for noteholders of the 2001 Notes.

44. There is evidence from Mr Fergus, which is not disputed, that trading in "defaulted securities" and transfers of "defaulted securities" between participants to a clearing system, are common features in a major international securities market, particularly in relation to debt and bond securities. He asserted that when the 2001 Notes are transferred through Euroclear, whether these securities are in default or not, all rights attaching to the securities, including rights of enforcement, are transferred to the purchaser. If it were otherwise, this would have major ramifications in the international capital markets, particularly for companies in Hong Kong that seek to issue Eurobonds.

45. Mr Fergus also gave evidence, which is again not challenged, that whilst it is not unusual for a situation to arise where there has been a default so that there is an obligation on the issuer to issue definitive notes to noteholders, in practice the issue of definitive notes "almost never occurs".

The meaning of "successors and assigns"

46. Before turning to the Company's arguments in detail, I will first deal with the less controversial matters on various aspects of the Deed of Covenant and the meaning to be attached to the expression "successors and assigns" therein.

47. It is pertinent to note that the Deed of Covenant has the character of a deed poll by the express provision in clause 6.01. A deed poll may be "a deed made by and expressing the active intention of one party only" and "any person named or sufficiently indicated in a deed poll may sue to enforce any obligation thereby undertaken in his favour, notwithstanding that he has not executed the deed" (Halsbury's Laws of England, 4th ed Reissue, Vol. 13, paras. 3 and 60). Hence, provided that the petitioners are "successors and assigns" within the meaning of clause 6.02, they will be entitled to enforce the Direct Rights under the Deed of Covenant. There is no decided authority on the ability to assign similar direct rights under a deed of covenant by trading through the Euroclear system.

48. Mr Strachan has referred me to various authorities to show that the words "successors" and "assigns" have been broadly and flexibly construed in a wide range of legal contexts. As stated in Black's Law Dictionary, 7th ed, of the word "assign" or "assignee", "it is difficult to ascribe positive meaning to it with any specificity. Courts recognise the protean nature of the term and are therefore often forced to look to the intent of the assignor and assignee in making the assignment - rather than to the formality of the use of the term assignee - in defining rights and responsibilities." Thus, depending on the context of the document in which the word "assign" is found, it can mean a licensee, a donee, a person in possession of land albeit that his possession is only under a conditional agreement for a lease, and a person may be an assign of another without taking that other's entire interest in the property in question, such as a lessee for a term of years may be regarded as the assign of the freehold owner of the land. As for the word "successor", the word has been defined as "one who follows in the place of another" (Jowitt's Dictionary of English Law, 2nd ed). In Ruthig v. Stuart Brothers [1923] 53 OLR 558, the plaintiff obtained an injunction restraining the defendant company, its "successors and assigns" from damming the waters of a river and it was held that the company that had purchased the mill and dam from the defendant company was bound by the injunction, being "successors and assigns" within the meaning of the order.

49. Mr Strachan submitted that here the words "successors and assigns" in clause 6.02 were plainly intended to extend the Direct Rights granted therein to those, such as the petitioners, who purchased the 2001 Notes in the Euroclear system, whether directly or indirectly, from any of the Accountholders as defined. If it were otherwise, those in the position of the petitioners who had purchased securities in default in the Euroclear system would have no rights against the issuer or any one else.

50. Mr Bleach submitted that the word "successor" does not add anything of substance to the petitioners' case, as it is apparent from the authorities cited by Mr Strachan as illustration that some act or event is necessary to effect a succession and it is still incumbent on the person claiming to be a successor to provide evidence of the succession, however it occurs. I am inclined to agree with Mr Bleach in this respect.

51. Mr Bleach also referred me to Silkdale Pty. Ltd v. Long Leys Co. Pty. Ltd, a decision of the Supreme Court of New South Wales on 25 August 1995, in which the court construed the word "successor" in a provision in a mortgage to the effect that the bank being the mortgagee could issue a statement of the indebtedness and such statement would be conclusive and binding on the mortgagor. The mortgage defined the bank as including "its successors or assigns". The court considered two possible constructions of this expression, it could mean a successor or assign of the business of the bank or a successor or assign of the mortgage from the bank and came to the view that the former construction would appear to be correct in the context of the document. Using this case as an analogy, Mr Bleach contended that in respect of the similar expression in clause 6.02, there are two possible constructions. It could mean that the Deed of Covenant will enure to the benefit of each Accountholder and the successors to and assignees of its business, or that the Deed of Covenant will enure to the benefit of each Accountholder and to the successors and assignees of the Deed. He submitted that the first construction would appear to be more likely because of the use of the possessive article "its" in clause 6.02.

52. Mr Strachan pointed out that there is an important difference in the context in which the expression was construed in Silkdale. There, the expression referred to the bank which is an entity that may have a continued existence. In the present case, the expression refers to Accountholders whose status rests on holding specific rights at a particular point in time. Mr Strachan submitted that the expression here should be construed to mean the successors and assignees of the rights of the Deed rather than the successors and assignees of the business of any Accountholder. In any event, if the expression should be construed in the way as contended by Mr Bleach, a purchaser of the entire rights of any Accountholder would have indeed acquired the business of the Accountholder, having acquired everything which accorded the Accountholder his status as defined in the Deed.

53. I agree with Mr Strachan's analysis that ultimately it would make no material difference which of the two constructions is to be adopted. I am also inclined to agree that in the present context, the expression should be construed to mean successors and assigns of the rights under the Deed.

The Company's contentions

54. I turn to the Company's contentions. It is contended by the Company that the book entries in the Euroclear system of the petitioners' securities clearance accounts do not constitute evidence of assignment of the Direct Rights to the petitioners. Mr Bleach advanced a number of grounds in support of this primary contention.

55. Firstly, it is submitted that the conclusive evidence provision in clause 3.01 of the Deed does not apply to the petitioners because this provision relates to "the identity of the Accountholders and the respective amounts credited to their securities accounts" and the petitioners are not Accountholders. I think that must be right. But what I do not agree with Mr Bleach is that any statement or certification given by Euroclear of the holdings of the 2001 Notes in the petitioners' securities clearance accounts (such as the letter dated 5 March 2002) is to be treated as having no effect at all. Even if the certification is not to be regarded as conclusive, in my view it is good evidence that the person to whose account the securities have been credited is the holder of those securities and it is something which the court is entitled to take into account.

56. I also reject a similar submission of Mr Bleach that the deeming provisions in clauses 4(d)(i)(v) and 4(d)(ii)(v) of the Euroclear Operating Procedures are of no relevance in that these provisions are only binding as between Euroclear and the participants of the system and do not affect the Company. In my view, as the securities were issued into the Euroclear system, the practice and procedure of Euroclear form part of the factual matrix for the purpose of construing the issue documentation of the securities. An issuer of securities into the system must be taken to know that when securities are traded within the system, transfers of securities are effected by debits and credits in the accountholders' account.

57. Secondly, Mr Bleach drew a distinction between the trading of securities in default (there is clear evidence that such securities could be held and traded in the Euroclear system) and securities which are void. Here, the PGN had become void as from 22 October 1997 by virtue of clause 7 of the PGN. He submitted that the evidence of trading in defaulted securities within the Euroclear system does not support the petitioners' case that void securities could be properly acquired by the petitioners through trading in the Euroclear system.

58. I think there is a fallacy in this argument. As Mr Strachan has pointed out, it is only the PGN that has become void, not the securities which are in default. I see no reason to restrict the expression of "securities in default" at page 27 of the User Guide to securities as to which an event of default has occurred but the PGN has not yet become void because it is still within the period (45 days from the event of default in this instance) during which the PGN is exchangeable for Definitive Notes. The securities remain in default in the event Definitive Notes are not issued within the stipulated period and the PGN has thereby become void. It would be a misnomer to speak of the 2001 Notes as "void" securities in the sense that they are of no effect once the PGN has become void, as it is a characteristic of the issue documentation (and this in conformity with the acceptance criteria in the User Guide) that once the PGN should become void, the rights under the Deed of Covenant are triggered and Direct Rights are afforded to Accountholders which may be assigned by them.

59. Thirdly, Mr Bleach has relied on various provisions in the Euroclear publications to the effect that certain restrictions on the transfer of beneficial ownership or registered title of securities can be enforced outside the Euroclear system, which I have already summarised above (the User Guide page 23; the Euroclear Operating Procedures, clause 10.3.1(c)(ii)). Regarding the statement in the letter of Euroclear dated 19 April 2002 that a transfer of securities within the Euroclear system is a complete transfer of all rights in the securities, this is qualified by the words "subject to any agreement to the contrary between the transferor and the transferee". He has also pointed out that under clause 6.03 of the Deed of Covenant, it is expressly provided that "all or any of [each Accountholder's] rights and benefits" under the Deed may be assigned.

60. On the basis of the above, Mr Bleach submitted that it is possible for any Accountholder to assign only some of the rights and benefits to a purchaser. If that had happened, this restriction on the transfer of ownership would not have been recorded in the Euroclear system. It is therefore incumbent on a purchaser to make sure that the seller is entitled to sell all the Direct Rights and that he has acquired all the Direct Rights in the purchase and that the same is established throughout the chain of transactions going right back to an Accountholder. The petitioners have simply not adduced any evidence of this kind to establish what rights, if any, they had acquired in the purchase through the Euroclear system. The only evidence of the petitioners is a credit entry for the securities in the Euroclear system.

61. Mr Strachan did not apparently dispute the theoretical possibility of a transferor assigning only some of the Direct Rights, but he emphasised one must look at the realities of the situation. It is a fact that no one apart from the petitioners has come forward to assert any rights in respect of the securities for which there is a credit entry in the petitioners' account in Euroclear. Furthermore, the Company admitted in evidence that it has not at any time received any notice of any assignment of rights of any kind in respect of the securities acquired by the petitioners through trading in Euroclear. If an accountholder had indeed reserved some of the Direct Rights when it transferred the securities to another accountholder by trading through Euroclear, it is very unlikely that the transferor would not have given notice of this to the issuer or the fiscal agent, as the rights of the transferor could only have been enforced outside the Euroclear system. There is also evidence from Mr Fergus that when the petitioners purchased the 2001 Notes, they were not notified of any restrictions in the rights transferred in the securities. If there had been restrictions, this would not be commercially acceptable to the petitioners and the price would have to be re-negotiated. It seems to me to be a fanciful possibility on the existing evidence that the petitioners did not acquire all the Direct Rights when they purchased the securities through Euroclear trading.

62. Fourthly, Mr Bleach submitted that the Direct Rights cannot be immobilized and are not capable of being validly traded through the Euroclear system. His argument runs as follows. The PGN being a bearer document was immobilised in a Euroclear depositary and immobilization is fundamental to the way Euroclear operates. The PGN has become void in this instance when no Definitive Notes were issued within the stipulated time. If Definitive Notes had been issued, they could not be immobilized. Hence, once Definitive Notes were issued, the whole transaction would exit the Euroclear system. On the basis that the Direct Rights in the Deed of Covenant are to be the same rights as if the Definitive Notes were issued immediately before the PGN becomes void, then the Direct Rights must likewise exit the Euroclear system upon the PGN becoming void. Further, as the Deed of Covenant was not immobilized in Euroclear, it is not a security of the type which could be traded through Euroclear.

63. The contention that Definitive Notes cannot be immobilized is founded upon the evidence of Mr Fergus on affidavit and under cross-examination. Mr Fergus has no experience of a situation when definitive notes were issued, as it is his evidence that such an event "almost never occurs". He had understood that Definitive Notes when issued would be exchanged for "delivery into the hands of the noteholders". If that were indeed provided in the issue documentation, it would be correct to say that Definitive Notes cannot be immobilized. However, there is no such provision in the issue documentation. Clause 3.05 of the Fiscal Agency Agreement provided that in the event that Definitive Notes are required to be delivered by the issuer pursuant to the terms of the PGN, the issuer shall "arrange for delivery to the Fiscal Agent or to its order". Clause 3.06 provided inter alia that the Fiscal Agent shall "hold in safe custody all ... Definitive Notes delivered to it in accordance with Clause 3.05" and shall ensure that such Notes are delivered in accordance with the terms of the Fiscal Agency Agreement or the PGN. Clause 4.03 provided that when Definitive Notes have been delivered to the Fiscal Agent, the Fiscal Agent shall, against presentation or surrender to it of the PGN, authenticate and deliver "to the bearer of the Permanent Global Notes Definitive Notes in an aggregate principal amount which corresponds to the principal amount of the Notes in respect of which Definitive Notes are required to be delivered". The understanding of Mr Fergus that Definitive Notes would be delivered into the hands of the Noteholders is not consistent with the issue documentation.

64. Further, it was pointed out to Mr Fergus in re-examination that contrary to what he had thought, there is express provision in the User Guide at page 76 that definitive notes or certificates are a form of security accepted for trading in the Euroclear system, on the basis that there is "physical receipt and delivery [of the certificates] through the Euroclear Depositary". Thereupon, Mr Fergus retracted his earlier evidence that Definitive Notes cannot be accepted for trading in the Euroclear system.

65. It seems to me that the Company's argument is based on a false premise that Definitive Notes when issued in this instance must necessarily exit the Euroclear system. There is nothing in the publications of Euroclear which precludes the trading in and transfer of the Direct Rights. Further, I see no reason why the Deed of Covenant, which is already deposited with the Fiscal Agent for safe custody in accordance with clause 4 thereof until all the obligations of the Company in respect of the 2001 Notes have been discharged in full, including its obligations under the Deed, should be required to be immobilized by depositing the same with a Euroclear depositary.

66. For the above reasons, I reject the Company's submissions that it has raised a bona fide dispute that the book entries in the Euroclear system of the petitioners' accounts do not provide evidence of assignment of the Direct Rights under the Deed to the petitioners. The provisions and effect of the Deed should be construed in the context of the practice and procedure of the Euroclear system and in the context of the understanding of those who participate in the system. I hold that the words "successors and assigns" in clause 6.02 of the Deed, as properly construed, should embrace those who purchased the securities in default, whether directly or indirectly from any Accountholder, through trading in the Euroclear system. Such purchasers are plainly intended to be accorded the Direct Rights against the Company as and when they acquire the securities.

The locus of the petitioners to petition for winding up

67. As I am satisfied that the petitioners are successors and assigns of Accountholders or downstream purchasers from any Accountholder and are entitled to the rights and benefits under the Deed of Covenant, they are creditors within the meaning of section 178(1)(a) of Cap. 32 and have locus to present this petition.

68. The petitioners have also relied on an alternative submission that they are equitable assignees and have locus to petition for winding up as creditors in equity pursuant to sections 178(1)(c) and 179(1), citing In re Steel Wing Co. Ltd [1921] 1 Ch 349 at 355. Mr Bleach does not dispute the proposition in that case that the equivalent provision of our section 179(1) would include a creditor in equity as well as a creditor at law. I am also satisfied that the petitioners are equitable assignees of the Direct Rights and as such they have locus to petition for winding up. The requirement in section 178(1)(c) that the Company "is unable to pay its debts" is also satisfied, as there is no dispute that the Company is insolvent.

69. As for the Company's contention that GSI (it had purchased the securities with a face value of US$23 million on behalf of ASO I Delaware LLC, and this is different from the situation of GSAF which had acquired securities with the face value of US$2 million on its own behalf) has no authority or capacity to petition for winding up as it is merely a trustee on behalf of beneficiaries who have not been joined as petitioners, this could be disposed of shortly. The Company's contention is founded on Re Adams, ex p Culley (1878) 9 Ch D 307 and Re Hastings, ex p Dearle (1884) 14 QBD 184. These cases established the rule in bankruptcy that a "bare trustee" of a debt for an absolute beneficial owner capable of dealing with the debt cannot present a petition against the debtor without joining the beneficiary as a petitioner. A similar norm applies in cases of corporate insolvency, see Segenhoe v. Permanent Trustee Co. Ltd [1992] 9 ACSR 270 (where a trustee for the benefit of holders of convertible notes issued by a company was held to have locus to commence winding up proceedings) and McPherson's Law of Company Liquidation by Andrew R Keay, 1st ed., para. 3.09. It is common ground that if GSI is not a "bare trustee", it can petition on its own.

70. It is submitted by the petitioners that GSI is not a bare trustee as it has full discretionary power to enforce debts owing under the 2001 Notes and that the individual investors under the investment fund managed by the affiliates of the petitioners have no ability to deal with the Notes or to release the Company from liability. This may well be the case but there is no evidence before me of these matters. Even if there is doubt on the locus of GSI to petition on its own, the locus of GSAF is not in doubt in this respect.

Events after the hearing

71. Having found in favour of the petitioners on the question of locus to present this petition, which is the only ground in opposition, I would have made a winding-up order against the Company but for a letter of the petitioners' solicitors to the court after the hearing. In their letter dated 3 April 2003, the petitioners' solicitors stated that they have instructions to apply for the appointment of provisional liquidators to explore the benefits to creditors of a rescue or restructuring as opposed to an immediate liquidation of the Company.

72. Also after the hearing and on 2nd April 2003, two notices of intention to appear were filed for Avenue Asia International Limited, an alleged creditor for US$3 million, and Avenue Asia Investments, L.P., an alleged creditor for US$15 million, to appear at the next hearing of the petition on a date to be fixed and to support such petition.

73. In view of the above matters, it would not be appropriate to make a winding-up order at this stage. I order that the petition is to be restored for hearing to a date to be fixed, to deal with the application proposed to be issued for the appointment of provisional liquidators. I do not propose to make an order nisi as to the costs in these proceedings, in view of the issues raised at earlier stages and subsequently abandoned by one party or the other and new issues raised by one or the other only at the hearing of the petition. I will hear argument on costs at the adjourned hearing of the petition.

74. I direct that the parties are to inform the court, within 7 days of the handing down of this judgment, of the estimated length of the adjourned hearing, and if the petitioners are to apply for an appointment of provisional liquidators, what directions the parties would seek regarding the filing of further evidence, for the application to be dealt with in a substantive way at the adjourned hearing. I further direct that notice of the adjourned hearing should be given to the solicitors for the two alleged creditors, for them to seek leave under rule 30 of the Companies (Winding-up) Rules to appear at the adjourned hearing. I will give further directions on the adjourned hearing by letter.