A lawsuit was ultimately withdrawn.
Since 2021, amid a profound industry adjustment, debt defaults by real estate enterprises have occurred frequently. The overseas bond market, particularly the US dollar bond market, which developers have heavily relied upon, has been a key area of concern. Recently, the Shanghai Financial Court concluded a case involving a default dispute over offshore US dollar bonds issued by a Chinese real estate enterprise (referred to as Company D), revealing the complex legal issues behind such cross-border debt defaults.
The core of the case revolves around a domestic bank that purchased US dollar bonds issued overseas by a Chinese developer. After the default, the bank attempted to file a lawsuit in Shanghai but encountered multiple legal obstacles. These included the bond documents stipulating New York jurisdiction, the investor not being recognized as a "bondholder" due to a "multi-tiered custody" structure, and restrictions from having already signed a restructuring support agreement that precluded separate legal action. Ultimately, the bank, as the creditor, chose to withdraw the lawsuit.
According to data cited by CITIC Securities from Bloomberg, as of March this year, the cumulative default amount of Chinese developers' US dollar bonds is approximately $150 billion. Currently, the resolution of real estate corporate debt risks is accelerating, with debt restructuring being the predominant approach. This case provides significant legal insights for domestic investors in overseas bonds.
Behind the $60 Million Bond: The Litigation Dilemma of a Bank Creditor
So-called offshore US dollar bonds issued by Chinese enterprises are typically issued offshore by overseas companies, denominated in US dollars, but closely tied to domestic operating assets. Bondholders are often spread across the globe, including domestic financial institutions. Following a bond default, overseas restructuring procedures may also be involved, making the situation far more complex than domestic bond defaults.
First, consider the debtor in the case: Company D is registered in the Cayman Islands, listed on the Hong Kong stock exchange, with its primary real estate business located domestically. It privately placed $60 million in bonds with an annual interest rate of 4.15% (payable semi-annually) and a maturity date of August 5, 2024. Additionally, Company D provided credit enhancement measures through several Hong Kong-based affiliated entities.
Next, the creditor: On August 5, 2021, a domestic bank (referred to as Bank M) fully subscribed to these bonds, becoming the sole holder of the bond interests. Subsequently, due to Company D's failure to pay bond interest on schedule, Bank M declared an acceleration of maturity and filed a lawsuit with the Shanghai Financial Court.
Since Bank M invested in US dollar bonds issued by an overseas real estate enterprise (affiliated with a Chinese real estate group), initiating legal proceedings domestically required addressing multiple legal issues. These included cross-jurisdictional issuance and subscription entities, the US multi-tiered bond registration system, and coordination with cross-border restructuring procedures. Analysis reveals that the key bases for these issues lie in the "Bond Indenture" and a "Final Information Disclosure Memorandum" (referred to as the Information Memorandum).
First, there was a jurisdiction dispute.
The Bond Indenture stipulated that any litigation arising from the bonds would be subject to the non-exclusive jurisdiction of any US federal or New York State court located in the Borough of Manhattan, New York City. The bonds, ancillary guarantees, joint ancillary guarantees, and the indenture itself would be governed by and construed in accordance with the laws of the State of New York, USA.
One defendant raised a jurisdictional objection, arguing that the case should fall under the jurisdiction of a competent court in New York State, USA, because the bonds were issued offshore and governed by New York State law, making Chinese court jurisdiction inconvenient.
Secondly, who is the actual "bondholder"?
According to the Bond Indenture, the bonds were held in global form, with the common depositary (or its nominee) being deemed the sole holder of the global bonds for all purposes under the indenture. The documents also explicitly stated that the bonds were held in global form through the book-entry systems of Euroclear and Clearstream Banking. All investors held only "beneficial interests," not the bonds themselves in a registered sense. During the period when the bonds were held in global form, the common depositary (or its nominee) was considered the sole holder of those global bonds under the Bond Indenture; investors holding book-entry interests were not, for any purpose, considered owners or holders of the bonds.
Simply put, under the US multi-tiered bond registration system, Citibank Europe Limited, as the common depositary, was the sole "bondholder." Bank M only held beneficial interests. Furthermore, Clause 6.02 of the Bond Indenture stipulated that in the event of a default, the bond trustee, Citibank International Limited, could seek recourse for principal and interest through legal proceedings. Unless specific conditions were met, no bondholder could initiate any legal proceedings for relief.
Ultimately, the creditor waived litigation rights under the restructuring plan.
According to the Information Memorandum, after Company D encountered difficulties and was unable to repay its debts, it initiated domestic and overseas debt restructuring procedures. In January 2025, the group to which Company D belongs signed a "Restructuring Support Agreement" with numerous US dollar bond creditors (including holders of multiple bond series) regarding the debt restructuring. This agreement is governed by Hong Kong law. Bank M signed and joined the agreement.
The agreement explicitly included an obligation for creditors not to take legal action. It stated that creditors irrevocably committed to Company D not to take, initiate, or continue any enforcement actions (including filing lawsuits, initiating, or joining any legal or arbitration proceedings against any overseas debtor or group company) that might hinder the implementation of the restructuring plan or procedures. This commitment served as consideration for Company D's adherence to its obligations under the restructuring agreement.
Complex Process: Bank Withdraws Lawsuit After Twists and Turns
So, how did the court rule? What were the difficulties in the process?
Regarding the first hurdle mentioned above, the Shanghai Financial Court held that the jurisdiction clause in the bond issuance documents constituted non-exclusive jurisdiction. This clause did not exclude or restrict bondholders from litigating in other courts with jurisdiction. The plaintiff's choice to initiate proceedings in a Chinese court, as the location where property could be attached, complied with Chinese procedural law on jurisdiction. The Shanghai Financial Court legally confirmed its jurisdiction over the case.
Simultaneously, considering that Company D's main real estate business was closely related to Mainland China, and it had disclosed in its listed company announcements that it also maintained offices in Mainland China, and that there was no significant inconvenience for the parties to participate in court proceedings, the principle of "forum non conveniens" did not apply to this case. After Company D appealed this conclusion, the second-instance court upheld the original ruling.
However, multiple procedural issues arose during the trial, one of which was difficulty in serving legal documents.
Details disclosed by the Shanghai Financial Court mentioned that in this case, since all seven defendants were located overseas, service of process was not smooth. Only one defendant, acting as a guarantor, responded to the lawsuit; documents for the remaining defendants were returned.
After direct service and postal service failed, the collegiate panel initiated a service by request procedure in accordance with regulations such as the "Arrangement of the Supreme People's Court on Mutual Service of Judicial Documents in Civil and Commercial Proceedings between the Mainland and the Hong Kong Special Administrative Region." At the same time, they actively utilized email as an auxiliary notification method. They found the email address of a foreign law firm (which uniformly represented all overseas creditors in the restructuring process) and the email address of the restructuring information agent, an international consulting company, from the listed company's restructuring announcement published on the issuer's official website. Case-related information was sent to these email addresses.
"Although this email auxiliary notification is not a legally prescribed method of service, through this effort, all defendants eventually hired lawyers to appear in court relatively quickly, without passively waiting for the service by request procedure, thus avoiding procedural delays," stated the Shanghai Financial Court.
The second challenge was cross-jurisdictional issues. The Shanghai Financial Court emphasized that since the case involved the governing law of the bonds (New York law, USA) and the governing law of the restructuring agreement (Hong Kong law), the collegiate panel, based on Articles 7 and 8 of the "Interpretation (II) of the Supreme People's Court on Several Issues Concerning the Application of the Law of the People's Republic of China on Application of Laws to Foreign-related Civil Relations," permitted video-linked expert testimony from Shanghai, Beijing, Hong Kong, and New York on the day of the trial to ascertain New York law and Hong Kong law. The process of presenting opinions, cross-examination, and answering the court's questions was smoothly completed via video, laying the foundation for the collegiate panel to ascertain the foreign laws.
After the trial, as the Shanghai Financial Court was preparing its judgment, the plaintiff applied to withdraw the lawsuit, which the court permitted.
What are the implications?
"Issuing US dollar bonds is an important channel for Chinese real estate enterprises to raise funds in the international market," said Huang Jing, a third-level senior judge of the Second Comprehensive Tribunal of the Shanghai Financial Court, citing Bloomberg data. As of the first half of 2025, the outstanding scale of Chinese developers' US dollar bonds was approximately $159.1 billion, accounting for 28% of the total Chinese US dollar bonds. However, affected by industry adjustments, frequent bond defaults by real estate enterprises have drawn high market attention.
Against this backdrop, Huang Jing, based on the litigation process and legal application disputes in this case, offered several suggestions for domestic offshore bond investors.
First, carefully evaluate jurisdiction clauses and reasonably choose the forum for litigation. It is common practice for offshore bond issuance documents to stipulate jurisdiction of foreign courts and select foreign law as the governing law. Bond investors should comprehensively consider factors such as litigation convenience, legal costs, and enforcement difficulties, and factor in the increased uncertainty of litigation as a risk element in bond investment pricing in advance.
Second, correctly understand the concepts and definitions in bond issuance documents. Huang Jing noted that typically, in the offshore bond market under common law systems, a multi-tiered custody trading structure is adopted. Bonds are issued in global form, with Euroclear and Clearstream providing the book-entry systems. In these systems, bonds are registered in the name of the common depositary or its nominee as the bondholder. Actual end investors often need to establish a connection through multiple levels of correspondent banks with the registered bondholder to trade the bonds and enjoy actual economic interests. However, under normal circumstances, the book-entry systems do not record any information about the actual investors.
Therefore, in such situations, actual end investors may face legal obstacles if they attempt to directly initiate lawsuits. Additionally, due to the existence of the bond trustee system, the exercise of litigation rights by actual investors is often subject to preconditions and procedures.
Huang Jing also emphasized that investors need to pay attention to the difference between public offerings and private placements of bonds. Private placements in the US can obtain registration exemptions, which may result in the inability to obtain protection under mandatory provisions of relevant US bond legislation. Rights and obligations are then defined solely based on the bond issuance documents.
Third, monitor the progress of cross-border restructuring procedures and consider the conflict and coordination between litigation and restructuring. Huang Jing stated that if investors, considering the overall success of the restructuring, have signed relevant restructuring support agreements promising not to hinder the restructuring and not to take any enforcement actions, they should abide by these commitments unless they can prove the commitments are invalid.
She specifically noted that based on the "Opinions on Carrying out Pilot Work on Recognition and Assistance of Insolvency Proceedings in the Hong Kong Special Administrative Region" issued by the Supreme People's Court in 2021, if the debtor enterprise (the bond issuer in this case) fails in restructuring and enters bankruptcy proceedings, the Hong Kong insolvency administrator has the right to apply to Mainland courts for recognition and assistance of Hong Kong insolvency proceedings. This could subsequently impact the litigation proceedings in this case. Even if investors win the lawsuit and recover assets, it might be deemed a preferential transfer or a violation of the "equal treatment of creditors of the same class" rule established in the pilot opinions.
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