Face Value Is Not Real Value: Hong Kong Court Sets Aside Paper Claim Swap And Endorses Liquidators’ Multi-track Recovery

The Hong Kong Court of First Instance has recently handed down a decision on a transaction at an undervalue, involving the replacement of a valuable claim with a paper claim of the same face value, allegedly for the benefit of a financially distressed corporate group. 

In The Joint and Several Liquidators of Shanghai Huaxin Group (Hongkong) Limited (in liquidation) v CSSC Energy (Singapore) Pte Ltd [2026] HKCFI 1780, the Court set aside a tripartite offset arrangement, which removed a USD 38 million receivable shortly before the collapse of Shanghai Huaxin Group (Hong Kong) Limited (the “Company”), as a transaction at an undervalue. The Court ordered the sum to be restored to the insolvent estate under section 265D of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) (“CWUMPO”).

Background

The Company was a Hong Kong subsidiary of CEFC Shanghai International Group Limited (the “Parent”) and was engaged in international oil trading. The Respondent, CSSC Energy (Singapore) Pte Ltd, was a Singapore company and an indirect subsidiary of a PRC state‑owned enterprise.

Under back‑to‑back oil transactions, the Company sold oil products to the Respondent, which in turn on-sold those products to Shenzhi Energy (HK) Limited (“Shenzhi”). Approximately two months before a winding-up petition was presented against the Company, the Company entered into a tripartite offset agreement with the Respondent and Shenzhi (the “Offset Agreement”). Although the legal effect of the Offset Agreement was disputed, on any interpretation, it either extinguished the Respondent’s debt or replaced it with a claim against Shenzhi. The Respondent claimed that the Offset Agreement benefited the Parent (which had given undertakings to secure Shenzhi’s payment obligations to the Respondent) by relieving it of potential liability. Shenzhi defaulted less than one month after the Offset Agreement was entered into.

Before commencing these proceedings, the Company’s liquidators presented a winding‑up petition against Shenzhi based on the replacement debt under the Offset Agreement. Shenzhi was subsequently wound up, and no assets were available for distribution.

Decision

The Court held that the Offset Agreement was a transaction at an undervalue and ordered the Company’s position to be restored by reviving its USD 38 million claim against the Respondent. In reaching that conclusion, the Court made the following key findings: 

• Assessment of value: The Respondent argued that the Offset Agreement merely replaced its debt with a claim against Shenzhi of equal face value, and was therefore not an undervalue transaction. The Court disagreed and held that the value of the replacement claim is not to be measured by its face value, but “in money or money’s worth”. A claim with no realistic prospect of payment is not worth its face value. Where value is speculative or contingent, the burden lies on the party asserting it. The Respondent failed to produce reliable evidence of Shenzhi’s financial position at the time the Offset Agreement was entered into. The Court was entitled to consider later events, including Shenzhi’s rapid default and assetless liquidation, which demonstrated that the replacement claim was effectively worthless. The Company had therefore exchanged a sound receivable for nothing of substance.
• No abuse of process: The Respondent argued that, having relied on the Offset Agreement to obtain a winding-up order against Shenzhi, the liquidators could not then seek to set aside the same agreement. The Respondent alleged that this amounted to approbation, reprobation, and an abuse of process. The Court rejected this argument and held that the liquidators’ earlier reliance on the Offset Agreement to petition for Shenzhi’s winding-up, followed by a later application to set it aside once the claim proved worthless, involved sequential, not inconsistent, steps to recover assets. The Respondent suffered no unfair prejudice from the Shenzhi winding-up: a winding‑up petition is a class remedy for the benefit of all creditors. In any event, Shenzhi was insolvent regardless, and the Respondent itself could have petitioned for Shenzhi’s winding-up at any time as a creditor.
• Statutory defence unavailable: The Court also rejected the statutory defence under section 265D(4) of the CWUMPO. To succeed, the Respondent had to show that the transaction was entered into in good faith, for the purpose of carrying on the Company’s business, and on reasonable grounds that it would benefit the Company. Diverting a USD 38 million receivable away from an already insolvent company could not reasonably be said to advance that purpose. The alleged benefit of relieving the Parent of potential liability was conferred on the Parent or the wider group, not the Company itself, and was therefore irrelevant.

Comments

This decision illustrates the Hong Kong courts’ commercial approach in looking beyond face value to assess whether real value was received by the insolvent company itself, rather than by the wider corporate group. A replacement claim of the same face value will not prevent a transaction from being set aside where that claim is, in substance, speculative or worthless. The decision also provides practical reassurance to liquidators that pursuing contractual recovery and statutory avoidance claims may be complementary means of maximising recoveries, rather than inconsistent positions that give rise to an abuse of process.

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