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All’s well that ends well for keepwell deeds: successful claims of breach of keepwell deeds in Re Peking University Founder Group Company Limited [2024] HKCA 445

15 May 2024



Keepwell deeds have been commonly used in financing arrangements entered into by business groups in Mainland China and foreign lenders because of the former limitation on repatriating proceeds raised overseas by Mainland companies, which had necessitated the use of foreign subsidiaries and a security structure.

Following the confirmation of the enforceability of keepwell deeds in its first instance decision ([2023] HKCFI 1350), the Hong Kong Court of Appeal recently discussed inter alia the nature of obligations under keepwell deeds, the modes of its performance, as well as the actionability of loss arising from breach of keepwell deeds in Re Peking University Founder Group Company Limited [2024] HKCA 445.  The first instance decision was overturned on appeal and declarations that the keepwell deeds had been breached were made.

Brief Background

Peking University Founder Group Company Limited (“PUFG”) is the holding company for its group company (“PU Group”).  The four plaintiffs are all offshore subsidiaries of the PU Group.  Two of the plaintiffs (“Issuers”) issued bonds (“Bonds”) in 2017-2018 respectively, with the other two plaintiffs (“Guarantors”) as their respective guarantors.  PUFG entered into a total of four keepwell deeds in relation to the Bonds (“Keepwell Deeds”) which required PUFG to cause each of the plaintiffs to, inter alia, maintain a certain amount of consolidated net equity and aggregate total equity and to have sufficient liquidity to ensure timely payments of their obligations in connection with the Bonds.  PUFG, the Issuers and Guarantors, together with the trustees of the Bonds also entered into deeds of equity purchase undertaking (“EIPUs”).

PUFG became insolvent and commenced reorganisation proceedings in Mainland China in 2020.  The plaintiffs defaulted under the Bonds and were all put in liquidation since 2021.  It was therefore claimed that PUFG had defaulted on its obligations under the Keepwell Deeds, giving rise to damages.

The material clauses in the Keepwell Deeds include:-

  • Clause 4.1(i) provided for PUFG’s undertaking that “it shall cause…each of the Issue and the Guarantor to have a Consolidated Net Worth of at least US$1.00 at all times” (“Balance Sheet Obligation”).
  • Clause 4.1(ii) provided for PUFG’s obligation to cause each of the plaintiffs to have sufficient liquidity to ensure timely payment by each of them of any amounts payable under or in respect of the Bonds or the related guarantees or trust deeds (“Liquidity Payment Obligation”).
  • Clause 2.2 provided that if, and to the extent that PUFG was required to obtain “necessary approvals, consents, licences, orders, permits and any other authorisations from the relevant Approval Authorities” (“Relevant Approvals”) in order to comply with its obligations under the Keepwell Deeds, the performance of such obligation shall always be qualified by, and subject to, PUFG having obtained such Relevant Approvals. It also included an undertaking on the part of PUFG to use best efforts to obtain the Relevant Approvals.

In the first instance decision, the learned judge only granted declaratory relief in favour of one of the offshore subsidiaries plaintiffs, finding that one of the pleaded breaches (which was said to have arisen prior to PUFG entering into reorganisation proceedings) was established.  In contrast, claims concerning post-reorganisation breaches were dismissed because it was contended that once PUFG was in reorganisation there was no realistic likelihood of regulatory approvals being granted to enable the discharge of obligations under the Keepwell Deeds.

The nature of the Balance Sheet Obligation

It is clear that the nature of the Balance Sheet Obligation is “not a guarantee but a ‘see to it obligation’” (§§77, 93), nor is it “a warranty or guarantee as to the existence of a particular state of events” (§94).

The plaintiffs contended that the learned judge conflated “the Balance Sheet Obligation with a payment obligation” in deciding that if the Relevant Approvals could not be obtained, then there was no breach of the Balance Sheet Obligation following the reorganisation of PUFG.  The plaintiffs contended that the liability under the Balance Sheet Obligation “did not need to be established in an action or converted into a judgment debt in order to be provable in an insolvency…The reorganisation did not change the contractual rights of the plaintiffs, it only meant that the plaintiffs had different rights of enforcement” (§85). That meant that when there may have been a breach was immaterial, be it before or after the commencement of insolvency (§86).

The Court of Appeal disagreed and held that:-

  • For a claim to arise under the clause, “there must be a breach of the ‘see to it’ obligation”(§95).
  • In construing the obligation, clause 2.2 would potentially apply to the alleged breaches to negate liability if Relevant Approvals were required for PUFG to comply with the Balance Sheet Obligation (§§96-97).

Similarly, the argument that clause 2.2 was not engaged in respect of the Liquidity Payment Obligation once PUFG entered into reorganisation, as the payment obligation was replaced by an obligation to admit debts to proof and to pay dividends following insolvency, was also rejected by the Court of Appeal. It remains essential for the plaintiffs to demonstrate a breach causing loss (§§104-106, 108-111).  This requires consideration being given to the Relevant Approvals.

The modes of performance: the Liquidity Payment Obligation could have been performed without the Relevant Approvals

The plaintiffs’ appeal was ultimately allowed despite the shielding effect of clause 2.2 in respect of obligations that could not be fulfilled due to the lack of Relevant Approvals.  This is because the obligations could potentially be met without requiring any Relevant Approvals.

On proper construction, “[t]o perform PUFG’s obligations under the Keepwell Deeds, Relevant Approvals might, but not necessarily will, be required” (§124).  The Court of Appeal held that PUFG could not have ruled out modes of performance which would not have required the Relevant Approvals:-

  • PUFG had adduced no factual evidence as to how it had intended to finance the plaintiffs’ repayment obligation, but the learned judge acknowledged three other possible modes: (i) issuing a new bond to refinance repayment of the existing bond, (ii) repurchase of onshore foreign direct investment, presumably denominated in a foreign currency, and (iii) making use of cash to support overseas investment or moving the fund offshore to support overseas project (§§123,127);
  • However, the learned judge did not rule on whether these modes of performance would require Relevant Approvals but simply found that it would be “highly probable that [PUFG] would have had difficulty in obtaining the necessary approvals” once it had entered into reorganisation, and the Relevant Approval “was very unlikely to be obtained” without administrators’ support (§127);
  • More fundamentally, the learned judge “failed to take into account the possibility of other modes of performance canvassed in the evidence and submissions that would not require Relevant Approvals” when there were other alternatives raised in the trial (§129).

Therefore, had the learned judge taken into consideration the other modes of performance, “he could not have been satisfied that PUFG has established that it would come within the escape clause in clause 2.2” (§129).   PUFG was in breach of its contractual obligation when the trustee of the Bonds issued the written notice referring to events of default to the plaintiffs (§130).

On the other hand, PUFG argued that the learned judge’s finding of the impossibility of obtaining regulatory approvals for performance should be affirmed, but such arguments were unsuccessful:-

  • Regulatory approvals would not have been granted even if PUFG was not insolvent: it was contended that the Relevant Approvals could only be acquired if there was an overseas investment project but the authorities would not treat the repayment of existing Bonds as a genuine overseas investment project (§§175, 177). This was rejected since the learned judge did not make such findings having regard to the totality of evidence (§§178-161).
  • Administrator was an approval authority and would not have granted approvals: the Court of Appeal held that “notwithstanding the breadth of the definition of “Approval Authorities”, this term should not include the Administrator and is plainly intended to refer to those governmental authorities in the PRC”. Administrators basically stepped into the shoes of the board of directors at the commencement of reorganisation and were simply making decisions for PUFG instead of acting as approval authorities (§§189-190).

Loss caused by breach of Keepwell Deeds recoverable by Issuers and Guarantors

PUFG further argued that (1) “any benefit derived by the plaintiffs would have been “clawed back” as a result of PRC insolvency law” (§207), and (2)  “a failure to inject liquidity into the plaintiffs…could only cause loss to the bondholders … and not the plaintiffs, because the plaintiffs’ own net balance sheet position would not be affected”.  In other words, if PUFG “had transferred monies to an Issuer or Guarantor, it would have been treated as a loan with the consequence that the net balance sheet position would not have improved” (§§211-212).  Therefore, there was no actionable loss in any event.

The Court of Appeal rejected the arguments:-

  • So far as the “claw back” principle under PRC insolvency law is concerned, either it is irrelevant as to whether the plaintiffs had suffered loss and damage under English law, or this is a matter of PRC law best left to be resolved in the Beijing Court in the reorganisation proceedings (§214).
  • The second argument is also flawed in that “[i]f the advance made by PUFG did not improve the net balance sheet position because of the way the advance was treated in the books of the Issuer or the Guarantor, the Consolidated Net Equity would have remained at a deficit”. That would mean the obligations under the Keepwell Deeds were not fulfilled (§§212-213).  It might well be that PUFG actually had to make a gift to the Issuers or the Guarantors to discharge the obligations.  It therefore means that the Issuers and the Guarantors do have standing to sue without reference to loss suffered by the bondholders (§212).

Other grounds raised by PUFG: purely adjudicatory jurisdiction

PUFG contended that the first instance decision should be affirmed because the plaintiffs’ claims have been discharged by submission of proofs of debt in the reorganisation and their rejection.  The crux of the argument is that “by submitting their proofs of debt in the reorganisation proceedings, the plaintiffs are obliged to “have all questions, of whatever kind, as against the debtor resolved within the insolvency as administered by the court of the jurisdiction of that insolvency”” such that the plaintiffs are bound by the administrators’ determinations (§165).  It was vexatious or oppressive to seek a declaratory judgment from the Hong Kong courts when the administrators had already adjudicated on and rejected the proofs of debt (§166).

The Court of Appeal disagreed based on the fact that the plaintiffs are invoking the “purely adjudicatory jurisdiction” of the Hong Kong courts and not seeking a judgment which they can enforce outside the reorganisation proceedings.  It is not a vexatious or oppressive act since “[n]otwithstanding the general disclination of the courts to give advisory opinion on issues for the benefit of foreign courts, there are instances where that had been done” (§§161, 171).

Other grounds raised by the plaintiffs: breach of natural justice and pleadings

For completeness, the Court of Appeal rejected other grounds of appeal on breach of natural justice and the plaintiffs’ defective pleadings.

  • The ground on natural justice is premised on the learned judge’s reliance on the evidence and submissions in a subsequent case brought of another keepwell deed against Tsinghua Unigroup Co Ltd which was heard right after the trial of the PUFG case (§§133-134). In particular, the plaintiffs alleged that they were not afforded a fair or proper opportunity to address the inconsistent and contradictory evidence of an expert witness who gave evidence in both trials (§136).
  • The Court of Appeal rejected the argument since in reality, various case management matters that would arise due to the back-to-back trials were discussed at the pre-trial review with appropriate measures adopted to ensure fairness (§145), and the “inconsistent evidence has just not assumed the kind of importance now sought to be placed by the plaintiffs” in any event (§148).
  • As for the ground on pleadings, the Court of Appeal also upheld the learned judge’s ruling that “[t]he particulars of breaches pleaded by the plaintiffs were all directed at breaches said to have occurred after the commencement of reorganisation” so it was not open to the plaintiffs to advance a case on breaches occurring prior to that (§§155, 157).


Having established the enforceability of keepwell deeds in the first instance judgment ([2023] HKCFI 1350), the Court of Appeal’s judgment likewise shed further light on issues surrounding keepwell deeds, providing welcome clarity on the nature of the obligations, available modes of performance and the approach for assessing loss caused by breaches of keepwell deeds.


The full judgment is available at


William Wong SC, Look Chan Ho and Tommy Cheung acted for the Plaintiffs (Appellants) at first instance, together with Mark Philips KC (of South Square) on appeal

José-Antonio Maurellet SC (also Associate Member of 3 Verulam Buildings), Tom Ng and Jasmine Cheung acted for PUFG (Respondent) at first instance, together with Tom Smith KC (of South Square) on appeal

This article was authored by Valerie Kwok, Pupil Barrister at Des Voeux Chambers.

MEMBERS acted for the Plaintiffs (Appellants) at first instance