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Keepwell Deeds enforced in second Hong Kong Court ruling

20 Jun 2023

As foreshadowed in his decision last month (Nuoxi Capital Ltd & ors v Peking University Founder Group Company Limited [2023] HKCFI 1350 (the “PUFG Case”)), on 15 June 2023, Harris J handed down a second decision on keepwell deeds, this time in relation to US$450,000,000 bonds issued by Tsinghua Unigroup Co., Ltd (“Tsinghua”)’s indirect subsidiary: see Citicorp International Limited v Tsinghua Unigroup Co., Ltd [2023] HKCFI 1572 (the “Tsinghua Case”).

Although concerning unrelated business groups, the facts in the Tsinghua Case and the PUFG Case were, in the learned judge’s words, “remarkably similar” (§2). For example:

  • Both cases concerned keepwell deeds and equity interest purchase undertakings (“EIPUs”) made by Mainland Chinese companies in respect of the liabilities of subsidiaries under bonds issued by them, and guaranteed by other subsidiaries, to raise US$ in the international debt market (§1).
  • The keepwell deeds and EIPUs in both cases were governed by English law with Hong Kong exclusive jurisdiction clauses and contained similar terms, including the requirement for the defendant company to use its best efforts to obtained regulatory approvals in order to comply with its obligations (§13).
  • The defendant companies were each placed in reorganisation by the Beijing First Intermediate People’s Court pursuant to the Enterprise Bankruptcy Law (§2).
  • The plaintiffs in the PUFG Case and the Tsinghua Case had submitted proofs of debt in the respective reorganisations of the defendant companies.

Despite the similar fact pattern, whereas the plaintiffs’ claims in the majority of the actions in the PUFG Case were dismissed, a different result was reached in the Tsinghua case, with the Court granting judgment on P’s claim in the sum of US$483,843,533 (being the principal amount and accrued contractual interest on the bonds and trustee’s costs pursuant to the relevant trust deed).

The major difference as found by his Lordship lies in timing: the default in the Tsinghua Case took place before Tsinghua was ordered into reorganisation on 16 July 2021, whereas this was not the case in the PUFG Case (§§2, 27).

More specifically, the learned Judge reasoned as follows:

  • His Lordship accepted that Tsinghua’s obligations were qualified by clause 2.2 of the keepwell deed and the EIPU, which were identical and provided that “Notwithstanding anything contained in this Deed, if and to the extent that the Company is required to obtain any Regulatory Approvals in order to comply with its obligations under this Deed, the performance of such obligation shall always be qualified by, and subject to, the Company having obtained such Regulatory Approvals. In this regard, the Company undertakes to use its best efforts to obtain such Regulatory Approvals within the time stipulated by the relevant Approval Authorities, if applicable.” (§§15, 21).
  • His Lordship also accepted that if despite using its best efforts the necessary regulatory approvals could not be obtained, Tsinghua would be able to rely on clause 2.2 as a defence without having to demonstrate that it had done anything (§36; see also §77 of the decision in the PUFG Case).
  • On the facts, his Lordship found that once Tsinghua was in reorganisation, any effort to comply with the keepwell deed and the EIPU “would probably have been futile”, but the situation is different before the reorganisation commenced (§36; see also the similar conclusion reached in §86 of the decision in the PUFG Case).
  • The Court found that there was no evidence of Tsinghua, the Issuer or the Guarantor ever making any efforts to comply with their contractual obligations or even giving any consideration to how they might do so, prior to the reorganisation. (§§29 to 36)
  • To the contrary, the fact that the Guarantor entered into a purported loan agreement with Tsinghua to lend US$523,000,000 to Tsinghua (“Guarantor’s Loan Agreement”) shortly before the bonds default and reorganisation demonstrates that (1) Tsinghua had access to US dollars that could have been used to comply with its keepwell and EIPU obligations but did not consider doing so; (2) Tsinghua itself was unaware that approvals for offshore-to-offshore transfers might be required, nor was there any suggestion that such approvals were sought for the Guarantor’s Loan Agreement. (§§35, 45)
  • Insofar as Tsinghua’s expert evidence suggest that, in practice, Tsinghua would never have been able to obtain the necessary approvals – that in itself calls into question the credibility and value of the expert evidence. Afterall, the Keepwell Deed and the EIPU were not worthless window dressing, but were genuine methods for providing additional security to bondholders. (§41)

Further, the Court found that the Trustee’s claim was not discharged simply by its submission of the proof of debt to the mainland administrators:-

  • The Trustee’s claim in the reorganisation proceedings have not been determined but were given a “pending” status. That being so, the Trustee had involvement, no say, no voting rights in the reorganisation process. (§50)
  • In those circumstances, the sheer fact that the Trustee filed a proof of debt in the Beijing Court alone would not “discharge” the debt. (§53)
  • This is not a case where the Trustee was taking steps outside a foreign insolvency proceeding which are inconsistent with notions of modified universalism, or attempting to recover more than it would recover in the mainland administration. (§53)

Taken together, the Tsinghua Case and the PUFG Case demonstrate that while there is no inherent public policy objection to enforcing keepwell deeds and EIPUs, much will turn on the likelihood (or lack thereof) of obtaining regulatory approvals from relevant Mainland Chinese authorities at different points in time.

Further, the Tsinghua Case confirmed that the sheer act of submitting a proof of debt in a foreign insolvency process may not necessarily be inconsistent with modified universalism and/or discharge the underlying debt.

Rachel Lam SC and Tiffany Chan (acted for the Trustee).

Jose Maurellet SC and Jasmine Cheung (acted for Tsinghua).