Bond defaults - Hong Kong court tells mainland administrators: we recognise you, but you can't “stay” here

In a significant judgment, a Hong Kong court has recognized the Beijing administrators of the commercial arm of the Peking University group but granted only a limited stay of proceedings which means that bondholders and issuers can have their contractual rights arising under "keepwell" agreements determined in the Hong Kong court, rather than the Beijing court.

Ordinarily, an interlocutory judgment in a contractual dispute in Hong Kong would not generate much fanfare. However, the decision of the Honourable Mr Justice Harris handed down on 17 December 2021, in four sets of proceedings brought against Peking University Founder Group Company Limited (北大方正集團有限公司)(PUFG) (the PUFG litigation) has the hallmarks of being a seminal Hong Kong judgment in the context of cross-border insolvency involving mainland China-incorporated enterprises.

In various actions brought against PUFG (HCA 778 of 2021, HCA 778/2021, HCA 798/2021, HCA 1418/2021 and HCA 1442/2021) heard together, Harris J. recognised the Beijing administrators of the commercial arm of Peking University and granted only a limited stay of proceedings so that bondholders and issuers could have their contractual rights arising under "keepwell" agreements determined in the Hong Kong court, rather than the Beijing court.

Question of jurisdiction

To the objective observer, the jurisdictional basis of a contractual interpretation/construction case arising from a contract governed by English law, in respect of which the (commercially sophisticated) parties bargained to submit to the exclusive jurisdiction of the Hong Kong courts, would appear uncontroversial.

Not so in the PUFG litigation, or indeed in other similar cases presently or expected to be pursued by aggrieved creditors in the Hong Kong courts. A pattern is emerging of mainland administrators appointed to undertake the reorganisation of mainland-incorporated enterprises, seeking to challenge the jurisdiction of the Hong Kong courts. 

The key question Harris J. had to grapple with was whether overseas insolvency proceedings essentially take precedence over a party's contractual rights.

Keepwells 101

In the context of Chinese-funded U.S. dollar-denominated debt, a keepwell agreement usually refers to an agreement between an onshore parent company and its offshore subsidiary, in which the parent company promises to maintain the liquidity and solvency of the subsidiary without formally guaranteeing repayment in the event of a default (indeed, they usually expressly state that they are not guarantees) . Where there is an offshore guarantor, the keepwell agreement may provide for the onshore parent to continue to maintain a significant equity interest in the offshore guarantor.


PUFG had entered into keepwell agreements with two bond-issuing subsidiaries (Nuoxi Capital Limited and Kunzhi Limited) (the issuers) within the Peking University Group, their two Hong Kong-incorporated direct parents, who had guaranteed the issuers' obligations under the bonds (the guarantors), and the bond trustee. The bonds in question were issued in 2017 and 2018, amounting to a total value of approximately US$1.7 billion.

The keepwell agreements contained identical material terms, which required PUFG to cause each of the issuers and guarantors to have sufficient liquidity to ensure timely payment of any amounts payable under the bonds. The issuers defaulted on their payment obligations, and the guarantors failed to honour the guarantees that were called under the bonds.

PUFG had commenced reorganisation in 2020 pursuant to an order issued by the Beijing court under the Enterprise Bankruptcy Law (EBL), and subsequently the issuers and the guarantors (each of which are in liquidation in their respective jurisdictions), sought to submit claims in the reorganisation. The administers rejected each of their claims save for that of one of the guarantors (whose claim we understand has not yet been determined by the administrators).

The Hong Kong litigation

The issuers and guarantors brought claims against PUFG in Hong Kong for breach of the keepwell agreements. PUFG responded to the claims by seeking a stay of the Hong Kong litigation to allow for the administration process and ultimately for the Beijing court to determine the disputes.

In applying for the stay, PUFG relied chiefly on the following grounds:

  • The plaintiffs elected to proceed in the mainland and submitted to the jurisdiction of the mainland courts in respect of the same cause of action to which the actions related and pursuant to article 21 of the Enterprise bankruptcy law, a civil action brought against a debtor should be filed with the mainland bankruptcy court
  • There was great uncertainty as to whether Hong Kong court judgments obtained for this action would be recognized or enforced in the mainland, and
  • That mainland courts were the more appropriate forum to determine the issues in the actions when considering the best interests and convenience of the parties to and witnesses in the proceedings.

To further complicate matters, shortly before the hearing of PUFG's stay application in November 2021, PUFG applied for recognition and assistance in Hong Kong (and a commensurate stay), and presented the Hong Kong court with a letter of request from the Beijing court in support.

A significant decision

Harris J. recognized the administrators (on the basis he was satisfied that the reorganisation was a collective insolvency process) but rejected their claims for a stay of the Hong Kong proceedings and upheld the exclusive jurisdiction clauses in the keepwell agreements.

He stated that in his view:

 "…it is clear that the submission of the claims by the Plaintiffs in the reorganisation in Beijing, although constituting submissions to the jurisdiction for the Beijing Court for the purpose of proving in the reorganisation, does not bar the Plaintiffs from commencing the proceedings. Neither does it alone constitute strong grounds for refusing to enforce the exclusive jurisdiction clause."

He noted that a Hong Kong court judgment would be valuable to the plaintiffs if and when they decided to advance a claim in the reorganisation, particularly if they wished to challenge decisions of the administrators before the Beijing court pursuant to Article 58 of the EBL.

Harris J. disagreed with the administrators' suggestion that the Beijing court was just as well placed to determine the potential issues as a Hong Kong court, noting that the issues were 'potentially extensive and complicated', and that the company had agreed to have any disputes concerning the deeds determined by a court able to apply English law.

He also dismissed the argument that a Hong Kong judgment on English law would not be given much weight by the Beijing court as it is not a judgment from an English court. In his view, failure to give weight to a Hong Kong judgment on this issue "would demonstrate a startling lack of comity" between Beijing and Hong Kong.

The administrators' approach

Harris J. was clearly troubled by the administrators' approach not least since he had previously requested that the administrators discuss with the Beijing court the possibility of the two courts cooperating with each other. Yet it appeared that the administrators had not even informed the Beijing court of this suggestion.

He was also critical of the letter of request, including where it stated that "…the provisions of the Enterprise Bankruptcy Law as set out in paragraph 19 above shall extend to the jurisdiction of the Hong Kong Special Administrative Region."

Whilst noting Senior Counsel for PUFG accepted that this was incorrect, Harris J went on to say the form was probably the result of clumsy drafting rather than a belief that the EBL had any effect in Hong Kong. He also criticized the redaction of the identities of 10 out of 12 members of the panel of administrators, commenting that unless there were very good reasons to do so, this was not a practice that he would expect to be repeated in future in such applications.

Harris J. also expressed his disappointment that the mainland insolvency experts (for both sides) were not made available for cross-examination at the hearing, noting: "…the common assumption that reports of Mainland law can be put before the court, and the court left to determine which evidence it prefers without the opportunity to question the experts is often mistaken."

Where do we go from here?

The judgment is evidently drafted with an intention that it be instructive to mainland  administrators, their solicitors, and to the Beijing court. In particular, Harris J. states:

"If the SPC's direction that courts are to communicate and cooperate to the greatest extent possible is to be complied with it is necessary for administrators and their lawyers in the Mainland to ensure that the Mainland courts receive complete and balanced information. Cross-border insolvency and assistance of foreign proceedings does not involve a contest between courts.  The courts aim to work together to implement fair and efficient insolvency processes whilst respecting the substantive law and procedure of each other's jurisdiction. I hope that this Decision assists the Beijing Court to understand that under Hong Kong law, the application for a stay is not as straight forward as it may have been led to believe and, also to advance the communication and cooperation of the SPC’s Opinion encourages."

A number of similar cases are before, or will likely come before Harris J. in the coming months and this decision provides a clear indication of where his intentions lie in relation to the interaction between choice of law clauses, and overseas insolvency procedures. This is ever important in light of the increasing concerns amongst the financial markets in Hong Kong and overseas regarding a number of bond defaults involving mainland companies.

That being said, it is acknowledged that all the judgment provides is to give the plaintiffs the right to have their claim heard in Hong Kong. There are, of course, no guarantees as to whether any subsequent Hong Kong judgment amount will be admitted in the reorganisation proceedings or whether it is in any way realistic to expect a stay of that process to allow for the Hong Kong case timetable.

Nonetheless, the decision will provide further impetus for rulings to be made on matters critically important to the determination and administration of time-sensitive bankruptcy processes and raises the prospect of mainland insolvency experts being made available for cross examination by the Hong Kong court.

Harris J. noted that there has not yet been a case of a mainland court granting an order recognizing a foreign insolvency process, and that to date, only one application for recognition and assistance has been made by Hong Kong liquidators pursuant to the new cooperation arrangement entered into on 14 May 2021.

Harris J also noted that the application which was the subject of Re Samson Paper Co. Ltd [2021] 3 HKLRD 727 (see Hogan Lovells alert, Hong Kong court approves first use of new Hong Kong – mainland China insolvency mechanism) was heard by the Shenzhen Intermediate People's Court on 10 September 2021 and that a decision on the application was awaited. As it transpired, in the period between the hearing and Harris J handing down his decision, the Shenzhen court made a determination on 15 December 2021 providing for the first time formal recognition in the mainland for Hong Kong appointed liquidators. More on this decision to follow.



Authored by Byron Phillips, Nigel Sharman and Chloe Wong.


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