Hong Kong Court of Appeal gives boost to bondholders in significant "keepwell" victory

The Hong Kong Court of Appeal has dismissed a challenge to a first instance decision which recognized the Beijing administrators of the commercial arm of the Peking University group but granted only a limited stay of proceedings. The decision means that bondholders and issuers can now be assured of having their contractual rights arising under "keepwell" agreements determined in the Hong Kong court, rather than the Beijing court.

Keepwells considered

As explained in our previous alert Bond defaults – Hong Kong court tells mainland administrators: we recognise you, but you can't "stay" here, the Honourable Mr. Justice Harris in December 2021 rejected jurisdictional challenges in various actions brought against Peking University Founder Group Company Limited (北大方正集團有限公司)(PUFG) (the PUFG litigation).

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 its offshore subsidiary.

To recap, 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 agreements were governed by English law and the parties submitted to the exclusive jurisdiction of the Hong Kong courts.

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. The issuers and guarantors (each of which are in liquidation in their respective jurisdictions) sought to submit claims in a reorganisation commenced in 2020 under the Enterprise Bankruptcy Law (EBL). Except for one of the claims (which has yet to be adjudicated), the administrator rejected all of the claims without giving reasons.

The issuers and guarantors also brought claims against PUFG in Hong Kong for breach of the keepwell agreements arguing that the mainland courts were the more appropriate forum to determine the issues in the actions and pointing to uncertainty as to whether Hong Kong court judgments obtained in the action would be recognised or enforced in the mainland.

First instance decision

At first instance, Harris J recognised the administrators but rejected their claims for a stay of the Hong Kong proceedings, in so doing upholding the exclusive jurisdiction clauses in the keepwell agreements. He disagreed with the administrators' suggestion that the Beijing court was just as well placed to determine the issues as a Hong Kong court, noting that the court had agreed to have disputes concerning the deeds determined by a court able to apply English law.

In his decision, Harris J made various criticisms of a failure by the administrators to inform the Beijing court of the possibility of co-operation with the Hong Kong court, the wording in the letter of request and the redaction of the identities of ten of the twelve members of the panel of administrators. He also expressed regret that mainland insolvency experts for both sides were not made available for the hearing.

The company and administrator applied for leave to appeal before Harris J (which was dismissed) and then before the Court of Appeal, also applying for leave to adduce new evidence for the purpose of the leave application and, if leave were granted, for the appeal itself.

Court of Appeal decision

The Court of Appeal in its decision Nuoxi Capital Limited (諾熙資本有限公司) (in liquidation in the British Virgin Islands) v Peking University Founder Group Company Limited (北大方正集團有限公司) [2022] HKCA 1514, (The Honourable Madam Justice Kwan, V-P and the Honourable Mr Justice Chow, JA) rejected the application to adduce new evidence that included a "letter of reply" from the Beijing court, finding that it did not appear that it would have an important influence on the outcome of the intended appeals.

As to the substantive issue on whether leave to appeal should be granted, Hon Kwan V-P (giving the judgment of the court), said that whilst it was "understandable" that the company and the administrator "may find it more straightforward to have the plaintiffs' claims dealt with entirely by the Beijing Court", this was not "of itself a sufficiently strong reason to deprive the plaintiffs of the right to have their claims dealt with before the contractually agreed court, especially when the Administrator has not demonstrated that the Hong Kong judgment will have no utility."

The Court of Appeal noted that Harris J had stated that the company / administrator had "failed to show that no weight will be given to a judgment of the Hong Kong court in the reorganisation proceedings" and the point was not addressed in the report of the company's expert. Interestingly, the Court of Appeal noted the PRC expert evidence in another keepwell dispute proceeding through the Hong Kong court which explained that "a judgment of the Hong Kong court […] could be adduced as evidence before the Beijing Court".

The Court of Appeal dismissed the suggestion that a declaration sought solely for the benefit of foreign courts would rarely be justified, pointing to the "importance of adopting a careful approach when such a declaration is sought, with an important question being whether the declaration sought would serve any practical utility."

The Court of Appeal similarly rejected a second objection, that the company would be prejudiced as it would not be able to enforce a judgment granted by the Hong Kong court in its favour. The Court of Appeal found that any such prejudice would be mitigated by the fact that the company and administrator "could utilise such judgment as evidence to support their position before the Beijing court".

For the above reasons, the Court of Appeal considered there was no basis for it to interfere with the judge's conclusion. Although the plaintiffs may have submitted claims in the reorganisation, it did not follow that they were barred from commencing the actions in Hong Kong, as the Court of Appeal did "not think that the commencement of proceedings per se by a creditor in Hong Kong would constitute an interference with the process mandated by the foreign insolvency regime if those proceedings would not result in any prior access to any part of the insolvent estate by that creditor."

The Court of Appeal found that the applications turned on "the consideration of well-established principles in relation to exclusive jurisdiction clauses, and whether strong reasons have been demonstrated not to enforce the exclusive jurisdiction clauses." It said it did not consider that the interests of justice required the question to be re-argued before the court.

The Court of Appeal concluded that none of the proposed grounds of appeal had any reasonable prospects of success and that there was no other reason in the interests of justice why the appeal should be heard.

Significant victory

The Court of Appeal decision represents a significant victory for bondholders and creditors enforcing agreements containing Hong Kong exclusive jurisdiction agreements. As the number of bond defaults involving mainland companies continue apace, the decision may prove crucial to the future determination of time-sensitive bankruptcy processes.

Attention turns now to the trials of this and other keepwell actions in the early part of 2023, and if these are successful, what weight the Beijing court will then attach to Hong Kong judgments on these matters. It also remains unclear whether the PRC administrator will eventually admit the claims for dividend purposes.



Authored by Jonathan Leitch, Byron Phillips, and Nigel Sharman.


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