Introduction
On June 10, 2023, the Hong Kong Court of Final Appeal delivered its judgment in in the Peking University Founder Group Keepwell Agreement case. This decision has drawn wide-ranging attention from the financial and legal sectors and is regarded as a milestone in relation to the enforcement of Keepwell Agreements in cross-border financing involving PRC-related entities. This article aims to elucidate the main points of the judgment, clarify the judicial attitude toward Keepwell Agreements, and discuss the practical implications for cross-border financing. This will be done with particular emphasis on the credit enhancement effect, i.e. the effectiveness of such agreements in improving the creditworthiness of debtors.
I.Overview of Keepwell Agreements
1.PRC USD Bonds
PRC USD bonds (U.S. dollar-denominated bonds issued by Chinese entities) serve as a major instrument for offshore financing by PRC companies, accounting for approximately 75% of the total volume of Chinese offshore debt. In recent years, amid rapidly changing market conditions, the scale of defaults on PRC USD bonds has increased year on year, reaching a peak in 2022. Cumulatively, the defaulted bonds accounted for nearly 17.5% of the outstanding PRC USD bonds. Real estate companies have been particularly prominent among the defaulting issuers.
Structurally, PRC USD bonds are issued using two main models: direct issuance and indirect issuance.
(1)Direct issuance refers to PRC onshore enterprises serving directly as issuers of USD bonds in the international market, accounting for about 55% of the total.
(2)Indirect issuance refers to PRC onshore companies using overseas entities or branches under their control as issuing vehicles, accounting for roughly 45% of the total bond value.
In order to boost credit ratings and attract investors, about 57% of primary PRC USD bonds are currently supported by credit enhancement measures. Among these, Keepwell Agreements represent a common type of credit enhancement, being employed in about 8% of the total issuance.
2.Application of Keepwell Agreements
Keepwell Agreements are typically used in indirect issuance structures, where the PRC parent company issues a letter undertaking to provide certain forms of liquidity support if the issuer encounters cash flow difficulties. This in turn ensures the issuer's ability to repay debts at maturity. One notable feature of Keepwell Agreements is their non-guarantee nature — they often expressly state that they are not guarantees, and that the provider of the Keepwell agreement cannot be required to make payment of principal or interest directly to the creditor in the issuer's place.
The applicability of Keepwell agreements is closely related to their "non-guarantee nature" and China's foreign exchange policies. From June 2014 to January 2017, if a Chinese onshore entity wished to provide a guarantee for offshore debt, it was required to register the guarantee and obtain approval from the State Administration of Foreign Exchange (SAFE). The relevant authorities could reject such applications, or could refuse to allow any proceeds from offshore financing that included guarantees to be remitted into China in any form. To circumvent these foreign exchange restrictions, Keepwell agreements — which explicitly purport to not amount to guarantees — began to be widely adopted. Although the underlying foreign exchange control policies were abolished in 2017, the Keepwell Agreement, as a form of credit enhancement, has continued to be used in practice thereafter.
3.Typical Provisions in Keepwell Agreements
Based on incomplete statistics and industry observations, Keepwell Agreements typically include provisions such as:
~Non-guarantee clauses: The Keepwell Agreement is expressly stated to not be a guarantee; it is similarly said to not be evidence of any obligation, liability, debt, or responsibility of the Keepwell provider to pay any sum of any kind or nature on behalf of the issuer under the laws of any jurisdiction (including China). On this basis, the agreement is said to not constitute a legally binding undertaking of guarantee.
~Regulatory approval conditions: If and to the extent that the company is required to obtain necessary approvals, consents, directives, licenses, or other authorizations from relevant regulatory authorities to perform its obligations under the terms of the Keepwell Agreement, the performance of such obligations is typically in turn subject to the company having obtained such approvals. In this regard, the company generally will undertake to use its best efforts to obtain the relevant approvals within any statutory period (if applicable).
~Undertakings regarding net assets, liquidity, etc.: The Keepwell provider also typically undertakes to procure that the issuer will maintain at all times a consolidated net asset value of at least a certain amount (or its equivalent in another currency). This serves to procure that the issuer has sufficient liquidity to ensure timely payment of all amounts due, and to procure that the issuer maintains total shareholder equity of not less than a specified amount at all times.
~Share purchase obligations: The Keepwell provider will, as part of the core obligations under the agreement, undertake to assist the issuer in meeting its payment obligations. Generally, the provider will also agree to purchase the equity interests in subsidiaries incorporated outside China, with the purchase price no less than the amount required for the issuer to fully perform its obligations under the relevant debt instruments.
~Governing law: Typically, the agreement is governed by overseas law, such as English Law, Hong Kong Law, or New York Law.
~Dispute resolution: Typically, the agreement provides for the exclusive jurisdiction of overseas courts, often the Hong Kong courts.
II.Typical Cases
As previously discussed, a key reason for the adoption of Keepwell agreements is their "non-guarantee" nature — that is, the Keepwell provider undertakes only to maintain the issuer's liquidity but does not assume any obligation to directly repay principal or interest to creditors in the event of the issuer's default. The credit enhancement effect of Keepwell agreements has been tested in judicial practice. In recent years, Hong Kong courts have ruled on Keepwell agreement-related claims in three cases, which are outlined and summarized below.
1.The CEFC Shanghai Case
The issuer was a wholly-owned indirect subsidiary of CEFC Shanghai International Group Ltd. ("CEFC Shanghai") incorporated in the British Virgin Islands ("BVI"). The investor, Time Harvest Global Investment Fund SPC — Time Harvest Value Investment Fund (the "Investor"), purchased EUR-denominated bonds issued by the issuer. CEFC Shanghai executed a Keepwell agreement in favor of the investor. The Keepwell agreement was governed by English law, with exclusive jurisdiction conferred on the Hong Kong courts.
After the occurrence of a Keepwell trigger event, CEFC Shanghai entered bankruptcy proceedings. The investor brought claims before the Hong Kong courts. In CEFC Shanghai's absence, the Hong Kong court rendered a default judgment in favor of the investor, including orders for payment of the bond principal, interest, and other specified costs by CEFC Shanghai.
The investor subsequently applied to the Shanghai Financial Court to recognize and enforce the Hong Kong judgment. CEFC Shanghai argued that the Keepwell agreement was intended to circumvent PRC financial regulations and that the Hong Kong judgment therefore contravened public policy. The Shanghai Financial Court held that the substantive issue of the validity of the Keepwell agreement under PRC law did not fall within the scope of review for this case. The judgment did not affect the interests of individuals, did not violate due process, and recognition and enforcement did not amount to a breach of PRC public policy. As the Keepwell agreement was governed by non-PRC law, the PRC courts could not use domestic rules regarding the nature and validity of Keepwell agreements as the standard for determining whether the social or public interest had been breached. On these grounds, the Shanghai Financial Court ultimately granted the investor's application for recognition and enforcement of the Hong Kong judgment.
2.The Peking University Founder Group Case
The issuers, Nuoxi Capital Ltd. and Kunzhi Ltd. (collectively, the "Issuers"), were incorporated in the BVI and were indirect wholly-owned subsidiaries of Peking University Founder Group Company Limited ("Founder Group"). The bonds issued by the issuers were guaranteed by Hong Kong Jinghuicheng Ltd. and Hong Kong Founder Information Ltd. (the "Guarantors"), both ultimate holding companies of the issuers. Founder Group provided a Keepwell agreement (including a share purchase undertaking) in respect of the bonds, such agreement being governed by English law and subject to exclusive jurisdiction of the Hong Kong courts.
（1）Declaring Creditors' Rights
After Founder Group entered bankruptcy proceedings, the issuers and the guarantors each sought to assert creditors' rights with the insolvency administrator, all of which were rejected. The administrator only admitted claims pertaining to Founder Group's direct guarantees of offshore bonds and rejected all claims relating to bonds supported solely by Keepwell arrangements.
（2）Jurisdiction
The issuers and guarantors proceeded to file lawsuits before Hong Kong courts. The insolvency administrator applied to the Hong Kong court for recognition and assistance of the onshore restructuring proceedings and sought a stay of the Hong Kong proceedings. The court granted the recognition and assistance application but denied the motion for a stay.
The Hong Kong court held that, generally speaking, it would enforce exclusive jurisdiction clauses absent compelling reasons to the contrary, and would not deprive a party of its right to litigate in the agreed forum. An insolvency proceeding in one jurisdiction has no ipso facto extraterritorial effect, and filing a proof of claim with the administrator does not constitute an absolute bar to creditors seeking relief in other jurisdictions. However, creditors cannot rely on foreign proceedings to obtain benefits exceeding those available in bankruptcy. In this case, the issuers and guarantors were not seeking excessive benefits from the Hong Kong action. It was entirely open to Courts in different jurisdictions to coordinate, with one hearing contractual disputes and another overseeing the company's insolvency. Here, the Keepwell was governed by English law; Hong Kong's common law system is substantively aligned with English law, making its judgments referenceable by the onshore bankruptcy court. For these reasons, the court rejected the insolvency administrator's application to stay the Hong Kong proceedings.
（3）First Instance Judgment
The first instance judgment was handed down by the Court of First Instance of the Hong Kong High Court. Among the claims by the issuers and the two guarantors, the court upheld only the claim of Hong Kong Founder Information Ltd., while rejecting those of the two issuers and the other guarantor. The key reason for the Court's decision was that the Keepwell obligation of Founder Group toward Hong Kong Founder Information Ltd. was triggered prior to Founder Group's entry into insolvency, whereas the Keepwell obligations toward the two issuers and the other guarantor were triggered only after the initiation of insolvency proceedings.
The Court further held that Founder Group ought to have made best efforts to obtain regulatory approval for compliance with its Keepwell obligations. In fact, Founder Group did nothing in this regard. If the Keepwell provider can demonstrate that obtaining the necessary approvals is impossible despite its best efforts, it need not perform further. Once bankruptcy proceedings commence, it is generally impossible to secure the required approvals. Since the relevant Keepwell obligations of Founder Group toward the two issuers and one guarantor were triggered after entering insolvency, those claims were rejected; only the claim for which the trigger event occurred pre-insolvency was granted.
（4）Second Instance Judgment
The unsuccessful parties (being both issuers and one guarantor) appealed. The Court of Appeal overturned the judgment and upheld the appellants' claims.
The appellate court found that the Court of First Instance had failed to consider that there are specific ways of performing the Keepwell obligations that do not require regulatory approval, such as utilizing offshore assets, arranging financial support from third-party entities not subject to PRC restrictions, using standby credit facilities to deposit RMB into onshore bank accounts, and / or having the insolvency administrator pay dividends to the claimants. Since regulatory approval was not a prerequisite for performance, the Court of Appeal allowed the appellants' appeals.
（5）Final Appeal Judgment
Founder Group then appealed to the Court of Final Appeal ("CFA"). On 19 March 2025, the CFA rendered its judgment, allowing Founder Group's appeal and reducing the awarded compensation to nominal damages.
The CFA held that the compensatory nature of damages for breach of contract is to put the creditor in the position it would have been had the contract been performed — the "net loss rule" flows logically and as a matter of principle from the compensatory nature of damages. Providing a loan is one way for Founder Group to fulfill its Keepwell obligations. If loans are made to the issuers and guarantors, their debts to bondholders become matched by debts to Founder Group. Thus, the failure by Founder Group to provide a loan caused no net loss to the issuers or guarantors for which damages could be claimed. The losses were suffered by the bondholders, not the issuers or guarantors. For these reasons, the CFA reduced the appellate damages to nominal sums.
3.Tsinghua Unigroup Case
The issuer, Unigroup International Holdings Ltd. ("Issuer"), was a Hong Kong-incorporated wholly-owned subsidiary of Tsinghua Unigroup Co., Ltd. ("Tsinghua Unigroup"). Tsinghua Unigroup International Co., Ltd. (the "Guarantor") acted as the guarantor for the bonds. Tsinghua Unigroup executed a Keepwell agreement (including a share purchase undertaking), governed by English law and subject to the exclusive jurisdiction of the Hong Kong courts.
Due to Tsinghua Unigroup's failure to perform its Keepwell obligations, Citicorp International Ltd. ("Trustee") filed a claim in the Hong Kong court. The Court of First Instance heard both the Founder Group and Tsinghua Unigroup cases together and noted that, while the parties were different, the transaction structures and documentation were nearly identical. The insolvency administrator also moved to stay the Hong Kong proceedings in Tsinghua Unigroup, but the grounds upon which the stay was sought differed from the Founder Group case; nevertheless, the court declined to grant the stay and proceeded to address substantive issues.
The Hong Kong court determined that Tsinghua Unigroup had made no effort to perform its Keepwell obligations or obtain regulatory approval, especially considering that it had received loans from the guarantor prior to default but never sought to apply these toward performance or to obtain the requisite approval. Given that the Keepwell obligation was triggered before Tsinghua Unigroup entered insolvency, the court upheld the trustee's claim and ordered payment of bond principal, interest, and related costs.
III.Conclusions and Insights
Based on the recent cases adjudicated by the Hong Kong courts relating to Keepwell agreements, the following conclusions can be drawn:
1.Jurisdiction:
The fact that a debtor is undergoing insolvency proceedings in Mainland China or that a creditor files proof of claim with a Mainland insolvency administrator does not, in itself, bar the creditor from bringing a lawsuit before the Hong Kong courts. Insolvency proceedings in one jurisdiction have no extraterritorial effect. Even if the Hong Kong court recognizes the Mainland insolvency administrator's status and agrees to assist in the Mainland restructuring process, this does not automatically result in a stay of proceedings in Hong Kong. Unless there are compelling reasons, the Hong Kong courts will not deprive parties of their right to litigate in the agreed forum. While creditors cannot use cross-border litigation to obtain benefits exceeding those available in the bankruptcy process, Courts in different jurisdictions may cooperate with each other to ensure that exclusive jurisdiction clauses are given their due effect.
2.Timing of the Triggering Event for Keepwell Obligations:
The timing at which the Keepwell obligations are triggered is not necessarily determinative. In the first instance judgments of the Founder Group and Tsinghua Unigroup cases, the timing of the Keepwell trigger was crucial — the Hong Kong Court of First Instance held that once a Mainland company had entered insolvency proceedings, obtaining regulatory approval became virtually impossible and, therefore, the Mainland company's Keepwell obligations were no longer operable. This formed the basis for different rulings regarding various issuers and guarantors in those cases. However, following the appellate judgment in the Founder Group case, the Hong Kong Court of Appeal held that, as there exist ways to perform Keepwell obligations without regulatory approval, a Mainland Keepwell provider may still be liable for inaction, notwithstanding entering insolvency proceedings. Thus, the timing of the triggering event for the Keepwell obligation is no longer determinative.
3.Proving Loss:
The ability of the Claimant to actually prove that it would have suffered loss arising out of breach of the Keepwell Agreement key factor. As demonstrated in the CFA's decision in the Founder Group case, where the issuer or guarantor sues the Keepwell provider for failure to perform, the court may award only nominal damages if the issuer or guarantor has suffered no net loss.
4.Recognition and Enforcement:
Where the Hong Kong courts issue judgments on disputes concerning Keepwell agreements, the likelihood of recognition and enforcement by Mainland courts is relatively high; refusal of recognition and enforcement on the ground of contravening public policy is unlikely.
5.Uncertainty in Mainland Courts:
Mainland courts have not yet directly adjudicated cases relating to Keepwell agreements. The outcome of such cases thus remains uncertain.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
