Hong Kong Court Of Appeal Considers The Enforceability Of Keepwell Deeds For The First Time



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On 10 May 2024, the Hong Kong Court of Appeal handed down its judgment in Nuoxi Capital Limited v. Peking University Founder Group Company Limited CACV 184/2023.
Hong Kong Litigation, Mediation & Arbitration
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On 10 May 2024, the Hong Kong Court of Appeal handed down its judgment in Nuoxi Capital Limited v. Peking University Founder Group Company Limited CACV 184/20231. This is the first time that the Court of Appeal has considered the enforceability of “Keepwell” Deeds and while their use has declined since January 2017, their prevalence in certain types of lending renders the decision important.

Keepwell Deeds form a key part of the security where onshore PRC entities seek to raise funds offshore. Wholly-owned offshore subsidiaries raise funds by issuing the bonds and the onshore parent enters into Keepwell Deeds with the issuers2 and the bond holders, under which the parent agrees to ensure that the issuer has sufficient capital and liquidity to meet its obligations to the bond holders.


The Defendant and the Respondent to the appeals, Peking University Founder Group Company Limited (PUFG), is a holding company wholly owned by the Ministry of Finance of the PRC. The four plaintiffs were each members of the PU group with the bond issuers (Nuoxi and Kunzhi) being incorporated in the BVI. The remaining plaintiffs were the immediate parents of Nuoxi and Kunzhi both of which were incorporated in Hong Kong 3.


In April 2017 and January 2018 Nuoxi issued USD900 million of bonds constituted by trust deeds4 which were due in 2020, 2021 and 2023. Performance of the bonds was guaranteed by Nuoxi's immediate parent HKJHC5. Both Nuoxi and HKJHC failed to honour their obligations and entered into liquidation in 2021.


As part of the lending structure PUFG entered into two Keepwell Deeds dated 20 April 2017 and 24 January 2018 which in essence obliged PUFG (1) to cause Nuoxi and HKJHC and to have sufficient net equity of at least USD1 at all times (the Balance Sheet Obligation); and (2) to have sufficient liquidity to ensure timely payment of any amounts payable under the bonds or guarantees (the Liquidity Obligation)6. There were in addition two Deeds of Equity Interest Purchase Undertaking (EIPUs) entered into between Nuoxi, HKJHC, PUFG and the Trustee. Each of the transaction documents was governed by English law with exclusive jurisdiction given to the courts of Hong Kong.


The financial state of PUFG deteriorated and on 19 February 2020 the PRC courts ordered that it commence reorganisation and an administrator was appointed. Subsequently, each of the four plaintiffs, acting through their respective liquidators, submitted claims to the administrator on the basis that their defaults under the bonds and guarantees arose as a result of PUFG's breaches of the Keepwell Deeds. The administrator rejected the claims on the basis7 that as PUFG was insolvent at the relevant times, the regulatory approvals required in the PRC for PUFG to transfer the necessary funds to enable the plaintiffs to meet their obligations, could not have been obtained and that therefore under the terms8 of the Keepwell Deeds there was no breach of PUFG's obligations. The restructuring plan was approved by the PRC court on 5 July 2021.


The Plaintiffs initially sought damages arising out of the alleged breaches of the Keepwell Deeds but amended their claims instead to seek declarations that the contractual obligations of PUFG to them had been breached. The purpose of the amendments was to seek a judgment upon which they could place reliance in proving their claims in the PUFG reorganisation proceedings in the PRC. Each of the alleged breaches9 occurred after the date upon which the PRC court ordered the commencement of the restructuring process.


PUFG raised several arguments in the court below. Principal amongst them concerned the ability of PUFG to obtain the necessary regulatory approval (as set out in clause 2.2) to satisfy the obligations which it owed to the issuers and guarantors. PUFG argued that its obligations were qualified given that the breaches post-dated the commencement of the PRC reorganisation order and there was thus no real prospect of obtaining the required approval. The judge found that PUFG had failed in its obligations in failing to ensure net assets and sufficient liquidity. He also found that at no time did PUFG seek to obtain the required regulatory approvals. The judge, however, accepted that where the failure to use best efforts to obtain approval made no difference to the outcome, it did not prevent PUFG relying on the qualification in clause 2.2.

Critically, he found that once PUFG entered into reorganisation there was no realistic likelihood of approvals being given for the necessary transfers to the plaintiffs being made outside of the PRC. The position was different before the reorganisation and as PUFG had been in breach of its balance sheet obligations to FIHK prior to the reorganisation, he made the declarations sought in favour of FIHK but dismissed the claims brought by the other three plaintiffs.


While the plaintiffs advanced several arguments on appeal that which succeeded concerned the judge's failure to deal with the evidence on modes of performance which did not require relevant approvals. Clause 2.2 only obliged PUFG to seek relevant approvals if and to the extent that they were required. If there were other modes of performance which did not require approvals then PUFG could not rely on the qualification or defence set out in clause 2.210 .

The plaintiffs contended that there were other means of performance which had been canvassed in the evidence11 that did not require the transfer of assets out of the PRC. The judge below had made his finding that regulatory approval would not have been forthcoming on the premise that PUFG's performance required the remittance of funds out of the PRC for which regulatory approval would be required. The Court of Appeal determined, however, that as the three modes of performance considered by the judge were not the only means of performance, he had failed to take into consideration the relevant evidence and had fallen into error. Consequently, the appeal was allowed and the appropriate declarations made.


PUFG raised several of points in its respondent's notice all of which were rejected. Two in particular stand out as having general significance:

  1. that the plaintiffs' claims had been discharged by the plaintiffs lodging a proof of debt in the PRC reorganisation which had been adjudicated upon by the administrator;
  2. that there was no causation of loss because the failure to inject liquidity into the plaintiffs caused loss only to the bondholders.


  • This is the first time that the Court of Appeal has considered the enforceability of Keepwell Deeds. The Court has effectively underlined that obligations under Keepwell Deeds are binding and enforceable in the Hong Kong courts. That had already been established as a general principle in the court below both here and the in the Tsinghua judgment12.
  • The common clause qualifying the keepwell obligations in cases where regulatory approval is required to enable the parent to comply with its obligations but cannot be obtained will be of no avail if there are other modes of performance which do not require regulatory approval13.
  • The plaintiffs were entitled to seek a declaratory judgment in Hong Kong to assist them in advancing their claim in the PRC reorganisation proceedings. While courts tended to lean against advisory opinions for the benefit of foreign courts they had done so in the past (and would do so here) where it was shown that the matter was of some complexity and that the judgments would likely serve as a valuable function in aid of foreign proceedings. The plaintiffs' claims had not been discharged by lodging proof of debts in the PRC process or by the administrator's adjudication.
  • The plaintiffs suffered recoverable loss because the Keepwell Deeds required PUFG to ensure that the consolidated net worth was USD1. Consequently, if PUFG was obliged to make a gift to the issuer or guarantor to satisfy that obligation then failure to do so would render it liable14.


1 It also handed down judgment in associated matters Hong Kong JHC Co (in liquidation) v. Peking University Founder Group Company Limited CACV 185/2023 and Kunzhi Limited (In liquidation in the British Virgin Islands) v. Peking University Founder Group Company Limited CACV 186/2023. As the transaction structure and underlying documents are materially similar and the issues on appeal the same, for the sake of brevity the article focuses on the Nuoxi appeal

2 Also, typically their guarantors.

3 Hong Kong JHC Co (HKJHC) and Founder Information Hong Kong Limited (FIHC).

4 The parties to which were the issuer, the trustee the guarantor and PUFG.

5 Similarly, Kunzhi issued bonds in April and May 2018 also guaranteed by its immediate parent.

6 There was an additional requirement in respect of HKJHC to have an aggregate total equity of HK$9,980.00 at all times.

7 As emerged at trial but not before.

8 Clause 2.2 in essence provided that if PUFG was required to obtain regulatory approvals in order to comply with its obligations, the performance of such was qualified by and subject to the obtaining of approval. PUFG undertook to use it best efforts to obtain approval where necessary.

9 Save for certain of the claims made by FIHK whose claim succeeded below and which did not concern the appeal.

10 This ground concerned only the Liquidity Obligation.

11 These included the utilsation of offshore assets, seeking third party financial support from an entity outside the PRC and depositing RMB into a PRC bank account pursuant to the Standby Facility in the Keepwell Deeds.

12 [2023] HKCFI 1572

13 This depends on the wording of each clause in each case and, of course, the underlying facts.

14 This was essentially by way of answer to PUFG's assertion that if an advance had been made by PUFG it would have been treated in the books of the issuer/guarantor as a loan and thus the issuer/guarantor would have remained in deficit.

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.

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