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Hong Kong Courts rule on the enforceability of Keepwell Deeds

21 May 2023

On 18 May 2023, Harris J handed down a long-awaited judgment [2023] HKCFI 1350 concerning the enforceability of Keepwell Deeds and Deeds of Equity Interest Purchase Undertaking (“EIPUs”) in four related actions against the Defendant, Peking University Founder Group Company Limited (“PUFG”).

As observed by the learned Judge, these actions were, as far as his Lordship was aware, the first of their sort. The issues concerned were of some importance, as Keepwell Deeds have been a common feature of the financing arrangements entered into by Mainland Chinese business groups and foreign lenders, although their use has been reduced in recent years.

On the facts, Harris J dismissed the Plaintiffs’ claims against the Defendant, PUFG, in three out of the four actions. He also granted a declaration in favour of the Plaintiff in the remaining action.

In reaching his conclusions, his Lordship considered the following issues (see §41 of the judgment):

  1. Whether the Plaintiffs’ claims have been discharged by the proofs of debt they filed in the reorganisation proceedings of PUFG in Mainland China (the “Reorganisation Proceedings”).
  2. Whether declaratory relief should be granted to the Plaintiffs when it is not demonstrated that such a declaration by the Hong Kong Court would be of use in the Reorganisation Proceedings.
  3. Whether PUFG’s obligation, if any, is qualified (or contingent) by Clause 2.2 of each of the Keepwell Deeds and the EIPUs (as set out in §14 of the judgment), such that PUFG is under no obligation or liability if it lacks the “Relevant Approvals” and there is no real prospect of obtaining them (despite the obligation to use best efforts). As part of this analysis, his Lordship considered the construction of the Keepwell Deeds and the EIPUs (which were governed by English law), and expert evidence on Mainland Chinese law and regulations governing foreign currency transactions and transfers.
  4. Whether the Plaintiffs have suffered any loss, bearing in mind that the Plaintiffs were issuers and guarantors of the bonds (acting by their liquidators) rather than the bondholders.

As foreshadowed in §46 of the judgment, proceedings against Tsinghua Unigroup gave rise to similar issues on Keepwell Deeds and EIPUs and took place immediately after the trial of this case, and will be the subject of a separate judgment. It remains to be seen how the issues will be resolved on the facts of Tsinghua Unigroup.

José-Antonio Maurellet SCTom Ng and Jasmine Cheung for the defendant.

William Wong SCLook Chan Ho and Tommy Cheung for the plaintiffs.