HK Court to Go Ahead with Keepwell Claim

HK Court to Go Ahead with Keepwell Claim

HK Court to Go Ahead with Keepwell Claim 1920 1080 Kelly

On 17 December 2021, the High Court in Nuoxi Capital v Peking University Founder Group Company Limited [2021] HKCFI 3817 held that the claims under a Keepwell Deed, notwithstanding ongoing insolvency proceedings in the Mainland, should be determined in Hong Kong in accordance with its exclusive jurisdiction clause.

What is a Keepwell Deed?

A Keepwell Deed is an increasingly common feature of financing arrangements entered into by Mainland business groups and foreign lenders to facilitate the issuance of offshore bonds. Typically, an onshore Mainland parent company undertakes the financial stability and solvency of its offshore subsidiaries to repay the bonds upon maturity. It is similar to what we know as letters of comfort and Keepwell Deeds often contain terms stating that the Keepwell Deed shall not be deemed a guarantee.


The Defendant, Peking University Found Group Company Limited (“PUFG”) is a Mainland incorporated holding company for a commercial group with diverse businesses (“PU Group”). Two members of the PU Group, which were incorporated in the British Virgin Islands and Hong Kong respectively, issued bonds worth US$900 million and US$800 million respectively. The two members defaulted on their payment obligations and the respective guarantees have not been honoured. PUFG, however, entered into four identical Keepwell Deeds in relation to the bonds. The courts of Hong Kong were given exclusive jurisdiction to settle disputes under the Keepwell Deeds. The Plaintiffs contend that PUFG defaulted on its obligations under the Keepwell Deeds.

The failure of the two members to honour their payment obligations arose from the deteriorating financial state of the PU Group. The Beijing No.1 People’s Court (the “Beijing Court”) ordered PUFG to commence its reorganisation in February 2020. Most of the Plaintiffs’ claims in the Defendant’s reorganisation were rejected as they were not on PUFG’s creditors’ list. The Plaintiffs who were rejected lodged an objection to the PUFG’s administrator (the “Administrator”).

In light of the above, the Plaintiffs commenced proceedings in Hong Kong against the Defendant. They now seek for an expedited trial as they are concerned that the Administrator will not set aside funds to pay their claims if they are admitted in the reorganisation proceedings in Beijing. On the other hand, the Defendant sought a stay of actions so that the disputes between the parties can be resolved in the reorganisation proceedings in Beijing. The Administrator also sought for an order for recognition and assistance of the reorganisation proceedings in Beijing and a stay of the actions.


The Plaintiffs argue that if the Keepwell Deeds had been complied with, the two members would have been able to comply with their payment obligations. The Plaintiffs accept that all they can obtain from the Hong Kong Court is a declaration of their rights as a matter of English law. They are not seeking an order that the Defendant should pay them a sum of money. Rather, the order from the Hong Kong Court will be of value in proving their claim before the Beijing Court.

The Defendant on the other hand, argues that notwithstanding the exclusive jurisdiction clause, the determination of claims in the reorganisation should take place before the Beijing Court. It put forward three key reasons: (1) By submitting formal claims in the reorganisation, the Plaintiffs have forgone the right to insist on the dispute being determined other than in the reorganisation; (2) any decision of the Hong Kong Court will not be recognised by the Beijing Court and thus, it is pointless permitting the actions to proceed; and (3) the Beijing Court is as well placed to determine the important issues that may arise in the Hong Kong Courts.

Mr. Justice Harris was not convinced by the Defendant’s arguments and had the following views, inter alia:

  1. The submission of proof of debt should not bar the Plaintiffs seeking adjudication of a dispute in a jurisdiction which is not the insolvency jurisdiction.
  2. The Court will enforce the exclusive jurisdiction clause unless it can demonstrate strong reasons for not doing so. In this regard, the Plaintiffs are entitled to have their claim tried in Hong Kong and obtain the benefit of a judgment to support their claims in the reorganisation.
  3. The Hong Kong Court is better placed to determine issues of English law under the Keepwell Deeds than the Beijing Court. The issues here involve potentially extensive and complicated questions of English law. The common law courts have developed procedures and practices over time which facilitate the determination of the kind of legal disputes that arise under common law.
  4. A Hong Kong Court’s judgment would be expected to carry weight in the Beijing Court. It would be “extraordinary” if the Beijing Court did not do so. The idea that the Beijing Court will refuse to place weight on a Hong Kong judgment dealing with issues of English law were not sufficiently demonstrated by the Defendant.

Interestingly, one of the experts in Mainland law suggested that refusing to stay the actions would be inconsistent with the steps taken between the Mainland and Hong Kong to promote cooperation in handling insolvency proceedings.  In this regard, Mr. Justice Harris agreed that the Hong Kong and Mainland courts are attempting to cooperate to facilitate the efficient progress of insolvencies and reorganisations. He also stated that “Cooperation requires at least some understanding of each court’ substantive law and procedure and the matters, which are likely to be of concern to them. The Mainland and Hong Kong have materially different legal systems and different economic models. Conscious and sensitive cooperation and communication is necessary in order to minimise misunderstandings and facilitate effective assistance. Initially this is likely to be a relatively slow and incremental process… 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.”

The Decision

The Court recognised the Mainland reorganisation proceedings and granted various forms of assistance, but dismissed the Administrator’s applications to stay the proceedings.

This decision is of particular importance as it pertains to the recognition of Keepwell Deeds in Hong Kong Courts, which should be welcome news for the growing number of holders of Keepwell-backed bonds and notes. This decision will hopefully support the growing cooperation between the Courts of Hong Kong and Mainland China in respect of insolvency proceedings.

Should you have any questions, please feel free to contact us today for a discussion.

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