Introduction

In the recent case of Nuoxi Capital Ltd (In Liquidation in the British Virgin Islands) v Peking University Founder Group Co Ltd [2021] HKCFI 3817, the Hong Kong Court (“HK Court”) held that the offshore bondholders’ rights under the keepwell deeds (“Keepwell Deeds”) should be determined in Hong Kong in accordance with the contractual exclusive jurisdiction clause, notwithstanding the HK Court recognising the keepwell provider’s Mainland insolvency proceedings and providing the Administrator various forms of assistance.

Keepwell arrangements, similar to letters of comfort, are common and popular form of credit enhancement used by PRC companies to facilitate the issuance of offshore bonds by their subsidiaries. They are oftentimes adopted to circumvent rules against providing security for offshore debts by Mainland corporate groups as the keepwell deeds do not constitute guarantees.

Background

The Peking University Founder Group Company Limited (the “Company”, together with its subsidiaries the “Group”) is a holding company incorporated in the Mainland. Two members of the Group, Nuoxi Capital Limited and Kunzhi Limited (together, the “Issuers”) issued bonds and the bonds were guaranteed by their respective parent companies, Hong Kong JHC Co Limited and Founder Information (Hong Kong) Limited (together, the “Guarantors”). The bonds were also backed by Keepwell Deeds entered into between the Company, the Issuers and the Guarantors. The Keepwell Deeds are governed by English law and contain Hong Kong exclusive jurisdiction clauses. The Issuers and Guarantors defaulted on the bonds and were wound up in their own respective jurisdictions.

On 19 February 2020, the Beijing No.1 Intermediate People’s Court (“Beijing Court”)  put the Company into reorganisation pursuant to the PRC Enterprise Bankruptcy Law and Administrator was appointed. The Issuers and Guarantors lodged claims to the Administrator on the basis that the Company had breached the Keepwell Deeds but the claims were later rejected. They then issued proceedings against the Company in the HK Court (“HK Actions”). The Issuers and Guarantors applied for an expedited trial of the HK Actions and a declaration of their rights as a matter of English law. In response, the Company, followed by the Administrator, applied to stay the HK Actions as the Issuers and Guarantors had submitted proofs of debt in the Company’s reorganisation in the Beijing Court and requested the HK Court to recognise and assist the Company’s reorganisation in the PRC.

The main issue is whether a stay of the actions should be granted so that the disputes between the Issuers, Guarantors and the Administrator can be resolved in the reorganisation proceedings taking place before the Beijing Court.

Keepwell Deeds

The Keepwell Deeds were expressly governed by English law and contained an exclusive Hong Kong jurisdiction clause. The Keepwell Deeds required the Company to cause each of the Issuers and Guarantors:

1. 1. to have a consolidated net worth of at least US$1 at all times; and
      
   2. to have sufficient liquidity to ensure timely payment by each of the Issuers and Guarantors of any amounts payable under the bonds.
      

HK Court’s rulings

Generally, the HK Court would enforce an exclusive jurisdiction clause and would not deprive a party of a right to have the claims determined before an agreed court unless a compelling reason is demonstrated. In this case, the HK Court was unable to find any compelling reason to deprive the Issuers and Guarantors of this right and hence refused to stay the HK Actions.

In line with the well-established English position that a liquidation stay has no extra-territorial effect, the HK Court considered that submission of a claim in foreign insolvency proceedings would not create an absolute bar to a creditor seeking adjudication of the claim in another jurisdiction. A creditor, however, cannot use proceedings outside the foreign insolvency jurisdiction to achieve a result which is inconsistent with that mandated by the foreign insolvency regime, that is, to try and obtain more than he would obtain if he proves in the insolvency proceedings.

The HK Court found that the Issuers and Guarantors were merely seeking for declaratory relief under the Keepwell Deeds by invoking a purely adjudicatory jurisdiction as opposed to trying to gain advantage over other creditors outside the reorganisation in the Mainland. There is a distinction between proceedings for adjudicating disputes and establishing contractual rights, and proceedings for determining how much a creditor is entitled to prove for in a reorganisation. It was further observed by the HK Court that foreign courts can coordinate with each other where contractual jurisdiction was exercised before one court, with insolvency jurisdiction exercised before another. For these reasons, the HK Court held that the reorganisation in Beijing does not bar the Issuers and Guarantors from commencing the HK Actions.

Further, the HK Court recognised that the disputes raised in the HK Actions relate to the construction of the Keepwell Deeds in which extensive and complicated questions of English law are central to the determination of the claims. As the Hong Kong common law of contract is generally the same as that of English law, a decision made by the HK Court on a contractual dispute under English law would be of value to the Beijing Court and the HK Court therefore expected that weight would be given by the Beijing Court to such a judgment.

Conclusion

This present case is particularly important in light of the recent developments concerning the judicial cooperation between the Mainland and Hong Kong in insolvency processes. The HK Court stressed that cross-border insolvency and assistance of foreign proceedings should not involve a contest between courts. Instead, the courts should aim to work together to implement fair and efficient insolvency process whilst respecting the substantive law and procedure of each other’s jurisdiction. To this end, conscious and sensitive cooperation and communication is necessary in order to minimize misunderstandings and facilitate effective assistance.