On 19 March 2025, the Court of Final Appeal (CFA) in Hong Kong delivered its landmark and first-ever judgment dealing with the enforceability of keepwell bonds, which underpin US$100bn of China-issued debt.
The CFA rejected the Plaintiffs’ claim for US$1.7bn of damages, and held that they were only entitled to nominal (ie, token) damages arising from breach of an obligation to provide liquidity pursuant to the Keepwell Deeds.
Background
By way of background, these proceedings were brought by the liquidators of the Issuers and Guarantors of US$1.7bn bonds that had been issued between 2017 and 2018, and which were backed by “Keepwell Deeds” issued by Peking University Founder Group Company Limited (PUFG). PUFG is the commercial arm of Peking University.
Keepwell Deeds typically contain obligations on the keepwell provider (in this case, PUFG), to maintain the financial health of the issuer and/or guarantor of the keepwell-backed bonds. In this case, the Keepwell Deeds contained two relevant obligations: (1) to maintain a positive consolidated net worth for each of the issuer and guarantor of at least US$1, and (2) to provide liquidity to meet payment obligations in respect of the bonds. Additionally, a proviso in the Keepwell Deeds provided that PUFG’s obligations under the Keepwell Deeds were subject to it obtaining any relevant regulatory approvals.
Lower courts
Before the Court of First Instance, the three Plaintiffs were unsuccessful. Harris J held that after PUFG entered into an onshore reorganisation process, it was not possible for PUFG to obtain regulatory approvals to transfer funds to the plaintiffs. As the reorganization commenced before the apparent date of breach of the keepwell obligations, PUFG was excused from performing the Keepwell Deeds.
Harris J’s decision was partially reversed by the Court of Appeal (CA), which held that it was PUFG’s burden to prove that all potential modes of performance were impossible. The CA decided that Harris J had failed to consider that there may be other modes of performing the Keepwell Deeds which did not require regulatory approvals, and that PUFG had failed to discharge its burden of proof in this regard. On that basis, the CA allowed the plaintiffs’ appeals, and granted declarations finding that PUFG had breached the second obligation under the Keepwell Deeds to provide liquidity, and was liable for the sum of US$1.7bn to the plaintiffs.
Court of Final Appeal makes final determination
The CFA unanimously reversed the CA’s decision.
The CFA accepted that PUFG was entitled to provide liquidity to the Plaintiffs in the form of a loan (rather than a gift). Accordingly, even if PUFG had complied with its obligation to provide liquidity to the Plaintiffs, and the Plaintiffs had used this liquidity to pay off the bondholders, the Plaintiffs would have become liable to PUFG for its loan, for the same amount previously owed to the bondholders. This would not have resulted in any actual monetary loss suffered by the Plaintiffs. They were therefore only entitled to nominal damages.
The CFA’s judgment concludes the long-running substantive claims brought by the Plaintiffs before the Hong Kong courts, and has important implications on future claims under keepwell bonds.
Key Takeaways
- Claims by issuers and guarantors (which have been put into liquidation) against keepwell providers for breach of a liquidity obligation face significant challenges in proving damages, in light of the CFA’s decision.
- Claims pursuant to Keepwell Deeds are complicated and vary from case to case, requiring a detailed examination of the underlying facts and circumstances.
- A number of issues relating to Keepwell Deeds remain undecided by the CFA, and we will have to see how future courts deal with such issues, as and when they arise.
Freshfields' Involvement
Freshfields acted for PUFG in its successful appeal before the Court of Final Appeal, and it has also acted on the only two cases which have gone to trial involving Keepwell Deeds.
For further information, please contact the authors.
