NUOXI CAPITAL LTD (IN LIQUIDATION IN THE BRITISH VIRGIN ISLANDS) v. PEKING UNIVERSITY FOUNDER GROUP CO LTD

HCA 778/2021, HCA 798/2021,
HCA 1418/2021 and HCA 1442/2021
(HEARD TOGETHER)

[2023] HKCFI 1350

HCA 778/2021

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 778 OF 2021

____________________

AND

HCA 798/2021

BETWEEN

____________________

AND

HCA 798/2021

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 798 OF 2021

____________________

BETWEEN

____________________

AND

HCA 1418/2021

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1418 OF 2021

____________________

BETWEEN

____________________

AND

HCA 1442/2021

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1442 OF 2021

____________________

BETWEEN

_____________________

(HEARD TOGETHER)

_________________

J U D G M E N T

_________________

Introduction

1.  Commencing on 11 January 2023 I heard the trial of four actions[1]. The actions give rise to issues of some importance. They concern the enforceability of what are known as Keepwell Deeds, given by the Defendant in respect of the liabilities of a number of its subsidiaries to the Plaintiffs which, the Plaintiffs quantify as US$963,456,001, as at 19 May 2021 in the case of the claims in HCA 778/2021 and HCA 1418/2021 and at US$857,427830 as at 1 February 2021 in the case of the claims in HCA 798/2021 and HCA 1442/2021. Keepwell Deeds have been a common feature of the financing arrangements entered into by Mainland[2] business groups and foreign lenders, although their use has reduced in recent years. The actions are, as far as I am aware, the first of their sort.

Background

2.  The Defendant in the four actions, Peking University Founder Group Company Limited, is incorporated in the Mainland (“Company”). It is the holding company for a commercial group, whose activities stretch across a wide range of businesses (“PU Group”). The PU Group’s ownership and activities are explained as follows in an offering circular dated 12 April 2018 for one of the tranches of bonds, with which the actions are concerned:

“The Group is a leading state-owned diversified conglomerate with strategic business segments covering several major industries in the PRC. Its business segments consist of information technology, healthcare and pharmaceuticals, finance and securities, bulk commodities trading and other businesses, such as education and training. The Company was founded in 1986 by Peking University (北京大學), which is wholly-owned by the Ministry of Finance of the PRC and controlled by the Ministry of Education of the PRC. As at the date of this Offering Circular, 70 per cent. of the Company’s issued share capital is held by Peking University through its wholly-owned subsidiary PKU Asset Management with the remaining 30 per cent. held by Beijing Zhaorun Investments Management Co., Ltd. (北京招潤投資管理有限公司), a holding company controlled by the Group’s employees. As at 30 September 2017, the Company had an issued share capital of CNY1.103 million and total assets of CNY250,139.9 million on a consolidated basis. For the years ended 31 December 2015 and 2016 and the nine months ended 30 September 2016 and 2017, the Group recorded revenue of CNY80,511.3 million, CNY82,004.8 million, CNY63,169.1 million and CNY79,997.0 million, respectively.

The Group considers its information technology, healthcare and pharmaceuticals, finance and securities and bulk commodities trading businesses as its core strengths. The Group intends to concentrate on the development of its information technology and healthcare and pharmaceuticals segments by leveraging its close collaboration with Peking University, and the expertise and capabilities of its finance and securities business, in order to achieve higher growth and greater synergies between different business segments. The Group envisages that its finance and securities business and the bulk commodities trading business will generate sufficient profits and cash flows to support the development of its other business segments.”

3.  In 2017 and 2018 respectively two members of the PU Group issued bonds. Nuoxi Capital Limited (“Nuoxi”, the Plaintiff in HCA 778/2021) issued US$900 million of bonds constituted by trust deeds dated 20 April 2017 and 24 January 2018. The trustee was the Bank of New York Mellon, London Branch. Nuoxi is incorporated in the British Virgin Islands (“BVI”). It is a wholly owned subsidiary of HongKong JHC Co Limited (“HKJHC”, the Plaintiff in HCA 1418/2021), which pursuant to the trust deeds to which it was a party guaranteed Nuoxi’s obligations under the Nuoxi bonds. HKJHC is a member of the PU Group. It is incorporated in Hong Kong. It was wound up in Hong Kong on 13 January 2021. Nuoxi is in liquidation in the BVI. On 24 February 2021, I made an order recognising the BVI liquidators[3].

4.  Kunzhi Limited (“Kunzhi”, the Plaintiff in HCA 1442/2021) issued US$800 million of bonds (I shall refer to the Nuoxi bonds and Kunzhi bonds collectively as the “Bonds”) constituted by trusts deeds dated 17 April 2018 and 21 May 2018. The trustee was also the Bank of New York Mellon, London Branch (“Trustee”). Kunzhi is incorporated in the BVI. It is a wholly owned subsidiary of Founder Information (Hong Kong) Limited (“FIHK”, the Plaintiff in HCA 798/2021), which pursuant to the trust deeds to which it was also a party guaranteed Kunzhi’s obligations under the Kunzhi bonds. FIHK is incorporated in Hong Kong. It was wound up in Hong Kong on 1 February 2021[4]. Kunzhi is in liquidation in the BVI. On 5 July 2021, I made an order recognising the BVI liquidators of Kunzhi.

5.  All four Plaintiffs are, therefore, in liquidation and their liquidators have initiated the four actions. I shall refer to Nuoxi and Kunzhi together as the (“Issuers”) and HKJHC and FIHK together as the (“Guarantors”).

6.  Nuoxi and Kunzhi have defaulted on their payment obligations under their respective bonds. The guarantees given by HKJHC and FIHK have been called. The guarantees have not been honoured. The Company had entered into two Keepwell Deeds in relation to the Nuoxi bonds with Nuoxi, HKJHC and the trustee dated 20 April 2017 (“1^st Nuoxi Keepwell Deed”) and 24 January 2018 (“2^nd Nuoxi Keepwell Deed”; together the “Nuoxi Keepwell Deeds”) respectively. The Company has also entered into two Keepwell Deeds in relation to the Kunzhi bonds with Kunzhi, FIHK and the Trustee dated 17 April 2018 (“1^st Kunzhi Keepwell Deed”) and 21 May 2018 (“2^nd Kunzhi Keepwell Deed”; together the “Kunzhi Keepwell Deeds”) respectively. The material terms of all four Keepwell Deeds are in most respects identical. I shall refer to them collectively as the “Keepwell Deeds”. They required the Company to cause each of Nuoxi, Kunzhi, HKJHC and FIHK (1) to have a consolidated net equity of at least US$1 at all times; (2) to have sufficient liquidity to ensure timely payment by each of Nuoxi, Kunzhi, HKJHC and FIHK of any amounts payable under the Bonds or guarantees; and (3) HKJHC to have an aggregate Total Equity of at least HK$9,980,000 at all times. The Plaintiffs contend that as a consequence of Nuoxi and Kunzhi’s defaults under the Bonds and HKJHC and FIHK’s failure to honour the guarantees the Company defaulted on its obligations under the Keepwell Deeds.

7.  In addition to the Keepwell Deeds, Nuoxi, HKJHC, the Company and the Nuoxi Bond trustees also entered into two Deeds of Equity Interest Purchase Undertaking dated 20 April 2017 and 24 January 2018. Kunzhi, FIHK, the Company and the Kunzhi Bond trustee entered into two further Deeds of Equity Interest Purchase Undertaking dated 17 April 2018 and 21 May 2018 (collectively “EIPUs”). The contractual documents are governed by English law and have Hong Kong exclusive jurisdiction clauses.

8.  The Plaintiffs have submitted claims to the Administrator (explained in the following paragraphs) of the Company based on the Company’s breach of the Keepwell Deeds and the EIPUs. Other than in respect of HKJHC’s claim, the Administrator has rejected the Plaintiffs’ claims without giving any reason.

9.  The failure of Nuoxi and Kunzhi to honour their payment obligations arose from the deteriorating financial state of the PU Group. On 19 February 2020 the Beijing First Intermediate People’s Court (“Beijing Court”) issued an order on the application of the Bank of Beijing Co., Ltd that the Company commence reorganisation pursuant to the Enterprise Bankruptcy Law (“EBL”). On 21 February 2020 the Beijing Court issued an announcement directing creditors of the Company to submit their claims to the Administrator of the Company.

10.  On 4 February 2021, Nuoxi submitted a claim in the Company’s reorganisation for RMB6.3 billion in respect of the 1^st Nuoxi Keepwell Deed and the 2^nd Nuoxi Keepwell Deed. On 26 May 2021, Nuoxi found out that its claims had been rejected, because it was not on the Company’s creditors’ list. On 7 June 2021, Nuoxi lodged an objection to the Administrator in accordance with the EBL.

11.  On 29 January 2021, Kunzhi submitted a claim in the Company’s Reorganisation in the sum of approximately RMB5.7 billion in respect of the 1^st Kunzhi Keepwell Deed and 2^nd Kunzhi Keepwell Deed. On 26 May 2021, Kunzhi found out that its claims had been rejected, also because it was not on the Company’s creditors’ list. On 7 June 2021, Kunzhi lodged an objection to the Administrator in accordance with the EBL.

12.  On 9 April 2021, FIHK submitted a claim in the Company’s Reorganisation in the sum of approximately RMB5.7 billion in respect of the 1^st Kunzhi Keepwell Deed and 2^nd Kunzhi Keepwell Deed. On 26 May 2021, FIHK found out that its claims had been rejected because it was not on the Company’s creditors’ list. On 7 June 2021, FIHK lodged an objection to the Administrator in accordance with the EBL.

13.  On 20 November 2020, HKJHC submitted a claim in the Company’s Reorganisation in the sum of approximately RMB6.3 billion in respect of the 1^st Nuoxi Keepwell Deed and 2^nd Nuoxi Keepwell Deed. The Administrator has not adjudicated the claim. Should the Administrator overrule the objections lodged by Nuoxi, Kunzhi and FIHK, they will have 15 days to appeal to the Beijing Court. As I have already mentioned the Administrator did not inform the Plaintiffs of the reasons for rejecting the claims. It was not until the Company filed evidence in support of its application to stay the present proceedings, which I determined in December 2021, that it gave any reasons for rejecting the claims[5]. The explanation was contained in a report by Zhang Xin dated 11 November 2021. Mr Zhang is a lawyer qualified in both the Mainland and England. He specialises in banking and finance, capital markets and international transactions. He explained that between 2011 and 2021 he has advised on 31 transactions, which have involved Keepwell Deeds. This serves to illustrate how widely Keepwell Deeds have been used, although Mr Zhang says that their use has declined since January 2017 when the State Administration of Foreign Exchange (“SAFE”) lifted the limitation on repatriating the bond proceeds raised overseas by Mainland companies, which had necessitated the use of foreign subsidiaries and a security structure, which included Mainland parent companies issuing what became known as Keepwell Deeds. The Nuoxi and the Kunzhi Keepwell Deeds were signed after January 2017.

14.  Mr Zhang explained in general terms the foreign exchange regulations that inhibit Mainland business groups in borrowing foreign currencies and the regulatory approvals required in order to do so. Mr Zhang said that his personal view is that in entering the Keepwell Deeds the Company did not violate any Mainland law or regulation and they did not require registration. This remained the Company’s position at the trial. However, Mr Zhang says in [25] of his report “the relevant Chinese Governmental Approvals would be required when the Keepwell Provider performs the obligations thereunder as and when an event triggering such obligations occurs. From this angle, receiving all relevant Chinese Governmental Approvals is an inherent and fundamental pre-condition for Keepwell Provider’s performance of its obligations under the Keepwell Structure when such obligations are triggered.” This explains why the Keepwell Deeds and the EIPUs contain in clause 2.2 provisions dealing with regulatory approvals.

Keepwell Deeds

“2.2 Regulatory Approvals

Notwithstanding anything contained in this Deed, if, and to the extent that the Company is required to obtain necessary approvals, consents, licences, orders, permits and any other authorisations from the relevant Approval Authorities (the Relevant Approvals) in order to comply with its obligations under this Deed, the performance of such obligation shall always be qualified by, and subject to, the Company having obtained such Relevant Approvals. In this regard, the Company undertakes to use its best efforts to obtain such Relevant Approvals within the time stipulated by the relevant Approval Authorities, if applicable.”

EIPUs

“2.2 Regulatory Approvals

Notwithstanding anything contained in this Deed, if and to the extent that the Company is required to obtain any Relevant Approvals in order to comply with its obligations under this Deed, the performance of such obligation shall always be qualified by, and subject to, the Company having obtained such regulatory Relevant Approvals. In this regard, the Company undertakes to use its best efforts to obtain such Relevant Approvals within the time stipulated by the relevant Approval Authorities, if applicable.”

15.  In short it was the Administrator’s view, with which Mr Zhang agreed, that at the relevant times the PU Group was insolvent and the regulatory approvals required for compliance with the Keepwell Deeds and the EIPUs could not have been obtained. Therefore, there was no breach of either the Keepwell Deeds or the EIPUs.

16.  The contractual documentation and the claims in the Actions are, with one material exception[6], the same. I shall explain the contractual documentation and claims by reference to the claims brought by Nuoxi in HCA 778.

Contractual Obligations

17.  As I have explained the three series of Bonds issued by Nuoxi maturing in 2020, 2021 and 2023 were constituted by trust deeds dated 20 April 2017 and 24 January 2018. As the terms of all the trust deeds to which I will refer in the Actions are in materially the same terms, I shall simply refer to them as the Trust Deed or Trust Deeds as the context requires. The parties to the Nuoxi Trust Deeds were Nuoxi as Issuer, HKJHC as Guarantor, the Company and the Trustee.

18.  As envisaged in the Circulars and the Nuoxi Bond Conditions, and pursuant to the terms of the Trust Deeds, Nuoxi, HKJHC, the Company and the Trustee entered into the Nuoxi Keepwell Deeds dated 20 April 2017 and 24 January 2018 and the EIPUs dated 20 April 2017 and 24 January 2018 in relation to the 2020 Bonds, the 2021 Bonds and the 2023 Bonds.

19.  The Trust Deeds, the Keepwell Deeds and the EIPUs contain the same material terms and all of the documents define and refer to Nuoxi as “the Issuer”, HKJHC as “the Guarantor”, the Company as the “Company”, and the Trustee as the “Trustee”. Each of the Trust Deeds (clauses 19.1 and 19.2) and the Nuoxi Bond Conditions (condition 18), the Keepwell Deeds (clauses 15.1 and 15.2), and the EIPUs (clauses 10.1 and 10.2) are governed by English law and are subject to the exclusive jurisdiction of the courts of Hong Kong. The Nuoxi Bonds Conditions, the Keepwell Deeds and the EIPUs are sophisticated agreements. Before considering the claims it is necessary to understand the payment and security provisions in these agreements.

20.  As stipulated in the Trust Deeds, Nuoxi and HKJHC’s respective obligations in relation to the corresponding Nuoxi Bonds are as follows:

(1) By clause 2.2 of each of the Trust Deeds, Nuoxi (and also pursuant to clause 5, HKJHC as Guarantor) covenant to pay the Trustee upon the Nuoxi Bonds becoming due.

(2) Clause 1.1 of each of the Trust Deeds define an “Event of Default” as an event described in Condition 9 of corresponding Nuoxi Bond Conditions.

(3) By clause 2.4 of each of the Trust Deeds, at any time after an Event of Default has occurred, the Trustee may by notice in writing to Nuoxi and HKJHC require them to make all subsequent payments in respect of the corresponding Nuoxi Bonds to or to the order of the Trustee.

(4) By clause 5 of each of the Trust Deeds, HKJHC gave a unconditional and irrevocable guarantee that if Nuoxi does not pay any sum expressed to be payable by it under the corresponding Trust Deed and Nuoxi Bonds by the time and on the date specified for such payment (whether on the normal due date, on acceleration or otherwise), HKJHC will be liable as principal debtor to pay that sum to or to the order of the Trustee.

(5) By clause 9 of each of the Trust Deeds, Nuoxi (failing which, HKJHC) is liable to pay the Trustee’s remuneration for its services as Trustee, and expenses for preparation, execution, and performance of duties under the relevant Trust Deed, relevant Agency Agreement[7], relevant Keepwell Deed, the relevant EIPU and the relevant one of the Nuoxi Bonds.

21.  Recital (C) of each of the Trust Deeds provides that:

(1) The Company will enter into a Keepwell Deed with Nuoxi, HKJHC and the Trustee whereby the Company would undertake to inter alia provide financial support to HKJHC and Nuoxi in order that they have sufficient funds to meet their respective payment obligations under the corresponding Nuoxi Bonds and the Guarantee (as defined in clauses 1.1 and 5 of the relevant Trust Deed);

(2) The Company will also enter into an EIPU with Nuoxi, HKJHC and the Trustee, and the Company undertakes to assist Nuoxi and HKJHC in meeting their obligations under the Nuoxi Bonds and HKJHC’s Guarantee whereby the Company agrees to purchase equity interests of subsidiaries of the HKJHC and the Company incorporated outside the PRC[8].

22.  Pursuant to each of the Keepwell Deeds:

(1) By clause 4.1(i) of each of the Nuoxi Keepwell Deeds, the Company undertakes that it shall cause each of Nuoxi and HKJHC to have a Consolidated Net Worth[9] of at least US$1 (or its equivalent in any other currency) at all times.

(2) By clause 4.1(ii) of each of the Nuoxi Keepwell Deeds, the Company undertakes that it shall cause each of Nuoxi and HKJHC to have sufficient liquidity to ensure timely payment by each of Nuoxi and HKJHC of any amounts payable under or in respect of the relevant one of the Nuoxi Bonds, and the corresponding Guarantee in accordance with the Nuoxi Bond Conditions and/or the relevant Trust Deed, and otherwise under the relevant Trust Deed and the relevant Agency Agreement.

(3) By clause 4.1(iii) of each of the Nuoxi Keepwell Deeds the Company undertakes that it shall cause HKJHC to have an aggregate Total Equity (as defined in clause 4.2) “of at least HK$9,980,000 at all times.” The Kunzhi Keepwell Deeds do not contain the same provision. This is the only material difference between the Nuoxi Keepwell Deeds and the Kunzhi Keepwell Deeds.

(4) By clause 6.2(a) and 6.2(d) of each of the Nuoxi Keepwell Deeds, if an Event of Default has occurred, the Company shall as soon as practicable grant to the Plaintiff a standby facility (“Standby Facility”) pursuant to which the Company will remit to an account of Nuoxi as soon as practicable an amount sufficient to allow Nuoxi to satisfy the payment obligations set out in clause 6.3 after conversion (if required) (“Standby Facility Amount”) and cause Nuoxi to use the Standby Facility Amount to discharge its obligations under the corresponding Nuoxi Bonds, Trust Deed, Agency Agreement, EIPU and Nuoxi Keepwell Deeds.

(5) By clause 6.3 of each of the Nuoxi Keepwell Deeds, in the case of an Event of Default, the Standby Facility Amount remitted under clause 6.2 must (after taking into account exchange rate movements) be sufficient to enable the Issuer/Nuoxi to discharge in full:

(a) its obligations under or in respect of the corresponding Nuoxi Bonds in accordance with the corresponding Nuoxi Bond Conditions and/or the relevant Trust Deed, and otherwise under the relevant Trust Deed and the relevant Agency Agreement (which obligations include the principal amount of the corresponding Nuoxi Bonds then outstanding and any interest due and unpaid and/or accrued but unpaid); and

(b) fees, costs, expenses and other amounts payable to the Trustee and/or the Trustee’s agents under or in connection with the corresponding Nuoxi Bonds, Trust Deed, Agency Agreement, EIPU and/or Keepwell Deed and that which may be incurred as notified by the Trustee.

(6) Pursuant to clause 9 of the Nuoxi Keepwell Deeds, they shall remain in full force and effect so long as any of the corresponding Nuoxi Bonds are outstanding.

(7) By clause 12 of the Nuoxi Keepwell Deeds, the Company undertook, for so long as any of the corresponding Nuoxi Bonds are outstanding, to inter alia:

(a) cause each of Nuoxi and HKJHC to remain in full compliance with the terms and conditions of the corresponding Nuoxi Bonds, Guarantee, Trust Deed and all applicable laws, rules and regulations in relation to the corresponding Nuoxi Bonds in the BVI (in the case of Nuoxi) or Hong Kong (in the case of HKJHC) (clause 12(ii) of the Nuoxi Keepwell Deeds);

(b) promptly to take any and all action necessary to comply with its obligations under the Nuoxi Keepwell Deeds (clause 12(iii));

(c) to cause each of Nuoxi and HKJHC to take all action necessary in a timely manner to comply with its obligations under the Nuoxi Keepwell Deeds (see clause 12(iv)).

23.  By clause 3.1 of each of the EIPUs, following receipt by the Company of a written Purchase Notice by the Trustee in accordance with the corresponding Trust Deed:

(1) the Equity Interest[10] held by HKJHC and/or any other Subsidiaries[11] of the Company incorporated outside the PRC (as designated by the Company and notified in writing to the Trustee within three Business Days after the date of the Purchase Notice) (clause 3.1(i)); or

(2) absent such designation and notification, the Equity Interest held by all the Subsidiaries of the Company incorporated outside the PRC (clause 3.1(ii)),

in either case for a purchase price to be determined in accordance with clause 3.3 of each EIPU and pursuant to closing arrangements specified in clause 3.2 of each EIPU.

24.  By clause 3.3 of each EIPU, the Company shall determine the purchase price of the Equity Interest within 10 business days after the date of the relevant Purchase Notice (“Purchase Price”) and other applicable terms, provided that the Purchase Price shall be no less than the aggregate of the following amounts (“Shortfall Amount”):

(1) the amount sufficient to enable Nuoxi and HKJHC to discharge their respective obligations under the corresponding Nuoxi Bonds, Guarantee and Trust Deed, in full (clause 3.3(a)); plus

(2) the interest payable in respect of one interest period on the corresponding Nuoxi Bonds then outstanding as at the date of that Purchase Notice (clause 3.3(b)); plus

(3) all fees, costs and expenses and other amounts payable in connection with the corresponding Nuoxi Bonds, Trust Deed, Keepwell Deed and/or EIPU as at the date of the Purchase Notice, and all future expenses and costs which may be incurred as notified by the Trustee in that Purchase Notice (clause 3.3(c)).

25.  Pursuant to clause 3.3, absent a determination by the Company of the Purchase Price within 10 Business Days after the date of the Purchase Notice, the Purchase Price shall be the Shortfall Amount. Further and also pursuant to clause 3.5 of the EIPU, the Company shall inter alia use its best efforts to do all such things and take all such actions as may be necessary to procure the completion of the purchase in any event within six months from the date of a Purchase Notice, and to procure the remittance of the Purchase Price to or to the order of the Relevant Transferor in accordance with the EIPU.

26.  Condition 9 of the Nuoxi Bond Conditions provides that various matters constitute an Event of Default in relation to the Nuoxi Bonds:

(1) A failure to pay the principal of or any premium on any of the corresponding Nuoxi Bonds when due or there is a failure to pay interest on any of the corresponding Nuoxi Bonds when due and such failure continues for a period of seven days: Condition 9(a).

(2) The following cross-defaults by members of the PU Group: (i) any other present or future indebtedness of the Company, Nuoxi, HKJHC or any of their respective Subsidiaries for or in respect of moneys borrowed or raised becomes (or becomes capable of being declared) due and payable prior to its stated maturity by reason of any actual default, event of default or the like, or (ii) any such indebtedness is not paid when due or, as the case may be, within any originally applicable grace period, or (iii) the Company, Nuoxi, HKJHC or any of their respective Subsidiaries fails to pay when due any amount payable by it under any present or future guarantee for, or indemnity in respect of, any moneys borrowed or raised provided that the aggregate amount of the relevant indebtedness, guarantees and indemnities in respect of which one or more of the events mentioned above have occurred equals or exceeds US$25,000,000 or its equivalent: Condition 9(c).

27.  Also pursuant to Condition 9 of the Nuoxi Bond Conditions, if any Event of Default occurs, the Trustee may in certain circumstances give written notice to Nuoxi, HKJHC and the Company declaring that the Nuoxi Bonds are, and they shall immediately become, due and payable at their principal amount together with accrued interest.

Alleged Events of Default

28.  It is Nuoxi’s pleaded case[12] that a number of Events of Default have occurred since 21 February 2020, which it will be recalled was when the reorganisation proceedings commenced. They are as follows:

(1) On 21 February 2020, the Company defaulted in payment of sums due pursuant to the super short-term commercial paper (19方正SCP002) (“SCP”). This constituted an Event of Default pursuant to Condition 9(c) of the Nuoxi Bond Conditions.

(2) There was a cross-default in February 2020 as a result of non-payment of interest by Subsidiaries in connection with US$310,000,000 floating rate Guaranteed Bonds due 2021 issued by Kunzhi and guaranteed by FIHK. This cross-default constituted an Event of Default pursuant to Condition 9(c) of the Nuoxi Bond Conditions.

(3) On or before 18 March 2020, Peking University Science Park Construction & Development Company Limited (北京北大科技園建設開發有限公司), the Company, and Peking University Resources Group Co., Ltd. (“Science Park Company”) failed to perform their payment obligations under certain Science Park Company asset-backed notes. This was a cross-default and constituted an Event of Default pursuant to Condition 9(c) of the Nuoxi Bonds.

(4) Neither Nuoxi nor HKJHC were able to pay the principal and interest due on 20 April 2020 under the 2020 Bonds, and the default continued for more than seven days. This was an Event of Default under Condition 9(a) of the Nuoxi Bond Conditions relating to the 2020 Bonds, and Condition 9(c) of the Nuoxi Bond Conditions relating to the 2021 Bonds and 2023 Bonds.

(5) There was a cross default in May 2020 as a result of non-payment of interest by Subsidiaries in connection with the US$310,000,000 floating rate Guaranteed Bonds due 2021 issued by Kunzhi and guaranteed by FIHK. This cross-default constituted an Event of Default pursuant to Condition 9(c) of the Nuoxi Bond Conditions.

(6) Neither Nuoxi nor HKJHC were able to pay interest due, on 24 July 2020, under the 2021 Bonds and 2023 Bonds, and the default continued for more than seven days. This was an Event of Default under Condition 9(a) and/or 9(c) of the Nuoxi Bond Conditions relating to the 2021 Bonds and 2023 Bonds.

29.  Nuoxi relies on a number of other Events of Default that occurred after late June 2020, but as none of the Events of Default I have described are disputed it is not necessary for me to describe the later ones. What is material is that pursuant to Condition 9 of the Nuoxi Bond Conditions relating to the 2020 Bonds, on 16 April 2020, the Trustee issued a written notice to Nuoxi, HKJHC and the Company in relation to the 2020 Bonds (“2020 April Written Notice”) referring to the Event of Default I have referred to in [28(2)]. It is Nuoxi’s case that as a consequence of the 2020 April Written Notice the 2020 Bonds became immediately due and payable at their principal amount together with accrued interest (the latter calculated as at 15 April 2020 as being US$6,672,000, and which would continue to accrue until payment was made as provided in the relevant Nuoxi Bond Conditions). The Trustee formally demanded payment of the total amount, which as at that date was US$306,672,000.

30.  Also pursuant to Condition 9 of the Nuoxi Bond Conditions on 16 April 2020, the Trustee issued two further written notices to Nuoxi, HKJHC and the Company in relation to the 2021 Bonds and 2023 Bonds (“2021 April Written Notice” and “2023 April Written Notice”) referring to the same Event of Default. It is Nuoxi’s case that as a consequence of the 2021 April Written Notice the 2021 Bonds became immediately due and payable at their principal amount together with accrued interest (the latter calculated as at 15 April 2020 as being US$2,116,000, and which would continue to accrue until payment was made as provided in the relevant Nuoxi Bond Conditions). The Trustee formally demanded payment of the total amount, which as at that date was US$202,116,000.

31.  It is also Nuoxi’s case that pursuant to the 2023 April Written Notice, the 2023 Bonds became immediately due and payable at their principal amount together with accrued interest (the latter calculated as at 15 April 2020 as being US$4,816,000, and which would continue to accrue until payment was made as provided in the relevant Nuoxi Bond Conditions). The Trustee formally demanded payment of the total amount, which as at that date was US$404,816,000.

32.  Nuoxi claims that as at 16 April 2020, it was liable under the Trust Deeds to pay at least the aforesaid principal and interest, and the Trustee’s Costs, in relation to all of the Nuoxi Bonds. These allegations, and the similar claims advanced in the other three actions, are admitted by the Company.

33.  Pursuant to clause 6.1 of each of the Trust Deeds, on 30 March 2020, the Trustee issued three purchase notices to the Company (with copies to Nuoxi and HKJHC) relating to the 2020 Bonds, 2021 Bonds and 2023 Bonds substantially in the form of Schedule 1 to the EIPUs, as specified in the EIPUs (“Purchase Notices”). Pursuant to each of the Purchase Notices the Trustee notified the Company that an Event of Default had occurred pursuant to Condition 9 of the Nuoxi Bond Conditions relating to either the 2020 Bonds, 2021 Bonds, or the 2023 Bonds, and reminded the Company of its obligation under clause 3.1 of the relevant EIPU to purchase the Equity Interest. The Trustee further specified that for the purposes of calculating the Purchase Price as at the date of the Purchase Notice, the Shortfall Amounts were as follows. In relation to the 2020, 2021 and 2023 Bonds at least US$313,061,500, US$206,524,000 and US$414,724,000 respectively (comprised of principal and payable interest) as well as fees, costs, expenses and other amounts payable as at the date of the Purchase Notice plus provision for other fees, costs, expenses and all other amounts that may be incurred after the date of the Purchase Notice.

34.  The Company did not, in accordance with clause 3.1 of the EIPUs, designate or notify within three business days of receipt of either of the Purchase Notices which Equity Interest it would purchase neither did it, as required by clause 3.3 of the EIPUs, determine the Purchase Price within 10 Business Days after the date of the Purchase Notices.

35.  It is Nuoxi’s case that pursuant to clauses 3.1 to 3.3 of the EIPUs, the Company has since at least late April 2020 been liable to purchase the Equity Interest held by all of the Company’s subsidiaries incorporated outside the Mainland, in the minimum of the Shortfall Amount (being the Purchase Price) as calculated in relation to each of the 2020 Bonds, 2021 Bonds and the 2023 Bonds. The Shortfall Amount and Purchase Price calculated by Nuoxi in accordance with clause 3.3 of each EIPU is:

(1) at least US$313,061,500 in relation to the 2020 Bonds;

(2) at least US$206,524,000 in relation to the 2021 Bonds; and

(3) at least US$414,724,000 in relation to the 2023 Bonds.

Further, Nuoxi says that pursuant to clause 3.5 of the EIPUs, the Company has been obliged since at least 30 March 2020 to use its best efforts to do all things and take all action necessary and desirable to procure the completion of the acquisition of the Equity Interests as soon as reasonably practicable, and in any event within six months from 30 March 2020, and to procure the remittance of each of the Purchase Prices (being each of the Shortfall Amounts) to or to the order of a Relevant Transferor in accordance with the EIPU. This, of course, has not happened.

36.  The Plaintiffs in the four actions allege that as a consequence of the Company’s failure to comply with the Keepwell Deeds and the EIPUs they have suffered the loss described in the following paragraphs. In the case of Nuoxi and HKJHC in HCA 778 and HCA 1418 respectively the loss is said to be as at 19 May 2021 at least US$963,456,001, which comprises of:

(1) the principal amount of US$321,693,000 of the 2020 Bonds, together with accrued contractual interest thereon up until 19 May 2021 of US$21,693,000 (which includes the contractual interest calculated up to 15 April 2020 of US$6,672,000);

(2) the principal amount of US$212,402,000 of the 2021 Bonds, together with accrued contractual interest thereon up to 19 May 2021 of US$12,402,000 (which includes the contractual interest calculated up to 15 April 2020 of US$2,116,000);

(3) the principal amount of US$428,236,000 of the 2023 Bonds, together with accrued contractual interest thereon up to 19 May 2021 of US$28,236,000 (which includes contractual interest calculated up to 15 April 2020 of US$4,816,000);

(4) the sum of at least US$375,000 being the outstanding Trustee’s Costs, pursuant to clause 9 of the Trust Deed, which the Trustee has incurred with respect to the 2020 Bonds up until 1 February 2021; and

(5) the sum of at least US$750,001 being the outstanding Trustee’s Costs, pursuant to clause 9 of the Trust Deed, which the Trustee has incurred with respect to the 2021 Bonds and 2023 Bonds up until 1 February 2021.

37.  In the case of Kunzhi and FIHK in HCA 1442 and HCA 798 respectively the loss is said to be as at 1 February 2021, at least the sum of US$857,427,830, which comprises of:

(1) the principal amount of US$490,000,000 of the 2020 Bonds, together with accrued contractual interest thereon up to until 1 February 2021 of US$39,557,700 (which includes the contractual interest calculated up to 15 April 2020 of US$15,141,000);

(2) the principal amount of US$310,000,000 of the 2021 Bonds, together with accrued contractual interest thereon up to 1 February 2021 of US$17,245,300 (which includes the contractual interest calculated up to 15 April 2020 of US$2,647,400);

(3) the sum of at least US$312,415 being the outstanding Trustee’s Costs, pursuant to clause 9 of the Trust Deed, which the Trustee has incurred with respect to the 2020 Bonds up until 1 February 2021; and

(4) the sum of at least US$312,415 being the outstanding Trustee’s Costs, pursuant to clause 9 of the Trust Deed, which the Trustee has incurred with respect to the 2021 Bonds up until 1 February 2021.

38.  The claims as pleaded originally sought judgment for these sums. During the applications I have referred to in [13] the Plaintiffs’ position changed. For reasons apparent from the issue addressed in [45]–[46] they told me during the hearing of the applications that at trial they would only seek declarations that the Keepwell Deeds had been breached resulting in the loss I have described in the previous paragraphs. It is the Plaintiffs’ position that they do not seek a judgment for a sum of money that they can enforce outside the Mainland or of which they can seek recognition and enforcement in the Mainland. They seek a judgment on which they can rely as evidence to prove their claims in the reorganisation proceedings to which the Company is subject in the Mainland.

39.  As can be been from my detailed description of the claims brought by Nuoxi (and save for FIHK’s claim pleaded in [38] of the Amended Statement of Claim in HCA 798, which I address in [68], it is true of the claims in the other three actions) the dates on which it is said the Keepwell Deeds and the EIPUs were breached are identified with precision and occurred after 19 February 2020. Neither the occurrence of the events, nor the dates on which they took place, is controversial. First, the earliest Events of Default took place on 21 February 2020[13]. Secondly, the Trustee issued a notice of default (the 2020 April Written Notice) on 16 April 2020 and the 2020 Bonds became immediately repayable. The same day notices of default were given in respect of the 2021 Bonds and 2023 Bonds. The three series of Bonds became immediately payable on these dates[14]. Thirdly, on 30 March 2020 the Trustee issued three purchase notices pursuant to the Trust Deeds, reminding the Company of its obligations under the EIPUs. It is Nuoxi’s case that “since at least late April 2020” the Company has been liable to purchase the Equity Interests[15]. It is not in dispute that the Company failed to put Nuoxi and the other Issuers in funds in order that they could comply with their obligations under the Bonds or purchase the Equity Interests.

40.  A point that is taken by the Company is that claims that have been brought are all for breaches that occurred after 19 February 2020 when the Beijing Court issued an order that the Company commence reorganisation proceedings. All interest that had become due prior to this date has been paid. This, the Company argues, is relevant to the determination of whether or not clause 2.2 applies. In short, it argues that once the reorganisation proceedings had commenced it is clear that the regulatory approvals required in order to transfer the funds that would enable the Issuers, the Guarantors or the Company itself to comply with their obligations could never be obtained.

The Issues

41.  The Company advances a number of other defences. They are as follows.

(1) The Plaintiffs’ claim have been discharged by the proofs of debt they filed in the Mainland reorganisation proceedings.

(2) No 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 Mainland.

(3) Under the Keepwell Deeds and the EIPUs, the Company’s obligation, if any, is qualified (or contingent) by clause 2.2 and the Company 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). The Company’s obligation has not arisen on the facts of the case in light of the Mainland law evidence.

(4) The Plaintiffs have suffered no loss.

42.  The first two arguments were advanced before me at the hearing for a stay[16]. I rejected them. The matter went on appeal. The arguments were also rejected by the Court of Appeal[17]. The Plaintiffs object that the issues are res judicata. For present purposes I will accept that it is open to the Company to reargue them. I, however, reject them for reasons I explain in the next sections of this judgment. I will then deal with the third and fourth defences.

Have the claims been discharged?

43.  This issue was addressed by me in [28]–[42][18] of my first decision and by the Court of Appeal in [19], [60]–[63] of its judgment[19]. The Company at the trial attempted to persuade me that both I and the Court of Appeal were wrong. Mr Maurellet did not simply repeat the argument that had failed initially. In addition he argued as follows. In the context of a scheme of arrangement it is established that there is an exception to the Rule in Gibbs[20], namely, that a debt can only be compromised in accordance with the law which governs the obligation that gives rise to the debt, if a creditor submits to an insolvency process conducted in accordance with the law of a jurisdiction other than that which governs the obligation. I was referred to my decision in Re China Singyes Solar Technologies Holdings Ltd[21]:

“18(2) Although the Convertible Bonds are governed by English law, there is no need to seek recognition of the Scheme in England. This is because 100% of the holders of the Convertible Bonds voted in favour of the Scheme. Accordingly, there is no issue about the ‘Gibbs rule’ because ‘there is an exception to the rule if the relevant creditor submits to the foreign insolvency preceding. In that situation, the creditor is taken to have accepted that his contractual rights will be governed by the law of the foreign insolvency proceeding’ (Re OJSC International Bank of Azerbaijan[22]).”

44.  As I explain in [31] of my first decision (with which the Court of Appeal agrees in [61]–[62] of its judgment[23]) “… a claim in foreign insolvency proceedings does not create an absolute bar to a creditor seeking adjudication of the claim in another jurisdiction, which the creditor may take the view is more appropriate for its resolution. This is consistent with the well-established English position that a liquidation stay has no extra-territorial effect. What the creditor cannot do is to attempt to use proceedings outside the foreign insolvency jurisdiction to achieve a result, which is inconsistent with that mandated by the foreign insolvency regime: at its most basic to try and obtain more than he would obtain if he proves in the insolvency proceedings”. It seems to me that the Company’s argument fails to recognise the distinction that this passage seeks to draw and does not distinguish between a submission for the purposes of determining what a creditor is entitled to recover in an insolvency process and the determination of a right outside an insolvency process, which may subsequently be used to advance a claim in that insolvency process. In the scheme context a creditor, which has participated in the scheme process cannot subsequently attempt to recover its debt outside the scheme. Given the nature of a scheme, submission to the scheme process is unlikely to leave any means for recovery by a creditor, which is not inconsistent with the principle I have explained in the passage I have quoted from my earlier decision. The present is not that type of case. The Plaintiffs are not seeking a judgment, which they can enforce outside the reorganisation under the EBL taking place in the Mainland. What they seek is a judgment, which assists them in advancing a claim in the reorganisation. The additional authorities that the Company have relied on at trial do not address this distinction. I reject the Company’s argument.

Will a judgment of this Court be of use in the Mainland proceedings?

45.  The Company argues that it has not been demonstrated by the Plaintiffs that a declaratory judgment will be of any utility in advancing its claims in the reorganisation in the Mainland. This seems to me to be plainly wrong. In [57]–[58] of its decision the Court of Appeal[24] says this:

“57. For the above reasons, we consider it was open to the judge to conclude that a judgment given by the Hong Kong court in the Actions would have some utility, and there is no basis for us to interfere with the judge’s conclusion.

58. For completeness, we note that Professor Shi Jingxia, who was also the expert witness on PRC law for the administrator appointed by the Beijing Court in the restructuring of the company in Citicorp International Limited v Tsinghua Unigroup Co. Ltd[2022] HKCFI 1558, explained in her oral testimony in that case as stated in §10 that a judgment of the Hong Kong court in the Actions could be adduced as evidence before the Beijing Court. This again goes to show that a Hong Kong judgment in the Actions is not necessarily, as the Company and the Administrators put it, of no relevance or utility in the PRC insolvency proceedings, even though it is entirely a matter for the Beijing Court to decide what weight should be given to such a judgment.”

46.  The proceedings regarding Tsinghua Unigroup to which the Court of Appeal refers gives rise largely to identical issues to that which arise in the present trial. The trial of Tsinghua Unigroup took place before me and immediately after the present case and will be the subject of a separate judgment. Professor Shi gave expert evidence for both the Company and Tsinghua Unigroup in the respective trials. Her evidence remained the same. It seems to me very difficult to see how it can sensibly be concluded, given the Company’s own expert’s views, that a judgment from the Hong Kong court will be of no utility. Hong Kong law is identical in nearly all material respects to English law. I am, like most of my colleagues, qualified in England. One of the advantages Hong Kong’s common law legal system gives China is a judiciary, which is able to determine disputes governed by the common law if that is what the parties to commercial contracts choose[25]. As I noted in my first decision it would be remarkable if the Beijing Court took no notice of the Hong Kong court’s opinion.

The Contractual Documentation and its interpretation

47.  The contractual documentation and Offering Circular were prepared in early 2017 by the Company with the assistance of underwriters Bank of China Limited, Barclays Bank Plc, DBS Bank Ltd., Founder Securities (Hong Kong) Limited, Haitong International Securities Company Limited, Standard Chartered Bank, and SMBC Nikko Capital Markets Limited and the participation of the Trustee. Experienced lawyers were involved, including Linklaters, Tian Yuan Law Firm and Walkers representing Nuoxi and Allen & Overy representing both the joint lead underwriters. The Bonds issue was a sophisticated financial transaction, and the contractual documentation reflects this.

48.  There are three disputes concerning the construction of the contract. The first concerns whether or not clause 4.1 of the Keepwell Deeds required the Company to be given notice that one or other of the Issuers or Guarantors required financial assistance before its obligations under clause 4.1 arose. The second concerns whether or not clause 2.2 in both the Keepwell Deeds and the EIPUs operates as a condition precedent to the obligations under clause 4 arising. The third concerns what the obligation in clause 2.2, which provides that the Company must use its “best efforts” to obtain the necessary approvals and consents, requires of the Company.

49.  The principles that guide the court in determining contested interpretations of provisions in contracts are largely uncontroversial: “The court must focus on the meaning of the relevant words in their documentary, factual and commercial context. If there is an ambiguity, or in other words, there are rival meanings, the court can give weight to the implications of the rival constructions by reaching a view as to which is more consistent with business common sense”[26]. The process was described by Judge Davis-White QC in Whitehall Capital Ltd v Land South East Ltd, in the following way: “The key is that the overall process is a unitary exercise involving an iterative process which involves not just a consideration of the words of a contract but a consideration of the same against the relevant background knowledge and the commercial consequences of competing constructions”[27].

50.  The importance of taking into account the commercial context, purpose and realties when assessing competing constructions of a contract are emphasised in two decisions of Lord Drummond Young in which he discusses comprehensively the importance in this process of applying what he describes as “commercial common sense” and what this involves. In Grove Investments Ltd v Cape Building Products Ltd[28], Lord Drummond Young explains that:

“In construing contracts it is also important to bear in mind that a contract is a co-operative enterprise, entered into by parties for their mutual benefit. It is intended to achieve objectives that are common to both parties; that is why a purposive construction must be adopted. Thus a contract should be construed in such a way that the benefits that may reasonably be expected from the contract accrue to both parties. It should likewise be construed in such a way that an excessive or disproportionate burden does not fall on one party through the application of a contractual provision. By ‘excessive or disproportionate’, we mean results that are objectively excessive or disproportionate according to what would be the expectations of reasonable parties in the particular contractual context. Further, commercial predictability is usually regarded as an important feature of any contract. We are accordingly of opinion that a contract should normally be construed in such a way as to avoid arbitrary or unpredictable burdens or impositions, and conversely arbitrary or unpredictable benefits, in the nature of windfalls; to do otherwise would frustrate one of the most elementary commercial objectives.

51.  More recently in Ashtead Plant Hire Co Ltd v Granton Central Developments Ltd[29], Lord Drummond Young explained the interaction between commercial common sense and purposive construction thus:

“….. in interpreting a contractual provision the court should adopt a purposive approach. What this means is that in construing a contract the court should have regard to the fundamental objectives that reasonable persons in the parties’ position would have had in mind. Essentially, the central provisions of a contract should, in any case of doubt, prevail over the subsidiary clauses. The substance of the parties’ agreement, construed objectively, should prevail over niceties of wording, and in particular over clauses that have not been well drafted.

Secondly, in construing a contract a court may have regard to what is generally referred to as commercial (or business) common sense. Reference to commercial common sense has attracted a certain amount of criticism in recent years. Nevertheless, the authorities supporting its use are quite clear; and they include most of the recent cases where the approach to contractual interpretation has been discussed. …

….. In general, it involves a double process: is a conclusion (a deduction or inference) one that is widely held by those with a knowledge of the particular field under consideration ([‘common’])? And does the converse of the conclusion make sense? If it does not, it is likely that the conclusion is correct (or makes ‘sense’) … ‘Commercial’ common sense involves applying these concepts to business transactions or business relationships, but with the addition of elementary microeconomics; ‘microeconomics’ is merely the branch of economics that covers the behaviour of individual firms (or individuals or families) in their commercial dealings with other persons. We would emphasise the word ‘elementary’. The court should not embark on anything approaching a full professional economic analysis. What it must do is rather to consider how a reasonable person in business would be likely to conduct his or her affairs in a particular situation …

The basic manner in which a business conducts its affairs, however, is a matter that should lie comfortably within judicial knowledge …

It is perhaps useful to mention three features of general business conduct that will frequently be relevant; all are of assistance in the present case. First, contracts are based on the principle of consideration, or exchange. This involves the notion of the quid pro quo; it is normal to find that the obligations of one party are broadly equivalent to the obligations of the other party. There may be exceptions, where a bad bargain has been concluded, but equivalence is the norm, and contracts should generally be construed accordingly. Secondly, the principle pacta sunt servanda applies; parties expect to perform their contractual obligations. For this reason they will normally avoid the risk of unreasonable or disproportionate burdens. Thirdly, predictability is generally regarded as important. For that reason the parties to a contract will normally try to avoid obligations or burdens that operate in an arbitrary manner. Conversely, they do not expect windfalls. Nevertheless, commercial ‘predictability’ is not achieved by construing contracts with brutal literalism, a practice that can easily produce arbitrary results; it is rather achieved by the use of a contextual and purposive construction of the words used, with the application where appropriate of commercial common sense …..”.

52.  The Keepwell Deeds and the EIPUs form part of one financial transaction. The court can[30] and should have regard to other agreements and documents that form part of a composite transaction in assessing what the objectives and expectations of the parties to individual agreements forming part of the transaction are likely to have been and to have regard to the character and components of the larger transaction in assessing the meaning and application of contentious provisions. The objective of the Company, as the holding company of the PU Group, was to procure investors to lend US$ for the tenor of the Bonds. For reasons I have explained earlier, in order to do this it was necessary for the PU Group to use offshore companies, with no material assets, to issue the Bonds. Necessarily, this meant that lenders would have no security unless it was provided by other members of the Group and, for reasons I have also explained, guarantees could not be given by onshore companies holding assets in the Mainland. The Keepwell Deeds and the EIPUs were required specifically because the PU Group was not able to provide guarantees from onshore companies. Although it was made clear to lenders that there might be difficulties in the Company complying with its obligations under the Keepwell Deeds and EIPUs if to do so required approvals from Mainland regulators and Government departments, it seems to me clear that the Keepwell Deeds and the EIPUs were presented as having significant value and were likely to be treated as such by prospective lenders. However, the Keepwell Deeds and the EIPUs had a number of inherent shortcomings.

53.  First, as is apparent from the very reason this novel form of security was required and is made explicit in the Offering Circulars and the terms of clause 2.2, financial regulations in the Mainland create difficulties for a company wishing to transfer currency out of the Mainland. It is clearly the intention of the regulations to restrict the circumstances in which such transfers can be made otherwise the Company would have been able to provide a guarantee. This must have been known to at least the more sophisticated investors otherwise they would have queried the structure of the borrowing and insisted on guarantees from a company which had substantial assets. Secondly, the Keepwell Deed provides no mechanism for the Trustee to monitor compliance. Why the Keepwell Deed did not contain a provision that required, for example, the Trustee to be provided with the audited financial statements of the Issuers and the Guarantors was not an issue explored before me. As long as interest was paid on the Bonds the Trustee would not know whether, for example, the Issuers and the Guarantors had a consolidated net worth of at least US$1. Because the Issuers had no assets their ability to pay interest and principal was dependent on the financial condition of the Company and the Group. Breaches of the Keepwell Deed were only likely to come to light after the Company was in serious financial difficulties. By that time, and, in particular, if the Company had been put into reorganisation in the Mainland pursuant to the EBL, for reasons I consider in detail in [88]–[91] it was inherently unlikely that regulatory approval for transfers necessary to pay liabilities under the Bonds and the Guarantees would be approved. In the evidence before me (largely from experts) no example was cited of regulatory approval ever having been given after a company had been put into reorganisation for a transfer of monies out of the Mainland to settle a liability analogous to those under the Keepwell Deeds and the EIPUs. It seems to me that in practice the Keepwell Deeds and the EIPUs were of limited practical value.

54.  That having been said the present case involves sophisticated and carefully documented financial transactions involving significant sums of moneys. It must reasonably be assumed that the Keepwell Deeds and the EIPUs were intended to create substantive rights, even if in practice they had less financial value than purchasers of the Bonds assumed, and any qualification to such rights was likely to be carefully circumscribed.

55.  I deal with the three contentious questions of construction in the following paragraphs:

(1) Did clause 4.1 require the Company to be given notice before it was obliged to ensure the financial criteria specified in clause 4.1 arose in [73];

(2) is clause 2.2 a condition precedent in [77]; and

(3) “best efforts” in [80]–[87].

Offering Circular

56.  The level of sophistication and care that went into the structuring of the transaction is demonstrated by the Offering Circulars. The Offering Circular dated 12 April 2017 for the Nuoxi Bonds is in excess of 150 pages in length. The section headed “Offer Structure”, which deals with the Keepwell Deed and, the EIPU is over two pages. The same section is included in the Offering Circular for the Kunzhi Bonds. I will quote it in full.

“THE KEEPWELL DEED

The Issuer, the Guarantor and the Company will execute the Keepwell Deed as further described in ‘Description of the Keepwell Deed’ with the Trustee on or about the Issue Date. Under the Keepwell Deed, the Company will undertake with the Issuer, the Guarantor and the Trustee, so long as any of the Bonds remain outstanding, that:

• it shall directly or indirectly own and hold not less than 85 per cent of the outstanding shares of the Guarantor and shall not directly or indirectly pledge, grant a security interest, or in any way encumber or otherwise dispose of any such shares unless required to dispose of any or all such shares pursuant to a court decree or order of any government authority which, in the opinion of a legal adviser to the Company, may not be successfully challenged; and

• it shall cause the Guarantor to directly or indirectly own and hold all the outstanding shares of the Issuer and not to directly or indirectly pledge, grant a security interest, or in any way encumber or otherwise dispose of any such shares unless required to dispose of any or all such shares pursuant to a court decree or order of any government authority which, in the opinion of a legal adviser to the Company, may not be successfully challenged.

In addition, the Company will undertake, among other things, so long as any of the Bonds remain outstanding, to:

• cause each of the Issuer and the Guarantor to have a Consolidated Net Worth of at least U.S.$1.00 at all times;

• cause each of the Issuer and the Guarantor to have sufficient liquidity to ensure timely payment by each of the Issuer and the Guarantor of any amounts payable in respect of the Bonds and the Guarantee in accordance with the Terms and Conditions of the Bonds and/or the Trust Deed and otherwise under the Trust Deed and the Agency Agreement;

• cause the Guarantor to have an aggregate Total Equity of at least HKS9,980,000 at all times;

• subject to certain exceptions as described in ‘Description of the Keepwell Deed’, not, and procure that its subsidiaries (other than a Listed Subsidiary and any subsidiary of such Listed Subsidiary) will not, create or permit to subsist any mortgage, charge, lien, pledge or other security interest, upon the whole or any part of its present or future undertaking, assets or revenues (including any uncalled capital) to secure any Relevant Indebtedness outside the PRC;

• to procure that the articles of association of each of the Issuer and the Guarantor shall not be amended in a manner that is, directly or indirectly, adverse to Bondholders;

• to cause each of the Issuer and the Guarantor to remain in full compliance with the Terms and Conditions of the Bonds, the Guarantee, the Trust Deed and all applicable laws, rules and regulations in Hong Kong (in the case of the Guarantor) or the British Virgin Islands (in the case of the Issuer);

• promptly to take any and all action necessary to comply with its obligations under the Keepwell Deed;

• to cause each of the Issuer and the Guarantor to take all action necessary in a timely manner to comply with its obligations under the Keepwell Deed;

• to procure that the Issuer will not carry on any business activity whatsoever other than in connection with the issue of the bonds and any other activities incidental thereto (which activities shall, for the avoidance of doubt, include the on-lending of the proceeds of the issue of the bonds (the ‘Proceeds of the Bonds’) to the Guarantor or the Company or as any of them may direct), and to cause such recipient of the Proceeds of the Bonds to pay the interest and principal in respect of such intercompany loan on time; and

• to maintain the Guarantor as a primary overseas platform of the Company for investment holding, trading and financing.

In addition, in the event (i) the Issuer does not provide a notice confirming it has sufficient liquidity to the Company and the Trustee no later than 30 Facility Business Days before each Interest Payment Date (the ‘Liquidity Notice Date’) or (ii) an Event of Default has occurred, the Company shall, subject to prevailing laws, regulations and government policies at such time and if required, the approvals from or registration with competent PRC government authorities, as soon as practicable, among other things, grant to the Issuer a standby facility (the ‘Standby Facility’) pursuant to which the Company will remit an amount after conversion (if required) sufficient to enable the Issuer (a) in the case of (i) to discharge its obligations under the Bonds and the Trust Deed which will become due on the immediate next Interest Payment Date, or in the case of (ii) to discharge its obligations under or in respect of the Bonds in accordance with the Terms and Conditions of the Bonds and/or the Trust Deed and otherwise under the Trust Deed and the Agency Agreement, and (b) cover all costs, fees, expenses and other amounts payable to the Trustee and/or the Agents under or in connection with the Bonds, the Trust Deed, the Agency Agreement, the Deed of Equity Interest Purchase Undertaking and/or the Keepwell Deed as at the date of the Liquidity Notice Date plus provisions for costs, fees, expenses and all other amounts which may be incurred after the Liquidity Notice Date as notified by the Trustee. The terms of the Standby Facility shall be at arm’s length (or more favourable to the Issuer) and shall not require any security from the Issuer.

The Keepwell Deed is not a guarantee by the Company of the payment of any obligation, responsibilities, indebtedness or liability, of any kind or character whatsoever, of the Issuer or Guarantor under the laws of any jurisdiction. The performance by the Company of certain of its obligations under the Keepwell Deed may be subject to approvals, registrations, filings or clearance or other authorisation of PRC government authorities, and the Company will undertake to use its best efforts to obtain the same. See ‘Risk Factors — Neither the Keepwell Deed nor the Deed of Equity Interest Purchase Undertaking from the Company is a guarantee of the payment obligations of the Issuer and the Guarantor under the Bonds and the Guarantee’.

THE DEED OF EQUITY INTEREST PURCHASE UNDERTAKING

The Issuer, the Guarantor and the Company will execute the Deed of Equity Interest Purchase Undertaking (as further described in ‘Description of the Deed of Equity Interest Purchase Undertaking’) with the Trustee on or about the Issuer Date. Pursuant to the terms of the Deed of Equity Interest Purchase Undertaking, the Company will agree to purchase, either by itself or through a PRC-incorporated Subsidiary of the Company, the Equity Interest held by the Guarantor and/or any other Subsidiaries of the Company incorporated outside the PRC (each a ‘Relevant Transferor’), upon receiving a written purchase notice (the ‘Purchase Notice’) from the Trustee in accordance with the Trust Deed given following the Trustee being expressly notified or becoming actually aware of the occurrence of an Event of Default under the Bonds (the ‘Purchase’). The purchase price will be determined by the Company provided that the purchase price shall after conversion (if required), among other things, be sufficient to enable the Issuer and the Guarantor to discharge in full their respective obligations under the Bonds, the Guarantee and the Trust Deed, plus the interest payable in respect of one interest period on the Bonds, plus all costs, fees, expenses and other amounts payable to the Trustee and/or the Agents under or in connection with the Bonds, the Trust Deed, the Agency Agreement, the Keepwell Deed and/or the Deed of Equity Interest Purchase Undertaking as at the date of such Purchase Notice plus provisions for costs, fees, expenses and all other amounts which may be incurred after the date of the Purchase Notice, as notified by the Trustee in the Purchase Notice.

The Company shall, and shall procure each Relevant Transferor to, use their respective best efforts to do all such things and take all such actions as may be necessary or desirable to (i) procure the completion of the Purchase on the relevant Purchase Closing Date (including providing information and applying for Relevant Approvals) as soon as reasonably practicable within six months from the date of the Purchase Notice; and (ii) procure the remittance of the sum of the Purchase Price to or to the order of the Relevant Transferor(s) in accordance with the Deed of Equity Interest Purchase Undertaking. See ‘Risk Factors — Performance by the Company of its undertaking under the Deed of Equity Interest Purchase Undertaking is subject to approvals of the PRC governmental authorities’.”

57.  The Offering Circular makes it clear in these pages that the Keepwell Deed is not a guarantee and its performance may require approvals by Mainland Government authorities. There is a similar reference to Mainland Government authorities’ approval in relation to the EIPU. There is also reference to the section of the Offering Circular dealing with Risk Factors. This is very comprehensive and runs to over 30 pages. Most of it deals with commercial and financial risk factors. Towards the end of this section there are further passages dealing with the Keepwell Deed and the EIPU. These are relied on by the Company as illustrating that prospective investors were warned that compliance by the Company with the terms of the Keepwell Deeds and EIPUs might require approvals from Mainland Government authorities. I will also quote them in full:

“Neither the Keepwell Deed nor the Deed of Equity Interest Purchase Undertaking from the Company is a guarantee of the payment obligations of the Issuer and the Guarantor under the Bonds and the Guarantee.

The Company will enter into the Keepwell Deed and the Deed of Equity Interest Purchase Undertaking in connection with the Bonds thereunder. See ‘Offer Structure - The Keepwell Deed’, ‘Description of the Keepwell Deed’, ‘Offer Structure - The Deed of Equity Interest Purchase Undertaking’ and ‘Description of the Deed of Equity Interest Purchase Undertaking’, Upon a breach of the Keepwell Deed or the Deed of Equity Interest Purchase Undertaking, the Trustee may take action against the Company to enforce the provisions of the Keepwell Deed or the Deed of Equity Interest Purchase Undertaking. However, none of the Keepwell Deed, the Deed of Equity Interest Purchase Undertaking or ay actions taken by the Company thereunder can be deemed as a guarantee by the Company for the payment obligations of the Issuer under the Bonds or the Guarantor under the Guarantee, Accordingly, pursuant to the terms of the Keepwell Deed, the Company will only be obliged to make sufficient funds available to the Issuer and the Guarantor or, in the case of the of Equity Interest Purchase Undertaking, undertake certain specified actions, rather than assume payment obligation as in the case of a guarantee. Furthermore, even if the Company intends to perform its obligations under the Keepwell Deed and the Deed of Equity Interest Purchase Undertaking, depending on the manner in which the Company arranges for sufficient funds to meet the payment obligations of the Issuer under the Bonds or the Guarantor under the Guarantee, such performance may be subject to obtaining prior consent or approvals from relevant PRC governmental authorities, including the NDRC, the MOFCOM and the SAFE and their respective local counterparts.

In addition, under the Keepwell Deed, the Company will undertake with the Issuer, the Guarantor and the Trustee, among other things, to cause the Issuer and the Guarantor to have sufficient liquidity to ensure timely payment of any amounts payable in respect of the Bonds and the Guarantee. However, any claim by the Issuer, the Guarantor and/or the Trustee against the Company in relation to the Keepwell Deed or the Deed of Equity Interest Purchase Undertaking will be effectively subordinated to all existing and future obligations of the Company’s subsidiaries (which do not provide a guarantee in respect of the Bonds), particularly the Company’s subsidiaries in the PRC, and all claims by creditors of such subsidiaries in the PRC will have priority to the assets of such entities over the claims of the Issuer, the Guarantor and the Trustee under the Keepwell Deed and the Deed of Equity Interest Purchase Undertaking.

Performance by the Company of its undertaking under the Deed of Equity Interest Purchase Undertaking is subject to approvals of the PRC governmental authorities

The Company intends to assist the Issuer and the Guarantor to meet their respective obligations by entering into the Deed of Equity Interest Purchase Undertaking on the Issue Date. Under the Deed of Equity Interest Purchase Undertaking, the Company agrees to purchase from a Relevant Transferor the equity interest in such Relevant Transferor’s onshore or offshore subsidiaries at a purchase price not lower than the amount sufficient to enable the Issuer and the Guarantor to discharge their respective obligations under the Bonds and the Guarantee.

Performance by the Company of the Deed of Equity Interest Purchase Undertaking is subject to the approval of or filing with:

• the NDRC or its local office in respect of the transfer of the equity interest in offshore subsidiaries from the Relevant Transferor to the Company;

• the MOFCOM or its local office in respect of the transfer of the equity interest in the onshore or offshore subsidiaries from the Relevant Transferor to the Company;

• the PRC State Administration for Industry and Commerce or its local counterpart in respect of the transfer of the equity interest in the PRC-incorporated subsidiaries from the Relevant Transferor to the Company;

• the relevant PRC tax authorities in respect of withholding tax for the Relevant Transferor; and

• SAFE or its local counterpart or commercial banks in respect of (i) changing the SAFE registration of, or in connection with, the onshore or offshore companies being sold (where applicable), and (ii) the remittance of the purchase price, denominated in U.S. dollars, from the Company in the PRC to the Guarantor in Hong Kong (where applicable).

As the approval process is beyond the control of the Company, there can be no assurance that the Company will successfully obtain either of the requisite approvals in time, or at all. In the event that the Company fails to obtain the requisite approvals, the Issuer and the Guarantor may still have insufficient funds to discharge their outstanding payment obligations to the Bondholders.

Further, in the event of an insolvency of a Relevant Transferor, any sale proceeds received by that Relevant Transferor may be subject to the insolvency claims of third parties. The Trustee’s claim against the sale proceeds will be an unsecured claim and may rank lower in priority to any claims by secured third-party creditors of such Relevant Transferor where it is the Guarantor. Where a Relevant Transferor is not the Guarantor, the Trustee will not have a direct claim against the sale proceeds received by such Relevant Transferor.”

58.  The Company puts much emphasis on the warning that the Keepwell Deed is not a guarantee[31], and that Mainland Government authorities’ approval may be required in order that payments the Company needs to make in order to comply with the Keepwell Deed or the EIPU can take place. However, the Offering Circular was clearly promoting the Keepwell Deed as having a genuine purpose and value, namely, providing additional protection for lenders to Nuoxi (as did the equivalent documents for the Kunzhi Bonds) which had no assets other than the proceeds of the Bond issue. The Keepwell Deed did not provide the security of a guarantee and the purchasers of the Bonds are warned that compliance with the Keepwell Deed by the Company might on occasions prove problematic. However, that in my view serves to demonstrate why the Keepwell Deeds and the EIPUs, should be understood as placing strict obligations on the Company, not, as the Company’s submissions on occasions veer into suggesting, justify a lenient interpretation, which requires little of it.

Keepwell Deeds

59.  In clauses 4 and 6 of the Keepwell Deeds the Company gives a number of undertakings, which are intended to ensure that Nuoxi and Kunzhi can comply with their repayment obligations under the Bonds and that HKJHC and FIHK can comply with their obligations under the guarantees. Clauses 4, 6 and 12 of the 1^st and 2^nd Nuoxi Keepwell Deeds are in identical terms, but they differ slightly to the equivalent clauses in the 1^st and 2^nd Kunzhi Keepwell Deeds, which are also in identical terms. I set out below the relevant clauses of the 1^st and 2^nd Nuoxi Keepwell Deeds and the equivalent clauses in the 1^st and 2^nd Kunzhi Keepwell Deeds to the extent that they differ materially:

(1) 1^st and 2^nd Nuoxi Keepwell Deeds:

“4. MAINTENANCE OF CONSOLIDATED NET WORTH; LIQUIDITY

4.1 The Company undertakes that it shall cause:

(i) each of the Issuer and the Guarantor to have a Consolidated Net Worth of at least US$1.00 at all times;

(ii) each of the Issuer and the Guarantor to have sufficient liquidity to ensure timely payment by each of the Issuer and the Guarantor of any amounts payable under or in respect of the Bonds and the Guarantee in accordance with the terms and conditions of the Bonds and/or the Trust Deed and otherwise under the Trust Deed and the Agency Agreement; and

(iii) the Guarantor to have an aggregate Total Equity of at least HK$9,980,000 at all times.

If the Issuer or the Guarantor at any time determines that it will have insufficient liquidity to meet its payment obligations as they fall due, then the Issuer and/or the Guarantor shall promptly notify the Company of the shortfall and the Company will make available to the Issuer or the Guarantor, before the due date of the relevant payment obligations, funds sufficient to enable the Issuer or the Guarantor (as the case may be) to pay such payment obligations in full as they fall due. The Issuer or the Guarantor shall use any funds made available to it by the Company in accordance with this Deed solely for the payment when due of such payment obligations under the Bonds, the Guarantee or the Trust Deed (as the case may be).

4.2 The Guarantor undertakes that its aggregate Total Equity will not be less than HK$9,980,000 at all times.

For purposes of this Deed:

Consolidated Net Worth means, (i) in respect of the Issuer, the excess of total assets of the Issuer and its consolidated Subsidiaries over total liabilities of the Issuer and its consolidated Subsidiaries; and (ii) in respect of the Guarantor, the excess of total assets of the Guarantor and its consolidated Subsidiaries over total liabilities of the Guarantor and its consolidated Subsidiaries, total assets and total liabilities each to be determined in accordance with the Hong Kong Financial Reporting Standards consistently applied;

Total Equity means, the line item with the corresponding caption in the consolidated statement of financial position of the Guarantor, comprising the aggregate of:

(i) the amount paid up or credited as paid up on the issued ordinary share capital of the Guarantor;

(ii) the amount standing to the credit of the consolidated reserve of the Guarantor and its Subsidiaries; and

(iii) the amount attributable to non-controlling interests.”

“6. IRREVOCABLE CROSS-BORDER STANDBY FACILITY

6.1 No later than 30 Facility Business Days before each Interest Payment Date (the Liquidity Notice Date), the Issuer shall send to each of the Company and the Trustee a notice in writing substantially in the form set out in Schedule 1 to this Deed (the Liquidity Notice) certifying, as at the date of the Liquidity Notice, that it has sufficient liquidity to meet its payment obligations under the Bonds and the Trust Deed as they may fall due on the next Interest Payment Date falling immediately after the date of such Liquidity Notice (together with evidence of available funding outside the PRC) and that no Event of Default or Potential Event of Default has occurred.

6.2 In the event that (i) the Issuer does not provide a Liquidity Notice in accordance with and by the time specified in Clause 6.1 or (ii) an Event of Default has occurred, the Company shall:

(a) as soon as practicable grant to the Issuer a standby facility (the Standby Facility) pursuant to which the Company will remit an amount sufficient to allow the Issuer to satisfy the payment obligations set out in Clause 6.3 after conversion (if required) (the Standby Facility Amount);

(b) as soon as practicable open with a PRC commercial bank (the Settlement Bank) a special account for the transfer and remittance of the Standby Facility Amount to the Issuer according to the relevant PRC laws;

(c) remit the Standby Facility Amount to a specified account of the Issuer in Hong Kong through the special account (x) in the case of Clause 6.2(i) at least two Facility Business Days prior to the next Interest Payment Date or (y) in the case of Clause 6.2 (ii) as soon as practicable; and

(d) cause the Issuer to use the Standby Facility Amount to discharge its obligations under the Bonds, the Trust Deed, the Agency Agreement, the Deed of Equity Interest Purchase Undertaking and the Keepwell Deed on the due date therefor.

6.3 The Standby Facility Amount to be remitted under Clause 6.2 must (after taking into account exchange rate movements) be sufficient to enable the Issuer to discharge in full:

(a) (i) in the case of Clause 6.2(i), its obligations under the Bonds and the Trust Deed which will become due on the immediate next Interest Payment Date, or (ii) in the case of Clause 6.2(ii), its obligations under or in respect of the Bonds in accordance with the terms and conditions of the Bonds and/or the Trust Deed and otherwise under the Trust Deed and the Agency Agreement (including, without limitation, the principal amount of the Bonds then outstanding and any interest due and unpaid and/or accrued but unpaid); plus

(b) (i) all costs, fees, expenses and other amounts payable to the Trustee and/or the Agents under or in connection with the Bonds, the Trust Deed, the Agency Agreement, the Deed of Equity Interest Purchase Undertaking and/or this Deed as at the date of the Liquidity Notice Date (including without limitation all foreign exchange conversion expenses) plus (ii) provisions for costs, fees, expenses and all other amounts which may be incurred after the Liquidity Notice Date as notified by the Trustee.

6.4 Each of the Company and the Issuer agree and acknowledge that the terms of the Standby Facility shall be at arm's length (or more favourable to the Issuer) and shall not require any security from the Issuer.

6.5 The Trustee shall not be obliged to monitor the occurrence of the events specified under Clause 6.2 or to calculate the Standby Facility Amount.”

“12. UNDERTAKINGS

For so long as the Bonds are outstanding, the Company hereby undertakes:

(i) to procure that the articles of association of each of the Issuer and the Guarantor shall not be amended in a manner that is, directly or indirectly, adverse to holders of the Bonds;

(ii) to cause each of the Issuer and the Guarantor to remain in full compliance with the terms and conditions of the Bonds, the Guarantee, the Trust Deed and all applicable laws, rules and regulations in Hong Kong (in the case of the Guarantor) or the British Virgin Islands (in the case of the Issuer);

(iii) promptly to take any and all action necessary to comply with its obligations under this Deed;

(iv) to cause each of the Issuer and the Guarantor to take all action necessary in a timely manner to comply with its obligations under this Deed;

(v) to procure that the Issuer will not carry on any business activity whatsoever other than in connection with the issue of the bonds and any other activities incidental thereto (which activities shall, for the avoidance of doubt, include the on-lending of the proceeds of the issue of the bonds (the Proceeds of the Bonds) to the Guarantor or the Company or as any of them may direct), and to cause such recipient of the Proceeds of the Bonds to pay the interest and principal in respect of such intercompany loan on time; and

(vi) to maintain the Guarantor as a primary overseas platform of the Company for investment holding, trading and financing.”

(2) 1^st and 2^nd Kunzhi Keepwell Deeds:

“4. MAINTENANCE OF CONSOLIDATED TOTAL EQUITY; LIQUIDITY

4.1 The Company undertakes that it shall cause:

(i) each of the Issuer and the Guarantor to have a Consolidated Total Equity of at least U.S.$1.00 (or its equivalent in any other currency) at all times. The Consolidated Total Equity of the Guarantor shall be tested by reference to the Guarantor Audited Financial Reports; and

(ii) each of the Issuer and the Guarantor to have sufficient liquidity to ensure timely payment by each of the Issuer and the Guarantor of any amounts payable under or in respect of the Bonds and the Guarantee in accordance with the terms and conditions of the Bonds and/or the Trust Deed and otherwise under the Trust Deed and the Agency Agreement.

4.2 If the Issuer or the Guarantor at any time determines that it will have insufficient liquidity to meet its payment obligations as they fall due, then the Issuer and/or the Guarantor shall promptly notify the Company of the shortfall and the Company will make available to the Issuer or the Guarantor, before the due date of the relevant payment obligations, funds sufficient to enable the Issuer or the Guarantor (as the case may be) to pay such payment obligations in full as they fall due. The Issuer or the Guarantor shall use any funds made available to it by the Company in accordance with this Deed solely for the payment when due of such payment obligations under the Bonds, the Guarantee or the Trust Deed (as the case may be).

The Guarantor undertakes that its Consolidated Total Equity will not be less than U.S.$1.00 (or its equivalent in any other currency) at all times.

For purposes of this Deed:

‘Consolidated Total Equity’ means, (i) in respect of the Issuer, the excess of total assets of the Issuer and its consolidated Subsidiaries over total liabilities of the Issuer and its consolidated Subsidiaries; and (ii) in respect of the Guarantor, the excess of total assets of the Guarantor and its consolidated Subsidiaries over total liabilities of the Guarantor and its consolidated Subsidiaries, total assets and total liabilities each to be determined in accordance with the Hong Kong Financial Reporting Standards consistently applied.”

Clause 4.1(i)

60.  Clause 4.1(i) requires each of the Issuer and the Guarantor to have a Consolidated Net Worth or Total Equity[32] of at least US$1 at all times. Consolidated Net Worth is defined in clause 4.2 of the Nuoxi Keepwell Deeds as follows: “in respect of the Issuer, the Guarantor or the Company, the excess of total assets of the Issuer, the Guarantor or the Company and its consolidated Subsidiaries over total liabilities of the Issuer, the Guarantor or the Company and its consolidated Subsidiaries, total assets and total liabilities each to be determined in accordance with the Accounting Standards for Business Enterprises in the PRC consistently applied”. Consolidated Total Equity is similarly defined in clause 4.2 of the Kunzhi Keepwell Deeds. I have very little evidence about the financial positions of either Nuoxi or Kunzhi from the date the Bonds were issued until February 2019 when the Company became subject to reorganisation proceedings.

61.  There is no evidence to suggest that immediately after receipt of the proceeds of the Bonds, Nuoxi did not have paid up capital of at least US$1 or that it did not lend to other PU Group companies the money raised by the Bonds on terms at least equal to those they were subject to in terms of interest and tenor and thus had a Consolidated Net Worth of at least US$1. It is, however, inherently likely given the insolvency of the PU Group that the value of the receivables represented by the loans that are likely to have been made to other PU Group companies by Nuoxi (and Kunzhi) were impaired over time and that there came a point at which the Consolidated Net Worth of the Plaintiffs dropped below US$1. As the Issuers were subsidiaries of their respective Guarantors this in turn would have effected the consolidated Net Worth of the Guarantors.

62.  Nuoxi and Kunzhi claim that the Company had breached its obligations to them from 31 October 2020 as the management accounts available for the period ending on 31 October 2020 for both companies show Nuoxi and Kunzhi having deficits of US$15,144,797.88 and HK$1,107,761,683 respectively. The management accounts for Nuoxi do not specify a period to which they relate and consistent with this show no opening balance.

63.  The Liquidators of Kunzhi have more financial documents than the Liquidators of Nuoxi. The former have management accounts for the period 1 January 2017 to 31 December 2017 and for the years 2018 to 2019. The balance sheet for the period ending 31 December 2017 shows a negative capital of HK$160,810,459.30 representing share capital of HK$7.8 (equivalent to US$1) and a loss of HK$160,810,467.10. It will be recalled that the Kunzhi Bonds and accompanying Keepwell Deeds were executed in April and May 2018. In the subsequent year an item appears under current assets of HK$5,044,079,509.30 (US$64,667,685.90 at an exchange rate of HK$7.8 to US$1) as a receivable from FIHK, but there is no note which explains precisely what it is. The Company has not disputed the authenticity or accuracy of the of these management accounts, which are pleaded. The management accounts appear to show that at the time the Bonds were issued and the Keepwell Deeds executed Kunzhi’s Consolidated Net Worth was materially less than US$1, which means the Company was at all material times in breach of clause 4.1(i). However, this is not a matter, which is pleaded, referred to in Kunzhi’s witness statements, or was explored with Kunzhi’s witnesses or addressed in submissions. It was a matter I identified when reading the documents during the initial drafting of this judgment. In order to ensure that I had not misunderstood the accounts or their provenance I asked for further submissions from the parties.

64.  There is no dispute that the accounts are genuine. The Company did not bring to my attention any other documents, which suggest that they are inaccurate, although in its submissions the Company emphasises that they are unaudited and suggests that they are of limited value. Also it argues that as the relevant pleaded breach of clause 4.1(i) is that the Company had not caused Kunzhi “to have a Consolidated Total Equity of at least US$1 at all times from 31 October 2020, which is the most recent management accounts of the Plaintiff made available to the JLs”[33] and the particulars then refer to the 2020 Management Accounts, it is not open to Kunzhi now to argue that clause 4.1(i) had been breached at the time of execution of the Keepwell Deeds and EIPUs.

65.  In their additional submissions the Plaintiffs contend that the accounting records I have described are relevant and can properly be taken into account by the Court. They argue as follows. In [17(c)] of the Defence the Company pleads that the obligations under clause 4.1 did not arise “as (a) the performance of the alleged obligations required Relevant Approvals, and (b) PUFG [Company] has not, and could not have obtained, the Relevant Approvals”. This is repeated in [29] which pleads directly to [39] of the Amended Statement of Claim. The information contained in the 2017 accounts are relevant, the Plaintiffs argue, to an assessment of the substance of the Company’s defence and the credibility of the Company’s witnesses. I disagree. The Company has pleaded a defence to a claim that “PUFG has breached its obligations to the Plaintiff under Clause 4.1(i) of the Keepwell Deeds, as it has not caused the Plaintiff to have a Consolidated Total Equity ………….. at all times from 31 October 2020…”. It is not defending an allegation that clause 4.1(i) was breached in 2017 or 2018 as demonstrated by the fact that the Plaintiffs did not rely at trial on the management accounts for these years. Maybe it was open to the Plaintiffs to assert and prove such a claim, but they did not do so. It seems to me that it is not open to Kunzhi to argue that clause 4.1(i) was breached in 2017 or 2018 and, therefore, the management accounts for that period are relevant only as background material.

66.  That having been said it is clear, and indeed not disputed, that from 31 October 2020 the Company had not complied with clause 4.1(i). The Company, of course, says that this did not give rise to a breach because there was no prospect of the necessary approvals being obtained. I find that the Company failed to comply with clause 4.1(i) of the 1^st and 2^nd Nuoxi Keepwell Deeds from 31 October 2020 by virtue of Nuoxi not having a Consolidated Net Worth of US$1. I find that the Company failed to comply with clause 4.1(i) of the 1^st and 2^nd Kunzhi Keepwell Deeds from 31 October 2020 by virtue of Kunzhi not having a Consolidated Total Equity of US$1.

67.  In respect of the Guarantors the Plaintiffs plead[34] that HKJHC did not have a consolidated net worth of US$1 “at all material times from” 30 June 2020 relying on the unaudited financial accounts of HKJHC as showing that it had a consolidated net worth of US$18,975,399 as at 30 June 2020, which is reduced to a deficit of US$908,232,601 after taking into account the liability under the Guarantee, when it was called. The Liquidators of HKJHC have audited financial statements, which show as pleaded, a positive net equity of US$18,975,399. This becomes a deficit if the liability under the Guarantee is included. The Company has not disputed HKJHC’s liability under the Guarantee. It follows that as at 16 April 2020 when the Guarantee was called by the Trustee notifying it of the event of default under the Bonds, which I do not understand to be disputed, HKJHC did not have a Consolidated Net Worth of US$1. I, therefore, find that as at 16 April 2020 HKJHC had a Consolidated Net Worth of less than US$1. It follows that the pleaded case that at all material times from 30 June 2020 HKJHC did not have a Consolidated Net Worth of US$1 is established and I so find.

68.  In the case of FIHK it is pleaded[35] that “at all material timesfrom31 December 2019” FIHK did not have a Consolidated Net Worth of US$1 relying on FIHK’s reports and consolidated financial statements, which show a deficit of RMB1,154,012,000. FIHK had a positive Consolidated Net Worth of RMB1,412,933 as at 31 December 2018 and its total equity dropped below US$1 during the 2018/2019 financial year. I find that (1) at all material times from 31 December 2019 FIHK did not have a consolidated net worth of US$1, and (2) as at 31 December 2019 FIHK had negative Consolidated Net Equity of RMB1,154,012,000, which at the current exchange rate is approximately US$166,670,837.

Clause 4.1(ii)

69.  Clause 4.1(ii) requires liquidity to be provided to ensure that the Issuer or, if necessary, the Guarantor, have enough liquidity “to ensure timely payment by each of” them of any amounts payable under the Bonds or the Guarantee. It does not seem to me that this provision requires that the Company ensures that at all times following the completion of issuance of the Bonds that either the Issuer or the Guarantor are able, as the Plaintiffs argue, to satisfy all their prospective liabilities to pay future interest instalments or return the principal. This seems to me clear. First, the most natural meaning of the language of the sub-clause is that sufficient liquidity is required to ensure that a particular payment can be made as it falls due; not that all future payments can be made. Secondly, given the purpose of the fund raising achieved through the Bond issues, namely, to raise working capital for the Group it seems unlikely that it was the parties’ intention that the Group should ensure that at all times the Issuer and the Guarantor retained amounts equal to the amount outstanding under the Bond. Thirdly, this is consistent with clause 3.3(b) of the EIPUs which require the Purchase Price to include an amount equal to one interest period on the corresponding Bonds[36].

70.  In my view clause 4.1(ii) required the Issuer and the Guarantor to have sufficient liquidity to make payments as they fell due. I note that the Plaintiffs at the Tsinghua Unigroup[37] trial accepted this construction. As all the interest instalments had been paid at the time the Company became subject to the reorganisation proceedings in my view, and I so find, the Company only failed to comply with clause 4.1(ii) after the events of default occurred which was after 19 February 2020.

Clause 4.1(iii)

71.  Clause 4.1(iii) applies only to HKJHC and requires it “to have an aggregate Total Equity of at least HK$9,980,000 at all times” for both the 1^st Nuoxi Keepwell Deed and the 2^nd Nuoxi Keepwell Deed. A similar provision is not included in the Keepwell Deeds given in respect of the Kunzhi Bonds; although as I have mentioned earlier FIHK does plead that its audited financial statement for the year ending 31 December 2019 shows that its Total Equity was in deficit of RMB1,154,012,000.

72.  In the case of HKJHC it is expressly alleged that the Company failed to ensure that HKJHC had a net worth of at least HK$9,980,000. HKJHC claims that its unaudited financial statements show that as at 30 June 2020 its Total Equity was a deficit of approximately HK$7,055,196,256 being the amount of the paid up capital of US$9,980,000 and retained profits of US$8,995,399 less HKJHC’s liability under the Guarantees of US$927,208,000[38]. This has not been disputed by the Company. It follows, claims HKJHC, that the Company failed to comply with clause 4.1(iii) from 30 June 2020. This would seem to be correct, and I so find.

Did clause 4.1 require the Company to be given notice that the Plaintiffs required finance?

73.  The final paragraph of clause 4.1 of the Nuoxi Keepwell Deeds contains a provision requiring the Issuers and the Guarantors to give notice to the Company if they have insufficient liquidity. It is in the following terms: “if the issuer or the guarantor at any time determines that it will have insufficient liquidity to meet its payment obligations as they fall due, then the issuer and/or the guarantor shall promptly notify the company of the shortfall and the company will make available to the issuer or the guarantor, before the due date of the relevant payment obligations, funds sufficient to enable the issuer or the guarantor (as the case may be) to pay such payment obligations in full as they fall due.” The Company argues that the Company never received notices referred to in this sub-clause and, therefore, its obligations under clause 4.1 were never engaged. I disagree. Clause 4.1 places on the Issuers and the Guarantors an obligation to notify the Company if they have insufficient liquidity. It does not follow that the Company’s obligations are only engaged if it receives such a notice. In my view given the purpose of clause 4.1 the correct construction is as follows: the Company is obliged to take steps to ensure that the Issuers and the Guarantors have sufficient liquidity to meet their obligations. That obligation is engaged when the Company is aware that either the Issuers or the Guarantors require additional liquidity. The Issuers and the Guarantors are meant to facilitate that obligation being satisfied by giving notice, but it does not follow that if the Company is aware that the Issuers or the Guarantors require additional liquidity it only has to ensure it is provided if the Issuer or the Guarantors provide a formal notice of that requirement. The material question, therefore, is whether or not the Company did have the requisite knowledge. I accept that there is no evidence in the present case of either the Issuers or the Guarantors giving such notice, however, it seems to me clear that the Company must have been aware of their financial position by late 2019 as it clearly faced serious financial problems that led to Bank of Beijing commencing proceedings against it. I, therefore, reject the Company’s argument.

Clause 12

74.  The Amended Statement of Claim in HCA 778/2021 pleads:

“14(6) By Clause 12 of each Keepwell Deed, PUFG undertook, for so long as any of the corresponding Nuoxi Bonds are outstanding, to inter alia:-

(c) cause each of the Plaintiff and HKJHC to remain in full compliance with the terms and conditions of the corresponding Nuoxi Bonds, Guarantee, Trust Deed and all applicable laws, rules and regulations in relation to the corresponding Nuoxi Bonds in BVI (in the case of the Plaintiff) or Hong Kong (in the case of HKJHC) (see Clause 12(ii) of each Keepwell Deed);

(d) promptly to take any and all action necessary to comply with its obligations under the same (see Clause 12(iii) of each Keepwell Deed);

(e) to cause each of the Plaintiff and HKJHC to take all action necessary in a timely manner to comply with its obligations under the same (see Clause 12(iv) of each Keepwell Deed).”

“43. PUFG has also breached Clause 12(ii), (iii) and (iv) of the Keepwell Deeds since 16 April 2020.

Particulars

(1) As and for reasons pleaded above, the Nuoxi Bonds have remained outstanding since 16 April 2020, and the Plaintiff has been unable to comply and has not complied with its obligations under each of the Nuoxi Bond Conditions, Guarantees and Trust Deeds.

(2) The Plaintiff will if necessary rely on the SEHK announcements made, and the failures by the Plaintiff and HKJHC to pay amounts outstanding under the Nuoxi Bonds, as have been pleaded in paragraph 22 above.

(3) The Plaintiff will rely on PUFG’s breaches of Clause 4.1 of the Keepwell Deeds (as pleaded above), and if necessary PUFG’s breaches of Clauses 6.2 and 6.3 of the Keepwell Deed and Clause 3 of the EIPUs (as pleaded below).

(4) PUFG has accordingly:

(i) failed to cause the Plaintiff to remain in full compliance with its obligations under each of the relevant Nuoxi Bond Conditions, the Guarantees, and the Trust Deeds;

(ii) failed to take all action necessary in a timely manner to comply with PUFG’s obligations under the Keepwell Deeds; and

(iii) failed to cause the Plaintiff to take all action necessary in a timely manner to comply with its obligations under the Keepwell Deeds.

(5) The Plaintiff reserves its right to plead further, if necessary, pursuant to discovery, interrogatories, and further investigation.”

75.  Similar claims are pleaded in the other three actions. There is no dispute that the Company took no steps to comply with the Keepwell Deeds.

EIPUs

76.  The Plaintiffs also claim that the Company was in breach of each of the EIPUs. The Amended Statement of Claim in HCA 778/2021 pleads:

“14. Pursuant to each of the Keepwell Deeds:-

(1) By Clause 4.1(i) of both of the Keepwell Deeds, PUFG undertakes that it shall cause each of the Plaintiff and HKJHC to have a Consolidated Net Worth of at least US$1.00 (or its equivalent in any other currency) at all times.

(2) By Clause 4.1(ii) of each Keepwell Deed, PUFG undertakes that it shall cause each of the Plaintiff and HKJHC to have sufficient liquidity to ensure timely payment by each of the Plaintiff and HKJHC of any amounts payable under or in respect of the relevant one of the Nuoxi Bonds, and the corresponding Guarantee in accordance with the Nuoxi Bond Conditions and/or the relevant Trust Deed, and otherwise under the relevant Trust Deed and the relevant Agency Agreement.

(3) By Clause 6.2(a) and 6.2(d) of each of the Keepwell Deeds, if an Event of Default has occurred, PUFG shall as soon as practicable grant to the Plaintiff a standby facility (the ‘Standby Facility’) pursuant to which PUFG will remit to an account of the Plaintiff as soon as practicable an amount sufficient to allow the Plaintiff to satisfy the payment obligations set out in Clause 6.3 after conversion (if required) (the ‘Standby Facility Amount’) and cause the Plaintiff to use the Standby Facility Amount to discharge its obligations under the corresponding Nuoxi Bonds, Trust Deed, Agency Agreement, EIPU and Keepwell Deed.

(4) By Clause 6.3 of each of the Keepwell Deeds, in the case of an Event of Default, the Standby Facility Amount remitted under Clause 6.2 must (after taking into account exchange rate movements) be sufficient to enable the Plaintiff to discharge in full:

(a) its obligations under or in respect of the corresponding Nuoxi Bonds in accordance with the corresponding Nuoxi Bond Conditions and/or the relevant Trust Deed, and otherwise under the relevant Trust Deed and the relevant Agency Agreement (which obligations include the principal amount of the corresponding Nuoxi Bonds then outstanding and any interest due and unpaid and/or accrued but unpaid); and

(b) fees, costs, expenses and other amounts payable to the Trustee and/or the Trustee’s agents under or in connection with the corresponding Nuoxi Bonds, Trust Deed, Agency Agreement, EIPU and/or Keepwell Deed and that which may be incurred as notified by the Trustee.

(5) Pursuant to Clause 9 of each Keepwell Deed, it shall remain in full force and effect so long as any of the corresponding Nuoxi Bonds are outstanding.

(6) By Clause 12 of each Keepwell Deed, PUFG undertook, for so long as any of the corresponding Nuoxi Bonds are outstanding, to inter alia:-

(c) cause each of the Plaintiff and HKJHC to remain in full compliance with the terms and conditions of the corresponding Nuoxi Bonds, Guarantee, Trust Deed and all applicable laws, rules and regulations in relation to the corresponding Nuoxi Bonds in BVI (in the case of the Plaintiff) or Hong Kong (in the case of HKJHC) (see Clause 12(ii) of each Keepwell Deed);

(d) promptly to take any and all action necessary to comply with its obligations under the same (see Clause 12(iii) of each Keepwell Deed);

(e) to cause each of the Plaintiff and HKJHC to take all action necessary in a timely manner to comply with its obligations under the same (see Clause 12(iv) of each Keepwell Deed).

15. By Clause 3.1 of each of the EIPUs, following receipt by PUFG of a written Purchase Notice by the Trustee in accordance with the corresponding Trust Deed (in particular Clause 6.1 of each Trust Deed), PUFG shall purchase (either by itself or through a PRC-incorporated Subsidiary):

(1) the Equity Interest[39] held by HKJHC and/or any other Subsidiaries4 of PUFG incorporated outside the PRC (as designated by PUFG and notified in writing to the Trustee within three Business Days after the date of the Purchase Notice) (see Clause 3.1(i) of each EIPU); or

(2) absent such designation and notification, the Equity Interest held by all the Subsidiaries[40] of PUFG incorporated outside the PRC (see Clause 3.1(ii) of the each EIPU),

in either case for a purchase price to be determined in accordance with Clause 3.3 of each EIPU (as pleaded below) and pursuant to closing arrangements specified in Clause 3.2 of each EIPU.

16. By Clause 3.3 of each EIPU, PUFG shall determine the purchase price of the Equity Interest within 10 business days after the date of the relevant Purchase Notice (the ‘Purchase Price’) and other applicable terms, provided that the Purchase Price shall be no less than the aggregate of the following amounts (the ‘Shortfall Amount’):-

(1) the amount sufficient to enable the Plaintiff and HKJHC to discharge their respective obligations under the corresponding Nuoxi Bonds, Guarantee and Trust Deed, in full (see Clause 3.3(a) of each EIPU); plus

(2) the interest payable in respect of one interest period on the corresponding Nuoxi Bonds then outstanding as at the date of that Purchase Notice (see Clause 3.3(b) of each EIPU); plus

(3) all fees, costs and expenses and other amounts payable in connection with the corresponding Nuoxi Bonds, Trust Deed, Keepwell Deed and/or EIPU as at the date of that Purchase Notice, and all future expenses and costs which may be incurred as notified by the Trustee in that Purchase Notice (see Clause 3.3(c) of each EIPU).

…

30. Pursuant to Clause 6.1 of each of the Trust Deeds, on 30 March 2020, the Trustee issued 3 purchase notices to PUFG (with copies to the Plaintiff and HKJHC) relating to the 2020 Bonds, 2021 Bonds and 2023 Bonds substantially in the form of Schedule 1 to the EIPUs, as specified in the EIPUs (the ‘Purchase Notices’).

31. Pursuant to each of the Purchase Notices:

(1) The Trustee notified PUFG that an Event of Default had occurred pursuant to Condition 9 of the Nuoxi Bond Conditions relating to either the 2020 Bonds, 2021 Bonds, or the 2023 Bonds, and reminded PUFG of its obligation under Clause 3.1 of the relevant EIPU to purchase the Equity Interest.

(2) The Trustee further specified that for the purposes of calculating the Purchase Price as at the date of the Purchase Notice, the Shortfall Amount as at that date:

(i) In relation to the 2020 Bonds was at least US$313,061,500 (comprised of principal and payable interest) as well as fees, costs, expenses and other amounts payable as at the date of that notice to the Trustees and/or the Agent under or in connection with the 2020 Bonds, plus provisions for other fees, costs, expenses and all other amounts that may be incurred after the date of the Purchase Notice.

(ii) In relation to the 2021 Bonds was at least US$206,524,000 (comprised of principal and payable interest) as well as fees, costs, expenses and other amounts payable as at the date of that notice to the Trustees and/or the Agent under or in connection with the 2021 Bonds, plus provisions for other fees, costs, expenses and all other amounts that may be incurred after the date of the Purchase Notice.

(iii) In relation to the 2023 Bonds was at least US$414,724,000 (comprised of principal and payable interest) as well as fees, costs, expenses and other amounts payable as at the date of that notice to the Trustees and/or the Agent under or in connection with the 2023 Bonds, plus provisions for other fees, costs, expenses and all other amounts that may be incurred after the date of the Purchase Notice.

…

44. Accordingly the Plaintiff claims against PUFG for a sum which would enable the Plaintiff to fully comply with its aforesaid obligations under each of the Nuoxi Bond Conditions, the Guarantees, and the Trust Deeds, in satisfaction of PUFG's obligations under the Keepwell Deeds, and/or a sum which would enable the Plaintiff to take all action necessary in a timely manner to comply with its obligations under each of the Keepwell Deeds, being not less than the sum referred to in paragraph 36 above.”

77.  There is no dispute that the Company failed to take any steps to comply with the EIPUs. It is the Company’s case that its failure to take any steps to comply with the obligations asserted in the Amended Statements of Claim in each of the four actions are not breaches of either the Keepwell Deeds or the EIPUs as the obligations never arose because the approvals referred to clause 2.2 could not have been obtained and the obligations under clauses 4, 6, 11 and 12 of the Keepwell Deeds and also the EIPUs only arose if clause 2.2 had been satisfied; in other words clause 2.2 was a condition precedent to the obligations under clauses 4, 6, 11 and 12 of the Keepwell Deeds and the EIPUs arising. I will address the issue of the approvals that were required later, but it is convenient to dispose of the argument that clause 2.2 is a condition precedent at this point. In my view the argument is wrong. The primary obligations created by the Keepwell Deeds and the EIPUs were the steps that those deeds required the Company to take to ensure that Nuoxi and Kunzhi could make the repayments required by the terms of the Bonds. If, however, despite using its best efforts (as required by clause 2.2) the necessary regulatory approvals could not be obtained the Company is relieved of its obligations. In other words clause 2.2 is in the nature of a defence.

78.  It follows that if, as is not in dispute, the Keepwell Deeds and EIPUs have not been complied with it is for the Company to prove on the balance of probabilities that despite using its best efforts it could not obtain the necessary regulatory approvals required to make the payments, which clause 4 of the Keepwell Deeds and the EIPUs required. However, as is pleaded in [30] of the Amended Statement of Claim, which I have quoted, the obligations under the EIPUs arose at the end of March 2020; after the reorganisation proceedings had commenced on 19 February 2020.

79.  I note at this point (and for the benefit of the Beijing Court) that whilst the question of what approvals were required is a matter of Mainland law, as the Keepwell Deeds and the EIPUs are expressly governed by English law, the interpretation of the Keepwell Deeds and the EIPUs is a matter of English law. This includes, for example, what entities come within the definition of “Approval Authorities” in clause 2.2.

Best Efforts

80.  As is apparent from what I have already explained the Company took no steps to obtain any approvals. It might immediately be thought that this being the case the Company cannot rely on clause 2.2 as it has made no efforts to obtain approvals. The Company argues that this is to misconstrue how clause 2.2 applies. It says that if it is impossible to obtain the necessary approvals, and, therefore, the failure to take any steps to obtain them made no difference to the outcome, clause 2.2 is engaged.

81.  For the sake of completeness I will summarise the factual evidence that was adduced by the Company. None of the Administrators gave evidence at the trial. Factual evidence was given by three witnesses: Du Juan, who is a Senior Director of the Credit Operations Department of PKU Founder Group Finance Co. Ltd. She joined the Credit Operations Department in July 2014 and was involved in the issuance of the Nuoxi Bonds. Her witness statement contains no evidence concerning consideration by the Company, the PU Group more generally or the Administrator about complying with Keepwell Deeds or the EIPU and regulatory difficulties that might be encountered. Li Wei, a lawyer at Dentons, who is a member of the working group assisting the Administrator. It is not clear when he became involved. His witness statement also does not address this issue directly. In [13] he says this: “In any event, the Administrator also considered that performance of the Keepwell Deeds and EIPUs would not have been possible because PUFG would not have been able to obtain the required regulatory approvals”. As Mr Li does not give details of the time the “consideration” took place and how whoever was involved came to be thinking about performance of the Keepwell Deeds, this is not helpful. At the beginning of [21] he says “After the commencement of the Reorganisation Proceedings, the Administrator did not and would not have decided for PUFG to take any action” to comply with the Keepwell Deeds or the EIPUs for reasons he then goes on to explain. This is consistent with the Administrator never giving any consideration to compliance. Wu Jing is a Senior Director of the Company’s Legal Department. She joined the Company in about April 2014. She gives no relevant evidence. In the proceedings brought by FIHK (HCA 798/2021, which relates to the Kunzhi Bonds) there is an additional factual witness: Fang Laitan. He is currently the responsible person for the operation of the Operations Management Department of Peking University Resources Group Urban Development Co., Ltd and joined the resources division of the PU Group in around July 2017. He does not give any evidence in relation to compliance with the Keepwell Deeds or EIPUs.

82.  In the light of the evidence I find as fact, what as I have explained is not in any event disputed, namely, that the Company took no steps at any time to obtain the approvals, consents, licences, orders, permits or any other authorisations as might prove necessary (“approvals”) for complying with the Company’s obligations under the 1^st Nuoxi Keepwell Deed, the 2^nd Nuoxi Keepwell Deed, the 1^st Kunzhi Keepwell Deed or the 2^nd Kunzhi Keepwell Deed or took any steps at any time to consider what approvals might be required in order for the Company to comply with its obligations under any of the four Keepwell Deeds, the four EIPUs or what the prospects were of obtaining such approvals as might be required. I now turn to consider the authorities, which consider what the obligation to use one’s best efforts to comply with the terms of a contract requires.

83.  The Company accepts that the term “best efforts” is synonymous with the more commonly used term “best endeavours” and is more onerous than the also commonly found obligation to use “reasonable endeavours”[41]. “Best endeavours” is explained in IBM United Kingdom Ltd v Rockware Glass Ltd[42], in which the duty is described as being “to take all reasonable steps which a prudent and determined man acting in his own interest and anxious would have taken”[43]. This formulation has been applied in Hong Kong in, for example, Tam King Hang v Yuen Lei Gwun[44].

84.  I understand the principles that I have just stated to be uncontroversial. What requires further consideration is how a “best efforts” obligation applies if no efforts were taken. The Company approached this issue by relying on the judgment of VK Rajah JA in the Singapore Court of Appeal’s decision in KS Energy Services Ltd v BR Energy (M) Sdn Bhd[45]. After a detailed consideration of case law commencing in [42] Rajah JS identifies what he considers are the principles that emerge from the authorities. I will quote the relevant paragraph, but note that the Company does not suggest that the Judge’s first conclusion, namely, that the test for determining whether “all reasonable endeavours” have been used is no different from the test for determining whether “best endeavours” have been used, is the position in Hong Kong, although as is apparent on a close reading of [93] in practice there is probably no difference given what the Singapore Court of Appeal found to be the test for “all reasonable endeavours”.

“93. The foregoing cases are the more significant cases to have originated from the English and Scottish courts on ‘all reasonable endeavours’ clauses and ‘best endeavours’ clauses. The available commentaries in this area of the law (and these tend to be professional rather than academic) tend to agree that there is a great deal of uncertainty surrounding the obligations imposed by the various ‘endeavours’ clauses. The typical advice in these commentaries is for the parties to expressly specify the criteria by which satisfaction of such clauses is to be assessed. This lack of certainty is unfortunate. Be that as it may, following on our holding (at paragraph 62 above) that the test for determining whether an ‘all reasonable endeavours’ obligation has been satisfied should ordinarily be the same as the test for determining whether a ‘best endeavours’ obligation has been satisfied (ie, the Travista test), we also endorse the guidelines below vis-à-vis the operation and extent of both ‘all reasonable endeavours’ and ‘best endeavours’ clauses:

(a) Such clauses require the obligor ‘to go on using endeavours until the point is reached when all reasonable endeavours have been exhausted’ (see Yewbelle (HC) at paragraph 123 and Yewbelle (CA)), or ‘to do all that it reasonably could’ (see Jet2 (CA) at paragraph 31).

(b) The obligor need only do that which has a significant (see The Talisman) or real prospect of success (see Yewbelle (HC) and Yewbelle (CA)) in procuring the contractually-stipulated outcome.

(c) If there is an insuperable obstacle to procuring the contractually-stipulated outcome, the obligor is not required to do anything more to overcome other problems which also stood in the way of procuring that outcome but which might have been resolved (see Yewbelle (CA)).

(d) The obligor is not always required to sacrifice its own commercial interests in satisfaction of its obligations (see CPC Group), but it may be required to do so where the nature and terms of the contract indicate that it is in the parties' contemplation that the obligor should make such sacrifice (see Jet2 (CA)).

(e) An obligor cannot just sit back and say that it could not reasonably have done more to procure the contractually-stipulated outcome in cases where, if it had asked the obligee, it might have discovered that there were other steps which could reasonably have been taken (see EDI).

(f) Once the obligee points to certain steps which the obligor could have taken to procure the contractually-stipulated outcome, the burden ordinarily shifts to the obligor to show that it took those steps, or that those steps were not reasonably required, or that those steps were not reasonably required, or that those steps would have been bound to fail (see EDI).”

85.  The Company places much reliance on [93(c)] and suggests that it is to be understood as establishing that if the contractually stipulated outcome could never have been achieved the obligor is not required to do things, which would have been of no utility. In the present case, the Company argues that if the necessary approvals could never have been obtained the failure to make any effort to obtain them does not prevent it relying on clause 2.2 because it made no difference to the outcome. I accept that as a broad principle this is correct. However, an obligor who had taken no steps to comply with a “best efforts/endeavours” obligation will have to prove by cogent evidence that this is the case. Generally, this will require the obligor to show what it would have had to do to comply with its obligation and further show why it would have been prevented from doing so.

86.  In the present case, in my view there is a material difference between what the Company has to show in respect of a failure to comply with the Keepwell Deeds or the EIPUs before the reorganisation commenced on 19 February 2020 and after it had commenced. I address the expert evidence on what the difficulties were in obtaining approval generally and, in particular, after the reorganisation had commenced in the next section. It seems to me clear that once the Company was in reorganisation there was no realistic likelihood of approvals being given to transfers out of the Mainland. This would simply have depleted assets available to the Administrators and the Company, which would otherwise be available to Mainland creditors or financing and implementing the reorganisation. However, the position was, in my view, different before the reorganisation.

87.  I have found that FIHK did not have a Consolidated Net Equity of US$1 as at 31 December 2019; it had a deficit of approximately US$166,670,837. It follows that the Company was in breach of the Keepwell Deed at that date and, presumably, for at least sometime before. The Company cannot say, and indeed has not, that it failed to ensure, as required by clause 4.1(i), that FIHK had the specified net worth because of the reorganisation process. The Company has to explain why it had taken no effort to ensure clause 4.1(i) was complied with at the end of December 2019. It has adduced no evidence of this at all. It follows that I find the Company has failed to prove that it used its best efforts to obtain the necessary approvals and, as clearly it had not complied with its obligations under the Keepwell Deeds and the EIPUs, the Company breached its obligations under clause 4.1(i) of the Kunzhi Keepwell Deeds in respect of FIHK. I address the resulting loss in [92]–[94].

Regulatory Approvals

88.  Most of the evidence at the trial consisted of Mainland witnesses opining on Mainland Bankruptcy Law and the scope and operation of the Mainland regulations governing foreign currency transactions. The evidence was not directed to a consideration of any particular transaction or type of transaction. There was no evidence adduced by the Company about how it expected, or would normally expect, to service its foreign debt. As a result, the evidence was general and fairly academic. For example, Madam Liu Hongyu, who gave evidence for the Plaintiffs, was cross-examined on her evidence that she would not have expected the Company to encounter any particular difficulty in obtaining foreign exchange approval to transfer money out of the Mainland to fund the repayment of Nuoxi or Kunzhi’s liabilities prior to the Company becoming subject to the reorganisation proceedings. Mr Maurellet suggested to Madam Liu that this was not the case, because, as I understood the assumption that underpinned his question, approval could not be obtained from SAFE for what would be treated by SAFE as a loan by a Mainland company to repay an offshore loan and as it would not be considered as, to quote Mr Maurellet, “a genuine authentic loan” because the Company would not acquire anything the regulator would consider of value. I suggested to Mr Maurellet this was difficulty to follow, because it seemed reasonable to assume the Company would have a commercial interest in its subsidiary honouring its liabilities otherwise the Company’s ability to borrow foreign currency in the future would be jeopardised. This argument makes a little more sense in respect of the EIPUs, because the EIPUs require the acquisition of companies for the value of the outstanding sums due under the Bonds, although the companies’ value might be materially less, and, therefore, their acquisition would confer no commercial benefit other than the ancillary one of allowing the PU Group’s foreign debt to be serviced.

89.  The Company had adduced no factual evidence as to how it had intended to finance Nuoxi and Kunzhi’s repayment obligations. It was only during the cross-examination of Mr Zhang[46] and Ma Shaobo, who had worked for SAFE and been the director of its Investment Administration Division until 2010 before joining Goldman Sachs, and who now runs his own investment advisory firm, that evidence began to emerge about how in practice repayment of the principal might be financed—it remained unclear how interest might be repaid. In practice the most likely method of repaying the principal was explained by Mr Zhang as follows: “the second aspect is, as a matter of practice, this type of bond issuance will be refinanced when the bond matures, so a new bond will be issued to refinance, to repay the existing bond, so that’s how the structure works under rollover basis, if everything goes fine”. Mr Ma identified two further methods, namely, the repurchase of onshore foreign direct investment (presumably denominated in a foreign currency) or to quote Mr Ma “to make use of cash to support overseas investment or to move the fund offshore to support overseas projects stop so the project should be genuine project, and the prerequisite should be it is in accordance with the country’s direction concerning assets”.

90.  In the absence of any evidence from the Company about how it did finance the interest payments that were made, how it intended to repay the principal or what it could have done to honour its obligations under the Keepwell Deeds and EIPUs, the expert evidence is largely hypothetical. What can, however, be said in my view with confidence is as follows. First, which is not in dispute, that the Keepwell Deeds, Guarantees and EIPUs were genuine, lawful under Mainland law and the necessary approvals for them had been obtained from the NDRC. Secondly, that regulatory approval would have been necessary to exchange RMB into US$ and transfer the US$ out of the Mainland or to transfer RMB to Hong Kong with a view to its exchange into US$ and its subsequent use to pay foreign creditors sums due under the Keepwell Deeds or the Guarantees. I did not understand this to be disputed. It seems to me highly probable that the Company would have had difficulty in obtaining the necessary approvals once the Company became subject to the reorganisation proceedings in February 2019. It may be that given the deteriorating financial position of the PU Group it would have been difficult to obtain the necessary approvals sometime before February 2019, but given the paucity of evidence adduced by the Company about its financial position or plans, it is impossible to say when this might have become the case. More generally the question of whether approval could have been obtained after the reorganisation proceedings were commenced is very much a fact sensitive issue. There is no evidence to suggest that the PU Group were concerned about the damage done to PU Group’s future prospects of borrowing foreign currency or a need for it to obtain in the short to medium term foreign currency to implement the reorganisation plan. Indeed, the Company’s response to the claims made in these four actions suggests it is not concerned about foreign debt markets’ response to its defaults and attitude to compliance with the Keepwell Deeds and the EIPUs. It seems to me that, realistically, absent the Administrator supporting an application for approval to transfer US$ out of the Mainland as part of the reorganisation plan’s implementation, regulatory approval was very unlikely to be obtained.

91.  The Company also argues that once the Administrator had been appointed it became one of the “Approval Authorities” under clause 2.2 and it would not give (and of course did not give) approval to any payments being made pursuant to the Keepwell Deeds or EIPUs. Although, the Mainland experts gave evidence on whether the Administrator constituted a separate entity to the Company for these purposes and should be treated as an Approval Authority, this is a question of English law. The issue is whether an insolvency officer, which is in substance the Administrator’s capacity, comes within the term Approval Authority in these English law agreements. An “authority” is not as a matter of language a term, which is normally used to describe a liquidator or similar officer. In the context of clause 2.2 it is plainly intended to refer to “PRC governmental authorities, including the NDRC, the MOFCOM and the SAFE and their respective local counterparts” to quote from the Offering Circular. It seems to me that the “Approval Authorities” did not include the Administrator.

Loss

92.  I have found that the Company is only liable for a breach of the Keepwell Deeds in respect of FIHK. The Company argued that in the event that I found for the Plaintiffs on liability I should reject the claim that the breaches caused loss. This was on the basis that I should take into account the subsequent reorganisation, with the consequence that there was no prospect of obtaining the necessary approvals. Given my reasoning this point falls away. I accept that once the reorganisation commenced there was no realistic prospect of obtaining approval, but that is irrelevant to an assessment of what the consequence was of the Company not ensuring that FIHK had a positive Consolidated Net Equity as at 31 December 2019 as it was obliged by the terms of the Keepwell Deeds to do. The Company argues that when considering what that consequence was it is the loss caused to the individual Issuers and Guarantors that needs to be determined, not the loss suffered by the Bond holders because of the Issuers and Guarantors failing to honour their obligations under the Bonds and Guarantees. With this I agree. The Company goes onto argue that if the Company had transferred monies to an Issuer or Guarantor, it would have been treated as a loan. The consequence, says the Company, is that the net balance sheet position would not have improved. The flaw in this argument is that if the advance made by the Company did not improve the net balance sheet position because of the way the advance was treated in the books of FIHK (I shall assume as it is the relevant Guarantor) the Consolidated Net Equity would have remained (RMB1,154,012,000). The Keepwell Deed required the Company to ensure that the Consolidated Total Equity was US$1 and if that meant it had to make a gift to FIHK to achieve that result, that was what was required. This also disposes of the Company’s argument that the Issuers and the Guarantors do not have standing to sue, because any breach of the Keepwell Deeds or EIPUs only caused loss to the Bond holders and any action should have been brought by the Trustee.

93.  It seems to me that the correct analysis of the consequence of the breach in the absence of any evidence from the Company is that it caused loss to FIHK by at the amount it should have, but did not receive, namely, RMB1,154,012,000.

94.  If I determined in the other three actions that the pleaded breaches had occurred, I would have found that the resulting loss was that claimed as the Company had made no effort to demonstrate that the amounts required to be paid by the Company to comply with the Keepwell Deeds was a different figure.

Determination and Conclusion

95.  I dismiss each of HCA 778, 1418 and 1442/2021 and make a costs order nisi that the Plaintiffs in those three actions pay the Company’s costs, such costs to be taxed if not agreed, with a certificate for three counsel.

96.  In the case of HCA 798/2021 I will make a declaration that the Company breached the Keepwell Deeds dated 17 April 2018 and 21 May 2018 and caused loss to FIHK in the sum of the US$ equivalent as at 31 December 2019 of RMB1,154,012,000. I will make a costs order nisi that the Company pay FIHK’s costs of the action, such costs to be taxed if not agreed, with a certificate for three counsel.

HCA 778/2021, HCA 798/2021,
HCA 1418/2021 and HCA 1442/2021
(HEARD TOGETHER)

[2022] HKCFI 636

HCA 778/2021

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 778 OF 2021

____________________

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 798 OF 2021

____________________

________________________

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1418 OF 2021

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1442 OF 2021

__________________________________

REASONS FOR DECISION

__________________________________

1.  On 17 December 2021, I dismissed the Defendant’s application to stay the Actions. On 22 February 2022, I dismissed the Defendant’s application (which I had heard on 18 February 2022) for leave to appeal that decision. Also on 22 February 2022 I heard a case management conference and made directions for the further conduct of the Actions leading to a trial commencing on 11 January 2023.

2.  Also on 17 December 2021 I made an order in HCMP 1831 of 2021 for recognition of the Administrators of the Defendant.  This included in [5]–[9] directions intended to facilitate cooperation between the Hong Kong court and the Beijing No.1 Intermediate People’s Court (“Beijing Court”), which has conduct of the Administration of the Defendant.  One reason for making comprehensive directions at this stage for the progress of the Actions is in order that the Beijing Court has some idea as to how the Actions will progress subject to the Beijing Court taking up the Hong Kong court’s suggestion that the two courts consider cooperating with a view to identifying issues, which arise in both the Actions and the Administration, and agreeing, with the involvement of the Parties, which court determines, which issue.  If this were to happen it may well be that the directions will have to be amended.

HCA 778/2021, HCA 798/2021, HCA 1418/2021,
HCA 1442/2021 and HCMP 1831/2021
(HEARD TOGETHER)

[2022] HKCFI 635

HCA 778/2021

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 778 OF 2021

____________________

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 798 OF 2021

____________________

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1418 OF 2021

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1442 OF 2021

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1831 OF 2021

____________________

_________________________________

REASONS FOR DECISION

_________________________________

1.  On 17 December 2021 I handed down my decision in respect of five proceedings: HCA 778, 798, 1418 and 1442 of 2021 (“Actions”) and HCMP 1831 of 2021 (“HCMP 1831”). The applications in the Actions were for stays of the Actions for the reasons explained in my Decision. The application in HCMP 1831 sought recognition and assistance of the Administrators of Peking University Founder Group Company Limited (“Administrators” and “Company” respectively).

2.  I dismissed the applications for a stay in all four writ Actions.  I granted an order in terms of [1]–[3], [5] and [6] of the Originating Summons in HCMP 1831 and substantially in the terms of [4].  However, I also added five paragraphs, which provide a preliminary procedure for cooperation between the Beijing No.1 Intermediate People’s Court (“Beijing Court”) in the further conduct of the Actions.  I could have simply granted an order in terms of the Originating Summons and then dealt with the question of the stay in the Actions.

3.  The Administrators now wish to appeal my decisions in the Actions and HCMP 1831.  There is no dispute that the decisions in the Actions are interlocutory and that leave is necessary.  In the case of HCMP 1831 the Administrators argue that the decision is final and that they are entitled to appeal it as of right and, consequently, they argue that leave should be given to appeal the decisions in the Actions because they give rise to the same issue.  As I have explained I could have made an order in the terms of the Originating Summons thus giving the Administrators nothing to appeal.  The argument I have just summarised smacks of intellectual slight of hand rather than being a point of substance.  For reasons I explain in [7]–[10] in my view it is wrong.

4.  The application gives rise to a number of issues:

(1)             The consequences, if any, of the application being made out of time.

(2)             Whether leave is necessary to appeal the decision in HCMP 1831.

(3)             Whether leave should be given to appeal my decisions in the Actions and, if it is interlocutory, HCMP 1831.

5.  The applications for leave to appeal should have been issued on Friday 31 December 2021.  They were issued on Monday 3 January 2022.  The reason for the delay was, apparently, Freshfields litigation clerk thinking that the Registry closed later than it does.

Leave to appeal out of time

6.  Once an application for leave is made out of time the criteria for determining leave change.  As I explain in [4]–[5] of The German Swiss International School Association Limited v Horst Geicke[1] if a delay is short and not the responsibility of the party the court is likely to grant an extension. If the court takes the view that the reason for the delay does not excuse the failure to commence an appeal within the material time it is necessary for the party seeking an extension to show that the appeal has a real prospect of success.  Mr Ho, on behalf of the Plaintiffs, argued that the failure to issue the appeal out of time continued a history of delay by the Company in these proceedings and invited me to assess the application on the basis that it was necessary for the Company to demonstrate a real prospect of success.  It seems to me that as Freshfields have gone on oath and deposed that it was their mistake that the application was issued slightly out of time, the application should be assessed on the basis that the delay is excusable and I will grant the necessary extension of time.  The delay, therefore, makes no difference to the criteria for assessing leave.

HCMP 1831

7.  As I have already explained I granted an order for recognition largely in the terms of the originating summons.  The form of [4] of the originating summons which sought a general stay of all proceedings against the Company was not in accordance with the current practice, which is explained in [7] of my decision in Re FDG Electric Vehicles Ltd[2]:

“The recognition orders that have until recently been granted have contained a paragraph in the following terms: ‘For so long as the Company remains in liquidation in [relevant jurisdiction], no action or proceedings shall be proceeded with or commenced against the Company or its assets or affairs, or their property within the jurisdiction of this Honourable Court, except with the leave of this Honourable Court and subject to such terms as this Honourable Court may impose’. This was intended to be in the nature of a case management provision, which would ensure that action would not take place in Hong Kong without the relevant parties being aware of the impact of the foreign insolvency proceedings and, if appropriate, a stay granted. However, I recognise that there are a number of questions that the order so worded gives rise to. First, that if (which was not the case with the initial orders that were granted) there are already proceedings on foot in Hong Kong, one would expect an application for a stay to be made in those proceedings. Secondly, whether or not it is appropriate to grant a stay in respect of unidentified prospective proceedings about which, necessarily, nothing is known. Both Mr Ng and Mr Ho agreed that the paragraph was more appropriately drafted in terms, which did not purport to impose a stay, but required appropriate applications in High Court proceedings to be issued and returnable before the judge granting the recognition order. The order that I will grant in the present case, and be amenable to granting in the future, is as follows:

‘If the Provisional Liquidators wish to apply for a stay or other directions in respect of proceedings in the High Court of any sort as a consequence of the recognition of their appointment by this order such application shall be listed before the Honourable Mr. Justice Harris or such other judge as he shall direct. The Provisional Liquidators shall write to the clerk to the Honourable Mr. Justice Harris seeking case management directions for the determination of any application that they wish to make pursuant to this order’.

I note in passing that in a recent recognition and assistance decision in the Cayman Islands, Mr Justice Segal granted a similar order [3].”

If [4] had been in the standard form I would have granted an order in terms and the question of appealing the recognition order would probably not have arisen.

8.  Mr Maurellet on behalf of the Administrators argued that the recognition order is a final order and, therefore, could be appealed as of right.  It is, so Mr Maurellet reasoned, final because it determined the substantive question of whether or not the Actions should be stayed.  In my view this is wrong.

9.  An application to stay an action has long been recognised as interlocutory in nature and requiring leave if an appeal is to be pursued[4]. This is because the substantive relief that is sought in the proceedings is something else.  In that regard the position is different from that when an anti-suit injunction is sought.

10.  Mr Maurellet argued that as HCMP 1831 was made by originating summons and resulted in a final determination of HCMP 1831, that determination is final.  The argument is based on an observation of the Court of Appeal in [9] of Re LehmanBrown Ltd[5], which Mr Maurellet argued establishes that an order made on an originating summons, which disposes of the application is final.  I disagree.  It seems to me clear from [16] of LehmanBrown that the Court of Appeal is not suggesting that the form of the application is of itself determinative, what is relevant is whether or not the application determines the substantive rights of the parties.  This is consistent with Bright Shipping[6]and Cheung JA in [7.8] of Re Grande Holdings Ltd[7].  What determines whether or not an order is interlocutory or final for the purposes of section 14AA of the High Court Ordinance, Cap 4, and RHC O59 r21 is not the form of the originating process, but the character of the decision.  As I have already explained stay applications are treated as interlocutory because they do not determine substantive rights.  In the present case the stay applications do not inhibit either party’s freedom to prosecute or defend the substantive claims.  In my view the decision is interlocutory and leave is necessary if the Administrators wish to appeal the decision.

Should leave be granted?

11.  Section 14AA(4) of the Ordinance provides that:

“Leave to appeal for the purpose of subsection (1) shall not be granted unless the court hearing the application for leave is satisfied that—

(a) The appeal has a reasonable prospect of success; or

(b) There is some other reason in the interests of justice why the appeal should be heard.”

12.  In the present case the Administrators wish to appeal the exercise of my discretion in both the Actions and HCMP 1831.   In the case of “an appeal against the exercise of discretion of the judge.  The appeal court is not to exercise an independent discretion of its own but rather review the decision of the judge.  It may set aside the judge’s exercise of discretion if it can be shown that the judge did so under a mistake of law or in disregard of principle, or under a misunderstanding of the evidence, or had taken into account irrelevant matters, or failed to take into account relevant ones, or that the conclusion reached in the exercise of discretion is outside the generous ambit within which reasonable disagreement is possible.  It is only if the appeal court has reached the conclusion that the judge’s exercise of discretion must be set aside for one or more of these reasons that it becomes entitled to exercise a discretion of its own[8].”

13.  The applications involved a consideration of legal principles concerning three matters: exclusive jurisdiction clauses, submission to insolvency jurisdiction and management of cross-border insolvency.  The law in relation to all three is clear.  The notices of appeal focus on the way in which I dealt with the Administrators’ argument that the Actions should be stayed because judgments in the Actions would serve no purpose, because the Beijing Court would, or at least might, give no weight to them.  Although in the domestic Mainland context it may well be the case that the Beijing Court would ignore a decision by another Mainland court because of Article 21 of the Enterprise Bankruptcy Law, the fact is that there is no guidance from a Mainland court, and in particular no guidance from the Supreme People’s Court, about the evidential weight to be given to a foreign judgment in a creditor’s favour if an administrator rejects a claim and the creditor appeals that decision.  If the claim is governed by foreign law, as the Administrators’ expert explains, the law and its application has to be proved.  In my view there are clearly reasons to expect that the Beijing Court would attach considerable weight to a decision of the Hong Kong court and, in practice, considerably more weight than it would to an expert opinion.  I can see no reason to think that the Court of Appeal would think that my decision in this regard was so clearly wrong it should interfere with it.

14.  Mr Maurellet argued that if I take the view, as I do, that the Applicants have not demonstrated a reasonable prospect of the Court of Appeal interfering in my decision for conventional reasons I should grant leave on the grounds that it is in the interests of justice that the appeal is heard.  I disagree.  There is no important legal issue that requires reconsideration by an appellate court.  I do not think that the interests of justice require that the Applicants are given the opportunity to re-argue the weight that the Beijing Court is likely to give to a Hong Kong judgment—an issue on which, in my view, the Administrators’ argument is both unpersuasive and unattractive.

15.  I, therefore, dismiss the leave applications and will order that the Applicants in HCMP and Defendant in the Actions pay the costs of the Respondent in HCMP and Plaintiffs in the Actions forthwith such costs to be taxed if not agreed.

HCA 778/2021, HCA 798/2021, HCA 1418/2021,
HCA 1442/2021 and HCMP 1831/2021
(HEARD TOGETHER)

[2021] HKCFI 3817

HCA 778/2021

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 778 OF 2021

____________________

____________________

AND

HCA 798/2021

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 798 OF 2021

____________________

____________________

AND

HCA 1418/2021

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1418 OF 2021

____________________

____________________

AND

HCA 1442/2021

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1442 OF 2021

____________________

____________________

AND

HCMP 1831/2021

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1831 OF 2021

____________________

____________________

____________________

(HEARD TOGETHER)

_________________

D E C I S I O N

_________________

The Applications

1.  A number of applications are made in these four actions[1]. The Plaintiffs seek case management directions for an expedited trial of all four actions, which I understand it to be common ground involve identical legal and factual issues.  The Defendant has issued a summons seeking principally a stay of the actions in order that the disputes between the Parties are resolved in reorganisation proceedings taking place before the Beijing No.1 Intermediate People’s Court (“Beijing Court”).  In addition, the Administrator of the Defendant (explained in [7][2]) issued an originating summons shortly before the hearing in which the Defendant seeks an order for recognition and assistance of the reorganisation proceedings in Beijing and stay of the actions.

2.  The applications give rise to issues of some importance.  The actions concern the enforceability of what are known as Keepwell Deeds, given by the Defendant in respect of a number of its subsidiaries.  Keepwell Deeds have become an increasingly common feature of the financing arrangements entered into by Mainland[3] business groups and foreign lenders.  In the present case the Keepwell Deeds relate to US$1.7 billion of debt.  The Keepwell Deeds are governed by English law and contain Hong Kong exclusive jurisdiction clauses.  The applications brought by the Defendant are the first of their sort in Hong Kong and give rise to issues concerning the interplay between the exercise of a party’s contractual rights and the impact of insolvency proceedings once a debtor has become insolvent and become subject to a formal insolvency process.

Background

3.  The Defendant in the four actions, Peking University Founder Group Company Limited, is incorporated in the Mainland (“Company”).  It is the holding company for a commercial group, whose activities stretch across a wide range of businesses the nature of which are not relevant for present purposes (“PU Group”).  It is majority owned by Peking University Asset Management Co Limited (“PUAM”). PUAM is wholly owned by Peking University, which is ultimately controlled by the Ministry of Education.  PUAM is, therefore, a State-owned enterprise.

4.  In 2017 and 2018 respectively two members of the PU Group issued bonds.  Nuoxi Capital Limited (“Nuoxi”, the Plaintiff in HCA 778/2021) issued US$900 million in aggregate principal of bonds constituted by trust deeds dated 20 April 2017 and 24 January 2018.  The trustee was the Bank of New York Mellon, London Branch.  Nuoxi is incorporated in the British Virgin Islands (“BVI”). It is a wholly owned subsidiary of Hong Kong JHC Co Limited (“HKJHC”, the Plaintiff in HCA 1418/2021), which guaranteed Nuoxi’s obligations under the Nuoxi bonds.  HKJHC is a member of the PU Group.  It is incorporated in Hong Kong.  It was wound up in Hong Kong on 13 January 2021. Nuoxi is in liquidation in the BVI.  On 24 February 2021, I made an order recognising the BVI liquidators[4].

5.  Kunzhi Limited (“Kunzhi”, the Plaintiff in HCA 1442/2021) issued US$800 million in aggregate principal of bonds (I shall refer to the Nuoxi bonds and Kunzhi bonds collectively as the “Bonds”) constituted by trusts deeds dated 17 April 2018 and 21 May 2018. The trustee was also the Bank of New York Mellon, London Branch (“Trustee”). Kunzhi is incorporated in the BVI.  It is a wholly owned subsidiary of Founder Information (Hong Kong) Limited (“FIHK”, the Plaintiff in HCA 798/2021). FIHK is incorporated in Hong Kong.  It was wound up in Hong Kong on 1 February 2021[5]. Kunzhi is in liquidation in the BVI.  On 5 July 2021, I made an order recognising the BVI liquidators of Kunzhi.

6.  Nuoxi and Kunzhi have defaulted on their payment obligations under their respective bonds.  The guarantees given by HKJHC and FIHK have been called.  The guarantees have not been honoured.  The Company had entered into two Keepwell Deeds in relation to the Nuoxi bonds with Nuoxi, HKJHC and the trustee dated 20 April 2017 (“1^st Nuoxi Keepwell Deed”) and 24 January 2018 (“2^nd Nuoxi Keepwell Deed”) respectively.  The Company has also entered into two Keepwell Deeds in relation to the Kunzhi bonds with Kunzhi, FIHK and the Trustee dated 17 April 2018 (“1^st Kunzhi Keepwell Deed”) and 21 May 2018 (“2^nd Kunzhi Keepwell Deed”) respectively.  The material terms of all four Keepwell Deeds are identical.  I shall refer to them collectively as the “Keepwell Deeds”.  They required the Company to cause each of Nuoxi, Kunzhi, HKJHC and FIHK (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 Nuoxi, Kunzhi, HKJHC and FIHK of any amounts payable under the Bonds.  Nuoxi and Kunzhi defaulted on their obligations under the Bonds.  The Plaintiffs contend that as a consequence the Company defaulted on its obligations under the Keepwell Deeds. The Plaintiffs have submitted claims to the Administrator (explained in the next paragraph) of the Company based on the Company’s breach of the Keepwell Deeds.  Other than in respect of HKJHC’s claim the Administrator has rejected the Plaintiff’s claims without giving any reason.

7.  The failure of Nuoxi and Kunzhi to honour their payment obligations arose from the deteriorating financial state of the PU Group.  On 19 February 2020 the Beijing Court issued an order on the application of the Bank of Beijing Co., Ltd that the Company commence reorganisation pursuant to the Enterprise Bankruptcy Law (“EBL”).  The letter of request from the Beijing Court in support of the Administrator’s application for recognition and assistance appends a copy of its decision of 19 February 2020 appointing, what the Decision refers to as a liquidation group to supervise the reorganisation and carry out the functions described in the Decision (“Administrator”) [6].  The Administrator comprises of a panel of 12 members.  Two are partners in Beijing Dentons Law Office.  The positions of the other 10 members have been redacted.  I asked at the hearing why I had not been provided with this information, which has been provided in previous cases, most relevantly Re HNA Group Co., Limited[7]. I was told that the other members had requested the Beijing Court that their positions be kept confidential.  I was subsequently told what their positions are (which is fairly conventional for a reorganisation of the size), but was requested to keep the information confidential.  This I will do.  However, I would have expected it to have been appreciated by the Company’s lawyers, and for it to have been explained to the members of the Administrator, that it was inappropriate to ask the Hong Kong court to recognise the Administrator, whilst withholding relevant information about the identity of the Administrator.  This is not something I would expect to be repeated in future applications for recognition by administrators of Mainland companies unless there is very good reasons, which would need to be explained in evidence made by the relevant members of the Administrator.

8.  On 21 February 2020 the Beijing Court issued an announcement directing creditors of the Company to submit their claims to the Administrator of the Company.

9.  On 4 February 2021, Nuoxi submitted a claim in the Company’s reorganistion for RMB6.3 billion in respect of the 1^st Nuoxi Keepwell Deed and the 2^nd Nuoxi Keepwell Deed.  On 26 May 2021, Nuoxi found out that its claims had been rejected, because it was not on the Company’s creditors’ list.  On 7 June 2021, Nuoxi lodged an objection to the Administrator in accordance with the EBL.

10.  On 29 January 2021, Kunzhi submitted a claim in the Defendant’s Reorganisation in the sum of approximately RMB5.7 billion in respect of the 1^st Kunzhi Keepwell Deed and 2^nd Kunzhi Keepwell Deed. On 26 May 2021, Kunzhi found out that its claims had been rejected, also because it was not on the Company’s creditors’ list.  On 7 June 2021, Kunzhi lodged an objection to the Administrator in accordance with the EBL.

11.  On 9 April 2021, FIHK submitted a claim in the Defendant’s Reorganisation in the sum of approximately RMB5.7 billion in respect of the 1^st Kunzhi Keepwell Deed and 2^nd Kunzhi Keepwell Deed. On 26 May 2021, FIHK found out that its claims had been rejected because it was not on the Company’s creditors’ list.  On 7 June 2021, FIHK lodged an objection to the Administrator in accordance with the EBL.

12.  On 20 November 2020, HKJHC submitted a claim in the Defendant’s Reorganisation in the sum of approximately RMB6.3 billion in respect of the 1^st Nuoxi Keepwell Deed and 2^nd Nuoxi Keepwell Deed.  The Administrator has not adjudicated on the claim.  Should the Administrator overrule the objections lodged by Nuoxi, Kunzhi and FIHK, they will have 15 days to appeal to the Beijing Court.  As I have already mentioned the Administrator has not informed the Plaintiffs of the reasons for rejecting the claims.

13.  As Nuoxi, Kunzhi, FIHK and HKJHC (together the “Plaintiffs”) claim that the Company has breached its obligations under the Keepwell Deeds, they commenced the present four writ actions against the Company.  The Plaintiffs have sought expedition of the trials because they are concerned that the Administrator will not set aside funds to pay the Plaintiffs’ claims if they are admitted in the reorganisation.  The Company issued in each of the actions a summons seeking a stay of the actions pursuant to the Rules of High Court O12 r8.  In particular, the summonses seek a stay pending determination of the application anticipated by the Administrator for recognition and assistance of the reorganisation proceedings in the Mainland.  The application for recognition and assistance issued on 18 November 2021 in which a stay of the actions is sought has in practice subsumed the earlier summonses.  The initial summonses for a stay summarise the grounds on which a stay is said to be justified:  First, the Plaintiffs have elected to proceed in the Mainland and submitted to the jurisdiction of the courts in the Mainland and in respect of the same cause of action to which the actions relate.  Secondly, there is great uncertainty as to whether any judgment obtained in the actions will be recognised or enforced in the Mainland and this is a strong reason for the Hong Kong courts to decline jurisdiction.  Thirdly, the actions should be stayed in view of the principle of modified universalism. Fourthly, the Mainland courts are distinctly more appropriate in view of the process in the Mainland and the issues to be determined in the actions and, considering the best interests and convenience of the parties to the proceedings and the witnesses in the proceedings, the proceedings should be conducted in the Mainland.

14.  The originating summons seeking an order for recognition and assistance is supported by a letter of request from the Beijing Court dated 5 November 2021.  I have appended an English translation of the Letter of Request to this Decision.  For the most part what is sought is conventional.  In addition to recognising the reorganisation and the Administrator, the following powers by way of assistance are sought in [2] of the originating summons:

(1)  To request and receive from third parties documents and information concerning the Company and its promotion, formation, business dealings, accounts, assets, liabilities or affairs including the cause of its insolvency;

(2)  To locate, protect, secure and take into their possession and control all assets and property within the jurisdiction of this Court to which the Company is or appears to be entitled;

(3)  To locate, protect, secure, and take into their possession and control the books, papers, and records of the Company including the accountancy and statutory records within the jurisdiction of this Court and to investigate the assets and affairs of the Company and the circumstances which gave rise to its insolvency.  The books, records and documents of the Company include:

(i)  emails exchanged and other correspondence between the Company and its auditors, and the Company and other third parties; and

(ii)  documents and information provided by the Company to its auditors and provided by the auditors to the Company in relation to the audit work;

(4)  To take all necessary steps to prevent any disposal of the Company’s assets and, in particular, to secure any credit balances in any bank accounts in the name or under the control of the Company within this jurisdiction;

(5)  To operate and open or close any bank accounts in the name and on behalf of the Company for the purpose of collecting the assets and paying the costs and expenses of the Administrator;

(6)  To retain and employ barristers, solicitors or attorneys, accountants and/or such other agents or professional persons as the Administrator considers appropriate for the purpose of advising or assisting in the execution of their powers and duties under this Order; and

(7)  So far as may be necessary to supplement and to effect the powers set out herein, to bring legal proceedings and make all such applications to this Court, whether in their own names or in the name of the Company or the Administrator, on behalf of and for the benefit of the Company, including any applications for:

 (i)  orders for disclosure, the production of documents and/or examination of third parties which may be made by the Administrator to facilitate the Administrator’s investigations into the assets and affairs of the Company and the circumstances which gave rise to its insolvency; and/or

 (ii)  ancillary relief such as freezing orders, search and seizure orders in any legal proceedings commenced.

15.  I have granted these powers in the case of three previous applications for recognition and assistance of Mainland insolvency proceedings[8].  Paragraph 4 of the originating summons is controversial.  It seeks a stay of the actions.  There was a period during, which an automatic stay, which could be challenged, was included in the standard from of order for recognition and assistance.  I concluded that this was inappropriate in Re FDG Electric Vehicles Ltd[9] and since that time the standard order requires a separate application for a stay if one is required.  The dispute in the present case concerns whether or not a stay of the actions should be granted.

The Keepwell Deeds and the Claims

16.  The Plaintiffs argue that if the Keepwell Deeds had been complied with Nuoxi and Kunzhi would have been able to comply with their payments obligations.  The loss caused by the Company’s failure to provide sufficient finance to permit to Nuoxi and Kunzhi to pay what is due under the Bonds is the amount that the bondholders should have received.  This totals RMB12 billion.

17.  The provisions of the Keepwell Deeds, which are relevant to the present applications, are contained in clauses 2.2, 15.1 and 15.2.  Clause 15.1 provides that the Keepwell Deeds are governed by and construed in accordance with English Law.  Clause 15.2 is the jurisdiction clause and is in the following terms:

“15.2 Jurisdiction

(a)  The courts of Hong Kong are to have exclusive jurisdiction to settle any disputes which may arise out of or in connection with this Deed and accordingly any legal action or proceedings arising out of or in connection with this Deed (Proceedings) may be brought in such courts.  All of the parties to this Deed irrevocably submit to the jurisdiction of such courts and waives any objection to Proceedings in such courts whether on the ground of venue or on the ground that the Proceedings have been brought in an inconvenient forum.”

18.  Clause 2.2 provides:

“2.2 Regulatory Approvals

Notwithstanding anything contained in this Deed, if, and to the extent that the Company is required to obtain necessary approvals, consents, licences, orders, permits and any other authorisations from the relevant Approval Authorities (the Relevant Approvals) in order to comply with its obligations under this Deed, the performance of such obligation shall always be qualified by, and subject to, the Company having obtained such Relevant Approvals. In this regard, the Company undertakes to use its best efforts to obtain such Relevant Approvals within the time stipulated by the relevant Approval Authorities, if applicable.”

19.  As I have already mentioned the Administrator did not inform the Plaintiffs why their claims had been rejected.  Reasons why it is suggested the Plaintiffs do not have a good claim under the Keepwell Deeds first appear in a report by Zhang Xin dated 11 November 2021 (in other words just over two weeks before the hearing) in which he suggests that the Company could not have complied with clause 2.2.  Mr Zhang is a lawyer qualified in both the Mainland and England.  He specialises in banking and finance, capital markets and international transactions.  He says that between 2011 and 2021 he has advised on 31 transactions, which have involved Keepwell Deeds.  This serves to illustrate how widely Keepwell Deeds have been used, although Mr Zhang says that their use has declined since January 2017 when the State Administration of Foreign Exchange (“SAFE”) lifted the limitation on repatriating the bond proceeds raised overseas by Mainland companies, which had necessitated the use of foreign subsidiaries and a security structure, which included Mainland parent companies issuing what became known as Keepwell Deeds.  The Nuoxi and the Kunzhi Keepwell Deeds were signed after January 2017.

20.  Mr Zhang explains the approvals required to be obtained in the Mainland in respect of cross-border security for foreign debt.  It is not necessary for the purposes of the present applications to consider this in detail, but in order to understand the grounds on which the Company says a stay is justified, an understanding of what is said by the Administrator to be the regulatory problems that the Keepwell Deeds faced is required.

21.  Mr Zhang says that his personal view is that the Company entering the Keepwell Deeds did not violate any Mainland law or regulation and they did not require registration.  However, Mr Zhang says in [25] of his report “the relevant Chinese Governmental Approvals would be required when the Keepwell Provider performs the obligations thereunder as and when an event triggering such obligations occurs.  From this angle, receiving all relevant Chinese Governmental Approvals is an inherent and fundamental pre-condition for Keepwell Provider’s performance of its obligations under the Keepwell Structure when such obligations are triggered.” Mr Zhang goes onto explain that the Company would need to obtain a number of approvals and these, he says, are not easy to obtain.  Mr Zhang says that for approval purposes any remittance by the Company overseas pursuant to its obligations would be characterised as either overseas investment or overseas lending.  They would be subject of the Guidelines for Capital Account Foreign Exchange Business, which would have to be strictly complied with before SAFE would approve the foreign exchange transactions.  In short, Mr Zhang suggests that the necessary approvals could not have been obtained once the Company became insolvent either in respect of the Keepwell Deeds or the associated Deeds of Equity Interest Purchase Undertaking.  What approvals, consents, licences, orders, permits and other authorisations (to use the language of clause 2.2) might be required is a matter of Mainland law and regulation.

22.  Although, it is not stated in Mr Zhang’s report or the affirmation evidence filed by Zhang Ting, who is one of the Administrator, whether or not the Company has ever tried to obtain what it understands to be the relevant approvals, it seems implicit in the evidence that it did not.  What approvals were required may be a matter of Mainland law, but whether the failure to seek or to obtain what was necessary was a breach of the Keepwell Deeds for which the Plaintiffs are entitled to be compensated is a matter of English law.  The assumption inherent in Mr Zhang’s report, namely, that if he is correct that clause 2.2 will not have been breached if after the Company went into reorganisation on 19 February 2020 the necessary approvals could not have been obtained, is overly simplistic.  As was argued by the Plaintiffs the determination of whether or not the Company breached the Keepwell Deeds and what loss was caused by such breaches as the court finds proved, goes beyond Mr Zhang Xin’s limited analysis.  The Plaintiffs identify the following as issues that are matters of English law and may require determination.

(1)  The proper scope of Clause 4.1.

(2)  The ways in which the obligations in Clause 4.1 can be performed, in particular whether performance can be in the form of admitting a proof of debt.

(3)  The proper scope of Clause 2.2, in particular:

(a)  the meaning of “if, and to the extent that the Company is required to obtain [the Relevant Approvals]”;

(b)  the meaning of “qualified by, and subject to”;

(c)  the meaning of “best efforts”.

(4)  The interaction between Clause 2.2 and proof of debt.

(5)  The interaction between Clause 2.2 and Clause 4.1.

(6)  The payment obligations (if any) of the Defendant towards the Plaintiffs on the true construction of the Keepwell Deeds and in the events which have happened.

23.  It would not be helpful for me to comment on the issues that might arise in any depth, but to take one example, it is not clear that the obligations under clause 4.1 are effected by Mr Zhang Xin’s analysis.  Clause 4.1 of the Keepwell Deeds provides:

“4. MAINTENANCE OF CONSOLIDATED NET WORTH; LIQUIDITY

4.1 The Company undertakes that it shall cause:

(i) each of the Issuer and the Guarantor to have a Consolidated Net Worth of at least US$1.00 at all times;

(ii) each of the Issuer and the Guarantor to have sufficient liquidity to ensure timely payment by each of the Issuer and the Guarantor of any amounts payable under or in respect of the Bonds and the Guarantee in accordance with the terms and conditions of the Bonds and/or the Trust Deed and otherwise under the Trust Deed and the Agency Agreement; and

(iii) the Guarantor to have an aggregate Total Equity of at least HK$9,980,000 at all times.

If the Issuer or the Guarantor at any time determines that it will have insufficient liquidity to meet its payment obligations as they fall due, then the Issuer and/or the Guarantor shall promptly notify the Company of the shortfall and the Company will make available to the Issuer or the Guarantor, before the due date of the relevant payment obligations, funds sufficient to enable the Issuer or the Guarantor (as the case may be) to pay such payment obligations in full as they fall due.  The Issuer or the Guarantor shall use any funds made available to it by the Company in accordance with this Deed solely for the payment when due of such payment obligations under the Bonds, the Guarantee or the Trust Deed (as the case may be).”

24.  It would seem arguable at least that the first part of clause 4.1 imposed on the Company from the date of execution of the Keepwell Deeds an obligation to provide funds to Nuoxi and Kunzhi.  If, as may be the case, it was the Company’s failure to do so between April 2017 and April 2018 when the 1^st Nuoxi Keepwell Deed and the 1^st Kunzhi Keepwell Deed respectively were signed and February 2020, when the Beijing Bank applied for the Company to be put into reorganisation, then the Plaintiffs may have a claim to which Mr Zhang’s qualifications are not relevant.  What this serves to demonstrate is that there are potentially complicated questions of English law, which will be central to the determination of the claim.  Another example is what “best efforts” means, which given that the Company’s evidence to date suggests that nothing was done, takes on an obvious significance.  The questions of construction of the Keepwell Deeds, which are matters of English law, may be rather more difficult to decide than understanding what approvals Mainland law and regulation required.

The Company’s Argument

25.  The Company argues that notwithstanding the exclusive jurisdiction clause, which includes a waiver of the right to object to jurisdiction on forum grounds, the court should stay these proceedings, because the determination of claims against the Company in the reorganisation has to take place before the Beijing Court.  It also suggests that the Beijing Court is at least as well placed to determine the important issues that arise as the Hong Kong court.  As I have already explained, shortly before the hearing of this matter the Administrator issued an originating summons seeking an order of recognition and assistance.  The principal assistance sought is a stay.  It will be appreciated that the Defendant in the actions and the Applicant for recognition and assistance are different.  The legal character of the Administrator and the Administrator’s relationship to the Company has not been explored before me.  It is not, however, in dispute that the Administrator is as a matter of Mainland law the lawful agent of the Company.  Except when distinguishing between the summons to stay issued in the actions and the originating summons, any distinction between the Company and the Administrator is immaterial.

26.  The Company accepts that the court will enforce the exclusive jurisdiction clause unless it can demonstrate strong reasons for not doing so[10]. As Lord Bingham states in Donohue v Armco Inc[11] the right of a party to have any dispute determined before the agreed court is an important and substantial one and not a formal or technical right.  The position was put thus by Ma CJHC (as he then was) in Noble Power Investments Ltd v Nissei Stomach Tokyo Co. Ltd[12]:

“[S]trong reasons must be shown by the party sued if he wishes to challenge the appropriateness of Hong Kong jurisdiction.

The extent of the burden can be put in several ways but the following provides a ready guide: strong or overwhelming reasons or exceptional circumstances must be shown, such as the existence of factors not contemplated by the parties at the time the relevant agreement was made.  It perhaps matters not exactly which term is preferred, but the main point to bear in mind is that strong reasons must be demonstrated to the court before it allows the parties to be freed from their contractual bargain.”

27.  The Company advances two grounds, which it argues weigh sufficiently strongly in favour of staying the proceedings in Hong Kong and requiring the Plaintiffs to litigate their claims before the Beijing Court, to justify ordering a stay.  First, it says that having submitted formal claims in the reorganisation it has foregone the right to insist on the dispute being determined other than in accordance with the reorganisation process.  Secondly, it argues that any decision of this court will not be recognised by the Beijing Court and it is, therefore, pointless to permit the actions to proceed and will serve no purpose other than to create delay and possibly conflicting decisions.  It further argues that the Beijing Court is better placed to determine the dispute given the nature of the issues.  I deal first with submission to the jurisdiction of the Beijing Court.

Submission to the Mainland jurisdiction by filing a proof of debt

28.  Rubin v Eurofinance SA[13] concerned whether the nature of insolvency proceedings resulted in a qualification to the established rules for determining whether a foreign court has jurisdiction to give a judgment in personam capable of enforcement or recognition in the United Kingdom.  The Court concluded that it did not.  The established circumstances in which a foreign judgment is enforceable include the person against whom a judgment is given being the claimant, voluntary submission to the jurisdiction by appearing in the foreign proceedings and an express agreement to submit to the foreign jurisdiction; as is the case if a contract, which gives rise to a dispute contains a jurisdiction clause[14].  This serves to illustrate the importance of including jurisdiction clauses in contracts.  That having been said Rubin v Eurofinance was relied on by the Company to demonstrate that submission of a proof in a foreign insolvency constitutes submission to the foreign jurisdiction and its insolvency process.  The relevant facts are contained in [158] of Lord Collins judgment:

“More relevant is the fact that from August 1999 the syndicate submitted proofs of debt (in relation to unsettled claims and outstanding premiums for the 1997, 1998, and 1999 years of account, and not to the reinsurance contracts which are the subject of these proceedings) and attended and participated in creditors’ meetings. In particular at an adjourned meeting of creditors on 16 September 2009 the syndicate had given a proxy for that meeting to the chairman, and submitted a proof of debt and proxy form for that meeting. The syndicate voted at a meeting of creditors in favour of a scheme of arrangement. The liquidator has admitted claims by the syndicate for the sterling equivalent of more than £650,000, although the liquidator is retaining the dividend in partial settlement of the costs incurred in these proceedings.”

29.  In [167] Lord Collins concludes that the liquidators having chosen to submit to New Cap’s Australian insolvency proceedings, should be taken to have submitted to the jurisdiction of the Australian court responsible for the supervision of the proceedings.  In [165] Lord Collins summarises the position in English law and refers to the decision of Bacon CJ in Ex p Robertsons; In re Morton[15].  As I will return to this decision later in [35] it is helpful to quote the paragraph in full.

“165. In English law there is no doubt that orders may be made against a foreign creditor who proves in an English liquidation or bankruptcy on the footing that by proving the foreign creditor submits to the jurisdiction of the English court. In Ex p Robertson; In re Morton (1875) LR 20 Eq 733 trustees were appointed over the property of bankrupt potato merchants in a liquidation by arrangement. A Scots merchant received payment of £120 after the liquidation petition was presented, and proved for a balance of £247 and received a dividend of what is now 20p in the pound. The trustees served a notice of motion, seeking repayment of the £120 paid out of the insolvent estate, out of the jurisdiction. The respondent objected to the jurisdiction of the English court on the ground that he was a domiciled Scotsman. On appeal from the county court, Bacon CJ held that the court had jurisdiction. He said, at pp 737–738:

‘what is the consequence of creditors coming in under a liquidation or bankruptcy? They come in under what is as much a compact as if each of them had signed and sealed and sworn to the terms of it—that the bankrupt’s estate shall be duly administered among the creditors.  That being so, the administration of the estate is cast upon the court, and the court has jurisdiction to decide all questions of whatever kind, whether of law, fact, or whatever else the court may think necessary in order to effect complete distribution of the bankrupt’s estate … can there be any doubt that the appellant in this case has agreed that, as far as he is concerned … the law of bankruptcy shall take effect as to him, and under this jurisdiction, to which he is not only subjected, but under which he has become an active party, and of which he has taken the benefit … [The appellant] is as much bound to perform the conditions of the compact, and to submit to the jurisdiction of the court, as if he had never been out of the limits of England.’”

30.  The Company argues that submission occurs on filing of a formal claim.  It is not necessary for it to be adjudicated before submission is taken to occur with the consequence, the Company argues, that from then on the claimant must pursue its claim in the foreign insolvency process and before the relevant foreign court; although three of the present claims have been adjudicated at least in the sense that they have been rejected by the Administrator.  The Company relied on the Privy Council’s decision in Stichting Shell Pensionenfonds v Krys[16] to support this argument. I accept that it is apparent from [31] of the decision that that submission to the foreign jurisdiction occurs on filing of a formal claim.  As Lord Sumption and Lord Toulson giving the judgment of the Board explain: “It cannot make any difference to the character of that act whether the proof is subsequently admitted or a dividend paid, any more than it makes a difference to the submission implicit in beginning an ordinary action whether it ultimately succeeds.”  However, as the Privy Council go on to explain it is not a necessary consequence of submission that a creditor foregoes such right as he might otherwise have to prosecute claims in another jurisdiction.  As their Lordships state in [39]–[40]:

“39. The Board concludes that where a creditor or member who is amenable to the personal jurisdiction of the court begins or continues foreign proceedings which will interfere with the statutory trusts over the assets of a company in insolvent liquidation, in principle an injunction will be available to restrain their prosecution irrespective of the nationality or residence of the creditor in question.

40. The Board would accept that as a general rule, there can be no objection in principle to a creditor invoking the purely adjudicatory jurisdiction of a foreign court, provided that it is an appropriate jurisdiction and that litigation there is not vexatious or oppressive to the liquidators or other interested parties.  But it is in principle inimical to the proper winding up process for a creditor to seek or enforce an order from a foreign court which will result in his enjoying prior access to any part of the insolvent estate.  In Kemsley v Barclays Bank plc [2013] BPIR 839, para 41 Roth J observed that where the foreign litigant undertakes to bring any assets realised in the foreign proceedings into the bankruptcy so that no advantage would be obtained over other creditors, the basis on which an anti-suit injunction might otherwise be justified will not apply.  The Board wishes to record its endorsement of that approach.”

31.  As this passage makes clear submission of a claim in foreign insolvency proceedings does not create an absolute bar to a creditor seeking adjudication of the claim in another jurisdiction, which the creditor may take the view is more appropriate for its resolution.  This is consistent with the well-established English position that a liquidation stay has no extra-territorial effect[17]. What the creditor cannot do is to attempt to use proceedings outside the foreign insolvency jurisdiction to achieve a result, which is inconsistent with that mandated by the foreign insolvency regime: at its most basic to try and obtain more than he would obtain if he proves in the insolvency proceedings.

32.  The Company has cited two short 19^th century decisions, which suggest that proving in foreign insolvency proceedings acts as a discharge of the debt in England.  The first Glass v Keogh[18] is entirely consistent with Stichting Shell, Stawell CJ holding that “Obtaining payment by means of insolvency, on the contrary, is clogged with the condition, that if the insolvent makes a full disclosure and surrender of his assets, he is discharged from debts provable against his estate. The present plaintiff invoked the assistance of the laws of another country in order to sequestrate the Defendant’s estate. He was the petitioning creditor. He proved his debt, received dividends, and retained his securities.”  As Stichting Shell makes clear once a creditor submits to a foreign insolvency process he cannot seek to improve on the amount he receives by way of dividend in the insolvency by taking separate proceedings in another jurisdiction.

33.  The Court of Appeal in Seligman v Huth[19] found that a defendant could not rely on a counterclaim by way of defence against the plaintiff, whose claim arose from an assignment from an assignee, who was in bankruptcy in the US.  The defendant had proved in the US bankruptcy and received a dividend.  It does not seem to me that this provides any relevant qualification to the principle that emerges in    [39]–[40] of Stichting Shell.

34.  The distinction between a creditor seeking adjudication of a dispute in the sense referred to in [40] of Stichting Shell and a creditor seeking to recover in a debtor’s foreign insolvency is considered further by the Federal Court of Australia in Akers as a joint foreign representative of Saad Investments Company Limited v Deputy Commissioner of Taxation[20]. This concerned an appeal by the joint foreign representatives of Saad Investments Company Limited, which was in liquidation in the Cayman Islands.  The central issue in the appeal was the treatment of a claim by the Deputy Commissioner of Taxation (“DCT”) that Saad was liable to Australian tax and penalties.  Saad was not a registered foreign company, did not carry on business in Australia, and it was common ground that it could not be wound up by an Australian court.  The appeal raised questions concerning the construction and interpretation of the UNCITRAL Model Law on Cross-Border Insolvency, which was made part of Australian law by the Cross-Border Insolvency Act 2008.  The particular question that is relevant was an argument by the foreign representatives (Saad’s liquidators) that the lodgement of a proof in the Cayman Islands liquidation by the DCT constituted submission to the jurisdiction and by that fact alone should have led to the court declining the DCT’s application to modify the orders that would have seen funds transferred to the Cayman Islands.  The relevant facts were these.  Subsequent to the lodgement of a proof the Australian court made an order recognising the Cayman Islands proceedings as foreign main proceedings under Article 17 of the Model Law and ordering, amongst other things, that the administration and distribution of all the defendant’s assets located in Australia be trusted to the plaintiffs, in their capacities as joint foreign representatives of the defendant.  Two years later the solicitor for Saad’s liquidators gave the DCT notice of their intention to remit Australian assets of the company to the Cayman Islands.  The DCT applied for modification of the recognition and assistance orders with a view to preventing this.

35.  In his judgment Allsop CJ considers Rubin v Eurofinance in some detail quoting [165]–[167] and then finds as follows:

“165. Neither Ex parte Robertson nor Rubin is determinative of the question before the Court here—whether the DCT had disentitled himself or herself from seeking the Modification Orders. The ‘compact’ referred to by Bacon CJ in Ex parte Robertson is one that authorises the liquidator and the supervising court to act. I am prepared to accept that formal submission of a proof of debt to the insolvency administration will generally be adequate to support a conclusion that the court supervising the administration thereafter has jurisdiction to make orders in matters connected with the administration against the creditor who has proved. Such a conclusion does not, however, answer the question whether, as a matter of law and discretion, a court should not make orders under Art 20.3 and 22.3 to protect local creditors in circumstances where the local creditor has lodged a proof of debt in the foreign main proceeding. There is no evident principle that, by the minimum act of submission to the foreign court supervising the foreign main proceeding, such as by the submission of a proof of debt, exclusive jurisdiction is placed in the hands of that court in respect of all possible issues concerning the insolvency, or that the local creditor becomes disentitled to make an application of the kind with which the Court is concerned. The Model Law assumes complementary authority of the local court and the court supervising the foreign main proceeding. No provision of the Model Law denies that complementary authority by reason only of lodgement of a proof in the Cayman Islands.

166. Thus, for somewhat different reasons from those of the primary judge, I would reject the submission that by lodgement of proof in the Cayman Islands, the DCT became disentitled to the Modification Orders.

167. For the above reasons, the appeal should be dismissed with costs.”

36.  Akers was decided before Stichting Shell and is referred to in [30] of the judgment in which Lord Sumption and Lord Toulson are addressing whether lodging of a proof is sufficient to constitute submission, which the Federal Court had found it to be and with which the Privy Council agreed.  Stichting Shell and Akers establish that there is no objection in principle to a creditor invoking a purely adjudicatory jurisdiction.  The Plaintiffs referred me to a number of cases that illustrate this to be the case and show how the courts have coordinated the exercise of a contractual jurisdiction before one court and an insolvency jurisdiction exercised by another.  The Lehman flip-clause litigation illustrates how this has been done by the English court exercising a contractual jurisdiction and the US Bankruptcy Court for the Southern District of New York[21].

37.  In essence, the flip-clause litigation arose out of Lehman’s bond financing programme with the following key features:

(1)  An offshore special purpose vehicle (“Issuer”) was formed to issue synthetic credit-linked notes to investors (“Noteholders”).

(2)  The Noteholders’ subscription money was used to purchase government bonds or other investments (“Collateral”) which were then vested in a security trustee (“Trustee”).

(3)  Lehman Brothers Special Financing Inc (“LBSF”), a Delaware-incorporated entity, entered into a credit default swap agreement (“Swap Agreement”) with the Issuer under which LBSF would pay the Issuer the amounts due by the Issuer to the Noteholders in exchange for the payment by the Issuer to LBSF of sums equal to the interest received on the Collateral.

(4)  The amount by which the sum payable under the Swap Agreement by LBSF exceeded the yield on the Collateral represented, in effect, the premium for credit protection insurance provided by the Noteholders.

(5)  The Collateral was charged by the Issuer in favour of the Trustee to secure its obligations to LBSF under the Swap Agreement and to the Noteholders.

(6)  A trust deed between the Issuer and the Trustee (“Trust Deed”) regulated the priorities between LBSF and the Noteholders with respect to the Collateral:

(i)  If there was no event of default (which would include LBSF’s insolvency), LBSF would have priority in relation to the Collateral.

(ii)  If there was an event of default, the priorities would flip such that the Noteholders would have priority over LBSF (“Noteholder Priority”).

(7)  The Trust Deed was governed by English law and conferred non-exclusive jurisdiction on the English court.

38.  The interaction between the English court’s contractual jurisdiction and the US bankruptcy court’s bankruptcy jurisdiction arose out of the following proceedings:

(1)  As an event of default occurred after LBSF filed for Chapter 11 protection, the Noteholders commenced proceedings in England against the Trustee seeking payment in accordance with the Noteholder Priority.

(2)  LBSF then commenced proceedings in the US bankruptcy court seeking a declaration that the flip clause triggering the Noteholder Priority was an unenforceable ipso facto clause which violated the US Bankruptcy Code.

(3)  In the meantime, LBSF applied to the English court to stay the English proceedings pending the resolution of the proceedings between LBSF and the Trustee in the US.  The Noteholders objected to the stay application on the grounds that all the relevant transactions were governed by English law and thus the English court should not stay the proceedings.

39.  The English court did not stay the proceedings and proceeded to determine the validity of the Noteholder Priority under English law.  The English court and the US bankruptcy court agreed to coordinate their respective rulings in order to avoid conflict between decisions in the two jurisdictions in the following manner:

(1)  “[T]he only rational outcome that makes good sense in a cross-border setting is for the United States bankruptcy court to be the principal, if not exclusive, decider of issues relating to US bankruptcy law; and similarly for the High Court in London to be the principal, if not exclusive, decider of issues of English law… [I]t would be very difficult for any rational or fair minded person to disagree with that proposition”[22].

(2)  “Following communications between the High Court in England and the Bankruptcy Court in New York, it was agreed that, in order to limit potential conflict between decisions in the two jurisdictions, relief would be limited to declaratory relief”[23].

(3)  Accordingly, “the English court has confined itself to making a declaration that the relevant contractual provisions are … ‘valid, effective and enforceable under English law as the proper law of such contracts so as to give effect to Noteholder Priority’”[24].

40.  In UBS A.G. v OMNI Holding A.G. (in liquidation)[25] a syndicate of banks for which the claimant’s assignor, a Swiss corporation (“S.B.C.”), acted as agent lent money in December 1989 to a German company and a Jersey company on the security of certain share pledges, both loans being governed by English law and providing for English jurisdiction over any disputes that might arise.  On the same date the defendant, the Jersey company and a Dutch company entered into an option agreement also governed by English law granting the Jersey company an option to put certain assets on the Dutch company, or in default on the defendant, at an agreed price to be determined by a formula.  By a deed of assignment also of the same date, the Jersey company assigned its rights and benefits under the option agreement to S.B.C. as trustee for the syndicate.  S.B.C. gave notices under each loan agreement in March 1991 demanding repayment and exercising its put option.  The following month the defendant, a Swiss company, petitioned the Swiss court for protection from its creditors and was granted an order for its interim protection and the appointment of provisional liquidators.  S.B.C. filed a claim with those liquidators for damages equal to the agreed price. In June 1992 S.B.C. received the net proceeds from enforced sales of the pledged shares.  The liquidators contended that S.B.C. had to give credit for the pledge proceeds for the purposes of its claim.  The claimant as assignee of S.B.C. applied to the High Court for declarations as to the sum payable to it by the defendant under the option agreement and that such sum should not be reduced by the amounts received from the sales, and a few days later issued proceedings in the Swiss court against the liquidators’ formal rejection of its claim.  The defendant applied for a stay of the High Court proceedings.  Much of the argument concerned the application of the Lugano Convention.  Rimer J found that the proceedings in London were within the Lugano Convention and that it followed that the application for a stay by OMNI should be dismissed.  He went onto consider how the court’s discretion to stay should be exercised if he had reached the alternative conclusion.  OMNI had argued that it was the subject of Swiss insolvency regime and all questions concerning the winding up should be determined in Switzerland; a similar argument to that, which I face and which I address in more detail later in this decision.  Rimer J says this[26]:

“ It appears to me, therefore, that not only have the parties expressly agreed that the English court should have jurisdiction to decide the question which UBS wants it to decide, it is likely to be of real benefit to the disposal of UBS’s appeal in Berne if it does decide it. In my view, once that position is arrived at all the other points advanced by Omni as supporting a stay fall away as being of little weight. Most of them revolve around the point that Omni is the subject of a Swiss insolvency regime and that all questions concerning the winding up of Omni should be determined in Switzerland. For the reasons given, and in the particular circumstances of this case, I consider that the English proceedings will be likely to serve a valuable function in aid of the disposal of the Swiss proceedings.

Mr. Davis also submitted that it was now too late in the day for UBS to have recourse to the English courts: he pointed out that its negotiations with the Omni liquidators have been going on in Switzerland since 1991. In my view, there is nothing in that. The negotiations have been lengthy but their outcome has been a decision in March 1999 which UBS regards as wrong as a matter of English law; and I can see no good reason why UBS should not now be entitled to ask an English court to determine the point. Mr. Davis also made the point that the Swiss appeal will be subject to a process which provides for an accelerated hearing which should take place within six months, or perhaps a little longer. I do not regard this as a material factor either. The issue- raised by UBS's action is a short one, capable of being disposed of within two days. If the Swiss proceedings are proceeding on a fast track, then I consider that the right way to deal with the English action is to direct its expedition, with a view to a hearing and decision during the next sittings.

    Mr. Davis argued Omni’s case very carefully and comprehensively.  However, I am not satisfied that he has identified grounds which have anything like the strength necessary to justify a stay of UBS’s proceedings.  I dismiss Omni’s application.”

41.  Fondazione Enasarco v Lehman Brothers Finance SA[27] (“LBF”) concerned a dispute arising from the construction and interpretation of the International Swaps and Derivatives Association (“ISDA”) 1992 Master Agreement, which governed a contentious derivative agreement entered into by Anthracite Rated Investments (Cayman) Ltd (“ARIC”) and LBF, with the aim of protecting the principal amount payable under secured Euro medium-term notes.  The ISDA Master Agreement provided that the derivative agreement was governed by English law, that disputes relating to the agreement was subject to the jurisdiction of the English courts, and that English courts had exclusive jurisdiction as between courts bound by the Lugano Convention.  LBF had been placed in liquidation in Switzerland by the Swiss Banking Commission shortly after Lehman collapsed.  LBF’s liquidators obtained a High Court order declaring that the Swiss bankruptcy proceedings were the foreign main proceedings under the Cross-Border Insolvency Regulations, 2006.  This had the effect of imposing an automatic stay of all proceedings in England against LBF.  The Swiss liquidators rejected ARIC’s claims that arose as a result of the closing out of the derivative and instead claimed that ARIC owed LBF approximately US$30 million under the derivative agreement.  ARIC’S assignee (Enasarco) of the claims subsequently commenced proceedings in Switzerland challenging the rejection of the claim and, having obtained a consent order lifting the stay of the English proceedings, commenced a claim against LBF for payment of the closeout payment.  LBF counterclaimed for the amount it considered to be payable to it.  It also applied for a stay of Enasarco’s claim.  It is the determination of that application that is relevant.  The hearing was heard by Richards J, who had considerable experience of cross-border insolvency and dealt with much of the Lehman litigation.  His assessment of LBF’s arguments in support of a discretionary stay are instructive particularly as similar arguments have been advanced before me on behalf of the Company:

“54. In support of its application for a discretionary stay, LBF relied on a number of factors. First, it submitted that there is a real risk of irreconcilable judgments on the issue whether LBF is liable to Enasarco under the derivative agreement and on the closely related issue whether ARIC has any liability to LBF. Secondly, unless a stay is granted, the two sets of proceedings will continue in parallel, wasting costs and court resources in hearing the same dispute twice. The Swiss proceedings are further advanced than the English proceedings and there appears to be agreement between the Swiss lawyers that judgment could be achieved by early 2015 or, if (as would seem to me to be likely) the Swiss court requires expert assistance on the issues of English law, some time in mid-2015. The Swiss court is perfectly capable of assessing the position in English law by reference to legal materials and expert evidence. Thirdly, this is not a case where the party seeking a stay has commenced foreign proceedings in breach of an exclusive jurisdiction clause. In this case, it is Enasarco, not LBF, which has instituted the Swiss as well as the English proceedings.

55. I do not consider that these amount to good or substantial grounds in favour of a stay in this case and I consider that there are strong grounds against the stay of the English proceedings.

56. First, the derivative agreement contains an exclusive jurisdiction clause, as regards states which are parties to the Lugano Convention, in favour of the English courts. The governing law of the contract is English law. The exclusive jurisdiction clause is itself ‘a powerful factor in support of refusal of a stay’ and the English court is ‘the natural court to consider the issues raised … because they raise contractual questions governed by English law’: see [Starlight Shipping Co v Allianz Marine & Aviation Versicherungs AG, The Alexandros T [2013] UKSC 70, [2014] 1 All ER 590 at [95]–[96]]. There is the additional factor, noted by the Court of Appeal in [AWB (Geneva) SA v North America Steamships Ltd [2007] EWCA Civ 739, [2007] 2 Lloyd’s Rep 315], that the derivative agreement incorporates the standard terms of the ISDA Master Agreement which is widely used in all types of derivative transactions on the international markets and plays an important role in the efficient functioning of those markets.

57. Secondly, as noted by the Court of Appeal in AWB v North America Steamships when refusing a stay of English proceedings in favour of insolvency proceedings in Canada, and also by Rimer J in UBS AG v Omni Holding A-G (in liq) [2000] 2 BCLC 310 when refusing a stay of English proceedings in favour of insolvency proceedings in Switzerland, it is likely that the Swiss court will be greatly assisted by having the judgment of the English court on the rights and liabilities of the parties under the derivative agreement, given that it is governed by English law. It is of course possible that the Swiss court would come to a different determination of these issues, presumably on the basis of expert English law evidence, but that evidence itself would have to take account of the decision of the English courts and the risk of irreconcilable decisions appears to me to be more theoretical than real. Even if the Swiss court came to a conclusion contrary to that reached by the English court, its decision would have effect only within the insolvency proceedings in Switzerland and would create no res judicata as to the substantive rights of the parties. A decision in the Swiss proceedings would determine whether Enasarco can make any recovery from the available assets of LBF, but it would have no effect on the claim made by the liquidators of LBF against ARIC. If it wished to pursue such claim, LBF would need to bring proceedings against ARIC. Although, as Mr Nash submitted, the jurisdiction clause would not preclude LBF from commencing proceedings against ARIC in the Cayman Islands where it is incorporated, it appears to me unlikely that in reality the issue would be determined by any court other than the English court.

58. Thirdly, as to practical considerations relating to the two sets of proceedings, I am not impressed by the submission that the Swiss proceedings are sufficiently far advanced to make it a relevant factor in favour of granting a stay of the English proceedings. Any decision of the Swiss court is at least 12 months away and, more probably, at least 18 months away. I doubt whether there will be a significant difference in the time by which the two courts are likely to reach their respective decisions. Given that the issues are issues of English law, I would have thought it not improbable that the Swiss court would delay its decision until the English court had given judgment. There are other practical considerations. The relevant contractual documents are complex and stand to be construed in English as a matter of English law. For the Swiss court to reach a decision, these documents would require to be translated and then construed in a language which is not that of the contract. There may well be further extensive documentation, all of it in English, which will require translation.

…

60. Fifthly, there is, I consider, nothing in the suggestion that the English proceedings should be stayed because Enasarco has chosen to commence proceedings in Switzerland. In reality, Enasarco had no choice at all in the matter. Because the liquidators chose to deal with Enasarco’s claims only in the Swiss insolvency proceedings and not through further proceedings in the English courts, Enasarco had no choice other than to issue its challenge to the schedule of claims within the prescribed period of 20 days if it wished to preserve its right (if established) to participate in the distribution of LBF’s assets. The true analysis is that it was the liquidators’ choice in this respect that forced Enasarco to issue the Swiss proceedings.

61. For these reasons, I am satisfied that a stay of the English proceedings should be refused, whether under art 28 of the Lugano Convention or under the court’s case management powers.”

42.  In my view it is clear that the submission of the claims by the Plaintiffs in the reorganisation in Beijing, although constituting submissions to the jurisdiction for the Beijing Court for the purpose of proving in the reorganisation, does not bar the Plaintiffs from commencing the proceedings.  Neither does it alone constitute strong grounds for refusing to enforce the exclusive jurisdiction clause.  Something more is required.

43.  It is the Company’s case that there are good reasons for staying the actions and requiring the Plaintiffs to pursue their clams in Beijing.  Those reasons are in two parts.  First, that the Beijing Court has, as a matter of Mainland Law to determine the Plaintiffs’ claims and may not recognise a Hong Kong judgment thus making the actions futile, wasteful and creating the risk of conflicting judgments.  Secondly, that the Beijing Court is as well placed as the Hong Kong court to determine the claims.

The Operation of the Enterprise Bankruptcy Law

44.  Article 21 of the EBL provides that after the People’s Court accepts an application for bankruptcy, a civil action against the debtor can only be filed with the People’s Court.  Articles 44 to 58 of the EBL provide a procedure for the submission by creditors of claims, their adjudication in the first place by an administrator and in the event of their rejection a right for a creditor under Article 58 to “file an action with the people’s court that has accepted the application for bankruptcy.”  An action filed under Article 58 would result in a hearing de novo of the creditor’s claim.   It follows, so argues the Company, that following the acceptance by the Beijing Court of Beijing Bank’s application on 19 February 2020, only the Beijing Court can determine a civil claim against the Company by its creditors.  In other words only the particular People’s Court, which accepts the application can determine such a civil claim.  The jurisdiction conferred by Article 21 of the EBL prevails over the jurisdiction established by the Civil Procedure Law[28], which I explain in [52].  It also follows, says the Company, that any decision by the Hong Kong court has no value, because the Beijing Court would have to determine the claim afresh before it could be admitted in the reorganisation.  In support of this argument the Company has adduced the following evidence.

45.  Zhang Ting, a member of the Administrator, and a partner in Beijing Dentons, has filed affirmations in support of the Company’s application for a stay.  In short, Ms Zhang suggests that any judgment of the Hong Kong court would not be enforceable in Beijing and the actions undermine the collective nature of the Company’s restructuring and would undermine the principle of modified universalism, which Mr Zhang understands, correctly, applies in Hong Kong.  Ms Zhang goes on to suggest that the continuation of the actions in Hong Kong will delay and disrupt the Company’s restructuring.  Ms Zhang also suggests that the Court in Beijing would have no difficulty in applying English law.

46.  The points taken by Ms Zhang are developed and considered in more detail in an expert’s report filed on behalf of the Company by Professor Shi Jingxia currently of Renmin University in the Mainland, who is well-known in the area of Mainland insolvency including cross-border insolvency[29]. I had originally anticipated that the experts on Mainland law would be available for cross examination having mentioned it at an earlier case management conference.  Unfortunately, the parties proceeded on the basis that this was not necessary probably because on substantive legal issues the experts are very largely in agreement.  I had, however, identified various matters that I would have appreciated the opportunity to ask Professor Shi about.  I did not, however, feel that this prevented me dealing with the applications. As I have previously mentioned to counsel in other cases, the common assumption that reports of Mainland law can be put before the court and the court left to determine which evidence it prefers without the opportunity to question the experts is often mistaken. Over and above the difficulty in determining matters which are important and disputed, it being common for the court to be faced with diametrically opposed views, often the opportunity to ask questions is helpful in getting a feel for the legal issues.

Recognising Mainland insolvency proceedings

47.  Before considering Professor Shi’s evidence in detail it will be helpful to summarise the nascent state of Mainland law concerning  cross-border insolvency.  As I explain in [26]–[35] of my decision in Re CEFC Shanghai International Group Ltd[30] there has been no case of a Mainland court granting an order recognising a foreign insolvency process pursuant to Article 5 of the EBL.  I am confident that Professor Shi is familiar with my decision in CEFC Shanghai, which was the first application for recognition and assistance by a Mainland office holder in Hong Kong (and I understand Professor Shi had a significant role in drafting Article 5).  She does not suggest in her Report that my understanding of the state of the Mainland law as described in my decision is incorrect.  As at the time of writing there has been one application for recognition and assistance made by Hong Kong liquidators: Re Samson Paper Co. Ltd[31]. This is a straightforward application and the first to be made pursuant to the cooperation arrangement entered into on 14 May 2021 by the Hong Kong’s Secretary for Justice and the Supreme People’s Court.  I explain the cooperation arrangement in more detail in [60]–[61]. I understand that the application was heard by the Shenzhen Intermediate People’s Court on 10 September 2021.  A decision on that application is still awaited.

48.  Professor Shi and Professor Zhao agree that assessed by reference to Mainland law the reorganisation is a collective insolvency process.  This is relevant to the application for recognition and assistance.  As I explain most recently in Re HNA Group Co., Ltd[32] the Hong Kong court will only recognise a foreign insolvency process, which assessed by reference to Hong Kong legal principles is properly characterised as a collective insolvency process.  HNA, which is another major Mainland reorganisation, had been placed in Chapter 8 Reorganisation pursuant to an order of the Hainan Province’s Higher People’s Court made in February 2021.  The Administrator of HNA was still in the process of formulating a reorganisation at the time the application for recognition and assistance was made.  I accepted for the reasons set out in my decision that HNA was in a collective insolvency process.  The present case is different because on 28 June 2021 the Beijing Court approved the plan to reorganise the Company, which had been approved by creditors on 28 May 2021, and to quote from [11] of the letter of request, made a ruling to “terminate the reorganisation process …..”.  This invites the question: is the Company still in a collective insolvency process?

49.  There is very limited authority, which considers whether or not the implementation of a restructuring or a repayment process can properly be characterised as a collective insolvency process in the sense in which the term is explained in HNA[33]. Some assistance can be obtained from case law on Chapter 15 of the United States Bankruptcy Code.  In In re Oversight and Control Commission of Avanzit SA[34] Judge Bernstein considers how the term “reorganisation” is to be understood in the context of the UNCITRAL Model Law on Cross-Border Insolvency:

“The Model Law does not define ‘reorganization’, but under United States law, a bankruptcy reorganization commonly means a financial restructuring ‘esp[ecially] in the repayment of debts, under a plan created by a trustee and approved by a court.’ BLACK’S LAW DICTIONARY 1324 (8^th ed. 2004). The Bank’s argument focuses on the approval of the plan and the discharge of the trustees, but ignores the repayment of debts, a critical component of any reorganization.

Avanzit will continue to make payments to its creditors under the Convenio during the next two years; if it fails, it faces liquidation in the Spanish Insolvency Court.  Although the Spanish Insolvency Court’s control and supervision was reduced once the Convenio was approved, it did not surrender all supervision and control.  The Spanish Insolvency Court continues to oversee the payment of claims, and more generally, to settle any disagreement concerning the ‘interpretation, enforcement and/or performance of [the Convenio] between Avanzit … and its creditors.’  (Convenio at Art. 12.) The closing order will not be issued until the payments are completed.”

50.  The procedure for a reorganisation under the EBL is broadly similar to the arrangement that Judge Bernstein describes.  The Judge accepted that the stage of Avanzit’s restructuring during which debts were to be paid in accordance with the restructuring plan approved by creditors under the supervision of Avanzit’s “Oversight Commission”, who it is explained in the judgment were appointed by the Spanish Insolvency Court, constituted part of a reorganisation process.  Judge Bernstein accepted that the final stage of distribution in accordance with the approved plan formed part of the reorganisation process and, therefore, could properly be recognised under Chapter 15.  Chapter VIII, Section 3 of the EBL contains the Articles, which govern the implementation of a reorganisation plan.  Although the evidence before me does not address directly what stage of the reorganisation process has reached in terms of the currently applicable section of the EBL, it seems fairly clear that it is either in the implementation stage or shortly will be.

51.  It follows that the reorganisation process to which the Company is subject can properly be recognised by the Hong Kong court.  In order to determine what assistance should be granted and, in particular, whether a stay should be granted requires an examination of the Mainland law concerning insolvency and recognition of foreign judgments, in particular dealing with the following matters:

(1)  The consequence of acceptance of an application for reorganisation [52]–[53].

(2)  How the Administrator’s decision can be challenged [54].

(3)  Determining foreign legal issues [55]–[56].

(4)  Recognition and assistance between Hong Kong and the Mainland of each other’s insolvency processes [57]–[61].

Consequence of Acceptance of an Application for Reorganisation

52.  I have introduced this subject in [44].  Article 21, which requires all claims commenced against a company, which is subject to bankruptcy proceedings to be commenced before the court that accepts the application for bankruptcy, is an exception to the general rule in Article 34 of the Civil Procedure Lawof the PRC (《中华人民共和国民事诉讼法》（2017修正）), effective from 1 July 2017, which provides that parties to a dispute over a contract or any other right or interest in properties may, by a written agreement, choose to commence proceedings at the People’s Court at (a) the place of domicile of the defendant; (b) the place where the contract is performed or signed; (c) the place of domicile of the plaintiff; (d) the place where the subject matter is located;  or (e) at any other place actually connected to the dispute to have jurisdiction over the dispute.  If one or more location among those mentioned in this Article is outside of the Mainland, the parties may choose a foreign court to exercise jurisdiction.  In that case, the general rule is that the Mainland court should not accept the case.  The Company accepts that the jurisdiction clause does not infringe Mainland law and, but for the reorganisation the Plaintiffs could enforce their rights by action in Hong Kong.  For completeness I note that Articles 33 and 266 of the Civil Procedure Law provide exceptions to the general rule established by Article 21 of the EBL for dispute relating to matters such as real estate and disputes arising from Sino-foreign joint ventures.  These exceptions are not relevant.

53.  Professor Shi explains that in her view Article 21 reflects the decision by the Central People’s Government that there is to be a uniform and centralised bankruptcy jurisdiction exercised by one court and this prevails over jurisdiction clauses in contracts that specify that another court should determine disputes.  Article 21 does not distinguish between proceedings in the Mainland and overseas. Professor Shi says that as a matter of Mainland law a claim under a contract entered into with a foreign jurisdiction clause should also be litigated in the Mainland before the court dealing with the bankruptcy.  This analysis does not distinguish between legal proceedings to establish contractual rights and proceedings to determine how much a creditor is entitled to prove for in a recoganisation.  In other words the distinction drawn in the authorities I have discussed in [37]–[41].  The failure to recognise this distinction in my view lead Professor Shi to mischaracterise proceedings commenced in a court of a foreign jurisdiction specified in a jurisdiction clause after reorganisation proceedings have been commenced and Article 21 is engaged.  Professor Shi suggests this “amounts to pursuing an individual repayment outside the collective bankruptcy/reorganisation process commenced by Beijing Court, which is directly against the collectivity of bankruptcy proceedings commenced by a PRC court where the centre of main interest (COMI) of the debtor is located.”  That might be the case if the Mainland company subject to bankruptcy proceedings has assets overseas and a foreign creditor is seeking to obtain a judgment in order to enforce against the foreign assets.  This would be inconsistent notions of modified universalism which favour the pooling of all a company’s assets wherever located with a view to unsecured creditors being paid on a pari passu basis wherever the unsecured creditor might be located.  That is not this case.  It is not suggested by the Plaintiffs that they can obtain repayment other than in the reorganisation process in the Mainland.  The Plaintiffs argue that a judgment obtained by the Hong Kong court will be of value to them in advancing a claim in the reorganisation and, in particular, if necessary in proceedings commenced to challenge the decisions of the Administrator in the Beijing Court, which they accept by virtue of Article 21 has the ultimate jurisdiction to determine for how much their claims should be admitted.

How the Administrator’s decision can be challenged

54.  If the Plaintiffs wish to challenge the Administrator’s decision in the Mainland reorganisation they will have to do so pursuant to Article 58 of the EBL, the final paragraph of which provides “Where the debtor or creditor has objections to what is recorded in the form of claims, he may file an action with the people’s court that has accepted the application for bankruptcy.”  The action would be a hearing de novo of the disputed claim.  In the present case the Parties’ choice of law would be applied in determining the claims under the Keepwell Deeds[35]. As the parties chose English Law to govern the Keepwell Deeds (as opposed to English Law being applicable according to Mainland principles of conflict of laws) it would be the duty of the Parties to demonstrate what is the applicable foreign law.  It is not clear from the experts’ reports how this would be done. I assume it would be done by producing reports from suitably qualified foreign lawyers.  Precisely what the status of the reports would be and the extent to which the foreign lawyers can opine on the answer to questions, which require determination, as opposed to providing only evidence of the relevant foreign legal principles, leaving the Mainland court to decide how they apply, is not touched on by either expert[36].

Determining foreign legal issues

55.  Mainland judges have often faced difficulties in determining disputes governed by foreign law, because of their lack of familiarity with foreign legal concepts.  To address this difficulty the Supreme People’s Court (“SPC”) has established a procedure known in English as the “ascertainment of foreign law process” (外国法查明).  The Several Provisions of the SPC on Establishing China International Commercial Court (“CICC”) (《最高人民法院关于设立国际商事法庭若干问题的规定》) permits various methods to be used to answer foreign legal questions.  Professor Shi states that these are applicable to the Beijing Court, although she does not cite any authority for this.  The CCIC was established by the SPC and is supervised by the SPC’s Fourth Civil Division. It currently has two courts: in Shenzhen and Xian.  It is not clear to me why Professor Shi (who is on its expert’s panel) assumes that its procedures for ascertaining foreign law apply to the Beijing Court.  Professor Shi also refers to the SPC’s Notice of the SPC on Promulgations of the Minutes of the Second National Work Conference for Foreign-Related Commercial and Maritime Trials (《最高人民法院第二次全国涉外商事海事审判工作会议纪要》).  This is not the same as the procedures available at the CICC.  The procedures contemplated in the Notice dealing with foreign related commercial and maritime trials focuses on the parties providing material and arguments which the Mainland court will then have to determine.  The procedures available at the CICC divide into two parts.  The first involves ascertainment by the CICC’s International Commercial Expert Committee, which includes a number of retired foreign judges.  The second is ascertainment by commercial organisations such as Benchmark, which as I understand it obtain opinions from eminent foreign lawyers on questions of foreign law[37].  I am not aware of either procedure yet being used by the CICC.  Professor Shi refers to a number of decisions by courts other than the CICC, which required foreign law to be applied.  I quote from [4.41] to [4.42] of Professor Shi’s report:

“4.41 As a result of the above efforts, there have been many examples of recent cases in which the PRC courts have applied foreign laws. For example, one Court in Zhejiang did not ask the parties to ascertain Korean Law agreed upon by the parties in the contract. Instead, the Court undertakes the responsibility of ascertaining Korean Law and then applies Korean Law to hear the case.[38] More relevantly, there are also reported cases in which English law was applied. For example, in a series of disputes concerning Hanjin Shipping Co. Ltd., Tianjin Intermediate People’s Court applied English law, the governing law of the contract, to determine the rights and obligations of parties to disputes in 2018. In these cases, according to the judgments, the plaintiff (the same one, Sea Co. Global Limited) authorized the PRC court to ascertain the applicable English law via the Centre for Ascertaining Foreign Law at China University of Politics and Law (CUPL). The Center issued a legal opinion on the relevant English Law in response to the request. The Court held that the legal opinion issued by the Centre serves as a legitimate channel to ascertain foreign law and thereby should be adopted.[39]

4.42 Also in another earlier case, the SPC applied English law to determine the validity of a Letter of Guarantee (L/G). Although the judgement made by the SPC did not elaborate on the procedure of how foreign laws are considered and applied, SPC stated in its judgment that:

This case concerns the dispute involving a foreign-related guaranty contract.  Based on the parties’ choice, English law shall be governing law to resolve this dispute.  In accordance with English law, a letter of guaranty shall satisfy several conditions to be legally valid, including written form, an agreement among three parties, and effective consideration, in addition to satisfying general conditions for a valid contract.[40]”

56.  Professor Shi concludes by suggesting that she does “not see a problem for the Beijing Bankruptcy Tribunal to apply English Law to decide this case.”  I disagree.  Professor Shi does not touch on the subject matter of the dispute, which is crucial when assessing what is the fairest and most efficient way of resolving it.  As I explain in [22]–[24] the issues are potentially extensive and complicated.  The Company agreed to have any disputes that were to arise under the Keepwell Deeds determined by a court able to apply 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 the common law.  This includes, for example, adversarial advocacy, which provide a dialectical process, which the common law finds the most effective technique for the determination of legal issues.  The suggestion that the Beijing Court is as well placed to determine the potential issues in the present case as a Hong Kong court by accessing opinions (the scope and nature of which Professor Shi has not explained) from experts is in my view unconvincing.

Recognition of Hong Kong judgments in the Mainland

57.  I think it is a fair summary of the experts’ views on the enforceability of any judgment that the Plaintiffs were to obtain in Hong Kong that it is unclear whether it would be recognised and enforced. The recognition and enforcement of such a Hong Kong judgment is currently subject to the Arrangement of the SPC between the Mainland and Hong Kong SAR Concerning Mutual Recognition and Enforcement of Judgments of Civil and Commercial Cases under the Jurisdiction as Agreed to by the Parties Concerned (《最高人民法院关于内地与香港特别行政区法院相互认可和执行当事人协议管辖的民商事案件判决的安排》, “2007 Arrangement”)[41], which became effective on 1 August 2008.  An updated version of this Arrangement was issued on 18 January 2019 (Arrangement for Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Cases by the Courts of the Mainland and of the Hong Kong Special Administrative Region  《关于内地与香港特别行政区法院相互认可和执行民商事案件判决的安排》) but it has not come into effect yet.  Under the 2007 Arrangement, the jurisdiction of the Hong Kong court to determine this case could be challenged in various circumstances.  The third circumstance listed is that the court at the locality of enforcement has exclusive jurisdiction over the case according to the laws of the locality of enforcement.  As I have explained, Article 21 of the EBL requires that a civil action against the debtor brought after the debtor enters liquidation or reorganisation, shall be filed with the Beijing Court.  The Beijing Court may take the view that recognition is inconsistent with its jurisdiction and that this falls within the third circumstance of Article 9 of the 2007 Arrangement.

58.  The first point to note is that the letter of request does not say that the Beijing Court would not recognise a judgment of the Hong Kong court.  What the letter of request does say in [19] and [20] of the preamble is this:

“19. In accordance with the provisions of Article 21 of the Enterprise Bankruptcy Law, after a court accepts an application for bankruptcy, any civil action against the relevant company may only be brought in the court which accepts the bankruptcy application…..

20. To prevent the Five Companies from uncertainties and the burden of potentially continuous litigation, and to ensure orderly progress of the reorganisation of the Five Companies, the High Court should make it clear that the legal effect arising from the provisions of the Enterprise Bankruptcy Law as set out in paragraph 19 above shall extend to the jurisdiction of the Hong Kong Special Administrative Region.”

59.  Mr Maurellet accepted at the outset that [20] is wrong[42]. This is probably, I assume, the result of clumsy drafting rather than a belief that the EBL has any effect in Hong Kong.  I assume what it is intended to mean is that the Hong Kong court is requested to stay the proceedings with the consequence that the Plaintiffs would have to proceed in accordance with Article 21 of the EBL.  What it does, however, serve to illustrate is that the Beijing Court has probably not been properly appraised of the issues that the Company’s two applications before me give rise to in Hong Kong.

60.  Professor Shi, straying into advocacy on behalf of the Company, suggests that for the Hong Kong court to refuse to stay the actions would be inconsistent with steps taken between the Mainland and Hong Kong to promote cooperation between courts in handling insolvencies proceedings. Professor Shi says this in [4.50] of her Report:

“Third, I believe that recognizing the HKSAR judgment would also be contrary to the cooperative spirit enshrined in the recently concluded Pilot Measures on Cross-Border Insolvency, which aims to promote an orderly and efficient insolvency regime, and the recognition and facilitation of Mainland insolvency proceedings by the HKSAR courts (and vice versa).[43] To some extent, the reorganization of PUFG in Beijing will be prejudiced or undermined when the Plaintiff elected to bring lawsuit in Hong Kong court pursuing its individual claim outside the Beijing proceeding. This is directly against the collectivity of Beijing proceeding commenced at the place of PUFG’s COMI and centralized jurisdiction of Beijing Bankruptcy Tribunal. The lawsuit brought in another jurisdiction with multiple proceedings, the risk of inconsistent decisions, and a possible recognition and enforcement application put the restructuring proceeding into an uncertain status and affect the smooth progress in Beijing. This may result in actual unfairness (with different standards applied) or harm to other creditors of PUFG, as multiple proceedings often lead to low efficiency and high costs involved, potentially inconsistent decisions, and bondholders who are not bound by the haircut agreed in the creditors’ meeting may try to enforce their claims elsewhere to the detriment of other creditors.”

61.  The pilot measures to which Professor Shi refers apply between the Hong Kong High Court and the Intermediate People’s courts in Shanghai, Shenzhen and Xian.  They do not apply to the Beijing Court.  The Hong Kong court has recognised and provided assistance in respect of three Mainland insolvencies proceedings[44]. In the case of two of the proceedings recognition and assistance were sought before the arrangement to which Professor Shi refers was made on 14 May 2021. No Hong Kong insolvency proceedings have been recognised in the Mainland.  As I have already noted the first application, which is made in accordance with the pilot measures, relates to Samson Paper[45] and has not yet been approved.  I agree with Professor Shi that the Hong Kong court and the Mainland courts are attempting to cooperate in order to facilitate the efficient progress of insolvencies and reorganisations, which involve both the Mainland and Hong Kong.  What this involves in practice I consider in the next section of this Decision.

Determination

62.  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 as was done in Perpetual Trustee (No. 2)[46].  They will not seek an order that the Company should pay them a sum of money.  The Plaintiffs argue that obtaining an order from the Hong Kong court determining what as a matter of English law they are entitled to, if anything, will be of value in proving their claim before the Beijing Court.  Professor Shi’s evidence is directed to the question of whether or not any order of the Hong Kong court in the Actions would be enforceable in the Mainland.  Professor Shi does not address the more general question of the evidential weight that might be given to such a judgment.  The Company submitted that as any judgment would not be from an English court, the Beijing Court might not give it much weight. This seems to be an unattractive argument.  Hong Kong common law of contract is the same as English law.  The extent to which the common law of England and Hong Kong law are generally the same is demonstrated by section 12(2) of the High Court Ordinance, Cap. 4, which provides: “the civil jurisdiction of the Court of First Instance shall consist of (a) original jurisdiction and authority of a like nature and extent as that held and exercised by the Chancery, Family and Queen’s Bench Divisions of the High Court of Justice in England…..”.  It would be extraordinary if the Beijing Court did not give weight to a decision of the High Court of Hong Kong on a contractual dispute under English law determined pursuant to an exclusive jurisdiction clause.  It would demonstrate a startling lack of comity.

63.  As I explain in [26] the Plaintiffs’ right to have their claims determined before the agreed court is an important and substantial one.  The Hong Kong court will only deprive a party of this right if a compelling reason is demonstrated.  It seems to me that the Plaintiffs are entitled to say, as they do, that they should be permitted to have their claim tried in Hong Kong and, if successful, obtain the benefit of a judgment that they can use to support the claim they will then make in the reorganisation.  In my view the Company/Administrator has not demonstrated that the Beijing Court will give no weight to a judgment of the Hong Kong court in the actions.  I understand that viewed from the perspective of the Administrator it would be more straightforward to have the Plaintiffs’ claims dealt with entirely by the Beijing Court.  This is not, in my opinion, a sufficiently strong reason to deprive the Plaintiffs of the right to have their claims dealt with before the contractually agreed court.  Neither do I consider the “co-operative spirit enshrined in the” pilot measures, to which Professor Shi appealed, justifies doing so for reasons I develop in the next 5 paragraphs.

64.  As I have already accepted, Professor Shi is correct that the pilot measure demonstrate an intention that the Hong Kong High Court and courts in the Mainland exercising a bankruptcy jurisdiction where appropriate cooperate and coordinate proceedings to facilitate the fair and efficient conduct of insolvency processes, which involve companies with assets and/or creditors on both sides of the internal border.  As the preamble to the Record of the Meeting[47] expressly states, one of the principle purposes of improving judicial cooperation in insolvency and reorganisation proceedings is to “facilitate integrative economic development, improve business environment underpinned by the rule of law…”.  The SPC’s Opinion[48] to which Professor Shi refers is more comprehensive than the Record of Meeting.  Article 25 of the Opinion states:

“二十五、试点法院应当与香港特别行政区法院进行最大限度的沟通与合作。

25.  The courts in the pilot areas shall communicate and cooperate with the courts in the Hong Kong Special Administrative Region to the greatest extent possible.”

65.  Cooperation requires at least some understanding of each court’s 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.  An administrator seeking a letter of request from a Mainland court will need to be mindful of how the application will look to a Hong Kong court and the concerns the Hong Kong court may have.  It does not seem to me that the Administrator has approached the application for recognition and assistance with these considerations is mind.  There is nothing to suggest in the evidence filed by the Administrator in support of the application for recognition and assistance that the Beijing Court had explained to it the issues that the application would give rise to in Hong Kong.  There is certainly nothing in the letter of the request, which acknowledges that the Hong Kong court would have to resolve the conflict between the rights of the Plaintiffs to have a claim determined in accordance with the jurisdiction and governing law clauses in the Keepwell Deeds and the priority given to the Beijing Court by Article 21 of the EBL in determining whether a claim should be admitted in the reorganisation.  Instead we get what I have already described as the clumsy wording of [20] of the letter of request.

66.  At the case management conference on 8 July 2021 in HCA 778/2021 and HCA 798/2021 I requested the Administrator to discuss with the Beijing Court the possibility of the two courts cooperating in order that the Hong Kong court could determine issues relating to the construction of the Keepwell Deeds.  On 9 November 2021 I wrote to the Administrator’s solicitors in Hong Kong asking if this had been done as no reference to it had been made in the evidence filed by the Administrator in support of its application for recognition.  In her 3^rd affirmation Ms Zhang Ting purports to answer this question:

“14. I confirm that the Administrator has, in the course of carrying out its duty to make regular reports to the Beijing Court, provided regular updates to the Beijing Court on the status of HCA 778/2021, HCA 798/2021, HCA 1418/2021 and HCA 1442/2021, and also communicated with the Beijing Court on several occasions concerning, among other things, whether the substantive claims against PUFG under the Keepwell Deeds and EIPUs (the Claims) should be determined by the Hong Kong courts or the Beijing Court. I was involved in those communications, as part of the Administrator’s duties.

15.  Following these communications, on 5 November 2021, the Beijing Court issued a letter of request to this Court.  A copy of the letter of request and courtesy English translation is at pages 1 to 23 of ZT-3.”

67.  I take it from the carefully chosen language that the Administrator did not inform the Beijing Court that the Hong Kong court had suggested that consideration be given to the Hong Kong court deciding issues relating to construction of the Keepwell Deeds

68.  If the SPC’s direction that courts are to communicate and cooperate to the greatest extent possible is to be complied with it is necessary for administrators and their lawyers in the Mainland to ensure that the Mainland courts receive complete and balanced information.  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.  I hope that this Decision assists the Beijing Court to understand that under Hong Kong law the application for a stay is not as straight forward as it may have been led to believe and, also to advance the communication and cooperation [25] of the SPC’s Opinion encourages.

Order

69.  I will make the following orders.

(1)  I will dismiss the Administrator’s applications to stay the actions.  I will make a costs order nisi that the Administrator pays the Plaintiffs’ costs of the applications forthwith with a certificate for two counsel, such costs to be taxed if not agreed.

(2)  I will make an order recognising the reorganisation proceedings in Beijing and providing assistance in the terms of the originating summons subject to the amendments explained in the next sub-paragraph.

(3)  Paragraph 4 of the order includes an automatic stay of proceedings. This had been a paragraph routinely included in orders for recognition and assistance until my decision in Re FDG Electric Vehicles Ltd[49]in which I explain why I consider that in future such an order should be replaced with a case management direction, which is set out in [7] of the decision, and provides that if a liquidator considers proceedings should be stayed an application should be made initially in writing to the judge specified in this paragraph of the order.  As I have heard comprehensive argument on this issue I am satisfied that it is appropriate to order a general stay.  However, I will include the following additional directions, which will replace [5] of the originating summons:

“5. The stay directed in paragraph 4 of this Order shall not apply to HCA 778, 798 1428 and 1442 of 2021.

6. The Applicants shall provide to the Beijing No. 1 Intermediate People’s Court a copy of this order and the decision of the Honourable Mr. Justice Harris dated 17 December 2021 (“Decision”) by 5pm on 23 December 2021.

7. The Administrators shall provide to the Respondents a draft translation of the Decision and this order into simplified Chinese by 5pm on 7 January 2022 or such other date as the parties agree.

8. The Respondent shall send to the Clerk to the Honourable Mr. Justice Harris the draft translation with any proposed amendments by 5pm on 21 January 2022 or such other date as the parties agree for approval by the Court translators.

9. The Applicants have liberty to apply by summons by 5.00pm on 28 February 2022 or such other date as the parties agree for directions suggested by the Beijing No.1 Intermediate Court for the further conduct of HCA 778/2021, HCA 798/2021, HCA 1418/2021 and HCA 1442/2021.”

70.  Although, I am not currently satisfied that this is a proper case in which to order a stay, it seems to me that it may be possible for the courts to agree the way in which the issues are to be determined, with the Hong Kong court dealing with issues of construction of the Keepwell Deeds.  This is something that the Beijing Court may wish to consider further in the light of this decision.

71.  The Plaintiffs shall fix a 30 minutes case management conference in order that I can consider what further directions to make to progress the actions.  I made no order on the summonses for expedited trials.  I shall consider when trial dates should be fixed at the case management conference.

Appendix I

Letter of Request

WHEREAS:

1.  This Court is a court exercising jurisdiction under the laws of the People’s Republic of China concerning domestic companies and bankruptcy, liquidation and reorganisation of companies.

2.  Peking University Founder Group Company Limited, Founder Industry Holdings Co., Ltd., PKU Healthcare Industry Group Co., Ltd., Peking University Founder Information Industry Group Co., Ltd. and Peking University Resources (Holdings) Company Limited (the Five Companies) are all established under the laws of the Mainland of the People’s Republic of China, with their centre of main interest, principal place of business and principal assets located in the Mainland of China.

3.  On 14 February 2020, this Court received the application from Bank of Beijing Co., Ltd. for the reorganisation of Peking University Founder Group Company Limited (PUFG) in accordance with Articles 2, 7 and 70 of the Enterprise Bankruptcy Law of the People’s Republic of China (2007) (the Enterprise Bankruptcy Law).

4.  On 19 February 2020, this Court made a ruling to accept the application and issued a civil decision (Decision I, a copy of which is attached hereto and marked as “A”), appointing the PUFG liquidation group as the administrator of PUFG (the Administrator).

5.  Based on Decision I, the Administrator is authorised and empowered to exercise all the rights specified in the Enterprise Bankruptcy Law and to perform the corresponding duties, including

(a)  Taking over PUFG’s assets, company seals and books of accounts, documents and other materials;

(b)  Investigating into PUFG’s financial position and preparing the reports on such financial position;

(c)  Determining the internal management and affairs of PUFG;

(d)  Determining the daily expenses and other necessary expenses of PUFG;

(e)  Determining the continuation or suspension of the business operation of PUFG prior to the holding of the first creditors’ meeting;

(f)  Managing and disposing of PUFG’s assets;

(g)  Engaging in lawsuits, arbitration or other legal proceedings for and on behalf of PUFG;

(h)  Calling for the convening of the creditors’ meetings; and

(i)  Other functions that this Court deems necessary to be performed by the Administrator.

6.  On 17 July 2020, this Court received an application from the Administrator for substantive consolidation and reorganisation of the Five Companies.

7.  On 31 July 2020, this Court made a ruling to allow the substantive consolidation and reorganisation of the Five Companies and issued a civil decision (Decision II, a copy of which is attached hereto and marked as “B”), appointing the Administrator as the administrator of the substantive consolidation and reorganisation of the Five Companies.

8.  Based on Decision II, the Administrator is authorized and empowered to exercise all the rights specified in the Enterprise Bankruptcy Law and to perform the corresponding duties, including:

(a)  Taking over the assets, company seals and books of accounts, documents and other materials of the Five Companies;

(b)  Investigating into the financial position and preparing the reports on such financial position of the Five Companies;

(c)  Determining the internal management and affairs of the Five Companies;

(d)  Determining the daily expenses and other necessary expenses of the Five Companies;

(e)  Determining the continuation or suspension of the business operation of the Five Companies before the first creditors’ meeting is held;

(f)  Managing and disposing of the assets of the Five Companies;

(g)  Engaging in lawsuits, arbitration or other legal proceedings for and on behalf of the Five Companies;

(h)  Calling for the convening of the creditors’ meetings; and

(i)  Other functions that this Court deems necessary to be performed by the Administrator.

9.  On 28 May 2021, the creditors of the Five Companies approved the reorganisation plan (the Plan) of the Five Companies. The Plan involves dealing with the Five Companies’ debts owed to domestic and overseas creditors, with an aggregate amount of RMB187.376 billion or approximately US$29.0 billion. Among the unsecured domestic and overseas creditors present at the meeting, those holding an aggregate of 84.3% of the debt value voted in favour of the Plan.

10.  On 31 May 2021, the Administrators applied to this Court for approval of the Plan.

11.  On 28 June 2021, this Court made a ruling to approve the Plan and terminate the reorganisation process of the Five Companies. The term for the implementation and supervision of the Plan shall be 28 June 2021 to 28 June 2022. The Administrator shall be responsible for supervising the implementation of the Plan.

12.  On 29 January 2021, Nuoxi Capital Limited (Nuoxi) submitted the following claims to the Administrator:

a.  claims in an aggregate amount of RMB 2,132,123,569 under a Keepwell Deed signed on 20 April 2017 and a Deed of Equity Interest Purchase Undertaking signed on 20 April 2017; and

b.  claims in an aggregate amount of RMB 4,215,694,789 under a Keepwell Deed signed on 24 January 2018 and a Deed of Equity Interest Purchase Undertaking signed on 21 January 2018.

13.  On 9 April 2021, Founder Information (Hong Kong) Limited (FIHK) submitted the following claims to the Administrator:

a.  claims in an aggregate amount of RMB 3,505,417,404.02 under a Keepwell Deed signed on 17 April 2018 and a Deed of Equity Interest Purchase Undertaking signed on 17 April 2018; and

b.  claims in an aggregate amount of RMB 2,203,434,904.02 under a Keepwell Deed signed on 21 May 2018 and a Deed of Equity Interest Purchase Undertaking signed on 21 May 2018.

14.  On 19 May 2021, the Administrator informed Nuoxi that it had decided to reject its claims referred to in Paragraph 12 above because the Administrator considered that the claims lacked legal basis. On 21 May 2021, the Administrator informed FIHK that it had decided to reject the claims referred to in Paragraph 13 above because the Administrator considered that the claims lacked legal basis.

15.  On May 20, 2021, Nuoxi filed a Civil Action No. 778 of 2021 (HCA 778/2021) against PUFG before the High Court of the Hong Kong Special Administrative Region (the High Court) in respect of the same claims referred to in Paragraph 12 above.

16.  On 24 May 2021, FIHK filed a Civil Action No. 798 of 2021 (HCA 798/2021) against PUFG before the High Court in respect of the same claims referred to in Paragraph 13 above.

17.  In light of the above, in order to enable the Administrator to effectively deal with the affairs relating to the Five Companies and avoid seeking for recourse continuously from the High Court, the Administrator applies to the High Court to seek an order of recognition.

18.  The effect of an order granting recognition will confirm that the Administrator has, and may exercise, the rights conferred to it under the Enterprise Bankruptcy Law and relevant judicial interpretations, and make available such rights to the Administrator under the laws of Hong Kong (to the extent permitted by the common law in Hong Kong), and make it possible to implement the Plan in the Hong Kong Special Administrative Region.

19.  In accordance with the provisions of Article 21 of the Enterprise Bankruptcy Law, after a court accepts an application for bankruptcy, any civil action against the relevant company may only be brought in the court which accepts the bankruptcy application. Item 7 of Paragraph 1 of Article 25 provides that an administrator should perform the duty of participating in litigations, arbitrations or any other legal proceedings on behalf of the debtor. Paragraph 1 of Article 90 provides that from the day that the court rules to approve a reorganisation plan and within the term of supervision as prescribed by the reorganisation plan, the relevant bankruptcy administrator shall supervise the implementation of the reorganisation plan.

20.  To prevent the Five Companies from uncertainties and the burden of potentially continuous litigation, and to ensure orderly progress of the reorganisation by the Five Companies, the High Court should make it clear that the legal effect arising from the provisions of the Enterprise Bankruptcy Law as set out in Paragraph 19 above shall extend to the jurisdiction of the Hong Kong Special Administrative Region.

21.  In accordance with the Enterprise Bankruptcy Law and relevant judicial interpretations, this Court confirms that it is fair and proper to issue this Letter of Request so that the Administrator can perform its duties effectively.

This Court hereby requests the High Court to issue the following orders and directions in assistance to the reorganisation process of the Five Companies and the Administrator：

1.  The appointment of Beijing Dentons Law Offices LLP (Address: 7^th Floor, Building D, Parkview Green FangCaoDi, Chaoyang District, Beijing) as the authorised representative of the Administrator to act within the jurisdiction of the Hong Kong Special Administrative Region (with lawyers Zheng Zhibin and Zhang Ting as the persons in charge and have ultimate decision-making authority on the work of the Administrator) be recognised by the High Court.

2.  The Administrator, to the fullest extent permitted by the laws of Hong Kong, shall have and may exercise the powers conferred on the Administrator as set out in relevant order and (as set out above) under the Enterprise Bankruptcy Law and related judicial interpretations, and may implement the Plan in the Hong Kong Special Administrative Region. In particular, and without prejudice to the generality of the foregoing, the Administrator may exercise the rights for following purposes:

    Represent PUFG in HCA 778/2021, HCA 798/2021 and other proceedings against PUFG.

3.  For the avoidance of doubt, the Administrator is expressly authorised to seek any relief available under the laws of Hong Kong, even if the scope thereof may not be entirely consistent with the corresponding scope under the Enterprise Bankruptcy Law and related judicial interpretations.

4.  Anything that is authorised or required to be done by the Administrator may be done by all or any one or more of the Administrator’s authorised representatives;

5.  Before the final termination of the bankruptcy procedures of the Five Companies in the Mainland of China (as confirmed by the written decision of this Court), no action or proceedings within the jurisdiction of the High Court shall be continued or commenced against the Five Companies except with the leave of the High Court and subject to the terms imposed by the High Court; and

6.  The Administrator shall correspond with this Court (and report to this Court) as directed by the terms of any further order which may be issued by this Court or the High Court.

This Court confirms and guarantees that the above request is not restricted by the Enterprise Bankruptcy Law or the related judicial interpretations.

(2020 Jing 01 Po No. 13

Appendix II

Beijing No.1 Intermediate People’s Court

Decision

On 19 February 2020, this Court, upon the application of Bank of Beijing Co., Ltd., made a ruling to accept the case for the reorganisation of Peking University Founder Group Company Limited, and, in accordance with provisions of Article 13, paragraph 1 of Article 22 and paragraph 1 of Article 24 of the Enterprise Bankruptcy Law of the People’s Republic of China and Articles 18 and 19 of the Provisions of the Supreme People’s Court on the Appointment of Administrator during the Trial of Enterprise Bankruptcy Cases, appoint the liquidation group of Peking University Founder Group Company Limited as the administrator of the Peking University Founder Group Company Limited.

The liquidation group of Peking University Founder Group Company Limited comprises the following members:

Guo Dayong	[REDACTED]
Meng Jun	[REDACTED]
Hua Chenggang	[REDACTED]
Lu jian	[REDACTED]
Zheng Zhibin	Senior partner of Beijing Dentons Law Office
Zhang Xiaolin	[REDACTED]
Shi Hongya	[REDACTED]
Hao Gang	[REDACTED]
He Tongbao	[REDACTED]
Lei Tong	[REDACTED]
Lu Qian	[REDACTED]
Zhang Ting	Senior partner of Beijing Dentons Law Office

Among the above members, Guo Dayong acts as the head of the liquidation group, and Meng Jun, Hua Chenggang, Lu Jian and Zheng Zhibin act as deputy heads of the liquidation group.

The administrator shall fulfil its functions diligently and faithfully, carry out the duties of the administrator as stipulated in the Enterprise Bankruptcy Law of the People’s Republic of China, report to the People’s Court and be subject to the supervision of the creditors’ meeting and the creditors' committee. The duties of the administrator are as follows:

(1)  Taking over the debtor’s assets, company seals and books of accounts, documents and other materials;

(2)  Investigating into the debtor’s financial position and preparing the reports on such financial position;

(3)  Determining the internal management and affairs of the debtor;

(4)  Determining the daily expenses and other necessary expenses of the debtor;

(5)  Determining the continuation or suspension of the business operation of the debtor prior to the holding of the first creditors’ meeting;

(6)  Managing and disposing of the debtor’s assets;

(7)  Engaging in lawsuits, arbitration or other legal proceedings for and on behalf of the debtor;

(8)  Calling for the convening of the creditors’ meetings; and

(9)  Other functions that this Court deems necessary to be performed by the administrator.

19 February 2020