Second Landmark Hong Kong High Court Decision on Enforceability of Keepwell Deeds in the Tsinghua Unigroup Case

On 15 June 2023, Justice Harris of the High Court of Hong Kong handed down his decision in Citicorp International Limited v Tsinghua Unigroup Co., Ltd (紫光集團有限公司) [2023] HKCFI 1572, the second of two landmark rulings on the enforceability of keepwell deeds. Kirkland & Ellis acted for the ad hoc group of bondholders instructing the successful plaintiff (the Trustee) and oversaw the conduct of the proceedings. The key takeaways are as follows:

• Consistent with the earlier decision in Nuoxi Capital Ltd & Others v Peking University Founder Group Company Limited [2023] HKCFI 1350, keepwell obligations are binding and enforceable contractual obligations, and there is no “public policy” objection to them per se. 
• Unlike a guarantee, a keepwell agreement is unlikely to generate a claim that can be submitted in a PRC reorganisation process. This is because, at least where the keepwell obligation is engaged after the onset of the process, it is unlikely that the necessary regulatory approvals could have been obtained. This is a material limitation on the credit support a keepwell agreement is likely to provide, albeit on the facts of this case did not afford a defence.
• Keepwell obligations are not guarantees and ordinary damages principles apply to the quantification of claims. Applying these principles, Justice Harris gave judgment in the amount of US$483,843,533 consisting of the principal amount of the Bonds, accrued interest and certain costs. Unlike in Nuoxi Capital, this is a money judgment and may be enforced directly against Tsinghua and its assets in accordance with and subject to the law of the jurisdiction of enforcement.  
• Depending on the circumstances, keepwell deeds can provide material credit support. However, while keepwell deeds are not worthless window dressing, the case illustrates how sensitive keepwell obligations are to supervening events and to the PRC regulatory regime.

Factual background

The defendant, Tsinghua Unigroup Co., Ltd (紫光集團有限公司) (Tsinghua), is the PRC holding company of a large commercial group specialising in IT, semiconductors, and information and communication technologies amongst other things. It is also associated with one of the PRC’s most prestigious universities. 

In 2015 and 2016, Unigroup International Holdings Ltd (the Issuer), an indirect subsidiary of Tsinghua, issued US$450 million of 6% bonds due 2020 guaranteed by Tsinghua Unigroup International Co. Ltd (the Guarantor). Tsinghua entered into a keepwell deed with the Trustee by which it undertook amongst other things to cause each of the Issuer and the Guarantor to have sufficient liquidity to ensure timely payment of principal and interest due under the bonds (the Sufficient Liquidity Obligation), and to cause the Guarantor to have a consolidated net worth of at least US$50 million at all times (the Net Worth Obligation). The keepwell deed expressed the Sufficient Liquidity Obligation and Net Worth Obligation to be subject to regulatory approvals.

On 16 November 2020, Tsinghua failed to redeem RMB1,300,000,000 bonds issued in the PRC, which had matured. On 7 December 2020, the Guarantor (as lender) entered into a loan agreement with Tsinghua (as borrower) to lend US$523,000,000 to Tsinghua (the Guarantor’s Loan Agreement). On 10 December 2020, the bonds matured, and the Issuer defaulted on payment. On 30 December 2020, the Trustee declared the bonds were immediately due and payable at their principal amount together with accrued interest. 

Some seven months later, on 16 July 2021, Tsinghua entered into reorganisation under the PRC Enterprise Bankruptcy Law. The Trustee submitted a claim in those proceedings but was effectively excluded from any participation in the reorganisation (the claim was left “pending”). The size and seriousness of the Trustee’s claim invited, in Justice Harris’ view, suspicion about the motives of the Administrator and Tsinghua in dealing with such a substantial claim from overseas creditors. On 13 July 2022, the reorganisation was terminated, and Tsinghua returned to operation as a going concern.

Ruling

In awarding the Trustee US$483,843,533 consisting of the principal amount of the bonds, accrued interest and certain Trustee costs, Justice Harris held:

• Consistent with his earlier decision in Nuoxi Capital, that in order to rely successfully on regulatory approvals as a defence Tsinghua had to demonstrate that it could not obtain the necessary regulatory approvals despite using its best efforts. However, there was no evidence of Tsinghua giving any consideration to what regulatory approvals were required (or the means by which the Issuer or Guarantor could have been put in funds), let alone making any effort to obtain any ([28]). 
• The Guarantor’s Loan Agreement demonstrated that in December 2020 Tsinghua had access to US$ that could have been used to comply with its obligations under the keepwell deed and that Tsinghua clearly did not consider doing so ([35]).
• Tsinghua failed to demonstrate that it was not possible for it to perform the keepwell deed obligations before 10 November 2020 because it could not obtain the necessary regulatory approval. This was the relevant period because, according to Tsinghua's own evidence, in order to comply with the keepwell deed it would have been necessary for Tsinghua to have been considering its options at least a month in advance of the last date by which the Issuer and the Guarantor needed funds to pay the bonds when they matured ([37] and [47]).
• There is no principle that by the minimum act of submission (through a proof of debt) to a foreign insolvency proceeding exclusive jurisdiction is placed in the hands of the courts of that foreign jurisdiction. However, if the proof of debt had been fully argued before the Beijing Court with the Trustee’s participation, Justice Harris would have readily granted a stay of these proceedings ([54]). And the fact that the Administrator did not determine the proof filed by the Trustee suggested that the Administrator found the novel and important issues, which this case gives rise to, very challenging and it was therefore reluctant to determine them ([55]).
• With respect to the assessment of damages, the relevant question in the context of the keepwell deed is what the Trustee has lost by the failure to comply with the keepwell deed. There was no dispute that the bonds matured and became payable on 10 December 2020. This was the date at which loss should be assessed, and the loss was the amount that should have been paid but was not (i.e., principal and interest on the bonds) ([59]).

Conclusions

Keepwell deeds have been a common feature of financing arrangements entered into by Mainland China-based business groups and foreign lenders for some time and continue to be utilized in transactions as a means of credit enhancement. Justice Harris’ latest decision is significant because it involves a clear application of the principles in connection with keepwell deeds he formulated in Nuoxi Capital and demonstrates that they can yield significant damages liabilities for keepwell providers. Depending on the circumstances, keepwell deeds can provide material credit support. However, while keepwell deeds are not worthless window dressing, the case does underscore how sensitive keepwell obligations are to supervening events and to the PRC regulatory regime.