Hong Kong's Highest Court Issues Ruling on Keepwell Deeds
The court's decision surprised bondholders and will affect future enforcement strategy.
On March 19, 2025, the Hong Kong Court of Final Appeal ("CFA") issued a landmark ruling on the enforceability of "keepwell deeds" in Peking University Founder Group Company Limited v. Nuoxi Capital Limited. As Hong Kong's highest court, the CFA only hears questions of public importance, making this a keenly anticipated decision for the legal and investment community.
Unique to China, keepwell deeds arose from restrictions on a Mainland parent's ability to guarantee the debts of its offshore subsidiary. Beginning in June 2014, any such guarantee had to be registered with the Mainland authorities, or risk being unenforceable. As the registration process could be uncertain, alternatives were sought. Keepwell deeds evolved as a type of "guarantee-lite"; at its heart lay various undertakings pursuant to which the Mainland parent agreed to ensure the financial well-being of its offshore subsidiary.
Peking University Founder Group Co. Limited ("PUFG"), a Mainland company, executed a keepwell deed in respect of US$1 billion in offshore bonds issued by its BVI subsidiary. PUFG undertook to ensure that its BVI subsidiary would have sufficient funds to meet its payment obligations under the offshore bonds. PUFG failed to do so, and its BVI subsidiary subsequently defaulted. PUFG itself fell on hard times, and went into reorganization. In order to file a proof of claim in PUFG's reorganization, liquidators of the BVI subsidiary argued that PUFG's breach of its funding obligations under the keepwell deed caused the BVI subsidiary to suffer losses in excess of US$1 billion (representing the unpaid principal and interest owed to bondholders), and sought a declaration to this effect.
The CFA rejected this. It held that PUFG's funding obligations under the keepwell deed were meant to be discharged by a loan. If PUFG had given this loan, its BVI subsidiary would simply have replaced one debt (owed to the bondholders) with another (owed to PUFG). As a result, the BVI subsidiary would have suffered no "net loss" as its balance sheet would have remained unchanged. Accordingly, a breach by PUFG of its funding obligations under the keepwell deed could not give rise to loss in excess of US$1 billion on the part of the BVI subsidiary.
The CFA indicated that the position would have been different had the claim been brought by the bondholders, but noted that a calculated decision had been made in this regard by the bondholders as it was felt that an affiliated or "friendly" claim (i.e., filed by the liquidators of the BVI subsidiary) would stand a greater chance of success in PUFG's reorganization proceedings compared to an "adversarial" claim filed directly by the bondholders.
As only questions of public importance come before the CFA, the effects of this case will be felt widely. While certain aspects of this case turn on its unique facts, there can be little doubt that keepwell deeds will face intense scrutiny in future deals.
