HCA778C/2021 NUOXI CAPITAL LTD (IN LIQUIDATION IN THE BRITISH VIRGIN ISLANDS) v. PEKING UNIVERSITY FOUNDER GROUP CO LTD

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.

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:

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^ndNuoxi 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.

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.

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:

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:

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”):

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:

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.

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:

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:

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:

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:

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.

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.

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]:

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.

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:

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.

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:

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:

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:

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.

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:

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.

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:

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 times from 31 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.

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.

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.

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.

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:

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.

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”.

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].

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.

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.

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.

[1] The Plaintiffs in HCA 778, 798, 1418 and 1442/2021 were represented by William Wong SC, Look Chan Ho and Tommy Cheung. The Defendant in those four High Court Actions, were represented by José-Antonio Maurellet SC, Tom Ng and Jasmine Cheung.

[2] The People’s Republic of China excluding the Hong Kong and Macau Special Administrative Regions and Taiwan.

[3] [2021] HKCFI 572; [2021] HKCLC 205.

[4] [2021] HKCFI 311; [2021] HKCLC 145.

[5] [2021] HKCFI 3817.

[6] [22(3)] below.

[7] Dated 20 April 2017 (in relation to the 2020 Bonds) and 24 January 2018 (in relation to the 2021 Bonds and 2023 Bonds) and entered into between Nuoxi, HKJHC, the Company and the Trustee in relation to the Trustee’s roles as calculation agent, paying agent and transfer agent, etc under the Nuoxi Bonds.

[8] Presumably, this was intended to mean outside the Mainland and not include Hong Kong.

[9] Presumably, this is intended (as the definition indicates) to be the same as Consolidated Total Equity, which is the term used in clause 4.1(i) of the Kunzhi Keepwell Deeds.

[10] Defined in Clause 1.1 of each EIPU as, inter alia, any shares, interests participations or equivalent ownership in any corporation, partnership, limited liability company, and any and all warrants, rights or options to purchase any of the foregoing.

[11] Defined in Clause 1.1 of each EIPU as “(a) any company or other business entity of which that person owns or controls (either directly or through one or more other Subsidiaries) more than 50 per cent. of the issued share capital or other ownership interest having ordinary voting power to elect directors, managers or trustees of such company or other business entity, or (b) any company or other business entity which at any time has its accounts consolidated with those of that person or which, under the law, regulations or generally accepted accounting principles of the jurisdiction of incorporation of such person from time to time, should have its accounts consolidated with those of that person…”

[12] Paragraph 22 of the Amended Statement of Claim in HCA 778/2021.

[13] [28(1)] above.

[14] [29] and [31] above.

[15] [35] above.

[16] [13] above.

[17] [2022] HKCA 1514.

[18] [13] above.

[19] Supra.

[20] Antony Gibbs & Sons v La Société Industrielle et Commerciale des Métaux (1890) 25 QBD 399.

[21] [2020] HKCLC 379.

[22] [2018] EWCA Civ 2802; [2019] Bus LR 1130 at [28] (Henderson LJ).

[23] [2022] 5 HKLRD 837; [2022] HKCA 1514.

[24] Supra.

[25] This was explained by President Xi Jinping in his speech in Hong Kong on 1 July 2022. “香港的根本利益同國家的根本利益是一致的，中央政府的心同香港同胞的心也是完全連通的。背靠祖國、聯通世界，這是香港得天獨厚的顯著優勢，香港居民很珍視，中央同樣很珍視。中央政府完全支持香港長期保持獨特地位和優勢，鞏固國際金融、航運、貿易中心地位，維護自由開放規範的營商環境，保持普通法制度，拓展暢通便捷的國際聯繫。中央相信，在全面建設社會主義現代化國家、實現中華民族偉大復興的歷史進程中，香港必將作出重大貢獻”。 “The fundamental interests of Hong Kong are in line with those of the country, and the central government and Hong Kong compatriots share the same aspirations. Hong Kong’s close connection with the world market and strong support from the motherland are its distinctive advantages. Such favourable conditions are cherished by the people of Hong Kong and by the central government as well. The central government fully supports Hong Kong in its effort to maintain its distinctive status and edges, to improve its presence as an international financial, shipping, and trading center, to keep its business environment free, open, and regulated, and to maintain the common law, so as to expand and facilitate its exchanges with the world. On the country’s journey toward building a modern socialist country in all respects and realizing the rejuvenation of the Chinese nation, the central government believes that Hong Kong will make great contributions.” Source of English translation, Xinhua.

[26] Fishbourne Developments Ltd v Stephens [2020] EWCA Civ 1704 at [33] (Asplin LJ); Soteria Insurance Ltd v IBM United Kingdom Ltd [2022] EWCA Civ 440; [2022] 2 All ER (Comm) 1082 at [31]–[33] (Coulson LJ); BNP Paribas Trust Corporation UK Ltd v Uro Property Holdings SA [2022] EWHC 3251 (Comm) at [98]–[105] (Jacobs J).

[27] [2022] EWHC 190 (Ch) at [44].

[28] [2014] CSIH 43; 2014 Hous LR 35 at [11].

[29] [2020] CSIH 2; 2020 SCLR 805 at [10]–[17].

[30] Kason Kek-Gardner Ltd v Process Components Ltd [2017] EWCA Civ 2132; [2018] 2 All ER (Comm) 381, [13] Lewison LJ; Jumbo King Ltd v Faithful Properties Ltd (1999) 2 HKCFAR 279 (Lord Hoffmann NPJJ).

[31] I note in passing that it has not been argued that the Keepwell Deeds or the EIPUs would be treated as guarantees under Mainland Law and are, or might arguably be, unenforceable (as would any foreign judgment enforcing them) against the Company in the Mainland on public policy or interest grounds as they constitute an impermissible attempt to circumvent foreign exchange controls: see discussion in Effectiveness of Keepwell Deeds under Chinese Law and Consideration of the Public Interest, Wang Fang, https://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=5859165. I assume this is because the inclusion of clause 2.2 makes such an objection moot. If any approval that is required cannot be obtained the issue is not engaged. If all necessary approvals can be obtained it seems reasonable to assume that there is little room for arguing that the Keepwell Deeds or the EIPUs are objectionable.

[32] The Kunzhi Keepwell Deeds use the term “Consolidated Total Equity”. It was not explained to me why different terms were used. The Offering Circular explains that both Guarantors’ financial statements are audited in accordance with the Hong Kong Financial Reporting Standards. It is not explained so far as I can see in accordance with which accounting standards the Issuers financial statements are audited. The Company’s audited financial statements are audited in accordance with PRC GAAP.

[33] Paragraph 39 of the Amended Statement of Claim in HCA 1442/2021.

[34] Paragraph 40 of the Amended Statement of Claim in HCA 1418/2021.

[35] Paragraph 38 of the Amended Statement of Claim in HCA 798/2021.

[36] [24(2)] above.

[37] HCA 1269/2021.

[38] Paragraph 40(2) of the Amended Statement of Claim in HCA 1418/2021.

[39] Defined in Clause 1.1 of each EIPU as, inter alia, any shares, interests participations or equivalent ownership in any corporation, partnership, limited liability company, and any and all warrants, rights or options to purchase any of the foregoing.

[40] Supra, footnote 4 of the Amended Statement of Claim in HCA 778/2021.

[41] Lewison, Interpretation of Contracts, 7^th ed. [16.47].

[42] [1980] FSR 335.

[43] per G Lane LJ at p345.

[44] HCA 490/2011, 16 April 2014.

[45] [2014] SGCA 16.

[46] [13] above.