3 December 2020
In November 2020, the Shanghai Financial Court delivered a judgment (“PRC Judgment”) which recognised a default judgment by the Hong Kong High Court against CEFC Shanghai International Group Limited, a PRC incorporated company (the “Company”).
The underlying Hong Kong default judgment (“HK Judgment”) was in relation to a claim for breach of a keepwell deed entered into between the Company and the holders of bonds issued by its subsidiary (the “Subsidiary”), whereby the Company had given certain undertakings to ensure that the Subsidiary remained solvent with sufficient liquidity to meet its payment obligations during the tenor of the bonds.
The PRC judgment is significant as limitations of a keepwell deed structure, frequently used as credit enhancement for bonds involving PRC companies, have always been a known risk. A breach of a keepwell deed would not typically give rise to a debt claim but only a claim for damages for breach of contract. In addition, the effectiveness of the keepwell deed structure has not previously been tested before a PRC court and there has been uncertainty as to how a PRC court would treat a claim under a keepwell deed.
Background
23 October 2017
On 23 October 2017, an offshore subsidiary of the Company issued bonds with an aggregate principal of EUR29.91 million. The bonds had the benefit
of a keepwell deed provided by the Company to the bondholders. Under
the keepwell deed, the Company undertook to ensure that the Subsidiary remained solvent with sufficient liquidity to meet its payment obligations during the tenor of the bonds. The keepwell deed was governed by English law with an exclusive jurisdiction clause in favour of the Hong Kong courts.
24 August 2018
On 24 August 2018, a bondholder obtained the HK Judgment against the Company for breach of the keepwell deed.
May 2019
In May 2019, the bondholder commenced proceedings in the Shanghai Financial Court to seek recognition and enforcement of the HK Judgement against the Company.
15 November 2019
The HK Judgement was obtained prior to the Company being placed into insolvent liquidation on 15 November 2019.
Takeaways
The limitations of a keepwell deed structure have always been a known risk. The breach of a keepwell deed would not typically give rise to a debt claim but only a claim for damages for breach of contract.
Further doubt on the efficacy of the keepwell deed structure has been raised following the recent decision of the PRC bankruptcy administrator in the administration proceedings of Peking University Founder Group, a PRC incorporated company, which rejected the proof of debt filed by the holders of bonds for which Peking University Founder Group was the PRC keepwell provider (and not the guarantor).
However, this PRC Judgment demonstrates that, in appropriate circumstances where the PRC keepwell provider is not already insolvent, a PRC court is likely to enforce a Hong Kong court judgment which gives effect to a keepwell deed pursuant to the Arrangement.
Decision
The Shanghai Financial Court decided to recognise the HK Judgment pursuant to the Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters between the Courts of the Mainland and of the HKSAR pursuant to the Choice of Court Agreements between Parties Concerned
(the “Arrangement”).
The Shanghai Financial Court held that the HK Judgment was a legally effective judgment for the purposes
of the Arrangement and that the validity under PRC law of the keepwell deed on which the HK judgment was based was not one of the factors that need to be considered when deciding whether to recognise and enforce the HK Judgment in accordance with Article 9(1) of the Arrangement.
In addition, the Shanghai Financial Court made it clear that the “social and public interest” exception to recognition and enforcement of the HK Judgment should be construed narrowly. As the keepwell deed was governed by English law (and not PRC law) and subject to the exclusive jurisdiction of the Hong Kong courts, the Shanghai Financial Court did not consider there were any “social and public interest” issues which would preclude it from recognising the HK Judgment.
For further information, please contac
Melvin Sng, Partner, Head of Dispute Resolution, Asia, Linklaters
melvin.sng@linklaters.com
