On 19 March 2025, the Court of Final Appeal handed down a landmark decision in the long-running keepwell deed dispute concerning Peking University Founder Group Company Limited (“PUFG”). The decision sheds light on important questions of law, and clarifies the legal effect of “keepwell deeds”.
The appeal concerned the important question of whether a breach of keepwell deeds, in the form of a failure by the parent company to advance liquidity to the issuers/guarantors of the underlying bonds (for the purpose of enabling them to pay off the bondholders), caused actionable loss to the issuers/guarantors sounding in damages in the amount which the parent was obliged to advance.
A summary of the facts of the case
The PUFG saga is “the first of its kind”: this was the first time keepwell deeds were tested in Courts in Hong Kong. As Harris J, the trial judge, remarked at paragraph 1 of his judgment:-
“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 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.”
In this case, PUFG, a Mainland Chinese holding company, wished to raise funds offshore. To do so, PUFG, via two offshore subsidiaries (“Issuers”), issued bonds to the tune of US$1.7 billion. The bonds were also guaranteed by two other offshore entities (“Guarantors”).
As was common at the time, PUFG executed “Keepwell Deeds” with the Issuers, the Guarantors and the bond trustee. The Keepwell Deeds obliged PUFG to, inter alia, maintain at least US$1 in consolidated net worth for each Issuer and Guarantor (clause 4.1(i)), and to ensure sufficient liquidity for timely bond payments (clause 4.1(ii)). Clause 2.2 provided that performance by PUFG of its obligations was subject to regulatory approvals.
Default on a bond was declared by the bond trustee on 16 April 2020. This was preceded by the deterioration of PUFG’s financial condition in early 2020, which culminated in the court-ordered reorganisation in Beijing on 19 February 2020.
In the meantime, the Issuers and the Guarantors were liquidated. The Issuers and Guarantors then sued PUFG for inter alia alleged breaches of the Keepwell Deeds.
Importantly, the Issuers and the Guarantors’ pleaded cases asserted (a) separate breaches of clause 4.1(i) occurring on various dates for different entities, and (b) breach of clause 4.1(ii) in April 2020.
Procedural history
At first instance, Harris J dismissed most claims, ruling that post-reorganisation, PUFG could not have obtained necessary regulatory approvals.
This was reversed by the Court of Appeal, and the Court of Appeal granted declarations that PUFG breached the Keepwell Deeds on 16 April 2020 and became liable in the amount of the Issuers’ unpaid debt obligations.
PUFG appealed to the Court of Final Appeal. PUFG’s argument centered on the contention that a failure to advance liquidity (i.e. a breach of clause 4.1(ii), as found by the Court of Appeal) caused no actual loss to the Issuers/Guarantors, because a loan by PUFG to them would have merely replaced one liability (to bondholders through the bond trustee) with another equal liability (to PUFG), resulting in no net impact on the balance sheet on the part of the Issuers/Guarantors.
The appeal was unanimously allowed by the Court of Final Appeal. In so doing, the Court of Final Appeal made important observations on the effect of a keepwell deed.
Reasoning of the Court of Final Appeal
The Court agreed with PUFG that clause 4.1(ii) could be performed by way of a loan. Contrary to the Issuers/Guarantors’ submissions, on proper construction of the Keepwell Deeds, there was no requirement for PUFG to perform its obligations under clause 4.1(ii) by making a gift.
It follows that PUFG was only liable to pay nominal damages for failing to lend money to the Issuers/Guarantors. The reasoning was as follows:
- Damages for breach of contract are generally aimed at putting the plaintiff in the position it would have been in had the contract been performed.
- This is a foundation of the “no net loss” rule as most recently expressed by the United Kingdom Supreme Court in Stanford International Bank Ltd (in liquidation) v HSBC Bank Plc [2023] AC 761, i.e. that in awarding damages for breach of contract or in tort, losses and gains arising from the breach must be netted off against each other and only any net loss awarded as damages.
- In this case, had a loan been provided by PUFG to the Issuers/Guarantors (to be used by them to pay off the bondholders), the pre-existing indebtedness to the bondholders would simply have been replaced by an equal amount of debt to PUFG, so there was no net loss for which substantial damages would be awarded.
- The Court of Final Appeal also considered the authorities submitted by PUFG, including decisions from 6 common law jurisdictions, namely England, Australia, New Zealand, Canada, the United States, and Singapore, to the effect that “the general rule was but a logical and common sense working out of the foundational rule that damages for breach of contract are compensatory and based on putting the plaintiff, as best as a money sum can, in the position in which it would have been had the contract been performed” (paragraph 67 of the judgment).
For these reasons, the Court unanimously allowed the appeals and declared that no loss beyond nominal damages resulted, with costs to PUFG.
Implications
The decision resolved an important question of law: if (as held by the Court of Appeal) PUFG was contractually obliged, but failed, to provide liquidity by lending to the Issuers/Guarantors a sum of money (in such an amount as to enable them to pay off their pre-existing debt), would that breach of contract cause actionable loss (sounding in damages) to the Issuers/Guarantors measured by the amount which the lender (PUFG) was obliged to lend, or (putting it in another way) by the amount of pre-existing debt which the Issuers/Guarantors could have paid off by using the sum/liquidity the lender (PUFG) was supposed to lend/procured or advanced?
The answer to this question, as the Court of Final Appeal now confirms, is a resounding “no”. A failure by a lender to lend a sum of money (in such an amount as to enable a borrower to pay off his pre-existing debt) to the putative borrower does not cause loss to the borrower measured by the amount to be lent (or by the pre-existing debt which the borrower could have paid off by using that sum). This is for the simple reason that, had the sum been lent, the borrower would at the same time have incurred a liability to the lender in the same amount. Simply put, there is no “net loss” measured by the amount to be lent (or the amount of the debt the borrower could have paid off by using the sum supposed to be lent).
The same position has been universally adopted in at least six major common law jurisdictions, namely England, Australia, New Zealand, the United States, Canada and Singapore.
The Court of Final Appeal’s decision now confirms that the common law in Hong Kong is the same. This is a development to be welcomed, which provides clarity to the market and practitioners alike.
The full judgment is available at:
https://legalref.judiciary.hk/lrs/common/ju/ju_frame.jsp?DIS=167147&currpage=T
Tom Smith KC, Jose Maurellet SC, Tom Ng and Jasmine Cheung, instructed by Freshfields, acted for the Appellant.
