PEKING UNIVERSITY FOUNDER GROUP COMPANY LIMITED (北大方正集團有限公司) v. NUOXI CAPITAL LIMITED (諾熙資本有限公司) (IN LIQUIDATION IN THE BRITISH VIRGIN ISLANDS)

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Press Summary (Chinese)

FACV Nos 7, 8 & 9 of 2024

[2025] HKCFA 6

FACV No. 7 of 2024

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NO. 7 OF 2024 (CIVIL)

(ON APPEAL FROM CACV NO. 184 OF 2023)

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FACV No. 8 of 2024

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NO. 8 OF 2024 (CIVIL)

(ON APPEAL FROM CACV NO. 185 OF 2023)

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FACV No. 9 of 2024

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NO. 9 OF 2024 (CIVIL)

(ON APPEAL FROM CACV NO. 186 OF 2023)

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J U D G M E N T

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Chief Justice Cheung:

1.  I agree with the judgment of Mr Justice Allsop NPJ.

Mr Justice Ribeiro PJ:

2.  I agree with the judgment of Mr Justice Allsop NPJ.

Mr Justice Fok PJ:

3.  I agree with the judgment of Mr Justice Allsop NPJ.

Mr Justice Lam PJ:

4.  I agree with the judgment of Mr Justice Allsop NPJ.

Mr Justice Allsop NPJ:

Introduction and the issue

5.  The three appeals before the Court that were heard together arise from the failure of a commercial group of companies of which the Appellant, the Peking University Founder Group Company Limited (PUFG or the Company) is the ultimate parent.  PUFG, a Mainland company, is now under re-organisation by Administrators pursuant to an order made by the Beijing No 1 Intermediate People’s Court (Beijing Court) on 19 February 2020.

6.  The three Respondents, being three (of four) Plaintiffs at first instance, are companies in the PUFG group.  Two, Nuoxi Capital Limited (Nuoxi) and Kunzhi Limited (Kunzhi) were the Issuers under United States dollar bond issues in 2017 and 2018, as described below.  Both Nuoxi and Kunzhi are incorporated in the British Virgin Islands.  Both are in liquidation.  The third, Hongkong JHC Co Limited (HKJHC) is the direct parent of Nuoxi and, was the Guarantor of Nuoxi’s obligations under the Nuoxi bond issues.  PUFG is the parent of HKJHC.

7.  Another company in the PUFG group, Founder Information (Hong Kong) Limited (FIHK), also a subsidiary of the Company, was the guarantor of Kunzhi’s obligations under the Kunzhi bond issues.

8.  HKJHC and FIHK are incorporated in Hong Kong. Both are in liquidation.

9.  All four subsidiaries brought proceedings in the High Court against the Company, claiming loss and damage said to have been caused by the Company’s alleged breach of provisions of deeds that were part of the bond issue documentation, called “Keepwell Deeds”.  The provisions obliged the Company to, inter alia, maintain at all times a positive consolidated net worth of at least US$1 of the four subsidiaries, and to provide for their liquidity to meet payment obligations in respect of the bonds.  FIHK was successful in its proceeding.  Nuoxi, Kunzhi and HKJHC were unsuccessful, with each of their proceedings being dismissed by the Court of First Instance (Harris J).  The appeals to the Court of Appeal by the three unsuccessful Plaintiffs were allowed, with the Court making the following declarations (collectively Declarations):

(1)     … that PUFG breached the Nuoxi Keepwell Deeds on 16 April 2020 and became liable to Nuoxi and HKJHC in the sums of US$306,672,000, US$202,116,000 and US$404,816,000 as on that date.

(2)     … that PUFG breached the Kunzhi Keepwell Deeds on 16 April 2020 and became liable to Kunzhi in the sums of US$312,647,400 and US$505,141,000.

10.  Both Declarations concerned the found breach by the Company of the provisions of the Keepwell Deeds that required the Company to provide funds for the liquidity of Nuoxi, Kunzhi and HKJHC in meeting specific payment obligations to bondholders.  The sums identified in the Declarations were the amounts of principal and interest due under the various bond issues on that date (16 April 2020) upon the falling-in of the bonds brought about by the demands of the trustee of the bond issue arrangements based on relevant events of default and cross-defaults, the details of which are unnecessary to examine.  It is sufficient to say that by December 2019 the Company was facing serious liquidity pressures that led to the Bank of Beijing Co Limited applying in February 2020 to the Beijing Court under the Enterprise Bankruptcy Law for an order of the kind made on 19 February.

11.  The proceedings brought by Nuoxi, Kunzhi and HKJHC failed before Harris J because of a factual finding that, after the order for re-organisation of the Company made by the Beijing Court on 19 February 2020, the Company would not have received regulatory approvals to transfer the required sums to the subsidiaries and so, on the proper construction of the Keepwell Deeds, there could be no breach of the relevant obligations after 19 February 2020.  The Court of Appeal overturned that factual finding and made the Declarations set out above. 

12.  In its reasoning that supported the Declarations, the Court of Appeal rejected an argument of the Company that the three subsidiaries had suffered no actionable loss by any breach by it of its obligations to maintain the liquidity of the Issuers and Guarantors under the Keepwell Deeds.  The argument of the Company was based on a proposition that funds could have been provided in compliance with the relevant provisions by the Company making a loan to each Issuer or Guarantor, which would have only replaced a debt to the bondholders (or the trustee under the bonds) with an equal debt to the Company, or to another lender if a different entity to the Company advanced the loan.  In this respect, the obligation was said to stand in contradistinction to the (separate) obligation in each Keepwell Deed to maintain, at all times, the consolidated net worth of the Issuers and Guarantors (the “balance sheet obligation” as it was called in the appeals).

13.  Thus, it is important to appreciate that the Declarations are to the effect that there were breaches of the Keepwell Deeds by the failure to make funds available and to pay the sums there identified to Nuoxi, Kunzhi and HKJHC, and thereby the Company became liable to Nuoxi, HKJHC and Kunzhi in the sums identified.  The Declarations have embedded within them the proposition that the respective totals of these sums represented loss and damage suffered by Nuoxi and HKJHC, and Kunzhi, respectively.  The explanation for this form of declaration is to be found in [38] of the reasons of Harris J and the CA judgment at [46].  The Plaintiffs explained at an interlocutory application that they did not seek money judgments for loss and damage caused by the breaches, but rather declarations as to breaches of the Keepwell Deeds resulting in loss and damage, upon which they could rely in support of proofs of debt in the Company’s re-organisation in Beijing.  Such declarations were intended to be, by the way the case was pleaded (see below) and presented to the Court of Appeal (see below) and by their terms (“and became liable to”), declarations of the liability of the Company to Nuoxi, Kunzhi and HKJHC for loss and damage caused by the failure to pay those sums to them in breach of the Keepwell Deeds.

14.  The above is made clear by the terms of the question of great general or public importance upon which the Court of Appeal granted leave to appeal to this Court.  The question focused upon whether the breaches of the provisions requiring the Company to maintain the liquidity of the Issuers and Guarantors could have caused loss and damage.  The question was in the following terms:

Whether a breach of an obligation by the Defendant to provide liquidity to the Plaintiff, which the Court of Appeal found could have been performed without Relevant Approvals but which (even if performed) would not have improved the balance sheet position of the Plaintiff, causes actionable loss (sounding in damages) measured by the amount of pre-existing debt the Plaintiff could have discharged with the liquidity it received, despite the fact that by receiving the liquidity the Plaintiff would have incurred a corresponding obligation to repay another creditor such as the Defendant in the same amount, such that the Plaintiff’s balance sheet position would have remained unchanged.

The bond issues and the Keepwell Deeds

15.  Under two trust deeds dated April 2017 and January 2018, Nuoxi issued US$900 million of bonds in three tranches of different maturity dates and interest rates in respect of which HKJHC was the Guarantor.  Under two trust deeds dated April and May 2018 Kunzhi issued US$800 million of bonds in two tranches of different maturity dates and interest rates in respect of which FIHK was the Guarantor.

16.  The bonds were issued to raise funds for the PUFG group to undertake its wide range of commercial activities, including information technology, healthcare and pharmaceuticals, finance and securities, bulk commodities trading, and education and training.

17.  The legal arrangements for the issue of the bonds were embodied in documentation that included four trust deeds, four so-called “Keepwell Deeds”, and four deeds each called a Deed of Equity Interest Purchase Undertaking (EIPU).  For present purposes, it is not necessary to discuss the EIPUs, and the specific terms of the trust deeds. Central to the appeals are the Keepwell Deeds, the terms of which were relevantly identical.

18.  The reason for utilising “Keepwell Deeds” was explained in the evidence before the trial judge.  From June 2014 until January 2017, Mainland business enterprises (such as PUFG) were required to apply to register and gain approval from the State Administration of Foreign Exchange for the entry into guarantees for off-shore debts, such as by capital raisings by the issue of bonds as in this case.  That governmental authority could refuse to accept the application, or could refuse to allow the repatriation of the proceeds of an off-shore capital raising under any structure containing such a guarantee.  The stated policy behind these restrictions was to seek to ensure that capital raised in off-shore markets would be used for productive purposes and did not contribute to speculative activities or financial instability in the PRC.  In order to avoid these restrictions, Mainland businesses, such as PUFG and its group, used Keepwell Deeds which were expressly not guarantees, but contained obligations to maintain the financial well-being of any off-shore subsidiaries which were involved as issuer or guarantor.  This was usually effected by provisions for the maintenance of net equity or consolidated net worth, of liquidity, and of management control and ownership.  The restriction ceased in 2017, but the form of Keepwell Deed security continued to be used, as it was in the Nuoxi and Kunzhi bond issues in 2017 and 2018. 

19.  That explanation (even if it be thought that the terms of the Keepwell Deeds here were not sufficient to do so) reveals that the Keepwell Deeds were for the benefit of the bondholders to give confidence in the financial viability of the issuers and guarantors and of the bond issues, in the absence of a parent guarantee.

The relevant provisions of the Keepwell Deeds

20.  The parties to the Keepwell Deeds (or Deeds) were the Company (as to all four) Nuoxi and HKJHC (as to two for the Nuoxi bonds issues), Kunzhi and FIHK (as to two for the Kunzhi bond issues) and The Bank of New York Mellon, London Branch (the Trustee) (as to all four). There were two sets of documentation for the three tranches of the Nuoxi bonds.

21.  Recitals (C) and (D) were in the following terms:

(C)     The Company intends to assist the Issuer and the Guarantor in meeting their obligations under the Bonds and the Guarantee by entering into this Deed.

(D)    The Company expressly intends for the Trustee in its capacity as the trustee for the holders of the Bonds, to be the beneficiary under this Deed as provided herein.

22.  Recital (C) reflected the benefit to the bondholders of the Deed.  Recital (D) made it clear that the parties contemplated that the Trustee, in the interests of the bondholders, was to have the benefit of the Deed.  The intent behind Recital (D) was made explicit in clause 11 of the operative part of the Deed, which was in the following terms:

The agreements herein set forth shall be mutually binding upon, and inure to the mutual benefit of, the Company, the Issuer, the Guarantor, the Trustee and their respective successors. The Company acknowledges that this Deed is being entered into by the Trustee as Trustee for itself and the Bondholders, and agrees that the provisions of this Deed may be enforced by the Trustee in that capacity in accordance with the terms of the Trust Deed.

Clause 11 could not have been clearer: The “agreements herein set forth” in the Deed, that is all the covenants in the provisions in the operative part of the Deed, inured to the benefit of the Trustee, and the Trustee could enforce, and sue upon, the Deed and its provisions and covenants for the benefit of the bondholders.

23.  In such suit, the damages recoverable by the Trustee would not be nominal or only be vindicating its own personal interests.  The Trustee held the covenants and their benefits for itself and on trust for the bondholders.  The Trustee’s right to sue encompassed the right to recover the loss and damage to the bondholders caused by any breach of covenant owed by the Company to the Trustee as a party to the Deed: Lloyd’s v Harper (1880) 16 Ch D 290 at 315, 317 and 321 (James, Cotton and Lush LJJ), as explained (as to Lush LJ at 321) by each member of the House of Lords in Woodar Investment Development Ltd v Wimpey Construction UK Ltd [1980] 1 WLR 277 (Lord Wilberforce at 283F-284D with whom Lord Salmon agreed at 291B-D, Lord Russell of Killowen at 293C-294E (in dissent, but not on this point), Lord Keith of Kinkel at 297E-298A, and Lord Scarman at 300A-E); and as explained by Windeyer J in Coulls v Bagot’s Executor and Trustee Co Ltd (1967) 119 CLR 460 at 501-502.  See also Lewin on Trusts (20^th Ed) at 159 [5-013]; and Jacobs’ Law of Trusts in Australia (8^th Ed) at 17.  That breach of the covenant owed to the Trustee was the failure of the Company to pay requisite sums to Nuoxi, Kunzhi and HKJHC, relevantly, under clause 4.1(ii) set out below. 

24.  Clause 2.1 made clear that the Deed was not a guarantee.  Clause 2.2 provided that performance by the Company of its obligations was subject to regulatory approvals, the importance of which, in the circumstances, had divided Harris J and the Court of Appeal.  Clause 3 concerned the maintenance of ownership and control of the Issuer and Guarantor in the Company.

25.  Clause 4 is central to this appeal.  Relevantly, it was in the following terms:

4.1     The Company undertakes that it shall cause:

(i)     each of the Issuer and the Guarantor to have a Consolidated Net Worth of at least US$1.00 at all times;

(ii)     each of the Issuer and the Guarantor to have sufficient liquidity to ensure timely payment by each of the Issuer and the Guarantor of any amounts payable under or in respect of the Bonds and the Guarantee in accordance with the terms and conditions of the Bonds and/or the Trust Deed and otherwise under the Trust Deed and the Agency Agreement; and

(iii)    the Guarantor to have an aggregate Total Equity of at least HK$9,980,000 at all times.

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 Issuer or the Guarantor shall use any funds made available to it by the Company in accordance with this Deed solely for the payment when due of such payment obligations under the Bonds, the Guarantee or the Trust Deed (as the case may be).

4.2 …

For the purposes of this Deed:

Consolidated Net Worth means, (i) in respect of the Issuer, the excess of total assets of the Issuer and its consolidated Subsidiaries over total liabilities of the Issuer and its consolidated Subsidiaries; and (ii) in respect of the Guarantor, the excess of total assets of the Guarantor and its consolidated Subsidiaries over total liabilities of the Guarantor and its consolidated Subsidiaries, total assets and total liabilities each to be determined in accordance with the Hong Kong Financial Reporting Standards consistently applied;

(Emphasis added)

26.  Clause 4.1(i) and (ii) were referred to in argument as the “balance sheet obligation” and the liquidity obligation (or “liquidity payment obligation” in the courts below).  Importantly, the breaches referred to in the Declarations were of the obligations in clause 4.1(ii), not (i).

27.  Clause 4.1(iii) related only to HKJHC.

28.  As to the obligation in clause 4.1(i), it must be emphasised in the light of the arguments of the Respondents that the Consolidated Net Worth required was of total liabilities and assets (as one would expect), not total current liabilities and assets.

29.  It is also to be noted that clause 4.1(i) involved an obligation to have a state of affairs of US$1 Consolidated Net Worth at all times.  It was not an obligation only to have a balance sheet at a particular time showing such a state of affairs. 

30.  Further, the liquidity obligation in clause 4.1(ii) was to make available from time to time funds before the due dates of relevant payment obligations of the Issuer or, in the case of default, Guarantor.  The Issuer and Guarantor were obliged to use the funds solely for the purpose of the Bonds, or performing the obligations under the Guarantee or the Trust Deed.  This contractual obligation may give rise to a question as to whether there was also an obligation upon the Issuer and Guarantor in equity in the nature of a so-called Quistclose trust impressed upon any such a payment (cf China Life Trustees Ltd v China Energy Reserve and Chemicals Group Overseas Co Ltd (2024) 27 HKCFAR 359; [2024] HKCFA 15).

31.  No form or mechanism was specified in clause 4.1(ii) as to how or in what manner the “sufficient funds” were to be “made available” to the Issuer or Guarantor.  Clause 6, however, provided for a mechanism of satisfying the liquidity obligation to the Issuer, as follows:

6.1     No later than 30 Facility Business Days before each Interest Payment Date (the Liquidity Notice Date), the Issuer shall send to each of the Company and the Trustee a notice in writing substantially in the form set out in Schedule 1 to this Deed (the Liquidity Notice) certifying, as at the date of the Liquidity Notice, that it has sufficient liquidity to meet its payment obligations under the Bonds and the Trust Deed as they may fall due on the next Interest Payment Date falling immediately after the date of such Liquidity Notice (together with evidence of available funding outside the PRC) and that no Event of Default or Potential Event of Default has occurred.

6.2     In the event that (i) the Issuer does not provide a Liquidity Notice in accordance with and by the time specified in Clause 6.1 or (ii) an Event of Default has occurred, the Company shall:

(a)     as soon as practicable grant to the Issuer a standby facility (the Standby Facility) pursuant to which the Company will remit an amount sufficient to allow the Issuer to satisfy the payment obligations set out in Clause 6.3 after conversion (if required) (the Standby Facility Amount);

(b)     as soon as practicable open with a PRC commercial bank (the Settlement Bank) a special account for the transfer and remittance of the Standby Facility Amount to the Issuer according to the relevant PRC laws;

(c)     remit the Standby Facility Amount to a specified account of the Issuer in Hong Kong through the special account (x) in the case of Clause 6.2(i) at least two Facility Business Days prior to the next Interest Payment Date or (y) in the case of Clause 6.2 (ii) as soon as practicable; and

(d)     cause the Issuer to use the Standby Facility Amount to discharge its obligations under the Bonds, the Trust Deed, the Agency Agreement, the Deed of Equity Interest Purchase Undertaking and the Keepwell Deed on the due date therefor.

6.3     The Standby Facility Amount to be remitted under Clause 6.2 must (after taking into account exchange rate movements) be sufficient to enable the Issuer to discharge in full:

(a)  (i) in the case of Clause 6.2(i), its obligations under the Bonds and the Trust Deed which will become due on the immediate next Interest Payment Date, or (ii) in the case of Clause 6.2(ii), its obligations under or in respect of the Bonds in accordance with the terms and conditions of the Bonds and/or the Trust Deed and otherwise under the Trust Deed and the Agency Agreement (including, without limitation, the principal amount of the Bonds then outstanding and any interest due and unpaid) and/or accrued but unpaid; plus

(b)  (i) all costs, fees, expenses and other amounts payable to the Trustee and/or the Agents under or in connection with the Bonds, the Trust Deed, the Agency Agreement, the Deed of Equity Interest Purchase Undertaking and/or this Deed as at the date of the Liquidity Notice Date (including without limitation all foreign exchange conversion expenses) plus (ii) provisions for costs, fees, expenses and all other amounts which may be incurred after the Liquidity Notice Date as notified by the Trustee.

6.4     Each of the Company and the Issuer agree and acknowledge that the terms of the Standby Facility shall be at arm's length (or more favourable to the Issuer) and shall not require any security from the Issuer.

6.5     The Trustee shall not be obliged to monitor the occurrence of the events specified under Clause 6.2 or to calculate the Standby Facility Amount.

32.  It is to be noted that the taking of the steps in clause 6.2 was an obligation of the Company: “the Company shall”, if an “Event of Default” had occurred (as it had here on or prior to 16 April 2020). Thus, it is clear that the Keepwell Deed contemplated a means or mechanism of bringing about the liquidity of the Issuer.  The arrangement contemplated or involved the use of a commercial banking arrangement (clause 6.2(a)), opened in an account with a PRC commercial bank for the purpose of transferring and remitting the required amount (the “Standby Facility Amount”) (clause 6.2(b)), for remittance to an account of the Issuer in Hong Kong (clause 6.2(c)), for the specified use of meeting the Issuer’s bond obligations (clause 6.2(d)).  The terms of the arrangement, including as contemplated by clause 6.4 (“at arm’s length (or more favourable to the Issuer)”) and the express requirement for a lack of security by the Issuer, contemplated the Issuer incurring an obligation for the provision of the benefit of the facility, either to the bank or to the Company.  It should be said, however, that there is nothing in clause 6 which would prevent the Company waiving, forgiving any such obligation (if it be to the Company) or taking over such obligation (if it be to the bank). Nevertheless, the arrangement plainly contemplated a commercial obligation on the Issuer to repay the funds provided by the use of the facility, though one for which security could not be sought.

33.  Clause 12 provided for continuing undertakings by the Company, relevantly as follows:

For so long as the Bonds are outstanding, the Company hereby undertakes:

…

(ii)     to cause each of the Issuer and the Guarantor to remain in full compliance with the terms and conditions of the Bonds, the Guarantee, the Trust Deed and all applicable laws, rules and regulations in Hong Kong (in the case of the Guarantor) or the British Virgin Islands (in the case of the Issuer);

(iii)    promptly to take any and all action necessary to comply with its obligations under this Deed;

(iv)    to cause each of the Issuer and the Guarantor to take all action necessary in a timely manner to comply with its obligations under this Deed;

The Court of Appeal’s reasons that there was loss and damage in the sums of money not made available under clause 4.1(ii)

34.  The Court of Appeal dealt with and rejected the argument of the Company that a failure to provide funds by the making of a loan to provide liquidity under clause 4.1(ii) did not cause any loss as its receipt involved a liability to repay that was matched by the removal of the equal liability to pay interest and repay principal to the bondholders.  The Court of Appeal did so by adopting and re-expressing the reasons of Harris J at [92] of his judgment, saying at [212]:

… PUFG argued that if it had transferred monies to an Issuer or Guarantor, it would have been treated as a loan with the consequence that the net balance sheet position would not have improved. The judge thought the argument is flawed. If the advance made by PUFG did not improve the net balance sheet position because of the way the advance was treated in the books of the Issuer or the Guarantor, the Consolidated Net Equity would have remained at a deficit. The Keepwell Deeds required PUFG to ensure that the Consolidated Net Worth and/or the Consolidated Total Equity of the Issuer or the Guarantor was US$1, and if that meant PUFG had to make a gift to the Issuer or the Guarantor to achieve that result, that was what was required. This also disposes of the 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 bondholders.

35.  The difficulty with this approach was that at this point ([92]) of his reasons, Harris J was dealing with the consequences of the breach by the Company of the obligation under clause 4.1(i), to maintain the Consolidated Net Worth of FIHK, not clause 4.1(ii), to provide liquidity.

36.  The Court of Appeal, at [213] of its reasons, also rejected the Company’s reliance upon Stanford International Bank Ltd (in liquidation) v HSBC Bank Plc [2022] UKSC 34; [2023] AC 761 at [26] to [31], [40] and [55] to [57] as dealing with damage by way of loss of a chance.  For the reasons below this was not a reason of itself to reject the argument that was put to Harris J or the Court of Appeal. 

The pleaded cases of Nuoxi, HKJHC and Kunzhi

37.  Given the arguments on the appeal to this Court, it is necessary to say something about the pleaded cases of the Plaintiffs at first instance.  Each of the four subsidiaries filed a separate statement of claim.  That of FIHK, of course, is now not relevant.  The statements of claim and, relevantly, the Amended Statements of Claim (ASoC) were in similar, and in important respects the same, terms.

38.  The particular features to be noted in the ASoCs are those relevant to the arguments before the Court.  First, it is necessary to remind oneself that each of Nuoxi, Kunzhi and HKJHC was a Plaintiff primarily claiming a money judgment and damages until the relief was adjusted at an interlocutory stay application, when the primary claim was abandoned in favour of a claim for declaratory relief that the Company had breached provisions of the Keepwell Deeds, and that as a consequence it (the relevant Plaintiff) was entitled to money representing loss or damage caused by such breaches.  It was for each of those Plaintiffs to plead and prove loss and damage. 

39.  Secondly, we are concerned only with the Declarations made by the Court of Appeal that concerned breach of clause 4.1(ii) on 16 April 2020.  The Court is not dealing with the question of loss and damage that might have been caused by any breach of clause 4.1(i).  Mr Justice Harris dealt with that in [92] of his reasons in respect of FIHK’s position in December 2019.  No argument was put before the Court that there was any error in his reasons or conclusions in respect of that proven breach of clause 4.1(i).  As will be discussed, the arguments of the Respondents (the original Plaintiffs) in these appeals sought to make relevant a consideration of the state of the Consolidated Net Worth of the relevant Issuer or Guarantor at the time of required fulfilment of the liquidity obligation under clause 4.1(ii) on 16 April 2020.

40.  In each ASoC, the breach of clause 4.1(ii) was said to be “since at least 16 April 2020”.  However, the Declarations of the Court of Appeal were expressed as breaches “on 16 April 2020”.  The reasons for this difference are dealt with below.  No complaint about, or appeal against, that form of Declarations has been made by the Respondents.  This breach was the failure to pay the amounts to Issuers (and in HKJHC’s case, as Guarantor) that were owing by them to bondholders, being the amounts claimed in the notices of the Trustee dated 16 April 2020.  The particulars appended to the pleading of the breach of clause 4.1(ii) alleged that the failure to pay these sums had the consequence that the relevant Plaintiff was thereby made insolvent, upon which it was wound-up.

41.  Nuoxi and Kunzhi claimed, in the alternative to breaches of clause 4.1(ii), loss and damage at least in the same amount from breaches of clauses 6.2, 6.3 and 11 of the Keepwell Deeds, owed to them as Issuers. No obligation in clauses 6.2 and 6.3 was owed to HKJHC.

42.  The pleading of the breaches of clause 4.1(i) pleaded the times of breach: “at all times from 31 October 2020” for Nuoxi and Kunzhi, and “at all times from 30 June 2020” for HKJHC; and the respective deficiencies at those dates: US$15,144,797.88 for Nuoxi, HK$1,107,761,683 for Kunzhi, and US$908,232,601 for HKJHC.  In the particulars to the relevant paragraphs in the pleadings a qualification was made by reference to the management accounts cited to the effect that each Plaintiff reserved its rights to plead further matters after discovery and further investigations.  On the second day of the hearing before Harris J, Mr Wong SC, in relation to one aspect of the pleading of the case based on the EIPUs and the expression “since at least late April” when referring to the Purchase Price as defined in each EIPU set out in the pleading, said, “We are saying that, at the latest, this is the latest date, and the reason why we say this is the latest date is because by the time when liquidators were being appointed into Nuoxi and Kunzhi, we have no idea as to what happened on the financial position before….”

43.  These matters are not said critically of the liquidators or Mr Wong SC.  In any liquidator’s action, especially one between liquidators or involving external administrators, there may be difficulties of proof, and in the unravelling of the past, without, or with limited, access to staff who were there at the time. Nevertheless, the trial proceeded with no investigation of the financial position (especially the Consolidated Net Worth positions) of Nuoxi, Kunzhi and HKJHC, other than at the dates pleaded in respect of clause 4.1(i), and not as at 16 April 2020 in respect of clause 4.1(ii).

44.  Nuoxi and Kunzhi also pleaded breaches of clauses 6.2, 6.3, 11 and 12(ii), (iii) and (iv) in respect of the breaches of clause 4.1(i).

45.  All three claimed damages for breach of clause 4.1(i) represented by the whole of the principal, interest and Trustee’s costs.

46.  In its Defence to each ASoC the Company pleaded the lack of any loss in respect of a breach of clause 4.1(ii) as follows:

… the alleged obligations … would not require the Defendant to take any step beyond lending to the Plaintiff … the Defendant’s alleged breach would have caused no loss to the Plaintiff.  The Plaintiff would have been indebted to the Defendant.

47.  In response, in its Reply to this paragraph each Plaintiff pleaded: “… the Defendant’s failure to lend … caused loss to the Plaintiff, being its insolvency.”

48.  From the above, and in the context of the judgments of Harris J and the Court of Appeal, the following is tolerably clear.  First, the breaches of clause 4.1(i) and (ii) were pleaded separately. This was emphasised by the Court of Appeal at [79] of its reasons where it was noted that the Plaintiffs’ cases below in the pleadings, at the trial, and before the Court of Appeal were that the obligations under clauses 4.1(i) and (ii) were legally and conceptually distinct.

49.  Secondly, the claims made in respect of each was for payment of, and for damages caused by the failure to pay the total principal, interest, and Trustees costs, under, or for breaches of, clauses 4.1(i) and (ii), 6.2 and 6.3, 11 and 12.

50.  Thirdly, there was no pleading or particularisation that clause 4.1(ii) could not be complied with by the making available of funds to the relevant Issuer or Guarantor by lending.  Indeed, the relevant paragraph of the Reply in each case (set out at [47] above) that dealt with the pleaded “no net loss” point, assumes a loan was a means of performing the obligation to make funds available under clause 4.1(ii)

51.  Fourthly, and relatedly to the last point, breaches of clauses 6.2 and 6.3 and the failure of the Company to grant a commercial standby facility were pleaded in the ASoCs.

52.  Fifthly, the times at which breaches of clause 4.1(ii) and clause 4.1(i) were pleaded were precise: from 16 April 2020 for clause 4.1(ii) for Nuoxi, HKJHC and Kunzhi; and from 31 October 2020 for Nuoxi and Kunzhi and from 30 June 2020 for HKJHC for clause 4.1(i).

53.  Sixthly, a continuity of breach by the Company was pleaded in relation to each Plaintiff.

54.  Seventhly, there was no pleading or particularisation of any breach of clause 4.1(ii) being dependent, in any way, whether as a matter of construction of the inter-connection of clause 4.1(i) and (ii) or as a matter of the identification of the nature of loss and damage suffered from a breach of clause 4.1(i), upon the existence of a contemporaneous and related breach of clause 4.1(i) or from the contemporaneous state of the Consolidated Net Worth of the relevant entity.

55.  Eighthly, and relatedly to the last point, and focusing on the date of 16 April 2020, as explained earlier at [38] and [39], there was no pleading or particularisation of the state of the Consolidated Net Worth of Nuoxi, or Kunzhi, or HKJHC on 16 April 2020. 

56.  Ninthly, there was no pleading of any consequential loss flowing from the state of insolvency, such as any diminution in asset value or increase in liabilities, or otherwise.

The confinement of the Declarations to 16 April 2020

57.  The Declarations made by the Court of Appeal set out above were directed only to the breach of clause 4.1(ii) found to have occurred on 16 April 2020.  The breaches of clause 4.1(ii) were pleaded as “since at least 16 April 2020” (emphasis added).  No declaration was made by the Court of Appeal about pleaded breaches of clause 4.1(i), or about continuing breaches of clause 4.1(ii), by reference to the operation of clause 12(ii), (iii) and (iv), or otherwise.

58.  The above is explained by the way the Court of Appeal dealt with the Company’s argument concerning Article 18 of the Enterprise Bankruptcy Law that all the contracts (including the Keepwell Deeds) were terminated by force of that provision two months after the order for re-organisation, that is on 19 April 2020.  The Company thus contended that it could not be liable after that date.  The Court of Appeal noted (at [200] of its judgment) that Harris J had not made any findings on the question; and (at [201]) that the point was only dealt with in closing written submissions of the Company at the trial, but not in written opening or closing submissions of the Plaintiffs.  The point was said by the Court of Appeal to have been “very lightly argued before us”  ([201]).

59.  In these circumstances, the Court of Appeal declined to make any ruling on the applicability of Article 18 ([202]), noting that the evidence revealed that the operation of the Article was not clear under PRC law ([203]).  Nor did the Court of Appeal consider it appropriate to deal with the Plaintiffs’ contention that they would nevertheless have a claim for compensation under Article 53 of the Enterprise Bankruptcy Law ([203]).  In these circumstances, the Court of Appeal restricted its relief to breaches found to exist before 19 April 2020, that is on 16 April 2020, being the breaches of clause 4.1(ii).  There is no complaint by the Respondents about this approach of the Court of Appeal.

60.  Importantly also, at [215] to [221] of its judgment, the Court of Appeal refused leave to the Plaintiffs (the Respondents before us) to amend the declarations sought to have breaches of both clause 4.1(i) and clause 4.1(ii) declared “on February 2020”.  In refusing leave, the Court of Appeal agreed with the submissions of the Company, including the submission that the amendments were not supported by the pleaded cases of the Plaintiffs.

61.  Importantly, that refusal of leave and the recognition that the pleadings and the case at trial had not been directed to breaches before 16 April 2020 meant that the only breaches upon which the Declarations were made concerned clause 4.1(ii).

62.  It is thus clear (and subject to the argument of the Respondents about the necessity to look to any deficiency in Consolidated Net Worth at the time of required performance of the obligation to fulfil the liquidation obligation) that the only breaches that are the subject of the question for this Court, and of the leave to appeal to this Court granted by the Court of Appeal are of clause 4.1(ii).  This is made abundantly clear in the Court of Appeal’s judgment in granting leave to appeal to this Court at [14]-[15], where the following was said:

14.     The judge’s reasoning in §92 of the CFI Judgment was in relation to the loss arising from a breach of the Balance Sheet Obligation in clause 4.1(i) in the Kunzhi Keepwell Deeds in respect of FIHK (see §87 of the CFI Judgment).  We think it may be reasonably arguable whether this reasoning (which was adopted by us) may not be applicable to the loss arising from a breach of the Liquidity Payment Obligation in clause 4.1(ii) in respect of Nuoxi and HKJHC in the Nuoxi Keepwell Deeds and Kunzhi in the Kunzhi Keepwell Deeds, in light of the “least burdensome” rule on contractual performance.

15.     Further, we think it may be open to debate whether the “actionable loss (sounding in damages)” should be “measured by the amount of pre-existing debt the plaintiffs could have discharged with the liquidity they received”, as declared in the CA Judgment at §222.

63.  Thus, as submitted by the Company, the judgment of, and the Declarations made by, the Court of Appeal were entirely founded upon the assumption that a breach of clause 4.1(ii) caused actionable loss measured by the amount of the pre-existing debt which the Respondents (the Plaintiffs below) could have paid off with the amount that the Company should have made available to them.

The arguments of the parties and the resolution of the appeals

The arguments of the Company

64.  The central proposition for which the Company contended is that in measuring the consequences of a breach of clause 4.1(ii) one must recognise the position in which each of Nuoxi, HKJHC and Kunzhi would have been had the Company complied with its obligation to each by lending the necessary funds to satisfy the claims of the Trustee on behalf of the bondholders for payment of principal and interest which were the subject of the Declarations of the Court of Appeal.  That position would have involved, it was submitted, the replacement of one liability (to the bondholders through the Trustee) with an equal liability (to the Company or another lender).

65.  That central submission depended upon the legal entitlement of the Company to fulfil its obligations under clause 4.1(ii) by making funds available to Nuoxi, HKJHC and Kunzhi by way of loan.

66.  The Company relied on the so-called “net loss” or “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 [2022] UKSC 34; [2023] AC 761 at [26] to [31], [40] and [54] to [57], especially at [40] and [54]-[57] in the reasons of Lord Leggatt JSC, and as found in authorities across the common law world in cases cited: in England (The South African Territories Ltd v Wallington [1897] 1 QB 692 at 695 (Lopes LJ, citing Chitty J in Western Wagon (below)) and 696-697 (Chitty LJ); Western Wagon and Property Co v West [1892] 1 Ch 271 at 277 (Chitty J at first instance); Bahamas (Inagua) Sisal Plantation Ltd v Griffin (1897) 14 TLR 139 at 140 (Bigham J); in Australia (see the comprehensive discussion in the Western Australian Supreme Court in Striker Resources NL v Australian Goldfields NL (in liq) [2006] WASC 153 at [230]-[239] (Heenan J) cited in Bovaird v Frost [2009] NSWSC 337; 3 ASTLR 155 at 173-174 [80] (Brereton J); in New Zealand (Milburn et al v Surfdale Estates Ltd (1926) 1 NZLJ 364 (Reed J, citing Chitty LJ in South African Territories)); in New York (Avalon Construction Corporation v Kirch Holding Co Inc 256 NY 137; 175 NE 651 (1931) at 652-653 [1]-[3] (Kellogg J, with whom Cardozo CJ, Pound, Crane, Lehman and O’Brien JJ in the Court of Appeals, agreed); in Canada (Cosgrave v Bank of Hamilton (1907) 10 OWR 956 at 958-959 (Mabee J); Harris v Whyte [1922] OJ No 255 at [10]-[11] (Hodgins JA)); and in Singapore(United Overseas Bank Ltd v Mohamed Arif [1994] SGHC 47, [1994] 1 SLR (R) 530 at 543-544 [40] (Judith Prakash JC, as she then was)).  A number of leading texts were cited to similar effect.

67.  The Company submitted (as the authorities and texts to which it referred stated), 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 positon in which it would have been had the contract been performed.  That said, a claim that pleaded and propounded consequential or special damage, relevantly foreseeable, may be recovered, such as more disadvantageous rates to obtain a replacement borrowing, or the loss of a valuable opportunity to which the funds would have been directed.  The Company accepted that entering the insolvency process could lead to losses manifesting, for instance, by the insolvency causing the diminishment of the value of assets or the increase in the amount of liabilities.  However, it submitted that the causing of insolvency per se, the mere assumption of that status, without more, does not constitute loss.  It was submitted that such losses as a consequence of becoming insolvent and being wound-up had not been pleaded.  The loss claimed (and the subject of the Declarations of the Court of Appeal) was only the pre-existing indebtedness to bondholders.  If a loan had been made, such indebtedness would have been replaced by an equal debt to the Company, or other lender.

68.  The Company submitted that it was not required to fulfil its obligations under clause 4.1(ii) by means other than lending, such as by making a gift.  It referred to the obligation in clause 6 to Nuoxi and Kunzhi as Issuers to discharge the obligation by a standby facility without seeking security from the Issuer.

69.  The Company submitted that any suggestion that it should have performed clause 4.1(ii) by making a gift was contrary to the principle that if a contract-breaker had a choice of alternative methods of performance, damages would be assessed on the alternative least onerous to it, citing: Chitty on Contracts (35^th Ed) at 2,221 [30-001]; Cockburn & Anor v Alexander (1848) 6 CB 791; 136 ER 1459 at 1468-1469 (Maule J); Abrahams & Anor v Herbert Reiach Ltd [1922] 1 KB 477 at 482 (Scrutton LJ); Withers v General Theatre Corp Ltd [1933] 2 KB 536 at 549-550 (Scrutton LJ); Mackenzie v AA Ltd & Anor [2022] EWCA Civ 901; [2022] ICR 1362 at 1374-1378 [28]-[41] (Bean LJ, with whom Popplewell and Stuart-Smith LJJ agreed).

The Respondents’ submissions and the disposition of the appeals

70.  The Respondents first submitted that they were entitled to be paid contractual sums, the failures of payment of which amounted to provable debts.

71.  Secondly, it was submitted that it was not open to the Company to provide the liquidity under clause 4.1(ii) by lending the funds.  This was so, it was submitted, because it would have put itself in breach of clause 4.1(i) in the same sum as the sum of any loan made.

72.  Thirdly, the failure to fulfil the obligations under clause 4.1(ii) was not a mere breach of a contract to make a loan attracting the general rule of “no net loss” for breach of such a contract, there should be an award of damages for the loss of liquidity and the consequential windings-up caused by the breaches.

73.  Fourthly, if the “no net loss” rule applied, the Plaintiffs could rely upon the “doctrine of transferred loss”, being the losses of the bondholders, which, it was submitted, fell into a “legal black hole” and remain unremedied and irremediable.

74.  For the reasons that follow, the above submissions should be rejected.

75.  It is helpful to commence by attending to the commercial reality of what happened and who, truly, has suffered loss.  The failure of the Company to comply with its obligation under clause 4.1(ii) of the Keepwell Deeds which it owed not only to Nuoxi, Kunzhi and HKJHC, but also to the Trustee on behalf of the bondholders, caused the bondholders to suffer (subject to any recovery in the re-organisation of the Company or in the liquidations of Nuoxi, Kunzhi and HKJHC) the total loss of their principal and the accrued interest after the order for the Company’s re-organisation, and for which loss the Trustee had, and has, a cause of action.

76.  In the penultimate paragraph of their first Written Case the Respondents set out what Harris J said in another case dealing with loss from breach of a Keepwell Deed concerning Tsinghua University’s failed bond issuing: Citicorp International Ltd v Tsinghua Unigroup Co Ltd [2023] HKCLC 555, [2023] HKCFI 1572 at [59], as follows:

The relevant question in the context of the Keepwell Deed … is what was lost by the failure to comply with the Keepwell Deed, the failure to comply being the failure to put the Issuer and/or the Guarantee [sic: Guarantor] in funds in order that they could pay the principal and interest due when they became due. There is no dispute that the Bonds matured and became payable on 10 December 2020. This is the date at which loss is to be assessed. The loss was the amount that should have been paid but was not.

77.  Mr Justice Harris was undoubtedly correct in that passage.  He was, however, discussing the position of the trustee (Citicorp International Limited) suing (on behalf of the bondholders) to recover their loss consequential upon the failure, in breach of a clause such as clause 4.1(ii), to put the issuer or guarantor in funds to pay principal and interest due, when they became due.  This is the true or ultimate commercial loss here from the failure of the Company to comply with its obligations under clause 4.1(ii).  The loss arose irrespective of whether the subsidiary of the Company, being the PUFG group vehicles for the bond issues (Nuoxi, Kunzhi and HKJHC) suffered any loss.

78.  As explained earlier, there is no doubt that the Trustee can sue the contract-breaker for breach of contract and recover not only any loss that it has suffered personally (such as here, its own costs), but also the losses of third parties not party to the contract, if the Trustee holds the contractual rights, the choses in action, on trust for those third parties.  Here, those third parties were and are the bondholders, and the Trustee holds rights under clause 4.1 on trust for the bondholders.  Clause 11 of the Keepwell Deed makes this plain, in express terms.

79.  The clarity of the right of the Trustee to sue for breach of any provision or covenant of the Keepwell Deeds if relevant to the interests of the bondholders means, amongst other things, that there is no legal “black hole” if the Respondents are not entitled to substantial damages in the amounts of the pre-existing debts arising from a breach of clause 4.1(ii).

The four arguments of the Respondents

80.  The Respondents first submitted, somewhat baldly (paragraph 9 of their Written Case) that the failure to pay a contractual sum (they described it as a “debt”) was provable in its insolvency like any other contractual liability.  The submission was said to be “uncontroversial”. 

81.  It is not uncontroversial.  This is so, in part, because of the elliptical expression employed.  The (now uncontroversial) breaches of clause 4.1(ii) were to pay money for the purpose of the Issuers paying their creditors.  The agreement required (at least for the Issuers: Nuoxi and Kunzhi) this to be effected by a commercial standby facility arrangement effecting a loan (though without security) (clause 6.2).  This was recognised by the Respondents who, as Plaintiffs, sued to recover loss for the breaches in failing to comply with clause 4.1(ii) and clauses 6.2 and 6.3.  This was the basis of the claims for declarations.  This was the basis of the making of the Declarations.  If fulfilment of clause 4.1(ii) required or permitted lending the funds, the loss would be nominal damages if the general rule reflected in Stanford International Bank applied: if there was no net loss. 

82.  The second way the Respondents put the matter was that lending funds in purported compliance with the obligation in clause 4.1(ii) would only have brought about a breach of clause 4.1(i).  There was a certain lack of clarity in the expression of how this would come about.  In his oral address, Mr Phillips KC said that the Trustee’s notices calling for all principal and interest caused those sums to “come onto the balance sheet”, and a loan which paid them off would not affect this position on either Nuoxi’s or Kunzhi’s balance sheet (that is either’s Consolidated Net Worth).  This way of putting the matter, which can also be found in the Written Case ignored, with respect, the undeniable fact that the bonds were already “on the balance sheet” (that is part of the Consolidated Net Liabilities of the respective Issuers and Guarantors).  No doubt, the notices brought about an important change.  The liability for principal was no longer non-current, but (very) current.  The calling-in of the bonds did not alter the Consolidated Net Worth of the Issuers or Guarantors.

83.  Provision of funds by loan would, upon the making of the loan, create a liability to repay the lender and cash on hand in equal amount in the borrower, with the recognition of a pre-existing liability to bondholders.  Upon payment of bondholders the cash on hand would cease to exist, as would the liability to bondholders.  There would have been no diminution of Consolidated Net Worth by the making of a loan to provide liquidity to pay the bondholders.  If, at 16 April 2020, the Consolidated Net Worth of Nuoxi, Kunzhi or HKJHC was greater or less than US$1, such would not have been affected by a loan to comply with clause 4.1(ii).

84.  A more subtle argument was developed by Mr Wong SC in oral address.  It posited a relationship between clause 4.1(i) and clause 4.1(ii) to the effect that in providing funds under clause 4.1(ii), such could not be provided by loan, at least until any existing state of the Consolidated Net Worth of the Issuer, if less than US$1, was remedied.

85.  Such a proposition would require the construction of clause 4.1 in this inter-connected way.  Further one would need to have, as a pleaded issue before the Court, the state of the Consolidated Net Worth of Nuoxi, Kunzhi and HKJHC as at 16 April 2020.

86.  Mr Wong SC, in oral address, pointed to various aspects of the accounts to demonstrate insolvency at 16 April 2020 by reference in particular to [9] and [63] of the judgment of Harris J , which were as follows:

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.

…

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.

87.  An examination of the management accounts in volumes 5 and 6 of the Record in these appeals gives some insight into what may well have been the Consolidated Net Worth of Nuoxi, Kunzhi and HKJHC at various points of time.  But the reality is that there was no pleaded case of any kind, and no investigation at the trial, of the Consolidated Net Worth of three Respondents other than for the deficits as at the pleaded dates in the ASoCs: 30 June 2020 and 31 October 2020.

88.  A submission was made by the Respondents, in oral address, to the effect that these gaps in the structure of the case and lack of investigation at the trial were the Appellant’s problem.  This should be rejected.  These matters were, in part, the foundation for seeking the wider declarations before the Court of Appeal.  This application was rejected by the Court of Appeal, because (amongst other reasons) it had not been pleaded.  No complaint is made about that decision.  It was for the Respondents, as Plaintiffs, to plead and prove their losses.  If their losses were to be measured by the deficiency in Consolidated Net Worth at the time clause 4.1(ii) was to be complied with, so that a gift, or, perhaps an equity subscription (depending on the treatment of liabilities and equity), was required to bring Consolidated Net Worth to at least US$1 before any funds made available to satisfy clause 4.1(ii) could be made available as a loan, that was for them to plead and prove. 

89.  Thus, even if such an interlocking construction could be made out, the underlying facts to prove loss, being the Consolidated Net Worth position as at 16 April 2020, were not put in issue at the trial. This cannot be raised now.

90.  Further, to persuade the Court as to the interlocking construction of clause 4.1(i) and (ii) may conceivably have required extrinsic evidence.  It is far from clear why that construction would be reached, certainly no term would be easily implied by necessity.  It may be that knowledge of both parties, or their lawyers, was to the effect that the purposes of clause 4.1(i) and (ii) were inter-related, as intended to deal collectively, not just severally, with the solvency positions of the Issuers and Guarantors: so-called “balance sheet insolvency” in (i) and so-called “cash flow insolvency” in (ii).  Both states of affairs, it might be thought, were important to protect the bondholders from risk of “claw back” of payments if the subsidiaries of the Company were insolvent (even if the Company was not). Such a case was not pleaded, argued or the subject of evidence.  It was not ventilated at all.  It cannot be run now.

91.  The third way of putting the matter was to challenge the proposition that the Company could rely on the so-called “no net loss” rule or on the proposition that the Company could rely on the principle that it was entitled to perform its obligation under clause 4.1(ii) in the way (by loan) most favourable to it.

92.  This was first put by reference to the pleading in the replies that the breaches of clause 4.1(ii) caused a lack of liquidity and the insolvency of the three Respondents.  The difficulty with this way of putting the loss and damage is that states of lack of liquidity, and of insolvency caused thereby, alone do not involve financial loss.  Loss may flow from the lack of liquidity or from the entry into winding-up, but none was pleaded, nor the subject of any investigation.  The loss pleaded and the subject of the Declarations was the pre-existing debt.  On the hypothesis of performance of clause 4.1(ii) by lending an amount equal to the pre-existing debt to bondholders, such would not have affected the Consolidated Net Worth. No doubt it is the case that the insolvency of an entity or its winding-up in insolvency can affect the value of assets and the amount of liabilities.  But that was not the subject of investigation, because the cases were not put in a way as to make such investigation relevant to a breach of clause 4.1(ii) as at 16 April 2020.

93.  The Respondents submitted that the Company failed to recognise that breach of a contract by failure to pay money can lead to substantial damages.  Reliance was placed on Arthur Larios v Antonio Bonany y Gurety (1873) LR 5 PC 346 at 357.

94.  Larios was not simply a case concerning a contract to pay money by way of loan.  The arrangements had a degree of complexity as described at 351-352.  In essence (though not fully manifested is some of the transaction documents) the plaintiff had conditionally sold property to the defendants; but despite an acknowledgement of receipt, no money had been received and the real contract was that the defendants would make advances on the plaintiff’s drafts up to the value of the property sold.  The Privy Council awarded damages as the case fell within the principle established or recognised by cases such as Marzetti v Williams & Ors (1830) 1 B & Ad 415; 109 ER 842: the obligation of a banker to meet a cheque drawn by the customer after receipt of sufficient funds from the customer; Rolin & Anor v Steward, Public Officer of the East of England Bank (1854) 14 CB 595; 139 ER 245, the wrongful dishonouring of an acceptance and cheques of a customer by a banker put in sufficient funds by the customer; and Prehn & Anor v Royal Bank of Liverpool (1870) LR 5 Ex 92, a claim for consequential damages against a banker who refused to meet bills of exchange that they had agreed to meet, the consequential damages being the higher cost of replacement credit, the liability to holders of the bills for their protest costs, and the costs of international communications necessary after the breach.  Larios and the principles underlying it are far from a contract to provide funds by loan or by means that may include a loan and are of no assistance to the Respondents.

95.  The Respondents sought to distinguish the circumstances here from a simple case of an agreement to make a loan by characterising the breach as a failure to pay moneys for the use by the Issuers for an identified purpose of discharging liabilities to the bondholders, such failure causing actionable loss in the nature of loss of liquidity.  They relied on David Kennedy v Royal Bank of Scotland plc [2018] CSIH 70; 2019 SC 168 as to loss of liquidity being damnum and recoverable loss.

96.  Kennedy concerned Scots law as to limitations of action or time bar (prescription).  The issue depended on when “damnum” first occurred.  The case concerned a bank giving (wrongful) notice of the termination of unexpired term lending and the (wrongful) calling-in of the loans.  This caused various consequential losses. However, the First Division found that the damnum causing the running of time to commence was the date of wrongful termination of the loan.  The expression as to why this was so were not necessarily reflective of actual quantified loss at that point.  For the Lord President (at [20]) the facilities had been terminated: that was damnum, although not yet suffered or precisely calculable, but having an inevitability. Lord Brodie (at [25]) agreed with the other members of the Court.  Lord Drummond Young (at [42]) saw damnum as not dependent upon actual quantifiable damage, and (at [43]-[47]) saw the likelihood of facing loss and the likely liquidity difficulties as damnum, even if their precise nature (implicitly, if any) would be worked out only in time. For his Lordship, the loss then and there of basic contractual rights was damnum.  Kennedy does not stand for the proposition that damnum of any kind results in any particular quantifiable loss.  The facts of the case were replete with the immediately likely, and soon to be suffered, severe damage to a working business by the precipitous and wrongful cutting of credit underpinning the day-to-day liquidity of a business.  As at the date of the damnum, there was no actual quantified loss.  If later events had been different to that which actually happened the actual loss, likewise, may have been different.

97.  The case and the consideration of the damage actually suffered by the precipitous denial of credit do not somehow lead to a conclusion here that Nuoxi, Kunzhi and HKJHC has each suffered loss in the sum of the pre-existing debt caused by a wrongful failure to lend money.  It can be accepted that the breach by the Company might be a damnum for the purposes of Scots law or the running of time for “prescription”.  That is not the point. Damages may be nominal and still be damnum.  The case is not authority for the proposition that the causing of illiquidity is a basis for substantial damages, and certainly not for damages here in the sum of the pre-existing liabilities to bondholders.

98.  The Respondents relied on the The Trustees of the Roman Catholic Church for the Diocese of Sydney v Hughes Bros Pty Ltd & Ors [2000] NSWCA 296 for the same proposition that the causing of liquidity sounded in substantial damage.  In this case damage was suffered from what flowed from the breach.  The principal under a building contract wrongfully withheld payments from the contractor.  This caused illiquidity in the contractor causing it to be unable to pay a sub-contractor, which filed an application to wind-up the contractor.  Under the contract of the contractor with the principal, that filing entitled the principal to take over the site and complete the work itself and claim the difference from the contractor.  The contractor, however, was entitled to sue the principal for wrongful non-payment which had caused the application by the sub-contractor, which caused the contractor’s removal from the site and the contractor’s liability to the principal itself.  In these circumstances, the contractor was thus entitled to claim (and set off) the amount of its liability to the principal as damages. The case is not authority for the proposition that causing illiquidity is actionable in itself for substantive damages.  It illustrates the obvious: that wrongful causing of illiquidity to a business enterprise often causes real consequential damage.  Here, the breach left the Issuers in substantially the same position in terms of Consolidated Net Worth. The damage that the relevant breaches caused was to the bondholders and Trustee.

99.  The Respondents relied on Wood v Wood (No 4) [2014] WASC 393; 13 ASTLR 544 for the same proposition as to liquidity. The case had nothing to do with a breach of contract to lend money and is of no assistance.  Trustees had behaved in a questionable way in removing assets from one party to another.  It was irrelevant in assessing the consequences of such breaches of duty (if found) that the (putatively wronged) transferor owed the (putatively wrongfully enriched) transferee other money in loans.

100.  The Respondents then sought to distinguish Stanford International Bank as a loss of a chance case, submitting that such context made the discussions of the “net loss” rule not of general application.  The submission should be rejected.

101.  It is correct to say that the case was framed as a loss of a chance.  The liquidator of an insolvent bank sought to characterise the wrongful debits to its account with HSBC to fund payments to pre-existing creditors as resulting in the loss of a chance of higher dividends in the insolvency.  The framing of the matter thus was an attempt to couch the damages in a way to establish loss.  The answer to this attempt was the brutal reality (the “simple truth” as Lord Leggatt JSC said at 779 [40]) that in truth it had suffered no loss.  Far from making the general statements of principle inapplicable, the circumstances informed their application.  Paying a valid debt did not and could not reduce the payer’s wealth and did not cause any loss of a chance.  The expression of principle by Lord Leggatt at 782-783 [55] was as to the so-called “no net loss” rule.  His Lordship referred to British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673 at 691 (Viscount Haldane LC), and Hodgson v Trapp [1989] AC 807 at 819 (Lord Bridge of Harwich).  The expressions there of netting off gains and losses, were not some narrow “rule” separate from the proper assessment of damages in contract.  They were illustrations of the “elementary” (Lord Bridge in Hodgson v Trapp at 819G) proposition that receipts that would not have occurred without the injury must be set-off against losses and expenses caused by it.  This is but an outworking or expression of the underlying principle in the classic statement of Parke B in Robinson v Harman (1848) 1 Ex 850 at 855, restated many times: see Chitty on Contracts (35^th Ed) at 2,221 [30-001] footnote 6 and the cases there cited, and recently restated by the Supreme Court in One Step (Support) Ltd v Morris-Garner & Anor [2019] AC 649 at 673 [35] (Lord Reed JSC, as he then was).  Whether this approach should have been applied in Stanford International Bank, given the dissenting views of Lord Sales JSC based on the character of the breach of fiduciary duty and the place of corporate personality, does not diminish the force of Lord Leggatt’s expression of general principle.

102.  Next, the Respondents sought to characterise the facts of this case as special and as going beyond the character of an agreement to lend or to provide funds by way of lending such as would attract the net loss “rule”.  They pointed out that the Keepwell Deeds were a critical component of the arrangement.  Clause 4.1(ii) was to assist in meeting obligations to pay the bondholders and so discharge their debts to them, not some “separate” pre-existing debt.  The Respondents were the “vehicles” and affiliates of the Company and they “bargained for” the discharge of their debts through the provision of liquidity. 

103.  All these propositions can be accepted, but they do not assist towards any conclusion that true loss by reference to the debt to the bondholders was suffered.  The subsidiary Issuers and Guarantors were creatures or vehicles (to use metaphor to illuminate intention) to give comfort to the parties who did eventually lose something: the bondholders.  There is no commercial utility in granting substantial damages, in the amount of the debt to the bondholders, to the creature or vehicle of the borrowing Company in order to sue the Company for loss, when the true loss caused by the Company is to the bondholders for which they can sue the Company or prove in its re-organisation administration.  

104.  The creature or vehicle has, undeniably, suffered no diminishment of wealth.  Yet, on the argument of the Respondents, they have the right to obtain substantial damages in the amount that the bondholders have suffered.  This either sets up a double claim (now within the re-organisation, a double proof) or (but there was no suggestion of this is argument) Nuoxi, Kunzhi and HKJHC should hold the benefit of their proofs on account for the bondholders.  If the latter be the case, there would be very little purpose in construing the circumstance to allow a party which has suffered no diminishment of wealth to recover substantial sums in damages, the equivalent of which other parties (the bondholders) can claim and recover for themselves through the Trustee.

105.  Next, the Respondents argued that the Company was not permitted to argue that it was entitled to choose the most favourable alternative (lending) to comply with its obligation in clause 4.1(ii), because that clause did not provide for alternative performance, but for one single obligation where there was a discretion or a choice as to how to perform.  In such a case, it was submitted that the assessment of damages “should not, as a matter of law, be limited strictly to what was the minimum level of performance permitted under the contract but should extend to a calculation of how the contract would have been performed at the relevant time had it not been repudiated.”  Reliance was placed on Durham Tees Valley Airport Ltd v BMI Baby Ltd & Anor [2010] EWCA Civ 485; [2011] 1 All ER (Comm) 731 at 755 [69] (Patten LJ, with whom Mummery LJ and Toulson LJ, as his Lordship then was, agreed).

106.  The Respondents’ submissions placed these two positions (alternative methods of performance, or one obligation with a discretion or choice as to how to perform) as conflicting rules or principles. Properly understood, they are not.  Lord Justice Patten in Durham was pointing out, very properly, that there is a difference between having contractually expressed alternative choices of action, and a single obligation against which one had to posit how the obligation would or could have been performed had there been no breach and the term had been complied with.  Where, rather than there being contractually identified alternative methods of performance, a single obligation is provided for, and some discretion or choice exists as to how it could be, or would have been, performed, a broader set of circumstances may be relevant to consider, consistent with the nature of the contract, a standard of reasonable commercial behaviour and all the circumstances.    That can all be accepted and has been expressed variously by influential commercial judges: Bankes, Scrutton and Atkin LJJ in Abrahams & Anor v Herbert Reiach Ltd [1922] 1 KB 477; Mustill J (as his Lordship then was) in Paula Lee Ltd v Robert Zehil & Co Ltd [1983] 2 All ER 390; Parker and Staughton LJJ in The World Navigator [1991] 2 Lloyds’s Rep 23; and Mummery LJ, Toulson LJ (as he then was) and Patten LJ in Durham Tees.

107.  That there was from time to time a difference in expression of the matter in these cases does not mean that there are differently expressed “rules”.  They are broadly all illustrations, in particular circumstances, as to how contractually compliant performance will be assessed.  Embedded within all of them is the proposition that performance that literally complies with the contract and that is reasonable can hardly be seen as a breach of contract.  A fortiori, if the performance is required by the contract.  The notion that breach can occur by performance called for, or required, by the contract is oxymoronic.

108.  What is the position here?  Assuming, as one should, for the reasons given earlier, that clause 4.1(ii) should be seen as a separate obligation, it can hardly be said that performance by the Company of the obligations in it in the manner required by clause 6.2 would have been a breach of contract.  Given the content of that obligation in clause 6.2 encompassed a lending facility, it cannot be said that in the circumstances a loan would not have been compliant performance of the obligation in clause 4.1(ii).

109.  There is no basis to view the corporate and contractual inter-connection between the Company and the Respondents as a basis to prevent the Company from performing clause 4.1(ii) by the making of a loan.

110.  On this point the reliance on Slocom Trading Ltd & Anor v Tatik Inc & Ors [2013] EWHC 1201 (Ch) was misplaced. There, Roth J at [33] posited A lending a sum to B so that B could lend to C on terms that B will repay A the principal and interest earned on the onward loan to C.   If D induces C to break its contract with B and does not repay B, D cannot say in B’s suit for inducing breach of contract that B has suffered no loss because it would have disgorged the funds to comply with the terms of its borrowing from A.  C would not be making a loan to B, but repaying one.  B has been deprived of the crystalisation of its receivable from C into cash with which to discharge its debt to A leaving it with any profit by way of interest differential (if there be any), rather than being left with a debt to A and only a contested receivable which it may never recover.  The case is of no assistance to the Respondents.

111.  Finally, the Respondents submitted that there was no evidence that the Company had the ability to lend.  That, however, is not the point.  In assessing the damage, if any, suffered by the relevant subsidiaries from the failure of the Company to perform clause 4.1(ii), one posits the relevant performance to see what the loss is or would be, if any.

112.  The fourth way the Respondents put the matter was that if the Company were correct and there was no net loss suffered by Nuoxi, Kunzhi or HKJHC, the doctrine of “transferred loss” would, however, be engaged, and they could sue for the loss suffered by the bondholders.  Such doctrine was recognised in Swynson Ltd v Lowick Rose LLP (in liq) [2017] UKSC 32; [2018] AC 313.

113.  It is appropriate to commence addressing this argument by recognising that the circumstances in which a party to a contract can sue for damages suffered by another for breach of contract of rights owed to the party are limited exceptions to the general rule that a claimant can only recover loss which it has itself suffered.  There are, of course, well known exceptions.  We have already seen one: the trustee’s right to sue for the beneficiary’s loss.  Another, recognised since the 18^th century, is the suit, by the consignor on a bill of lading against the carrier on the bill after the goods have been sold (with title, right to possession, and risk passing to the buyer) for loss of or damage to the goods: William Dunlop & Ors v George Lambert & Ors (1839) 6 Cl & Fin 600; 7 ER 824 and The Albazero [1977] AC 774.  The successful party is, in these circumstances, held to be accountable for the proceeds to the third party.

114.  There was an extension of the principle in The Albazero in Linden Gardens Trust Ltd v Lenesta Sludge Disposal Ltd [1994] 1 AC 85 where the contract (there a building contract) was entered into on the basis that the plaintiff would be able to enforce contractual rights on behalf of the third parties.

115.  The relationship of later cases such as Alfred McAlpine Construction Ltd v Panatown Ltd [2001] 1 AC 518 to this development hinged on at least two considerations: first, that there was a contractual intention to benefit the third party; and, secondly, that without the right to recover the loss of another, there would be no one able to sue for the contractual breach: the contract-breaker would go free.  To use the metaphor used to illuminate the latter feature: there would be a “legal black hole”.

116.  It is unnecessary, and would be inappropriate, to discuss these important and interesting cases, as well as Dr Jones Yeovil Ltd v The Stepping Stone Group Ltd [2020] EWHC 2308 (TCC); Palmali Shipping SA v Litasco SA [2020] EWHC 2581 (Comm); Forthwell Ltd v Pontegadea UK Ltd [2024] CSOH 59; 2024 SLT 657 (in the Outer House of the Court of Session), and [2024] CSIH 38; 2024 SLT 1245 (in the Inner House). This is so because there is no case justifying a notion of transferred loss where not only was such a contractual intention missing (as it was here), but also where there was clearly no “legal black hole” (as there is clearly not here, with the clearest of rights by the third party bondholders to sue for their loss through the Trustee).  There is no basis to consider that there is, or would be, any injustice in leaving the bondholders and the Trustee to look after their own interests.  If the Trustee was reluctant to bring action on behalf of the bondholders, it could be required by the bondholders to bring a claim; or the bondholders could sue in their own names (perhaps in a representative action: cf National Bolivian Navigation Company v Wilson (1880) 5 App Cas 176) and join the Trustee as a defendant: Lewin on Trusts (20^th Ed) at  1023 [47-003]-[47-004] and the cases at footnotes 15, 16 and 19; Vandepitte v Preferred Accident Insurance Corporation of New York [1933] AC 70 at 79 (Lord Wright); Barbados Trust Co v Bank of Zambia [2007] EWCA Civ 148; [2007] 1 Lloyd’s Law Reports 495; and Jacobs’ Law of Trusts in Australia (8^th Ed) at 20.

117.  The Issuers and HKJHC suffered no loss from the breaches by the Company to comply with clause 4.1(ii) of the Keepwell Deeds on 16 April 2020.

118.  The appeals should be allowed.  The Declarations in the terms made cannot stand.  The only question is whether, for the sake of good order, a declaration should be made that a breach of clause 4.1(ii) occurred on 16 April 2020, but no loss beyond nominal damages resulted; or whether the orders of the trial judge that the application be dismissed should be made.  In the circumstances of the re-organisation in Beijing and for the benefit of the Beijing Court and the Administrators, the orders should be the former.

Chief Justice Cheung:

119.  The Court therefore unanimously allows the appeals and makes an order that the Declarations made by the Court of Appeal in terms set out in paragraph 222(1) and (2) of its judgment be varied by excising all words and numbers after “on 16 April 2020” and in the place of the excised words there be inserted the words: “but such breaches sound in nominal damages only” and an order nisi that the costs of the appeals (in the Court of Appeal and in the Court of Final Appeal) be paid by the Respondents in the Court of Final Appeal to the Appellant in the Court of Final Appeal. If any party wishes to vary the order nisi, written submissions should be filed within 14 days of the handing down of this judgment and the Court will make a final order as to costs on the papers.