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

HCA 778/2021, HCA 798/2021,
HCA 1418/2021 and HCA 1442/2021
(HEARD TOGETHER)

[2023] HKCFI 1350

HCA 778/2021

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 778 OF 2021

____________________

AND

HCA 798/2021

BETWEEN

____________________

AND

HCA 798/2021

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 798 OF 2021

____________________

BETWEEN

____________________

AND

HCA 1418/2021

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1418 OF 2021

____________________

BETWEEN

____________________

AND

HCA 1442/2021

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1442 OF 2021

____________________

BETWEEN

_____________________

(HEARD TOGETHER)

_________________

J U D G M E N T

_________________

Introduction

1.  Commencing on 11 January 2023 I heard the trial of four actions[1]. The actions give rise to issues of some importance. They concern the enforceability of what are known as Keepwell Deeds, given by the Defendant in respect of the liabilities of a number of its subsidiaries to the Plaintiffs which, the Plaintiffs quantify as US$963,456,001, as at 19 May 2021 in the case of the claims in HCA 778/2021 and HCA 1418/2021 and at US$857,427830 as at 1 February 2021 in the case of the claims in HCA 798/2021 and HCA 1442/2021. Keepwell Deeds have been a common feature of the financing arrangements entered into by Mainland[2] business groups and foreign lenders, although their use has reduced in recent years. The actions are, as far as I am aware, the first of their sort.

Background

2.  The Defendant in the four actions, Peking University Founder Group Company Limited, is incorporated in the Mainland (“Company”). It is the holding company for a commercial group, whose activities stretch across a wide range of businesses (“PU Group”). The PU Group’s ownership and activities are explained as follows in an offering circular dated 12 April 2018 for one of the tranches of bonds, with which the actions are concerned:

“The Group is a leading state-owned diversified conglomerate with strategic business segments covering several major industries in the PRC. Its business segments consist of information technology, healthcare and pharmaceuticals, finance and securities, bulk commodities trading and other businesses, such as education and training. The Company was founded in 1986 by Peking University (北京大學), which is wholly-owned by the Ministry of Finance of the PRC and controlled by the Ministry of Education of the PRC. As at the date of this Offering Circular, 70 per cent. of the Company’s issued share capital is held by Peking University through its wholly-owned subsidiary PKU Asset Management with the remaining 30 per cent. held by Beijing Zhaorun Investments Management Co., Ltd. (北京招潤投資管理有限公司), a holding company controlled by the Group’s employees. As at 30 September 2017, the Company had an issued share capital of CNY1.103 million and total assets of CNY250,139.9 million on a consolidated basis. For the years ended 31 December 2015 and 2016 and the nine months ended 30 September 2016 and 2017, the Group recorded revenue of CNY80,511.3 million, CNY82,004.8 million, CNY63,169.1 million and CNY79,997.0 million, respectively.

The Group considers its information technology, healthcare and pharmaceuticals, finance and securities and bulk commodities trading businesses as its core strengths. The Group intends to concentrate on the development of its information technology and healthcare and pharmaceuticals segments by leveraging its close collaboration with Peking University, and the expertise and capabilities of its finance and securities business, in order to achieve higher growth and greater synergies between different business segments. The Group envisages that its finance and securities business and the bulk commodities trading business will generate sufficient profits and cash flows to support the development of its other business segments.”

3.  In 2017 and 2018 respectively two members of the PU Group issued bonds. Nuoxi Capital Limited (“Nuoxi”, the Plaintiff in HCA 778/2021) issued US$900 million of bonds constituted by trust deeds dated 20 April 2017 and 24 January 2018. The trustee was the Bank of New York Mellon, London Branch. Nuoxi is incorporated in the British Virgin Islands (“BVI”). It is a wholly owned subsidiary of HongKong JHC Co Limited (“HKJHC”, the Plaintiff in HCA 1418/2021), which pursuant to the trust deeds to which it was a party guaranteed Nuoxi’s obligations under the Nuoxi bonds. HKJHC is a member of the PU Group. It is incorporated in Hong Kong. It was wound up in Hong Kong on 13 January 2021. Nuoxi is in liquidation in the BVI. On 24 February 2021, I made an order recognising the BVI liquidators[3].

4.  Kunzhi Limited (“Kunzhi”, the Plaintiff in HCA 1442/2021) issued US$800 million of bonds (I shall refer to the Nuoxi bonds and Kunzhi bonds collectively as the “Bonds”) constituted by trusts deeds dated 17 April 2018 and 21 May 2018. The trustee was also the Bank of New York Mellon, London Branch (“Trustee”). Kunzhi is incorporated in the BVI. It is a wholly owned subsidiary of Founder Information (Hong Kong) Limited (“FIHK”, the Plaintiff in HCA 798/2021), which pursuant to the trust deeds to which it was also a party guaranteed Kunzhi’s obligations under the Kunzhi bonds. FIHK is incorporated in Hong Kong. It was wound up in Hong Kong on 1 February 2021[4]. Kunzhi is in liquidation in the BVI. On 5 July 2021, I made an order recognising the BVI liquidators of Kunzhi.

5.  All four Plaintiffs are, therefore, in liquidation and their liquidators have initiated the four actions. I shall refer to Nuoxi and Kunzhi together as the (“Issuers”) and HKJHC and FIHK together as the (“Guarantors”).

6.  Nuoxi and Kunzhi have defaulted on their payment obligations under their respective bonds. The guarantees given by HKJHC and FIHK have been called. The guarantees have not been honoured. The Company had entered into two Keepwell Deeds in relation to the Nuoxi bonds with Nuoxi, HKJHC and the trustee dated 20 April 2017 (“1^st Nuoxi Keepwell Deed”) and 24 January 2018 (“2^nd Nuoxi Keepwell Deed”; together the “Nuoxi Keepwell Deeds”) respectively. The Company has also entered into two Keepwell Deeds in relation to the Kunzhi bonds with Kunzhi, FIHK and the Trustee dated 17 April 2018 (“1^st Kunzhi Keepwell Deed”) and 21 May 2018 (“2^nd Kunzhi Keepwell Deed”; together the “Kunzhi Keepwell Deeds”) respectively. The material terms of all four Keepwell Deeds are in most respects identical. I shall refer to them collectively as the “Keepwell Deeds”. They required the Company to cause each of Nuoxi, Kunzhi, HKJHC and FIHK (1) to have a consolidated net equity of at least US$1 at all times; (2) to have sufficient liquidity to ensure timely payment by each of Nuoxi, Kunzhi, HKJHC and FIHK of any amounts payable under the Bonds or guarantees; and (3) HKJHC to have an aggregate Total Equity of at least HK$9,980,000 at all times. The Plaintiffs contend that as a consequence of Nuoxi and Kunzhi’s defaults under the Bonds and HKJHC and FIHK’s failure to honour the guarantees the Company defaulted on its obligations under the Keepwell Deeds.

7.  In addition to the Keepwell Deeds, Nuoxi, HKJHC, the Company and the Nuoxi Bond trustees also entered into two Deeds of Equity Interest Purchase Undertaking dated 20 April 2017 and 24 January 2018. Kunzhi, FIHK, the Company and the Kunzhi Bond trustee entered into two further Deeds of Equity Interest Purchase Undertaking dated 17 April 2018 and 21 May 2018 (collectively “EIPUs”). The contractual documents are governed by English law and have Hong Kong exclusive jurisdiction clauses.

8.  The Plaintiffs have submitted claims to the Administrator (explained in the following paragraphs) of the Company based on the Company’s breach of the Keepwell Deeds and the EIPUs. Other than in respect of HKJHC’s claim, the Administrator has rejected the Plaintiffs’ claims without giving any reason.

9.  The failure of Nuoxi and Kunzhi to honour their payment obligations arose from the deteriorating financial state of the PU Group. On 19 February 2020 the Beijing First Intermediate People’s Court (“Beijing Court”) issued an order on the application of the Bank of Beijing Co., Ltd that the Company commence reorganisation pursuant to the Enterprise Bankruptcy Law (“EBL”). On 21 February 2020 the Beijing Court issued an announcement directing creditors of the Company to submit their claims to the Administrator of the Company.

10.  On 4 February 2021, Nuoxi submitted a claim in the Company’s reorganisation for RMB6.3 billion in respect of the 1^st Nuoxi Keepwell Deed and the 2^nd Nuoxi Keepwell Deed. On 26 May 2021, Nuoxi found out that its claims had been rejected, because it was not on the Company’s creditors’ list. On 7 June 2021, Nuoxi lodged an objection to the Administrator in accordance with the EBL.

11.  On 29 January 2021, Kunzhi submitted a claim in the Company’s Reorganisation in the sum of approximately RMB5.7 billion in respect of the 1^st Kunzhi Keepwell Deed and 2^nd Kunzhi Keepwell Deed. On 26 May 2021, Kunzhi found out that its claims had been rejected, also because it was not on the Company’s creditors’ list. On 7 June 2021, Kunzhi lodged an objection to the Administrator in accordance with the EBL.

12.  On 9 April 2021, FIHK submitted a claim in the Company’s Reorganisation in the sum of approximately RMB5.7 billion in respect of the 1^st Kunzhi Keepwell Deed and 2^nd Kunzhi Keepwell Deed. On 26 May 2021, FIHK found out that its claims had been rejected because it was not on the Company’s creditors’ list. On 7 June 2021, FIHK lodged an objection to the Administrator in accordance with the EBL.

13.  On 20 November 2020, HKJHC submitted a claim in the Company’s Reorganisation in the sum of approximately RMB6.3 billion in respect of the 1^st Nuoxi Keepwell Deed and 2^nd Nuoxi Keepwell Deed. The Administrator has not adjudicated the claim. Should the Administrator overrule the objections lodged by Nuoxi, Kunzhi and FIHK, they will have 15 days to appeal to the Beijing Court. As I have already mentioned the Administrator did not inform the Plaintiffs of the reasons for rejecting the claims. It was not until the Company filed evidence in support of its application to stay the present proceedings, which I determined in December 2021, that it gave any reasons for rejecting the claims[5]. The explanation was contained in a report by Zhang Xin dated 11 November 2021. Mr Zhang is a lawyer qualified in both the Mainland and England. He specialises in banking and finance, capital markets and international transactions. He explained that between 2011 and 2021 he has advised on 31 transactions, which have involved Keepwell Deeds. This serves to illustrate how widely Keepwell Deeds have been used, although Mr Zhang says that their use has declined since January 2017 when the State Administration of Foreign Exchange (“SAFE”) lifted the limitation on repatriating the bond proceeds raised overseas by Mainland companies, which had necessitated the use of foreign subsidiaries and a security structure, which included Mainland parent companies issuing what became known as Keepwell Deeds. The Nuoxi and the Kunzhi Keepwell Deeds were signed after January 2017.

14.  Mr Zhang explained in general terms the foreign exchange regulations that inhibit Mainland business groups in borrowing foreign currencies and the regulatory approvals required in order to do so. Mr Zhang said that his personal view is that in entering the Keepwell Deeds the Company did not violate any Mainland law or regulation and they did not require registration. This remained the Company’s position at the trial. However, Mr Zhang says in [25] of his report “the relevant Chinese Governmental Approvals would be required when the Keepwell Provider performs the obligations thereunder as and when an event triggering such obligations occurs. From this angle, receiving all relevant Chinese Governmental Approvals is an inherent and fundamental pre-condition for Keepwell Provider’s performance of its obligations under the Keepwell Structure when such obligations are triggered.” This explains why the Keepwell Deeds and the EIPUs contain in clause 2.2 provisions dealing with regulatory approvals.

Keepwell Deeds

“2.2 Regulatory Approvals

Notwithstanding anything contained in this Deed, if, and to the extent that the Company is required to obtain necessary approvals, consents, licences, orders, permits and any other authorisations from the relevant Approval Authorities (the Relevant Approvals) in order to comply with its obligations under this Deed, the performance of such obligation shall always be qualified by, and subject to, the Company having obtained such Relevant Approvals. In this regard, the Company undertakes to use its best efforts to obtain such Relevant Approvals within the time stipulated by the relevant Approval Authorities, if applicable.”

EIPUs

“2.2 Regulatory Approvals

Notwithstanding anything contained in this Deed, if and to the extent that the Company is required to obtain any Relevant Approvals in order to comply with its obligations under this Deed, the performance of such obligation shall always be qualified by, and subject to, the Company having obtained such regulatory Relevant Approvals. In this regard, the Company undertakes to use its best efforts to obtain such Relevant Approvals within the time stipulated by the relevant Approval Authorities, if applicable.”

15.  In short it was the Administrator’s view, with which Mr Zhang agreed, that at the relevant times the PU Group was insolvent and the regulatory approvals required for compliance with the Keepwell Deeds and the EIPUs could not have been obtained. Therefore, there was no breach of either the Keepwell Deeds or the EIPUs.

16.  The contractual documentation and the claims in the Actions are, with one material exception[6], the same. I shall explain the contractual documentation and claims by reference to the claims brought by Nuoxi in HCA 778.

Contractual Obligations

17.  As I have explained the three series of Bonds issued by Nuoxi maturing in 2020, 2021 and 2023 were constituted by trust deeds dated 20 April 2017 and 24 January 2018. As the terms of all the trust deeds to which I will refer in the Actions are in materially the same terms, I shall simply refer to them as the Trust Deed or Trust Deeds as the context requires. The parties to the Nuoxi Trust Deeds were Nuoxi as Issuer, HKJHC as Guarantor, the Company and the Trustee.

18.  As envisaged in the Circulars and the Nuoxi Bond Conditions, and pursuant to the terms of the Trust Deeds, Nuoxi, HKJHC, the Company and the Trustee entered into the Nuoxi Keepwell Deeds dated 20 April 2017 and 24 January 2018 and the EIPUs dated 20 April 2017 and 24 January 2018 in relation to the 2020 Bonds, the 2021 Bonds and the 2023 Bonds.

19.  The Trust Deeds, the Keepwell Deeds and the EIPUs contain the same material terms and all of the documents define and refer to Nuoxi as “the Issuer”, HKJHC as “the Guarantor”, the Company as the “Company”, and the Trustee as the “Trustee”. Each of the Trust Deeds (clauses 19.1 and 19.2) and the Nuoxi Bond Conditions (condition 18), the Keepwell Deeds (clauses 15.1 and 15.2), and the EIPUs (clauses 10.1 and 10.2) are governed by English law and are subject to the exclusive jurisdiction of the courts of Hong Kong. The Nuoxi Bonds Conditions, the Keepwell Deeds and the EIPUs are sophisticated agreements. Before considering the claims it is necessary to understand the payment and security provisions in these agreements.

20.  As stipulated in the Trust Deeds, Nuoxi and HKJHC’s respective obligations in relation to the corresponding Nuoxi Bonds are as follows:

(1) By clause 2.2 of each of the Trust Deeds, Nuoxi (and also pursuant to clause 5, HKJHC as Guarantor) covenant to pay the Trustee upon the Nuoxi Bonds becoming due.

(2) Clause 1.1 of each of the Trust Deeds define an “Event of Default” as an event described in Condition 9 of corresponding Nuoxi Bond Conditions.

(3) By clause 2.4 of each of the Trust Deeds, at any time after an Event of Default has occurred, the Trustee may by notice in writing to Nuoxi and HKJHC require them to make all subsequent payments in respect of the corresponding Nuoxi Bonds to or to the order of the Trustee.

(4) By clause 5 of each of the Trust Deeds, HKJHC gave a unconditional and irrevocable guarantee that if Nuoxi does not pay any sum expressed to be payable by it under the corresponding Trust Deed and Nuoxi Bonds by the time and on the date specified for such payment (whether on the normal due date, on acceleration or otherwise), HKJHC will be liable as principal debtor to pay that sum to or to the order of the Trustee.

(5) By clause 9 of each of the Trust Deeds, Nuoxi (failing which, HKJHC) is liable to pay the Trustee’s remuneration for its services as Trustee, and expenses for preparation, execution, and performance of duties under the relevant Trust Deed, relevant Agency Agreement[7], relevant Keepwell Deed, the relevant EIPU and the relevant one of the Nuoxi Bonds.

21.  Recital (C) of each of the Trust Deeds provides that:

(1) The Company will enter into a Keepwell Deed with Nuoxi, HKJHC and the Trustee whereby the Company would undertake to inter alia provide financial support to HKJHC and Nuoxi in order that they have sufficient funds to meet their respective payment obligations under the corresponding Nuoxi Bonds and the Guarantee (as defined in clauses 1.1 and 5 of the relevant Trust Deed);

(2) The Company will also enter into an EIPU with Nuoxi, HKJHC and the Trustee, and the Company undertakes to assist Nuoxi and HKJHC in meeting their obligations under the Nuoxi Bonds and HKJHC’s Guarantee whereby the Company agrees to purchase equity interests of subsidiaries of the HKJHC and the Company incorporated outside the PRC[8].

22.  Pursuant to each of the Keepwell Deeds:

(1) By clause 4.1(i) of each of the Nuoxi Keepwell Deeds, the Company undertakes that it shall cause each of Nuoxi and HKJHC to have a Consolidated Net Worth[9] of at least US$1 (or its equivalent in any other currency) at all times.

(2) By clause 4.1(ii) of each of the Nuoxi Keepwell Deeds, the Company undertakes that it shall cause each of Nuoxi and HKJHC to have sufficient liquidity to ensure timely payment by each of Nuoxi and HKJHC of any amounts payable under or in respect of the relevant one of the Nuoxi Bonds, and the corresponding Guarantee in accordance with the Nuoxi Bond Conditions and/or the relevant Trust Deed, and otherwise under the relevant Trust Deed and the relevant Agency Agreement.

(3) By clause 4.1(iii) of each of the Nuoxi Keepwell Deeds the Company undertakes that it shall cause HKJHC to have an aggregate Total Equity (as defined in clause 4.2) “of at least HK$9,980,000 at all times.” The Kunzhi Keepwell Deeds do not contain the same provision. This is the only material difference between the Nuoxi Keepwell Deeds and the Kunzhi Keepwell Deeds.

(4) By clause 6.2(a) and 6.2(d) of each of the Nuoxi Keepwell Deeds, if an Event of Default has occurred, the Company shall as soon as practicable grant to the Plaintiff a standby facility (“Standby Facility”) pursuant to which the Company will remit to an account of Nuoxi as soon as practicable an amount sufficient to allow Nuoxi to satisfy the payment obligations set out in clause 6.3 after conversion (if required) (“Standby Facility Amount”) and cause Nuoxi to use the Standby Facility Amount to discharge its obligations under the corresponding Nuoxi Bonds, Trust Deed, Agency Agreement, EIPU and Nuoxi Keepwell Deeds.

(5) By clause 6.3 of each of the Nuoxi Keepwell Deeds, in the case of an Event of Default, the Standby Facility Amount remitted under clause 6.2 must (after taking into account exchange rate movements) be sufficient to enable the Issuer/Nuoxi to discharge in full:

(a) its obligations under or in respect of the corresponding Nuoxi Bonds in accordance with the corresponding Nuoxi Bond Conditions and/or the relevant Trust Deed, and otherwise under the relevant Trust Deed and the relevant Agency Agreement (which obligations include the principal amount of the corresponding Nuoxi Bonds then outstanding and any interest due and unpaid and/or accrued but unpaid); and

(b) fees, costs, expenses and other amounts payable to the Trustee and/or the Trustee’s agents under or in connection with the corresponding Nuoxi Bonds, Trust Deed, Agency Agreement, EIPU and/or Keepwell Deed and that which may be incurred as notified by the Trustee.

(6) Pursuant to clause 9 of the Nuoxi Keepwell Deeds, they shall remain in full force and effect so long as any of the corresponding Nuoxi Bonds are outstanding.

(7) By clause 12 of the Nuoxi Keepwell Deeds, the Company undertook, for so long as any of the corresponding Nuoxi Bonds are outstanding, to inter alia:

(a) cause each of Nuoxi and HKJHC to remain in full compliance with the terms and conditions of the corresponding Nuoxi Bonds, Guarantee, Trust Deed and all applicable laws, rules and regulations in relation to the corresponding Nuoxi Bonds in the BVI (in the case of Nuoxi) or Hong Kong (in the case of HKJHC) (clause 12(ii) of the Nuoxi Keepwell Deeds);

(b) promptly to take any and all action necessary to comply with its obligations under the Nuoxi Keepwell Deeds (clause 12(iii));

(c) to cause each of Nuoxi and HKJHC to take all action necessary in a timely manner to comply with its obligations under the Nuoxi Keepwell Deeds (see clause 12(iv)).

23.  By clause 3.1 of each of the EIPUs, following receipt by the Company of a written Purchase Notice by the Trustee in accordance with the corresponding Trust Deed:

(1) the Equity Interest[10] held by HKJHC and/or any other Subsidiaries[11] of the Company incorporated outside the PRC (as designated by the Company and notified in writing to the Trustee within three Business Days after the date of the Purchase Notice) (clause 3.1(i)); or

(2) absent such designation and notification, the Equity Interest held by all the Subsidiaries of the Company incorporated outside the PRC (clause 3.1(ii)),

in either case for a purchase price to be determined in accordance with clause 3.3 of each EIPU and pursuant to closing arrangements specified in clause 3.2 of each EIPU.

24.  By clause 3.3 of each EIPU, the Company shall determine the purchase price of the Equity Interest within 10 business days after the date of the relevant Purchase Notice (“Purchase Price”) and other applicable terms, provided that the Purchase Price shall be no less than the aggregate of the following amounts (“Shortfall Amount”):

(1) the amount sufficient to enable Nuoxi and HKJHC to discharge their respective obligations under the corresponding Nuoxi Bonds, Guarantee and Trust Deed, in full (clause 3.3(a)); plus

(2) the interest payable in respect of one interest period on the corresponding Nuoxi Bonds then outstanding as at the date of that Purchase Notice (clause 3.3(b)); plus

(3) all fees, costs and expenses and other amounts payable in connection with the corresponding Nuoxi Bonds, Trust Deed, Keepwell Deed and/or EIPU as at the date of the Purchase Notice, and all future expenses and costs which may be incurred as notified by the Trustee in that Purchase Notice (clause 3.3(c)).

25.  Pursuant to clause 3.3, absent a determination by the Company of the Purchase Price within 10 Business Days after the date of the Purchase Notice, the Purchase Price shall be the Shortfall Amount. Further and also pursuant to clause 3.5 of the EIPU, the Company shall inter alia use its best efforts to do all such things and take all such actions as may be necessary to procure the completion of the purchase in any event within six months from the date of a Purchase Notice, and to procure the remittance of the Purchase Price to or to the order of the Relevant Transferor in accordance with the EIPU.

26.  Condition 9 of the Nuoxi Bond Conditions provides that various matters constitute an Event of Default in relation to the Nuoxi Bonds:

(1) A failure to pay the principal of or any premium on any of the corresponding Nuoxi Bonds when due or there is a failure to pay interest on any of the corresponding Nuoxi Bonds when due and such failure continues for a period of seven days: Condition 9(a).

(2) The following cross-defaults by members of the PU Group: (i) any other present or future indebtedness of the Company, Nuoxi, HKJHC or any of their respective Subsidiaries for or in respect of moneys borrowed or raised becomes (or becomes capable of being declared) due and payable prior to its stated maturity by reason of any actual default, event of default or the like, or (ii) any such indebtedness is not paid when due or, as the case may be, within any originally applicable grace period, or (iii) the Company, Nuoxi, HKJHC or any of their respective Subsidiaries fails to pay when due any amount payable by it under any present or future guarantee for, or indemnity in respect of, any moneys borrowed or raised provided that the aggregate amount of the relevant indebtedness, guarantees and indemnities in respect of which one or more of the events mentioned above have occurred equals or exceeds US$25,000,000 or its equivalent: Condition 9(c).

27.  Also pursuant to Condition 9 of the Nuoxi Bond Conditions, if any Event of Default occurs, the Trustee may in certain circumstances give written notice to Nuoxi, HKJHC and the Company declaring that the Nuoxi Bonds are, and they shall immediately become, due and payable at their principal amount together with accrued interest.

Alleged Events of Default

28.  It is Nuoxi’s pleaded case[12] that a number of Events of Default have occurred since 21 February 2020, which it will be recalled was when the reorganisation proceedings commenced. They are as follows:

(1) On 21 February 2020, the Company defaulted in payment of sums due pursuant to the super short-term commercial paper (19方正SCP002) (“SCP”). This constituted an Event of Default pursuant to Condition 9(c) of the Nuoxi Bond Conditions.

(2) There was a cross-default in February 2020 as a result of non-payment of interest by Subsidiaries in connection with US$310,000,000 floating rate Guaranteed Bonds due 2021 issued by Kunzhi and guaranteed by FIHK. This cross-default constituted an Event of Default pursuant to Condition 9(c) of the Nuoxi Bond Conditions.

(3) On or before 18 March 2020, Peking University Science Park Construction & Development Company Limited (北京北大科技園建設開發有限公司), the Company, and Peking University Resources Group Co., Ltd. (“Science Park Company”) failed to perform their payment obligations under certain Science Park Company asset-backed notes. This was a cross-default and constituted an Event of Default pursuant to Condition 9(c) of the Nuoxi Bonds.

(4) Neither Nuoxi nor HKJHC were able to pay the principal and interest due on 20 April 2020 under the 2020 Bonds, and the default continued for more than seven days. This was an Event of Default under Condition 9(a) of the Nuoxi Bond Conditions relating to the 2020 Bonds, and Condition 9(c) of the Nuoxi Bond Conditions relating to the 2021 Bonds and 2023 Bonds.

(5) There was a cross default in May 2020 as a result of non-payment of interest by Subsidiaries in connection with the US$310,000,000 floating rate Guaranteed Bonds due 2021 issued by Kunzhi and guaranteed by FIHK. This cross-default constituted an Event of Default pursuant to Condition 9(c) of the Nuoxi Bond Conditions.

(6) Neither Nuoxi nor HKJHC were able to pay interest due, on 24 July 2020, under the 2021 Bonds and 2023 Bonds, and the default continued for more than seven days. This was an Event of Default under Condition 9(a) and/or 9(c) of the Nuoxi Bond Conditions relating to the 2021 Bonds and 2023 Bonds.

29.  Nuoxi relies on a number of other Events of Default that occurred after late June 2020, but as none of the Events of Default I have described are disputed it is not necessary for me to describe the later ones. What is material is that pursuant to Condition 9 of the Nuoxi Bond Conditions relating to the 2020 Bonds, on 16 April 2020, the Trustee issued a written notice to Nuoxi, HKJHC and the Company in relation to the 2020 Bonds (“2020 April Written Notice”) referring to the Event of Default I have referred to in [28(2)]. It is Nuoxi’s case that as a consequence of the 2020 April Written Notice the 2020 Bonds became immediately due and payable at their principal amount together with accrued interest (the latter calculated as at 15 April 2020 as being US$6,672,000, and which would continue to accrue until payment was made as provided in the relevant Nuoxi Bond Conditions). The Trustee formally demanded payment of the total amount, which as at that date was US$306,672,000.

30.  Also pursuant to Condition 9 of the Nuoxi Bond Conditions on 16 April 2020, the Trustee issued two further written notices to Nuoxi, HKJHC and the Company in relation to the 2021 Bonds and 2023 Bonds (“2021 April Written Notice” and “2023 April Written Notice”) referring to the same Event of Default. It is Nuoxi’s case that as a consequence of the 2021 April Written Notice the 2021 Bonds became immediately due and payable at their principal amount together with accrued interest (the latter calculated as at 15 April 2020 as being US$2,116,000, and which would continue to accrue until payment was made as provided in the relevant Nuoxi Bond Conditions). The Trustee formally demanded payment of the total amount, which as at that date was US$202,116,000.

31.  It is also Nuoxi’s case that pursuant to the 2023 April Written Notice, the 2023 Bonds became immediately due and payable at their principal amount together with accrued interest (the latter calculated as at 15 April 2020 as being US$4,816,000, and which would continue to accrue until payment was made as provided in the relevant Nuoxi Bond Conditions). The Trustee formally demanded payment of the total amount, which as at that date was US$404,816,000.

32.  Nuoxi claims that as at 16 April 2020, it was liable under the Trust Deeds to pay at least the aforesaid principal and interest, and the Trustee’s Costs, in relation to all of the Nuoxi Bonds. These allegations, and the similar claims advanced in the other three actions, are admitted by the Company.

33.  Pursuant to clause 6.1 of each of the Trust Deeds, on 30 March 2020, the Trustee issued three purchase notices to the Company (with copies to Nuoxi and HKJHC) relating to the 2020 Bonds, 2021 Bonds and 2023 Bonds substantially in the form of Schedule 1 to the EIPUs, as specified in the EIPUs (“Purchase Notices”). Pursuant to each of the Purchase Notices the Trustee notified the Company that an Event of Default had occurred pursuant to Condition 9 of the Nuoxi Bond Conditions relating to either the 2020 Bonds, 2021 Bonds, or the 2023 Bonds, and reminded the Company of its obligation under clause 3.1 of the relevant EIPU to purchase the Equity Interest. The Trustee further specified that for the purposes of calculating the Purchase Price as at the date of the Purchase Notice, the Shortfall Amounts were as follows. In relation to the 2020, 2021 and 2023 Bonds at least US$313,061,500, US$206,524,000 and US$414,724,000 respectively (comprised of principal and payable interest) as well as fees, costs, expenses and other amounts payable as at the date of the Purchase Notice plus provision for other fees, costs, expenses and all other amounts that may be incurred after the date of the Purchase Notice.

34.  The Company did not, in accordance with clause 3.1 of the EIPUs, designate or notify within three business days of receipt of either of the Purchase Notices which Equity Interest it would purchase neither did it, as required by clause 3.3 of the EIPUs, determine the Purchase Price within 10 Business Days after the date of the Purchase Notices.

35.  It is Nuoxi’s case that pursuant to clauses 3.1 to 3.3 of the EIPUs, the Company has since at least late April 2020 been liable to purchase the Equity Interest held by all of the Company’s subsidiaries incorporated outside the Mainland, in the minimum of the Shortfall Amount (being the Purchase Price) as calculated in relation to each of the 2020 Bonds, 2021 Bonds and the 2023 Bonds. The Shortfall Amount and Purchase Price calculated by Nuoxi in accordance with clause 3.3 of each EIPU is:

(1) at least US$313,061,500 in relation to the 2020 Bonds;

(2) at least US$206,524,000 in relation to the 2021 Bonds; and

(3) at least US$414,724,000 in relation to the 2023 Bonds.

Further, Nuoxi says that pursuant to clause 3.5 of the EIPUs, the Company has been obliged since at least 30 March 2020 to use its best efforts to do all things and take all action necessary and desirable to procure the completion of the acquisition of the Equity Interests as soon as reasonably practicable, and in any event within six months from 30 March 2020, and to procure the remittance of each of the Purchase Prices (being each of the Shortfall Amounts) to or to the order of a Relevant Transferor in accordance with the EIPU. This, of course, has not happened.

36.  The Plaintiffs in the four actions allege that as a consequence of the Company’s failure to comply with the Keepwell Deeds and the EIPUs they have suffered the loss described in the following paragraphs. In the case of Nuoxi and HKJHC in HCA 778 and HCA 1418 respectively the loss is said to be as at 19 May 2021 at least US$963,456,001, which comprises of:

(1) the principal amount of US$321,693,000 of the 2020 Bonds, together with accrued contractual interest thereon up until 19 May 2021 of US$21,693,000 (which includes the contractual interest calculated up to 15 April 2020 of US$6,672,000);

(2) the principal amount of US$212,402,000 of the 2021 Bonds, together with accrued contractual interest thereon up to 19 May 2021 of US$12,402,000 (which includes the contractual interest calculated up to 15 April 2020 of US$2,116,000);

(3) the principal amount of US$428,236,000 of the 2023 Bonds, together with accrued contractual interest thereon up to 19 May 2021 of US$28,236,000 (which includes contractual interest calculated up to 15 April 2020 of US$4,816,000);

(4) the sum of at least US$375,000 being the outstanding Trustee’s Costs, pursuant to clause 9 of the Trust Deed, which the Trustee has incurred with respect to the 2020 Bonds up until 1 February 2021; and

(5) the sum of at least US$750,001 being the outstanding Trustee’s Costs, pursuant to clause 9 of the Trust Deed, which the Trustee has incurred with respect to the 2021 Bonds and 2023 Bonds up until 1 February 2021.

37.  In the case of Kunzhi and FIHK in HCA 1442 and HCA 798 respectively the loss is said to be as at 1 February 2021, at least the sum of US$857,427,830, which comprises of:

(1) the principal amount of US$490,000,000 of the 2020 Bonds, together with accrued contractual interest thereon up to until 1 February 2021 of US$39,557,700 (which includes the contractual interest calculated up to 15 April 2020 of US$15,141,000);

(2) the principal amount of US$310,000,000 of the 2021 Bonds, together with accrued contractual interest thereon up to 1 February 2021 of US$17,245,300 (which includes the contractual interest calculated up to 15 April 2020 of US$2,647,400);

(3) the sum of at least US$312,415 being the outstanding Trustee’s Costs, pursuant to clause 9 of the Trust Deed, which the Trustee has incurred with respect to the 2020 Bonds up until 1 February 2021; and

(4) the sum of at least US$312,415 being the outstanding Trustee’s Costs, pursuant to clause 9 of the Trust Deed, which the Trustee has incurred with respect to the 2021 Bonds up until 1 February 2021.

38.  The claims as pleaded originally sought judgment for these sums. During the applications I have referred to in [13] the Plaintiffs’ position changed. For reasons apparent from the issue addressed in [45]–[46] they told me during the hearing of the applications that at trial they would only seek declarations that the Keepwell Deeds had been breached resulting in the loss I have described in the previous paragraphs. It is the Plaintiffs’ position that they do not seek a judgment for a sum of money that they can enforce outside the Mainland or of which they can seek recognition and enforcement in the Mainland. They seek a judgment on which they can rely as evidence to prove their claims in the reorganisation proceedings to which the Company is subject in the Mainland.

39.  As can be been from my detailed description of the claims brought by Nuoxi (and save for FIHK’s claim pleaded in [38] of the Amended Statement of Claim in HCA 798, which I address in [68], it is true of the claims in the other three actions) the dates on which it is said the Keepwell Deeds and the EIPUs were breached are identified with precision and occurred after 19 February 2020. Neither the occurrence of the events, nor the dates on which they took place, is controversial. First, the earliest Events of Default took place on 21 February 2020[13]. Secondly, the Trustee issued a notice of default (the 2020 April Written Notice) on 16 April 2020 and the 2020 Bonds became immediately repayable. The same day notices of default were given in respect of the 2021 Bonds and 2023 Bonds. The three series of Bonds became immediately payable on these dates[14]. Thirdly, on 30 March 2020 the Trustee issued three purchase notices pursuant to the Trust Deeds, reminding the Company of its obligations under the EIPUs. It is Nuoxi’s case that “since at least late April 2020” the Company has been liable to purchase the Equity Interests[15]. It is not in dispute that the Company failed to put Nuoxi and the other Issuers in funds in order that they could comply with their obligations under the Bonds or purchase the Equity Interests.

40.  A point that is taken by the Company is that claims that have been brought are all for breaches that occurred after 19 February 2020 when the Beijing Court issued an order that the Company commence reorganisation proceedings. All interest that had become due prior to this date has been paid. This, the Company argues, is relevant to the determination of whether or not clause 2.2 applies. In short, it argues that once the reorganisation proceedings had commenced it is clear that the regulatory approvals required in order to transfer the funds that would enable the Issuers, the Guarantors or the Company itself to comply with their obligations could never be obtained.

The Issues

41.  The Company advances a number of other defences. They are as follows.

(1) The Plaintiffs’ claim have been discharged by the proofs of debt they filed in the Mainland reorganisation proceedings.

(2) No declaratory relief should be granted to the Plaintiffs when it is not demonstrated that such a declaration by the Hong Kong court would be of use in the Mainland.

(3) Under the Keepwell Deeds and the EIPUs, the Company’s obligation, if any, is qualified (or contingent) by clause 2.2 and the Company is under no obligation or liability if it lacks the “Relevant Approvals” and there is no real prospect of obtaining them (despite the obligation to use best efforts). The Company’s obligation has not arisen on the facts of the case in light of the Mainland law evidence.

(4) The Plaintiffs have suffered no loss.

42.  The first two arguments were advanced before me at the hearing for a stay[16]. I rejected them. The matter went on appeal. The arguments were also rejected by the Court of Appeal[17]. The Plaintiffs object that the issues are res judicata. For present purposes I will accept that it is open to the Company to reargue them. I, however, reject them for reasons I explain in the next sections of this judgment. I will then deal with the third and fourth defences.

Have the claims been discharged?

43.  This issue was addressed by me in [28]–[42][18] of my first decision and by the Court of Appeal in [19], [60]–[63] of its judgment[19]. The Company at the trial attempted to persuade me that both I and the Court of Appeal were wrong. Mr Maurellet did not simply repeat the argument that had failed initially. In addition he argued as follows. In the context of a scheme of arrangement it is established that there is an exception to the Rule in Gibbs[20], namely, that a debt can only be compromised in accordance with the law which governs the obligation that gives rise to the debt, if a creditor submits to an insolvency process conducted in accordance with the law of a jurisdiction other than that which governs the obligation. I was referred to my decision in Re China Singyes Solar Technologies Holdings Ltd[21]:

“18(2) Although the Convertible Bonds are governed by English law, there is no need to seek recognition of the Scheme in England. This is because 100% of the holders of the Convertible Bonds voted in favour of the Scheme. Accordingly, there is no issue about the ‘Gibbs rule’ because ‘there is an exception to the rule if the relevant creditor submits to the foreign insolvency preceding. In that situation, the creditor is taken to have accepted that his contractual rights will be governed by the law of the foreign insolvency proceeding’ (Re OJSC International Bank of Azerbaijan[22]).”

44.  As I explain in [31] of my first decision (with which the Court of Appeal agrees in [61]–[62] of its judgment[23]) “… a claim in foreign insolvency proceedings does not create an absolute bar to a creditor seeking adjudication of the claim in another jurisdiction, which the creditor may take the view is more appropriate for its resolution. This is consistent with the well-established English position that a liquidation stay has no extra-territorial effect. What the creditor cannot do is to attempt to use proceedings outside the foreign insolvency jurisdiction to achieve a result, which is inconsistent with that mandated by the foreign insolvency regime: at its most basic to try and obtain more than he would obtain if he proves in the insolvency proceedings”. It seems to me that the Company’s argument fails to recognise the distinction that this passage seeks to draw and does not distinguish between a submission for the purposes of determining what a creditor is entitled to recover in an insolvency process and the determination of a right outside an insolvency process, which may subsequently be used to advance a claim in that insolvency process. In the scheme context a creditor, which has participated in the scheme process cannot subsequently attempt to recover its debt outside the scheme. Given the nature of a scheme, submission to the scheme process is unlikely to leave any means for recovery by a creditor, which is not inconsistent with the principle I have explained in the passage I have quoted from my earlier decision. The present is not that type of case. The Plaintiffs are not seeking a judgment, which they can enforce outside the reorganisation under the EBL taking place in the Mainland. What they seek is a judgment, which assists them in advancing a claim in the reorganisation. The additional authorities that the Company have relied on at trial do not address this distinction. I reject the Company’s argument.

Will a judgment of this Court be of use in the Mainland proceedings?

45.  The Company argues that it has not been demonstrated by the Plaintiffs that a declaratory judgment will be of any utility in advancing its claims in the reorganisation in the Mainland. This seems to me to be plainly wrong. In [57]–[58] of its decision the Court of Appeal[24] says this:

“57. For the above reasons, we consider it was open to the judge to conclude that a judgment given by the Hong Kong court in the Actions would have some utility, and there is no basis for us to interfere with the judge’s conclusion.

58. For completeness, we note that Professor Shi Jingxia, who was also the expert witness on PRC law for the administrator appointed by the Beijing Court in the restructuring of the company in Citicorp International Limited v Tsinghua Unigroup Co. Ltd [2022] HKCFI 1558, explained in her oral testimony in that case as stated in §10 that a judgment of the Hong Kong court in the Actions could be adduced as evidence before the Beijing Court. This again goes to show that a Hong Kong judgment in the Actions is not necessarily, as the Company and the Administrators put it, of no relevance or utility in the PRC insolvency proceedings, even though it is entirely a matter for the Beijing Court to decide what weight should be given to such a judgment.”

46.  The proceedings regarding Tsinghua Unigroup to which the Court of Appeal refers gives rise largely to identical issues to that which arise in the present trial. The trial of Tsinghua Unigroup took place before me and immediately after the present case and will be the subject of a separate judgment. Professor Shi gave expert evidence for both the Company and Tsinghua Unigroup in the respective trials. Her evidence remained the same. It seems to me very difficult to see how it can sensibly be concluded, given the Company’s own expert’s views, that a judgment from the Hong Kong court will be of no utility. Hong Kong law is identical in nearly all material respects to English law. I am, like most of my colleagues, qualified in England. One of the advantages Hong Kong’s common law legal system gives China is a judiciary, which is able to determine disputes governed by the common law if that is what the parties to commercial contracts choose[25]. As I noted in my first decision it would be remarkable if the Beijing Court took no notice of the Hong Kong court’s opinion.

The Contractual Documentation and its interpretation

47.  The contractual documentation and Offering Circular were prepared in early 2017 by the Company with the assistance of underwriters Bank of China Limited, Barclays Bank Plc, DBS Bank Ltd., Founder Securities (Hong Kong) Limited, Haitong International Securities Company Limited, Standard Chartered Bank, and SMBC Nikko Capital Markets Limited and the participation of the Trustee. Experienced lawyers were involved, including Linklaters, Tian Yuan Law Firm and Walkers representing Nuoxi and Allen & Overy representing both the joint lead underwriters. The Bonds issue was a sophisticated financial transaction, and the contractual documentation reflects this.

48.  There are three disputes concerning the construction of the contract. The first concerns whether or not clause 4.1 of the Keepwell Deeds required the Company to be given notice that one or other of the Issuers or Guarantors required financial assistance before its obligations under clause 4.1 arose. The second concerns whether or not clause 2.2 in both the Keepwell Deeds and the EIPUs operates as a condition precedent to the obligations under clause 4 arising. The third concerns what the obligation in clause 2.2, which provides that the Company must use its “best efforts” to obtain the necessary approvals and consents, requires of the Company.

49.  The principles that guide the court in determining contested interpretations of provisions in contracts are largely uncontroversial: “The court must focus on the meaning of the relevant words in their documentary, factual and commercial context. If there is an ambiguity, or in other words, there are rival meanings, the court can give weight to the implications of the rival constructions by reaching a view as to which is more consistent with business common sense”[26]. The process was described by Judge Davis-White QC in Whitehall Capital Ltd v Land South East Ltd, in the following way: “The key is that the overall process is a unitary exercise involving an iterative process which involves not just a consideration of the words of a contract but a consideration of the same against the relevant background knowledge and the commercial consequences of competing constructions”[27].

50.  The importance of taking into account the commercial context, purpose and realties when assessing competing constructions of a contract are emphasised in two decisions of Lord Drummond Young in which he discusses comprehensively the importance in this process of applying what he describes as “commercial common sense” and what this involves. In Grove Investments Ltd v Cape Building Products Ltd[28], Lord Drummond Young explains that:

“In construing contracts it is also important to bear in mind that a contract is a co-operative enterprise, entered into by parties for their mutual benefit. It is intended to achieve objectives that are common to both parties; that is why a purposive construction must be adopted. Thus a contract should be construed in such a way that the benefits that may reasonably be expected from the contract accrue to both parties. It should likewise be construed in such a way that an excessive or disproportionate burden does not fall on one party through the application of a contractual provision. By ‘excessive or disproportionate’, we mean results that are objectively excessive or disproportionate according to what would be the expectations of reasonable parties in the particular contractual context. Further, commercial predictability is usually regarded as an important feature of any contract. We are accordingly of opinion that a contract should normally be construed in such a way as to avoid arbitrary or unpredictable burdens or impositions, and conversely arbitrary or unpredictable benefits, in the nature of windfalls; to do otherwise would frustrate one of the most elementary commercial objectives.

51.  More recently in Ashtead Plant Hire Co Ltd v Granton Central Developments Ltd[29], Lord Drummond Young explained the interaction between commercial common sense and purposive construction thus:

“….. in interpreting a contractual provision the court should adopt a purposive approach. What this means is that in construing a contract the court should have regard to the fundamental objectives that reasonable persons in the parties’ position would have had in mind. Essentially, the central provisions of a contract should, in any case of doubt, prevail over the subsidiary clauses. The substance of the parties’ agreement, construed objectively, should prevail over niceties of wording, and in particular over clauses that have not been well drafted.

Secondly, in construing a contract a court may have regard to what is generally referred to as commercial (or business) common sense. Reference to commercial common sense has attracted a certain amount of criticism in recent years. Nevertheless, the authorities supporting its use are quite clear; and they include most of the recent cases where the approach to contractual interpretation has been discussed. …

….. In general, it involves a double process: is a conclusion (a deduction or inference) one that is widely held by those with a knowledge of the particular field under consideration ([‘common’])? And does the converse of the conclusion make sense? If it does not, it is likely that the conclusion is correct (or makes ‘sense’) … ‘Commercial’ common sense involves applying these concepts to business transactions or business relationships, but with the addition of elementary microeconomics; ‘microeconomics’ is merely the branch of economics that covers the behaviour of individual firms (or individuals or families) in their commercial dealings with other persons. We would emphasise the word ‘elementary’. The court should not embark on anything approaching a full professional economic analysis. What it must do is rather to consider how a reasonable person in business would be likely to conduct his or her affairs in a particular situation …

The basic manner in which a business conducts its affairs, however, is a matter that should lie comfortably within judicial knowledge …

It is perhaps useful to mention three features of general business conduct that will frequently be relevant; all are of assistance in the present case. First, contracts are based on the principle of consideration, or exchange. This involves the notion of the quid pro quo; it is normal to find that the obligations of one party are broadly equivalent to the obligations of the other party. There may be exceptions, where a bad bargain has been concluded, but equivalence is the norm, and contracts should generally be construed accordingly. Secondly, the principle pacta sunt servanda applies; parties expect to perform their contractual obligations. For this reason they will normally avoid the risk of unreasonable or disproportionate burdens. Thirdly, predictability is generally regarded as important. For that reason the parties to a contract will normally try to avoid obligations or burdens that operate in an arbitrary manner. Conversely, they do not expect windfalls. Nevertheless, commercial ‘predictability’ is not achieved by construing contracts with brutal literalism, a practice that can easily produce arbitrary results; it is rather achieved by the use of a contextual and purposive construction of the words used, with the application where appropriate of commercial common sense …..”.

52.  The Keepwell Deeds and the EIPUs form part of one financial transaction. The court can[30] and should have regard to other agreements and documents that form part of a composite transaction in assessing what the objectives and expectations of the parties to individual agreements forming part of the transaction are likely to have been and to have regard to the character and components of the larger transaction in assessing the meaning and application of contentious provisions. The objective of the Company, as the holding company of the PU Group, was to procure investors to lend US$ for the tenor of the Bonds. For reasons I have explained earlier, in order to do this it was necessary for the PU Group to use offshore companies, with no material assets, to issue the Bonds. Necessarily, this meant that lenders would have no security unless it was provided by other members of the Group and, for reasons I have also explained, guarantees could not be given by onshore companies holding assets in the Mainland. The Keepwell Deeds and the EIPUs were required specifically because the PU Group was not able to provide guarantees from onshore companies. Although it was made clear to lenders that there might be difficulties in the Company complying with its obligations under the Keepwell Deeds and EIPUs if to do so required approvals from Mainland regulators and Government departments, it seems to me clear that the Keepwell Deeds and the EIPUs were presented as having significant value and were likely to be treated as such by prospective lenders. However, the Keepwell Deeds and the EIPUs had a number of inherent shortcomings.

53.  First, as is apparent from the very reason this novel form of security was required and is made explicit in the Offering Circulars and the terms of clause 2.2, financial regulations in the Mainland create difficulties for a company wishing to transfer currency out of the Mainland. It is clearly the intention of the regulations to restrict the circumstances in which such transfers can be made otherwise the Company would have been able to provide a guarantee. This must have been known to at least the more sophisticated investors otherwise they would have queried the structure of the borrowing and insisted on guarantees from a company which had substantial assets. Secondly, the Keepwell Deed provides no mechanism for the Trustee to monitor compliance. Why the Keepwell Deed did not contain a provision that required, for example, the Trustee to be provided with the audited financial statements of the Issuers and the Guarantors was not an issue explored before me. As long as interest was paid on the Bonds the Trustee would not know whether, for example, the Issuers and the Guarantors had a consolidated net worth of at least US$1. Because the Issuers had no assets their ability to pay interest and principal was dependent on the financial condition of the Company and the Group. Breaches of the Keepwell Deed were only likely to come to light after the Company was in serious financial difficulties. By that time, and, in particular, if the Company had been put into reorganisation in the Mainland pursuant to the EBL, for reasons I consider in detail in [88]–[91] it was inherently unlikely that regulatory approval for transfers necessary to pay liabilities under the Bonds and the Guarantees would be approved. In the evidence before me (largely from experts) no example was cited of regulatory approval ever having been given after a company had been put into reorganisation for a transfer of monies out of the Mainland to settle a liability analogous to those under the Keepwell Deeds and the EIPUs. It seems to me that in practice the Keepwell Deeds and the EIPUs were of limited practical value.

54.  That having been said the present case involves sophisticated and carefully documented financial transactions involving significant sums of moneys. It must reasonably be assumed that the Keepwell Deeds and the EIPUs were intended to create substantive rights, even if in practice they had less financial value than purchasers of the Bonds assumed, and any qualification to such rights was likely to be carefully circumscribed.

55.  I deal with the three contentious questions of construction in the following paragraphs:

(1) Did clause 4.1 require the Company to be given notice before it was obliged to ensure the financial criteria specified in clause 4.1 arose in [73];

(2) is clause 2.2 a condition precedent in [77]; and

(3) “best efforts” in [80]–[87].

Offering Circular

56.  The level of sophistication and care that went into the structuring of the transaction is demonstrated by the Offering Circulars. The Offering Circular dated 12 April 2017 for the Nuoxi Bonds is in excess of 150 pages in length. The section headed “Offer Structure”, which deals with the Keepwell Deed and, the EIPU is over two pages. The same section is included in the Offering Circular for the Kunzhi Bonds. I will quote it in full.

“THE KEEPWELL DEED

The Issuer, the Guarantor and the Company will execute the Keepwell Deed as further described in ‘Description of the Keepwell Deed’ with the Trustee on or about the Issue Date. Under the Keepwell Deed, the Company will undertake with the Issuer, the Guarantor and the Trustee, so long as any of the Bonds remain outstanding, that:

• it shall directly or indirectly own and hold not less than 85 per cent of the outstanding shares of the Guarantor and shall not directly or indirectly pledge, grant a security interest, or in any way encumber or otherwise dispose of any such shares unless required to dispose of any or all such shares pursuant to a court decree or order of any government authority which, in the opinion of a legal adviser to the Company, may not be successfully challenged; and

• it shall cause the Guarantor to directly or indirectly own and hold all the outstanding shares of the Issuer and not to directly or indirectly pledge, grant a security interest, or in any way encumber or otherwise dispose of any such shares unless required to dispose of any or all such shares pursuant to a court decree or order of any government authority which, in the opinion of a legal adviser to the Company, may not be successfully challenged.

In addition, the Company will undertake, among other things, so long as any of the Bonds remain outstanding, to:

• cause each of the Issuer and the Guarantor to have a Consolidated Net Worth of at least U.S.$1.00 at all times;

• cause 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 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;

• cause the Guarantor to have an aggregate Total Equity of at least HKS9,980,000 at all times;

• subject to certain exceptions as described in ‘Description of the Keepwell Deed’, not, and procure that its subsidiaries (other than a Listed Subsidiary and any subsidiary of such Listed Subsidiary) will not, create or permit to subsist any mortgage, charge, lien, pledge or other security interest, upon the whole or any part of its present or future undertaking, assets or revenues (including any uncalled capital) to secure any Relevant Indebtedness outside the PRC;

• to procure that the articles of association of each of the Issuer and the Guarantor shall not be amended in a manner that is, directly or indirectly, adverse to Bondholders;

• 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);

• promptly to take any and all action necessary to comply with its obligations under the Keepwell Deed;

• to cause each of the Issuer and the Guarantor to take all action necessary in a timely manner to comply with its obligations under the Keepwell Deed;

• to procure that the Issuer will not carry on any business activity whatsoever other than in connection with the issue of the bonds and any other activities incidental thereto (which activities shall, for the avoidance of doubt, include the on-lending of the proceeds of the issue of the bonds (the ‘Proceeds of the Bonds’) to the Guarantor or the Company or as any of them may direct), and to cause such recipient of the Proceeds of the Bonds to pay the interest and principal in respect of such intercompany loan on time; and

• to maintain the Guarantor as a primary overseas platform of the Company for investment holding, trading and financing.

In addition, in the event (i) the Issuer does not provide a notice confirming it has sufficient liquidity to the Company and the Trustee no later than 30 Facility Business Days before each Interest Payment Date (the ‘Liquidity Notice Date’) or (ii) an Event of Default has occurred, the Company shall, subject to prevailing laws, regulations and government policies at such time and if required, the approvals from or registration with competent PRC government authorities, as soon as practicable, among other things, grant to the Issuer a standby facility (the ‘Standby Facility’) pursuant to which the Company will remit an amount after conversion (if required) sufficient to enable the Issuer (a) in the case of (i) to discharge its obligations under the Bonds and the Trust Deed which will become due on the immediate next Interest Payment Date, or in the case of (ii) to discharge 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, and (b) cover 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 the Keepwell Deed as at the date of the Liquidity Notice Date plus provisions for costs, fees, expenses and all other amounts which may be incurred after the Liquidity Notice Date as notified by the Trustee. 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.

The Keepwell Deed is not a guarantee by the Company of the payment of any obligation, responsibilities, indebtedness or liability, of any kind or character whatsoever, of the Issuer or Guarantor under the laws of any jurisdiction. The performance by the Company of certain of its obligations under the Keepwell Deed may be subject to approvals, registrations, filings or clearance or other authorisation of PRC government authorities, and the Company will undertake to use its best efforts to obtain the same. See ‘Risk Factors — Neither the Keepwell Deed nor the Deed of Equity Interest Purchase Undertaking from the Company is a guarantee of the payment obligations of the Issuer and the Guarantor under the Bonds and the Guarantee’.

THE DEED OF EQUITY INTEREST PURCHASE UNDERTAKING

The Issuer, the Guarantor and the Company will execute the Deed of Equity Interest Purchase Undertaking (as further described in ‘Description of the Deed of Equity Interest Purchase Undertaking’) with the Trustee on or about the Issuer Date. Pursuant to the terms of the Deed of Equity Interest Purchase Undertaking, the Company will agree to purchase, either by itself or through a PRC-incorporated Subsidiary of the Company, the Equity Interest held by the Guarantor and/or any other Subsidiaries of the Company incorporated outside the PRC (each a ‘Relevant Transferor’), upon receiving a written purchase notice (the ‘Purchase Notice’) from the Trustee in accordance with the Trust Deed given following the Trustee being expressly notified or becoming actually aware of the occurrence of an Event of Default under the Bonds (the ‘Purchase’). The purchase price will be determined by the Company provided that the purchase price shall after conversion (if required), among other things, be sufficient to enable the Issuer and the Guarantor to discharge in full their respective obligations under the Bonds, the Guarantee and the Trust Deed, plus the interest payable in respect of one interest period on the Bonds, plus 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 Keepwell Deed and/or the Deed of Equity Interest Purchase Undertaking as at the date of such Purchase Notice plus provisions for costs, fees, expenses and all other amounts which may be incurred after the date of the Purchase Notice, as notified by the Trustee in the Purchase Notice.

The Company shall, and shall procure each Relevant Transferor to, use their respective best efforts to do all such things and take all such actions as may be necessary or desirable to (i) procure the completion of the Purchase on the relevant Purchase Closing Date (including providing information and applying for Relevant Approvals) as soon as reasonably practicable within six months from the date of the Purchase Notice; and (ii) procure the remittance of the sum of the Purchase Price to or to the order of the Relevant Transferor(s) in accordance with the Deed of Equity Interest Purchase Undertaking. See ‘Risk Factors — Performance by the Company of its undertaking under the Deed of Equity Interest Purchase Undertaking is subject to approvals of the PRC governmental authorities’.”

57.  The Offering Circular makes it clear in these pages that the Keepwell Deed is not a guarantee and its performance may require approvals by Mainland Government authorities. There is a similar reference to Mainland Government authorities’ approval in relation to the EIPU. There is also reference to the section of the Offering Circular dealing with Risk Factors. This is very comprehensive and runs to over 30 pages. Most of it deals with commercial and financial risk factors. Towards the end of this section there are further passages dealing with the Keepwell Deed and the EIPU. These are relied on by the Company as illustrating that prospective investors were warned that compliance by the Company with the terms of the Keepwell Deeds and EIPUs might require approvals from Mainland Government authorities. I will also quote them in full:

“Neither the Keepwell Deed nor the Deed of Equity Interest Purchase Undertaking from the Company is a guarantee of the payment obligations of the Issuer and the Guarantor under the Bonds and the Guarantee.

The Company will enter into the Keepwell Deed and the Deed of Equity Interest Purchase Undertaking in connection with the Bonds thereunder. See ‘Offer Structure - The Keepwell Deed’, ‘Description of the Keepwell Deed’, ‘Offer Structure - The Deed of Equity Interest Purchase Undertaking’ and ‘Description of the Deed of Equity Interest Purchase Undertaking’, Upon a breach of the Keepwell Deed or the Deed of Equity Interest Purchase Undertaking, the Trustee may take action against the Company to enforce the provisions of the Keepwell Deed or the Deed of Equity Interest Purchase Undertaking. However, none of the Keepwell Deed, the Deed of Equity Interest Purchase Undertaking or ay actions taken by the Company thereunder can be deemed as a guarantee by the Company for the payment obligations of the Issuer under the Bonds or the Guarantor under the Guarantee, Accordingly, pursuant to the terms of the Keepwell Deed, the Company will only be obliged to make sufficient funds available to the Issuer and the Guarantor or, in the case of the of Equity Interest Purchase Undertaking, undertake certain specified actions, rather than assume payment obligation as in the case of a guarantee. Furthermore, even if the Company intends to perform its obligations under the Keepwell Deed and the Deed of Equity Interest Purchase Undertaking, depending on the manner in which the Company arranges for sufficient funds to meet the payment obligations of the Issuer under the Bonds or the Guarantor under the Guarantee, such performance may be subject to obtaining prior consent or approvals from relevant PRC governmental authorities, including the NDRC, the MOFCOM and the SAFE and their respective local counterparts.

In addition, under the Keepwell Deed, the Company will undertake with the Issuer, the Guarantor and the Trustee, among other things, to cause the Issuer and the Guarantor to have sufficient liquidity to ensure timely payment of any amounts payable in respect of the Bonds and the Guarantee. However, any claim by the Issuer, the Guarantor and/or the Trustee against the Company in relation to the Keepwell Deed or the Deed of Equity Interest Purchase Undertaking will be effectively subordinated to all existing and future obligations of the Company’s subsidiaries (which do not provide a guarantee in respect of the Bonds), particularly the Company’s subsidiaries in the PRC, and all claims by creditors of such subsidiaries in the PRC will have priority to the assets of such entities over the claims of the Issuer, the Guarantor and the Trustee under the Keepwell Deed and the Deed of Equity Interest Purchase Undertaking.

Performance by the Company of its undertaking under the Deed of Equity Interest Purchase Undertaking is subject to approvals of the PRC governmental authorities

The Company intends to assist the Issuer and the Guarantor to meet their respective obligations by entering into the Deed of Equity Interest Purchase Undertaking on the Issue Date. Under the Deed of Equity Interest Purchase Undertaking, the Company agrees to purchase from a Relevant Transferor the equity interest in such Relevant Transferor’s onshore or offshore subsidiaries at a purchase price not lower than the amount sufficient to enable the Issuer and the Guarantor to discharge their respective obligations under the Bonds and the Guarantee.

Performance by the Company of the Deed of Equity Interest Purchase Undertaking is subject to the approval of or filing with:

• the NDRC or its local office in respect of the transfer of the equity interest in offshore subsidiaries from the Relevant Transferor to the Company;

• the MOFCOM or its local office in respect of the transfer of the equity interest in the onshore or offshore subsidiaries from the Relevant Transferor to the Company;

• the PRC State Administration for Industry and Commerce or its local counterpart in respect of the transfer of the equity interest in the PRC-incorporated subsidiaries from the Relevant Transferor to the Company;

• the relevant PRC tax authorities in respect of withholding tax for the Relevant Transferor; and

• SAFE or its local counterpart or commercial banks in respect of (i) changing the SAFE registration of, or in connection with, the onshore or offshore companies being sold (where applicable), and (ii) the remittance of the purchase price, denominated in U.S. dollars, from the Company in the PRC to the Guarantor in Hong Kong (where applicable).

As the approval process is beyond the control of the Company, there can be no assurance that the Company will successfully obtain either of the requisite approvals in time, or at all. In the event that the Company fails to obtain the requisite approvals, the Issuer and the Guarantor may still have insufficient funds to discharge their outstanding payment obligations to the Bondholders.

Further, in the event of an insolvency of a Relevant Transferor, any sale proceeds received by that Relevant Transferor may be subject to the insolvency claims of third parties. The Trustee’s claim against the sale proceeds will be an unsecured claim and may rank lower in priority to any claims by secured third-party creditors of such Relevant Transferor where it is the Guarantor. Where a Relevant Transferor is not the Guarantor, the Trustee will not have a direct claim against the sale proceeds received by such Relevant Transferor.”

58.  The Company puts much emphasis on the warning that the Keepwell Deed is not a guarantee[31], and that Mainland Government authorities’ approval may be required in order that payments the Company needs to make in order to comply with the Keepwell Deed or the EIPU can take place. However, the Offering Circular was clearly promoting the Keepwell Deed as having a genuine purpose and value, namely, providing additional protection for lenders to Nuoxi (as did the equivalent documents for the Kunzhi Bonds) which had no assets other than the proceeds of the Bond issue. The Keepwell Deed did not provide the security of a guarantee and the purchasers of the Bonds are warned that compliance with the Keepwell Deed by the Company might on occasions prove problematic. However, that in my view serves to demonstrate why the Keepwell Deeds and the EIPUs, should be understood as placing strict obligations on the Company, not, as the Company’s submissions on occasions veer into suggesting, justify a lenient interpretation, which requires little of it.

Keepwell Deeds

59.  In clauses 4 and 6 of the Keepwell Deeds the Company gives a number of undertakings, which are intended to ensure that Nuoxi and Kunzhi can comply with their repayment obligations under the Bonds and that HKJHC and FIHK can comply with their obligations under the guarantees. Clauses 4, 6 and 12 of the 1^st and 2^nd Nuoxi Keepwell Deeds are in identical terms, but they differ slightly to the equivalent clauses in the 1^st and 2^nd Kunzhi Keepwell Deeds, which are also in identical terms. I set out below the relevant clauses of the 1^st and 2^nd Nuoxi Keepwell Deeds and the equivalent clauses in the 1^st and 2^nd Kunzhi Keepwell Deeds to the extent that they differ materially:

(1) 1^st and 2^nd Nuoxi Keepwell Deeds:

“4. MAINTENANCE OF CONSOLIDATED NET WORTH; LIQUIDITY

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 The Guarantor undertakes that its aggregate Total Equity will not be less than HK$9,980,000 at all times.

For 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;

Total Equity means, the line item with the corresponding caption in the consolidated statement of financial position of the Guarantor, comprising the aggregate of:

(i) the amount paid up or credited as paid up on the issued ordinary share capital of the Guarantor;

(ii) the amount standing to the credit of the consolidated reserve of the Guarantor and its Subsidiaries; and

(iii) the amount attributable to non-controlling interests.”

“6. IRREVOCABLE CROSS-BORDER STANDBY FACILITY

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.”

“12. UNDERTAKINGS

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

(i) to procure that the articles of association of each of the Issuer and the Guarantor shall not be amended in a manner that is, directly or indirectly, adverse to holders of the Bonds;

(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;

(v) to procure that the Issuer will not carry on any business activity whatsoever other than in connection with the issue of the bonds and any other activities incidental thereto (which activities shall, for the avoidance of doubt, include the on-lending of the proceeds of the issue of the bonds (the Proceeds of the Bonds) to the Guarantor or the Company or as any of them may direct), and to cause such recipient of the Proceeds of the Bonds to pay the interest and principal in respect of such intercompany loan on time; and

(vi) to maintain the Guarantor as a primary overseas platform of the Company for investment holding, trading and financing.”

(2) 1^st and 2^nd Kunzhi Keepwell Deeds:

“4. MAINTENANCE OF CONSOLIDATED TOTAL EQUITY; LIQUIDITY

4.1 The Company undertakes that it shall cause:

(i) each of the Issuer and the Guarantor to have a Consolidated Total Equity of at least U.S.$1.00 (or its equivalent in any other currency) at all times. The Consolidated Total Equity of the Guarantor shall be tested by reference to the Guarantor Audited Financial Reports; and

(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.

4.2 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).

The Guarantor undertakes that its Consolidated Total Equity will not be less than U.S.$1.00 (or its equivalent in any other currency) at all times.

For purposes of this Deed:

‘Consolidated Total Equity’ 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.”

Clause 4.1(i)

60.  Clause 4.1(i) requires each of the Issuer and the Guarantor to have a Consolidated Net Worth or Total Equity[32] of at least US$1 at all times. Consolidated Net Worth is defined in clause 4.2 of the Nuoxi Keepwell Deeds as follows: “in respect of the Issuer, the Guarantor or the Company, the excess of total assets of the Issuer, the Guarantor or the Company and its consolidated Subsidiaries over total liabilities of the Issuer, the Guarantor or the Company and its consolidated Subsidiaries, total assets and total liabilities each to be determined in accordance with the Accounting Standards for Business Enterprises in the PRC consistently applied”. Consolidated Total Equity is similarly defined in clause 4.2 of the Kunzhi Keepwell Deeds. I have very little evidence about the financial positions of either Nuoxi or Kunzhi from the date the Bonds were issued until February 2019 when the Company became subject to reorganisation proceedings.

61.  There is no evidence to suggest that immediately after receipt of the proceeds of the Bonds, Nuoxi did not have paid up capital of at least US$1 or that it did not lend to other PU Group companies the money raised by the Bonds on terms at least equal to those they were subject to in terms of interest and tenor and thus had a Consolidated Net Worth of at least US$1. It is, however, inherently likely given the insolvency of the PU Group that the value of the receivables represented by the loans that are likely to have been made to other PU Group companies by Nuoxi (and Kunzhi) were impaired over time and that there came a point at which the Consolidated Net Worth of the Plaintiffs dropped below US$1. As the Issuers were subsidiaries of their respective Guarantors this in turn would have effected the consolidated Net Worth of the Guarantors.

62.  Nuoxi and Kunzhi claim that the Company had breached its obligations to them from 31 October 2020 as the management accounts available for the period ending on 31 October 2020 for both companies show Nuoxi and Kunzhi having deficits of US$15,144,797.88 and HK$1,107,761,683 respectively. The management accounts for Nuoxi do not specify a period to which they relate and consistent with this show no opening balance.

63.  The Liquidators of Kunzhi have more financial documents than the Liquidators of Nuoxi. The former have management accounts for the period 1 January 2017 to 31 December 2017 and for the years 2018 to 2019. The balance sheet for the period ending 31 December 2017 shows a negative capital of HK$160,810,459.30 representing share capital of HK$7.8 (equivalent to US$1) and a loss of HK$160,810,467.10. It will be recalled that the Kunzhi Bonds and accompanying Keepwell Deeds were executed in April and May 2018. In the subsequent year an item appears under current assets of HK$5,044,079,509.30 (US$64,667,685.90 at an exchange rate of HK$7.8 to US$1) as a receivable from FIHK, but there is no note which explains precisely what it is. The Company has not disputed the authenticity or accuracy of the of these management accounts, which are pleaded. The management accounts appear to show that at the time the Bonds were issued and the Keepwell Deeds executed Kunzhi’s Consolidated Net Worth was materially less than US$1, which means the Company was at all material times in breach of clause 4.1(i). However, this is not a matter, which is pleaded, referred to in Kunzhi’s witness statements, or was explored with Kunzhi’s witnesses or addressed in submissions. It was a matter I identified when reading the documents during the initial drafting of this judgment. In order to ensure that I had not misunderstood the accounts or their provenance I asked for further submissions from the parties.

64.  There is no dispute that the accounts are genuine. The Company did not bring to my attention any other documents, which suggest that they are inaccurate, although in its submissions the Company emphasises that they are unaudited and suggests that they are of limited value. Also it argues that as the relevant pleaded breach of clause 4.1(i) is that the Company had not caused Kunzhi “to have a Consolidated Total Equity of at least US$1 at all times from 31 October 2020, which is the most recent management accounts of the Plaintiff made available to the JLs”[33] and the particulars then refer to the 2020 Management Accounts, it is not open to Kunzhi now to argue that clause 4.1(i) had been breached at the time of execution of the Keepwell Deeds and EIPUs.

65.  In their additional submissions the Plaintiffs contend that the accounting records I have described are relevant and can properly be taken into account by the Court. They argue as follows. In [17(c)] of the Defence the Company pleads that the obligations under clause 4.1 did not arise “as (a) the performance of the alleged obligations required Relevant Approvals, and (b) PUFG [Company] has not, and could not have obtained, the Relevant Approvals”. This is repeated in [29] which pleads directly to [39] of the Amended Statement of Claim. The information contained in the 2017 accounts are relevant, the Plaintiffs argue, to an assessment of the substance of the Company’s defence and the credibility of the Company’s witnesses. I disagree. The Company has pleaded a defence to a claim that “PUFG has breached its obligations to the Plaintiff under Clause 4.1(i) of the Keepwell Deeds, as it has not caused the Plaintiff to have a Consolidated Total Equity ………….. at all times from 31 October 2020…”. It is not defending an allegation that clause 4.1(i) was breached in 2017 or 2018 as demonstrated by the fact that the Plaintiffs did not rely at trial on the management accounts for these years. Maybe it was open to the Plaintiffs to assert and prove such a claim, but they did not do so. It seems to me that it is not open to Kunzhi to argue that clause 4.1(i) was breached in 2017 or 2018 and, therefore, the management accounts for that period are relevant only as background material.

66.  That having been said it is clear, and indeed not disputed, that from 31 October 2020 the Company had not complied with clause 4.1(i). The Company, of course, says that this did not give rise to a breach because there was no prospect of the necessary approvals being obtained. I find that the Company failed to comply with clause 4.1(i) of the 1^st and 2^nd Nuoxi Keepwell Deeds from 31 October 2020 by virtue of Nuoxi not having a Consolidated Net Worth of US$1. I find that the Company failed to comply with clause 4.1(i) of the 1^st and 2^nd Kunzhi Keepwell Deeds from 31 October 2020 by virtue of Kunzhi not having a Consolidated Total Equity of US$1.

67.  In respect of the Guarantors the Plaintiffs plead[34] that HKJHC did not have a consolidated net worth of US$1 “at all material times from” 30 June 2020 relying on the unaudited financial accounts of HKJHC as showing that it had a consolidated net worth of US$18,975,399 as at 30 June 2020, which is reduced to a deficit of US$908,232,601 after taking into account the liability under the Guarantee, when it was called. The Liquidators of HKJHC have audited financial statements, which show as pleaded, a positive net equity of US$18,975,399. This becomes a deficit if the liability under the Guarantee is included. The Company has not disputed HKJHC’s liability under the Guarantee. It follows that as at 16 April 2020 when the Guarantee was called by the Trustee notifying it of the event of default under the Bonds, which I do not understand to be disputed, HKJHC did not have a Consolidated Net Worth of US$1. I, therefore, find that as at 16 April 2020 HKJHC had a Consolidated Net Worth of less than US$1. It follows that the pleaded case that at all material times from 30 June 2020 HKJHC did not have a Consolidated Net Worth of US$1 is established and I so find.

68.  In the case of FIHK it is pleaded[35] that “at all material times from 31 December 2019” FIHK did not have a Consolidated Net Worth of US$1 relying on FIHK’s reports and consolidated financial statements, which show a deficit of RMB1,154,012,000. FIHK had a positive Consolidated Net Worth of RMB1,412,933 as at 31 December 2018 and its total equity dropped below US$1 during the 2018/2019 financial year. I find that (1) at all material times from 31 December 2019 FIHK did not have a consolidated net worth of US$1, and (2) as at 31 December 2019 FIHK had negative Consolidated Net Equity of RMB1,154,012,000, which at the current exchange rate is approximately US$166,670,837.

Clause 4.1(ii)

69.  Clause 4.1(ii) requires liquidity to be provided to ensure that the Issuer or, if necessary, the Guarantor, have enough liquidity “to ensure timely payment by each of” them of any amounts payable under the Bonds or the Guarantee. It does not seem to me that this provision requires that the Company ensures that at all times following the completion of issuance of the Bonds that either the Issuer or the Guarantor are able, as the Plaintiffs argue, to satisfy all their prospective liabilities to pay future interest instalments or return the principal. This seems to me clear. First, the most natural meaning of the language of the sub-clause is that sufficient liquidity is required to ensure that a particular payment can be made as it falls due; not that all future payments can be made. Secondly, given the purpose of the fund raising achieved through the Bond issues, namely, to raise working capital for the Group it seems unlikely that it was the parties’ intention that the Group should ensure that at all times the Issuer and the Guarantor retained amounts equal to the amount outstanding under the Bond. Thirdly, this is consistent with clause 3.3(b) of the EIPUs which require the Purchase Price to include an amount equal to one interest period on the corresponding Bonds[36].

70.  In my view clause 4.1(ii) required the Issuer and the Guarantor to have sufficient liquidity to make payments as they fell due. I note that the Plaintiffs at the Tsinghua Unigroup[37] trial accepted this construction. As all the interest instalments had been paid at the time the Company became subject to the reorganisation proceedings in my view, and I so find, the Company only failed to comply with clause 4.1(ii) after the events of default occurred which was after 19 February 2020.

Clause 4.1(iii)

71.  Clause 4.1(iii) applies only to HKJHC and requires it “to have an aggregate Total Equity of at least HK$9,980,000 at all times” for both the 1^st Nuoxi Keepwell Deed and the 2^nd Nuoxi Keepwell Deed. A similar provision is not included in the Keepwell Deeds given in respect of the Kunzhi Bonds; although as I have mentioned earlier FIHK does plead that its audited financial statement for the year ending 31 December 2019 shows that its Total Equity was in deficit of RMB1,154,012,000.

72.  In the case of HKJHC it is expressly alleged that the Company failed to ensure that HKJHC had a net worth of at least HK$9,980,000. HKJHC claims that its unaudited financial statements show that as at 30 June 2020 its Total Equity was a deficit of approximately HK$7,055,196,256 being the amount of the paid up capital of US$9,980,000 and retained profits of US$8,995,399 less HKJHC’s liability under the Guarantees of US$927,208,000[38]. This has not been disputed by the Company. It follows, claims HKJHC, that the Company failed to comply with clause 4.1(iii) from 30 June 2020. This would seem to be correct, and I so find.

Did clause 4.1 require the Company to be given notice that the Plaintiffs required finance?

73.  The final paragraph of clause 4.1 of the Nuoxi Keepwell Deeds contains a provision requiring the Issuers and the Guarantors to give notice to the Company if they have insufficient liquidity. It is in the following terms: “if the issuer or the guarantor at any time determines that it will have insufficient liquidity to meet its payment obligations as they fall due, then the issuer and/or the guarantor shall promptly notify the company of the shortfall and the company will make available to the issuer or the guarantor, before the due date of the relevant payment obligations, funds sufficient to enable the issuer or the guarantor (as the case may be) to pay such payment obligations in full as they fall due.” The Company argues that the Company never received notices referred to in this sub-clause and, therefore, its obligations under clause 4.1 were never engaged. I disagree. Clause 4.1 places on the Issuers and the Guarantors an obligation to notify the Company if they have insufficient liquidity. It does not follow that the Company’s obligations are only engaged if it receives such a notice. In my view given the purpose of clause 4.1 the correct construction is as follows: the Company is obliged to take steps to ensure that the Issuers and the Guarantors have sufficient liquidity to meet their obligations. That obligation is engaged when the Company is aware that either the Issuers or the Guarantors require additional liquidity. The Issuers and the Guarantors are meant to facilitate that obligation being satisfied by giving notice, but it does not follow that if the Company is aware that the Issuers or the Guarantors require additional liquidity it only has to ensure it is provided if the Issuer or the Guarantors provide a formal notice of that requirement. The material question, therefore, is whether or not the Company did have the requisite knowledge. I accept that there is no evidence in the present case of either the Issuers or the Guarantors giving such notice, however, it seems to me clear that the Company must have been aware of their financial position by late 2019 as it clearly faced serious financial problems that led to Bank of Beijing commencing proceedings against it. I, therefore, reject the Company’s argument.

Clause 12

74.  The Amended Statement of Claim in HCA 778/2021 pleads:

“14(6) By Clause 12 of each Keepwell Deed, PUFG undertook, for so long as any of the corresponding Nuoxi Bonds are outstanding, to inter alia:-

(c) cause each of the Plaintiff and HKJHC to remain in full compliance with the terms and conditions of the corresponding Nuoxi Bonds, Guarantee, Trust Deed and all applicable laws, rules and regulations in relation to the corresponding Nuoxi Bonds in BVI (in the case of the Plaintiff) or Hong Kong (in the case of HKJHC) (see Clause 12(ii) of each Keepwell Deed);

(d) promptly to take any and all action necessary to comply with its obligations under the same (see Clause 12(iii) of each Keepwell Deed);

(e) to cause each of the Plaintiff and HKJHC to take all action necessary in a timely manner to comply with its obligations under the same (see Clause 12(iv) of each Keepwell Deed).”

“43. PUFG has also breached Clause 12(ii), (iii) and (iv) of the Keepwell Deeds since 16 April 2020.

Particulars

(1) As and for reasons pleaded above, the Nuoxi Bonds have remained outstanding since 16 April 2020, and the Plaintiff has been unable to comply and has not complied with its obligations under each of the Nuoxi Bond Conditions, Guarantees and Trust Deeds.

(2) The Plaintiff will if necessary rely on the SEHK announcements made, and the failures by the Plaintiff and HKJHC to pay amounts outstanding under the Nuoxi Bonds, as have been pleaded in paragraph 22 above.

(3) The Plaintiff will rely on PUFG’s breaches of Clause 4.1 of the Keepwell Deeds (as pleaded above), and if necessary PUFG’s breaches of Clauses 6.2 and 6.3 of the Keepwell Deed and Clause 3 of the EIPUs (as pleaded below).

(4) PUFG has accordingly:

(i) failed to cause the Plaintiff to remain in full compliance with its obligations under each of the relevant Nuoxi Bond Conditions, the Guarantees, and the Trust Deeds;

(ii) failed to take all action necessary in a timely manner to comply with PUFG’s obligations under the Keepwell Deeds; and

(iii) failed to cause the Plaintiff to take all action necessary in a timely manner to comply with its obligations under the Keepwell Deeds.

(5) The Plaintiff reserves its right to plead further, if necessary, pursuant to discovery, interrogatories, and further investigation.”

75.  Similar claims are pleaded in the other three actions. There is no dispute that the Company took no steps to comply with the Keepwell Deeds.

EIPUs

76.  The Plaintiffs also claim that the Company was in breach of each of the EIPUs. The Amended Statement of Claim in HCA 778/2021 pleads:

“14. Pursuant to each of the Keepwell Deeds:-

(1) By Clause 4.1(i) of both of the Keepwell Deeds, PUFG undertakes that it shall cause each of the Plaintiff and HKJHC to have a Consolidated Net Worth of at least US$1.00 (or its equivalent in any other currency) at all times.

(2) By Clause 4.1(ii) of each Keepwell Deed, PUFG undertakes that it shall cause each of the Plaintiff and HKJHC to have sufficient liquidity to ensure timely payment by each of the Plaintiff and HKJHC of any amounts payable under or in respect of the relevant one of the Nuoxi Bonds, and the corresponding Guarantee in accordance with the Nuoxi Bond Conditions and/or the relevant Trust Deed, and otherwise under the relevant Trust Deed and the relevant Agency Agreement.

(3) By Clause 6.2(a) and 6.2(d) of each of the Keepwell Deeds, if an Event of Default has occurred, PUFG shall as soon as practicable grant to the Plaintiff a standby facility (the ‘Standby Facility’) pursuant to which PUFG will remit to an account of the Plaintiff as soon as practicable an amount sufficient to allow the Plaintiff to satisfy the payment obligations set out in Clause 6.3 after conversion (if required) (the ‘Standby Facility Amount’) and cause the Plaintiff to use the Standby Facility Amount to discharge its obligations under the corresponding Nuoxi Bonds, Trust Deed, Agency Agreement, EIPU and Keepwell Deed.

(4) By Clause 6.3 of each of the Keepwell Deeds, in the case of an Event of Default, the Standby Facility Amount remitted under Clause 6.2 must (after taking into account exchange rate movements) be sufficient to enable the Plaintiff to discharge in full:

(a) its obligations under or in respect of the corresponding Nuoxi Bonds in accordance with the corresponding Nuoxi Bond Conditions and/or the relevant Trust Deed, and otherwise under the relevant Trust Deed and the relevant Agency Agreement (which obligations include the principal amount of the corresponding Nuoxi Bonds then outstanding and any interest due and unpaid and/or accrued but unpaid); and

(b) fees, costs, expenses and other amounts payable to the Trustee and/or the Trustee’s agents under or in connection with the corresponding Nuoxi Bonds, Trust Deed, Agency Agreement, EIPU and/or Keepwell Deed and that which may be incurred as notified by the Trustee.

(5) Pursuant to Clause 9 of each Keepwell Deed, it shall remain in full force and effect so long as any of the corresponding Nuoxi Bonds are outstanding.

(6) By Clause 12 of each Keepwell Deed, PUFG undertook, for so long as any of the corresponding Nuoxi Bonds are outstanding, to inter alia:-

(c) cause each of the Plaintiff and HKJHC to remain in full compliance with the terms and conditions of the corresponding Nuoxi Bonds, Guarantee, Trust Deed and all applicable laws, rules and regulations in relation to the corresponding Nuoxi Bonds in BVI (in the case of the Plaintiff) or Hong Kong (in the case of HKJHC) (see Clause 12(ii) of each Keepwell Deed);

(d) promptly to take any and all action necessary to comply with its obligations under the same (see Clause 12(iii) of each Keepwell Deed);

(e) to cause each of the Plaintiff and HKJHC to take all action necessary in a timely manner to comply with its obligations under the same (see Clause 12(iv) of each Keepwell Deed).

15. By Clause 3.1 of each of the EIPUs, following receipt by PUFG of a written Purchase Notice by the Trustee in accordance with the corresponding Trust Deed (in particular Clause 6.1 of each Trust Deed), PUFG shall purchase (either by itself or through a PRC-incorporated Subsidiary):

(1) the Equity Interest[39] held by HKJHC and/or any other Subsidiaries4 of PUFG incorporated outside the PRC (as designated by PUFG and notified in writing to the Trustee within three Business Days after the date of the Purchase Notice) (see Clause 3.1(i) of each EIPU); or

(2) absent such designation and notification, the Equity Interest held by all the Subsidiaries[40] of PUFG incorporated outside the PRC (see Clause 3.1(ii) of the each EIPU),

in either case for a purchase price to be determined in accordance with Clause 3.3 of each EIPU (as pleaded below) and pursuant to closing arrangements specified in Clause 3.2 of each EIPU.

16. By Clause 3.3 of each EIPU, PUFG shall determine the purchase price of the Equity Interest within 10 business days after the date of the relevant Purchase Notice (the ‘Purchase Price’) and other applicable terms, provided that the Purchase Price shall be no less than the aggregate of the following amounts (the ‘Shortfall Amount’):-

(1) the amount sufficient to enable the Plaintiff and HKJHC to discharge their respective obligations under the corresponding Nuoxi Bonds, Guarantee and Trust Deed, in full (see Clause 3.3(a) of each EIPU); plus

(2) the interest payable in respect of one interest period on the corresponding Nuoxi Bonds then outstanding as at the date of that Purchase Notice (see Clause 3.3(b) of each EIPU); plus

(3) all fees, costs and expenses and other amounts payable in connection with the corresponding Nuoxi Bonds, Trust Deed, Keepwell Deed and/or EIPU as at the date of that Purchase Notice, and all future expenses and costs which may be incurred as notified by the Trustee in that Purchase Notice (see Clause 3.3(c) of each EIPU).

…

30. Pursuant to Clause 6.1 of each of the Trust Deeds, on 30 March 2020, the Trustee issued 3 purchase notices to PUFG (with copies to the Plaintiff and HKJHC) relating to the 2020 Bonds, 2021 Bonds and 2023 Bonds substantially in the form of Schedule 1 to the EIPUs, as specified in the EIPUs (the ‘Purchase Notices’).

31. Pursuant to each of the Purchase Notices:

(1) The Trustee notified PUFG that an Event of Default had occurred pursuant to Condition 9 of the Nuoxi Bond Conditions relating to either the 2020 Bonds, 2021 Bonds, or the 2023 Bonds, and reminded PUFG of its obligation under Clause 3.1 of the relevant EIPU to purchase the Equity Interest.

(2) The Trustee further specified that for the purposes of calculating the Purchase Price as at the date of the Purchase Notice, the Shortfall Amount as at that date:

(i) In relation to the 2020 Bonds was at least US$313,061,500 (comprised of principal and payable interest) as well as fees, costs, expenses and other amounts payable as at the date of that notice to the Trustees and/or the Agent under or in connection with the 2020 Bonds, plus provisions for other fees, costs, expenses and all other amounts that may be incurred after the date of the Purchase Notice.

(ii) In relation to the 2021 Bonds was at least US$206,524,000 (comprised of principal and payable interest) as well as fees, costs, expenses and other amounts payable as at the date of that notice to the Trustees and/or the Agent under or in connection with the 2021 Bonds, plus provisions for other fees, costs, expenses and all other amounts that may be incurred after the date of the Purchase Notice.

(iii) In relation to the 2023 Bonds was at least US$414,724,000 (comprised of principal and payable interest) as well as fees, costs, expenses and other amounts payable as at the date of that notice to the Trustees and/or the Agent under or in connection with the 2023 Bonds, plus provisions for other fees, costs, expenses and all other amounts that may be incurred after the date of the Purchase Notice.

…

44. Accordingly the Plaintiff claims against PUFG for a sum which would enable the Plaintiff to fully comply with its aforesaid obligations under each of the Nuoxi Bond Conditions, the Guarantees, and the Trust Deeds, in satisfaction of PUFG's obligations under the Keepwell Deeds, and/or a sum which would enable the Plaintiff to take all action necessary in a timely manner to comply with its obligations under each of the Keepwell Deeds, being not less than the sum referred to in paragraph 36 above.”

77.  There is no dispute that the Company failed to take any steps to comply with the EIPUs. It is the Company’s case that its failure to take any steps to comply with the obligations asserted in the Amended Statements of Claim in each of the four actions are not breaches of either the Keepwell Deeds or the EIPUs as the obligations never arose because the approvals referred to clause 2.2 could not have been obtained and the obligations under clauses 4, 6, 11 and 12 of the Keepwell Deeds and also the EIPUs only arose if clause 2.2 had been satisfied; in other words clause 2.2 was a condition precedent to the obligations under clauses 4, 6, 11 and 12 of the Keepwell Deeds and the EIPUs arising. I will address the issue of the approvals that were required later, but it is convenient to dispose of the argument that clause 2.2 is a condition precedent at this point. In my view the argument is wrong. The primary obligations created by the Keepwell Deeds and the EIPUs were the steps that those deeds required the Company to take to ensure that Nuoxi and Kunzhi could make the repayments required by the terms of the Bonds. If, however, despite using its best efforts (as required by clause 2.2) the necessary regulatory approvals could not be obtained the Company is relieved of its obligations. In other words clause 2.2 is in the nature of a defence.

78.  It follows that if, as is not in dispute, the Keepwell Deeds and EIPUs have not been complied with it is for the Company to prove on the balance of probabilities that despite using its best efforts it could not obtain the necessary regulatory approvals required to make the payments, which clause 4 of the Keepwell Deeds and the EIPUs required. However, as is pleaded in [30] of the Amended Statement of Claim, which I have quoted, the obligations under the EIPUs arose at the end of March 2020; after the reorganisation proceedings had commenced on 19 February 2020.

79.  I note at this point (and for the benefit of the Beijing Court) that whilst the question of what approvals were required is a matter of Mainland law, as the Keepwell Deeds and the EIPUs are expressly governed by English law, the interpretation of the Keepwell Deeds and the EIPUs is a matter of English law. This includes, for example, what entities come within the definition of “Approval Authorities” in clause 2.2.

Best Efforts

80.  As is apparent from what I have already explained the Company took no steps to obtain any approvals. It might immediately be thought that this being the case the Company cannot rely on clause 2.2 as it has made no efforts to obtain approvals. The Company argues that this is to misconstrue how clause 2.2 applies. It says that if it is impossible to obtain the necessary approvals, and, therefore, the failure to take any steps to obtain them made no difference to the outcome, clause 2.2 is engaged.

81.  For the sake of completeness I will summarise the factual evidence that was adduced by the Company. None of the Administrators gave evidence at the trial. Factual evidence was given by three witnesses: Du Juan, who is a Senior Director of the Credit Operations Department of PKU Founder Group Finance Co. Ltd. She joined the Credit Operations Department in July 2014 and was involved in the issuance of the Nuoxi Bonds. Her witness statement contains no evidence concerning consideration by the Company, the PU Group more generally or the Administrator about complying with Keepwell Deeds or the EIPU and regulatory difficulties that might be encountered. Li Wei, a lawyer at Dentons, who is a member of the working group assisting the Administrator. It is not clear when he became involved. His witness statement also does not address this issue directly. In [13] he says this: “In any event, the Administrator also considered that performance of the Keepwell Deeds and EIPUs would not have been possible because PUFG would not have been able to obtain the required regulatory approvals”. As Mr Li does not give details of the time the “consideration” took place and how whoever was involved came to be thinking about performance of the Keepwell Deeds, this is not helpful. At the beginning of [21] he says “After the commencement of the Reorganisation Proceedings, the Administrator did not and would not have decided for PUFG to take any action” to comply with the Keepwell Deeds or the EIPUs for reasons he then goes on to explain. This is consistent with the Administrator never giving any consideration to compliance. Wu Jing is a Senior Director of the Company’s Legal Department. She joined the Company in about April 2014. She gives no relevant evidence. In the proceedings brought by FIHK (HCA 798/2021, which relates to the Kunzhi Bonds) there is an additional factual witness: Fang Laitan. He is currently the responsible person for the operation of the Operations Management Department of Peking University Resources Group Urban Development Co., Ltd and joined the resources division of the PU Group in around July 2017. He does not give any evidence in relation to compliance with the Keepwell Deeds or EIPUs.

82.  In the light of the evidence I find as fact, what as I have explained is not in any event disputed, namely, that the Company took no steps at any time to obtain the approvals, consents, licences, orders, permits or any other authorisations as might prove necessary (“approvals”) for complying with the Company’s obligations under the 1^st Nuoxi Keepwell Deed, the 2^nd Nuoxi Keepwell Deed, the 1^st Kunzhi Keepwell Deed or the 2^nd Kunzhi Keepwell Deed or took any steps at any time to consider what approvals might be required in order for the Company to comply with its obligations under any of the four Keepwell Deeds, the four EIPUs or what the prospects were of obtaining such approvals as might be required. I now turn to consider the authorities, which consider what the obligation to use one’s best efforts to comply with the terms of a contract requires.

83.  The Company accepts that the term “best efforts” is synonymous with the more commonly used term “best endeavours” and is more onerous than the also commonly found obligation to use “reasonable endeavours”[41]. “Best endeavours” is explained in IBM United Kingdom Ltd v Rockware Glass Ltd[42], in which the duty is described as being “to take all reasonable steps which a prudent and determined man acting in his own interest and anxious would have taken”[43]. This formulation has been applied in Hong Kong in, for example, Tam King Hang v Yuen Lei Gwun[44].

84.  I understand the principles that I have just stated to be uncontroversial. What requires further consideration is how a “best efforts” obligation applies if no efforts were taken. The Company approached this issue by relying on the judgment of VK Rajah JA in the Singapore Court of Appeal’s decision in KS Energy Services Ltd v BR Energy (M) Sdn Bhd[45]. After a detailed consideration of case law commencing in [42] Rajah JS identifies what he considers are the principles that emerge from the authorities. I will quote the relevant paragraph, but note that the Company does not suggest that the Judge’s first conclusion, namely, that the test for determining whether “all reasonable endeavours” have been used is no different from the test for determining whether “best endeavours” have been used, is the position in Hong Kong, although as is apparent on a close reading of [93] in practice there is probably no difference given what the Singapore Court of Appeal found to be the test for “all reasonable endeavours”.

“93. The foregoing cases are the more significant cases to have originated from the English and Scottish courts on ‘all reasonable endeavours’ clauses and ‘best endeavours’ clauses. The available commentaries in this area of the law (and these tend to be professional rather than academic) tend to agree that there is a great deal of uncertainty surrounding the obligations imposed by the various ‘endeavours’ clauses. The typical advice in these commentaries is for the parties to expressly specify the criteria by which satisfaction of such clauses is to be assessed. This lack of certainty is unfortunate. Be that as it may, following on our holding (at paragraph 62 above) that the test for determining whether an ‘all reasonable endeavours’ obligation has been satisfied should ordinarily be the same as the test for determining whether a ‘best endeavours’ obligation has been satisfied (ie, the Travista test), we also endorse the guidelines below vis-à-vis the operation and extent of both ‘all reasonable endeavours’ and ‘best endeavours’ clauses:

(a) Such clauses require the obligor ‘to go on using endeavours until the point is reached when all reasonable endeavours have been exhausted’ (see Yewbelle (HC) at paragraph 123 and Yewbelle (CA)), or ‘to do all that it reasonably could’ (see Jet2 (CA) at paragraph 31).

(b) The obligor need only do that which has a significant (see The Talisman) or real prospect of success (see Yewbelle (HC) and Yewbelle (CA)) in procuring the contractually-stipulated outcome.

(c) If there is an insuperable obstacle to procuring the contractually-stipulated outcome, the obligor is not required to do anything more to overcome other problems which also stood in the way of procuring that outcome but which might have been resolved (see Yewbelle (CA)).

(d) The obligor is not always required to sacrifice its own commercial interests in satisfaction of its obligations (see CPC Group), but it may be required to do so where the nature and terms of the contract indicate that it is in the parties' contemplation that the obligor should make such sacrifice (see Jet2 (CA)).

(e) An obligor cannot just sit back and say that it could not reasonably have done more to procure the contractually-stipulated outcome in cases where, if it had asked the obligee, it might have discovered that there were other steps which could reasonably have been taken (see EDI).

(f) Once the obligee points to certain steps which the obligor could have taken to procure the contractually-stipulated outcome, the burden ordinarily shifts to the obligor to show that it took those steps, or that those steps were not reasonably required, or that those steps were not reasonably required, or that those steps would have been bound to fail (see EDI).”

85.  The Company places much reliance on [93(c)] and suggests that it is to be understood as establishing that if the contractually stipulated outcome could never have been achieved the obligor is not required to do things, which would have been of no utility. In the present case, the Company argues that if the necessary approvals could never have been obtained the failure to make any effort to obtain them does not prevent it relying on clause 2.2 because it made no difference to the outcome. I accept that as a broad principle this is correct. However, an obligor who had taken no steps to comply with a “best efforts/endeavours” obligation will have to prove by cogent evidence that this is the case. Generally, this will require the obligor to show what it would have had to do to comply with its obligation and further show why it would have been prevented from doing so.

86.  In the present case, in my view there is a material difference between what the Company has to show in respect of a failure to comply with the Keepwell Deeds or the EIPUs before the reorganisation commenced on 19 February 2020 and after it had commenced. I address the expert evidence on what the difficulties were in obtaining approval generally and, in particular, after the reorganisation had commenced in the next section. It seems to me clear that once the Company was in reorganisation there was no realistic likelihood of approvals being given to transfers out of the Mainland. This would simply have depleted assets available to the Administrators and the Company, which would otherwise be available to Mainland creditors or financing and implementing the reorganisation. However, the position was, in my view, different before the reorganisation.

87.  I have found that FIHK did not have a Consolidated Net Equity of US$1 as at 31 December 2019; it had a deficit of approximately US$166,670,837. It follows that the Company was in breach of the Keepwell Deed at that date and, presumably, for at least sometime before. The Company cannot say, and indeed has not, that it failed to ensure, as required by clause 4.1(i), that FIHK had the specified net worth because of the reorganisation process. The Company has to explain why it had taken no effort to ensure clause 4.1(i) was complied with at the end of December 2019. It has adduced no evidence of this at all. It follows that I find the Company has failed to prove that it used its best efforts to obtain the necessary approvals and, as clearly it had not complied with its obligations under the Keepwell Deeds and the EIPUs, the Company breached its obligations under clause 4.1(i) of the Kunzhi Keepwell Deeds in respect of FIHK. I address the resulting loss in [92]–[94].

Regulatory Approvals

88.  Most of the evidence at the trial consisted of Mainland witnesses opining on Mainland Bankruptcy Law and the scope and operation of the Mainland regulations governing foreign currency transactions. The evidence was not directed to a consideration of any particular transaction or type of transaction. There was no evidence adduced by the Company about how it expected, or would normally expect, to service its foreign debt. As a result, the evidence was general and fairly academic. For example, Madam Liu Hongyu, who gave evidence for the Plaintiffs, was cross-examined on her evidence that she would not have expected the Company to encounter any particular difficulty in obtaining foreign exchange approval to transfer money out of the Mainland to fund the repayment of Nuoxi or Kunzhi’s liabilities prior to the Company becoming subject to the reorganisation proceedings. Mr Maurellet suggested to Madam Liu that this was not the case, because, as I understood the assumption that underpinned his question, approval could not be obtained from SAFE for what would be treated by SAFE as a loan by a Mainland company to repay an offshore loan and as it would not be considered as, to quote Mr Maurellet, “a genuine authentic loan” because the Company would not acquire anything the regulator would consider of value. I suggested to Mr Maurellet this was difficulty to follow, because it seemed reasonable to assume the Company would have a commercial interest in its subsidiary honouring its liabilities otherwise the Company’s ability to borrow foreign currency in the future would be jeopardised. This argument makes a little more sense in respect of the EIPUs, because the EIPUs require the acquisition of companies for the value of the outstanding sums due under the Bonds, although the companies’ value might be materially less, and, therefore, their acquisition would confer no commercial benefit other than the ancillary one of allowing the PU Group’s foreign debt to be serviced.

89.  The Company had adduced no factual evidence as to how it had intended to finance Nuoxi and Kunzhi’s repayment obligations. It was only during the cross-examination of Mr Zhang[46] and Ma Shaobo, who had worked for SAFE and been the director of its Investment Administration Division until 2010 before joining Goldman Sachs, and who now runs his own investment advisory firm, that evidence began to emerge about how in practice repayment of the principal might be financed—it remained unclear how interest might be repaid. In practice the most likely method of repaying the principal was explained by Mr Zhang as follows: “the second aspect is, as a matter of practice, this type of bond issuance will be refinanced when the bond matures, so a new bond will be issued to refinance, to repay the existing bond, so that’s how the structure works under rollover basis, if everything goes fine”. Mr Ma identified two further methods, namely, the repurchase of onshore foreign direct investment (presumably denominated in a foreign currency) or to quote Mr Ma “to make use of cash to support overseas investment or to move the fund offshore to support overseas projects stop so the project should be genuine project, and the prerequisite should be it is in accordance with the country’s direction concerning assets”.

90.  In the absence of any evidence from the Company about how it did finance the interest payments that were made, how it intended to repay the principal or what it could have done to honour its obligations under the Keepwell Deeds and EIPUs, the expert evidence is largely hypothetical. What can, however, be said in my view with confidence is as follows. First, which is not in dispute, that the Keepwell Deeds, Guarantees and EIPUs were genuine, lawful under Mainland law and the necessary approvals for them had been obtained from the NDRC. Secondly, that regulatory approval would have been necessary to exchange RMB into US$ and transfer the US$ out of the Mainland or to transfer RMB to Hong Kong with a view to its exchange into US$ and its subsequent use to pay foreign creditors sums due under the Keepwell Deeds or the Guarantees. I did not understand this to be disputed. It seems to me highly probable that the Company would have had difficulty in obtaining the necessary approvals once the Company became subject to the reorganisation proceedings in February 2019. It may be that given the deteriorating financial position of the PU Group it would have been difficult to obtain the necessary approvals sometime before February 2019, but given the paucity of evidence adduced by the Company about its financial position or plans, it is impossible to say when this might have become the case. More generally the question of whether approval could have been obtained after the reorganisation proceedings were commenced is very much a fact sensitive issue. There is no evidence to suggest that the PU Group were concerned about the damage done to PU Group’s future prospects of borrowing foreign currency or a need for it to obtain in the short to medium term foreign currency to implement the reorganisation plan. Indeed, the Company’s response to the claims made in these four actions suggests it is not concerned about foreign debt markets’ response to its defaults and attitude to compliance with the Keepwell Deeds and the EIPUs. It seems to me that, realistically, absent the Administrator supporting an application for approval to transfer US$ out of the Mainland as part of the reorganisation plan’s implementation, regulatory approval was very unlikely to be obtained.

91.  The Company also argues that once the Administrator had been appointed it became one of the “Approval Authorities” under clause 2.2 and it would not give (and of course did not give) approval to any payments being made pursuant to the Keepwell Deeds or EIPUs. Although, the Mainland experts gave evidence on whether the Administrator constituted a separate entity to the Company for these purposes and should be treated as an Approval Authority, this is a question of English law. The issue is whether an insolvency officer, which is in substance the Administrator’s capacity, comes within the term Approval Authority in these English law agreements. An “authority” is not as a matter of language a term, which is normally used to describe a liquidator or similar officer. In the context of clause 2.2 it is plainly intended to refer to “PRC governmental authorities, including the NDRC, the MOFCOM and the SAFE and their respective local counterparts” to quote from the Offering Circular. It seems to me that the “Approval Authorities” did not include the Administrator.

Loss

92.  I have found that the Company is only liable for a breach of the Keepwell Deeds in respect of FIHK. The Company argued that in the event that I found for the Plaintiffs on liability I should reject the claim that the breaches caused loss. This was on the basis that I should take into account the subsequent reorganisation, with the consequence that there was no prospect of obtaining the necessary approvals. Given my reasoning this point falls away. I accept that once the reorganisation commenced there was no realistic prospect of obtaining approval, but that is irrelevant to an assessment of what the consequence was of the Company not ensuring that FIHK had a positive Consolidated Net Equity as at 31 December 2019 as it was obliged by the terms of the Keepwell Deeds to do. The Company argues that when considering what that consequence was it is the loss caused to the individual Issuers and Guarantors that needs to be determined, not the loss suffered by the Bond holders because of the Issuers and Guarantors failing to honour their obligations under the Bonds and Guarantees. With this I agree. The Company goes onto argue that if the Company had transferred monies to an Issuer or Guarantor, it would have been treated as a loan. The consequence, says the Company, is that the net balance sheet position would not have improved. The flaw in this argument is that if the advance made by the Company did not improve the net balance sheet position because of the way the advance was treated in the books of FIHK (I shall assume as it is the relevant Guarantor) the Consolidated Net Equity would have remained (RMB1,154,012,000). The Keepwell Deed required the Company to ensure that the Consolidated Total Equity was US$1 and if that meant it had to make a gift to FIHK to achieve that result, that was what was required. This also disposes of the Company’s argument that the Issuers and the Guarantors do not have standing to sue, because any breach of the Keepwell Deeds or EIPUs only caused loss to the Bond holders and any action should have been brought by the Trustee.

93.  It seems to me that the correct analysis of the consequence of the breach in the absence of any evidence from the Company is that it caused loss to FIHK by at the amount it should have, but did not receive, namely, RMB1,154,012,000.

94.  If I determined in the other three actions that the pleaded breaches had occurred, I would have found that the resulting loss was that claimed as the Company had made no effort to demonstrate that the amounts required to be paid by the Company to comply with the Keepwell Deeds was a different figure.

Determination and Conclusion

95.  I dismiss each of HCA 778, 1418 and 1442/2021 and make a costs order nisi that the Plaintiffs in those three actions pay the Company’s costs, such costs to be taxed if not agreed, with a certificate for three counsel.

96.  In the case of HCA 798/2021 I will make a declaration that the Company breached the Keepwell Deeds dated 17 April 2018 and 21 May 2018 and caused loss to FIHK in the sum of the US$ equivalent as at 31 December 2019 of RMB1,154,012,000. I will make a costs order nisi that the Company pay FIHK’s costs of the action, such costs to be taxed if not agreed, with a certificate for three counsel.