1 . Case Facts

（A）Basic Information

Plaintiff: CITICORP INTERNATIONAL LIMITED

Defendant: TSINGHUA UNIGROUP CO., LTD

Nature of the Case: Issues related to the enforceability of the “Equity Purchase Agreement” and the guarantee regarding subsidiary liabilities under bonds issued by a Mainland China company

Court: High Court of the Hong Kong Special Administrative Region

Case Number: HCA 1269/2021

Judgment Date: June 15, 2023

（B）Case Overview

1. 1. Company Overview

TSINGHUA UNIGROUP CO., LTD (hereinafter referred to as “Tsinghua Unigroup”) was formerly the Tsinghua University Science and Technology Development Corporation, established in 1988 by Tsinghua Holdings Limited and renamed to its current name in 2005. As of a specific date, the company’s ownership structure is as follows: Tsinghua Holdings Limited holds 51%, and Beijing Jiankun Investment Group Co., Ltd. holds 49%. Tsinghua Holdings Limited is a wholly-owned subsidiary of Tsinghua University, which is supervised by the Ministry of Education and the Ministry of Finance of China. The university’s funding primarily comes from financial support provided by the Ministry of Finance.

1. 2. Bond Issuance

On December 10, 2015, a subsidiary of Tsinghua Unigroup, Unigroup International Holdings Ltd (hereinafter referred to as the “Issuer”), issued a USD 350 million guaranteed bond due in 2020 with an interest rate of 6%. CITICORP INTERNATIONAL LIMITED served as the bond trustee, and the bond was guaranteed by Tsinghua Unigroup International Ltd. (hereinafter referred to as the “Guarantor”). Both the Issuer and the Guarantor are indirect wholly-owned subsidiaries of Tsinghua Unigroup. On the same day, the Issuer, Guarantor, Tsinghua Unigroup, and the Trustee jointly signed the Keepwell Deed and the Equity Purchase Agreement (EIPU). On April 11, 2016, the Issuer issued another USD 100 million guaranteed bond due in 2020 with an interest rate of 6%. According to Clause 15 of the 2020 bond terms, this bond was consolidated into the same series as the previously issued bonds, and both the Keepwell Deed and the Equity Purchase Agreement applied to all the bonds.

1. 3. Financial Distress and Bond Default

In November 2020, Tsinghua Unigroup encountered financial difficulties. On November 10, a task force was assigned to address the related issues. On November 16, Tsinghua Unigroup failed to redeem RMB 1.3 billion worth of bonds maturing in Mainland China. On December 7, the Guarantor (as the lender) and Tsinghua Unigroup (as the borrower) signed a loan agreement, providing a loan of USD 523 million to Tsinghua Unigroup. Subsequently, the 2020 bonds defaulted. On December 10, when the bonds matured, the Issuer and Guarantor failed to redeem the principal and defaulted on the bond interest payments. On December 11, the Issuer and Guarantor informed the Trustee about the default on the Mainland China bonds on November 16 and the failure to pay the principal of the 2020 bonds on December 10. On December 30, the Trustee formally notified the Issuer, Guarantor, and Tsinghua Unigroup in writing, declaring that the 2020 bonds were immediately due for payment, including both principal and accrued interest.

1. 4. Restructuring Process and Subsequent Developments

On July 16, 2021, Tsinghua Unigroup entered into a restructuring process. On July 23, 2021, the Trustee issued a triggering notice under Clause 7.2 of the Keepwell Deed, demanding the payment of principal and interest (at that time, USD 462.676 million) as well as USD 6,000 in incurred and future fees. At the same time, a purchase notice was issued under Clause 3.1 of the Equity Purchase Agreement. On August 23, 2021, the Trustee updated the triggering notice, revising the payable amount to USD 481.61726667 million in principal and interest, along with USD 100,000 in incurred and future fees, and updated the purchase notice under Clause 3.1 of the Equity Purchase Agreement. On July 13, 2022, the restructuring was terminated, and Tsinghua Unigroup resumed its ongoing operations.

（C）Judgment Result

The court issued a judgment in favor of the Trustee, in the amount of USD 483,843,533. This amount is based on the revised Claim Statement, Article 48, and the Request, Article 1, and specifically includes: (1) Principal of USD 449,200, along with accrued contractual interest of USD 34,513,533.33, calculated at a 6% annual rate according to Clause 5 of the 2020 bond terms, as of September 20, 2021; (2) Unpaid fees of USD 130,000 incurred by the Plaintiff as of September 20, 2021, under Clause 9 of the Trust Deed. Regarding the issue of interest after September 20, 2021, since no related claims were made before the court, the court ordered that interest be paid at the statutory rate from the date of the judgment. Additionally, the court issued an interim costs order, requiring Tsinghua University to pay the Trustee’s costs. If the parties cannot reach an agreement, two lawyers will issue a certificate to verify and calculate the fees.

2 . Disputed Legal Issues, Judge’s Conclusion, and Reasoning

（A）Interpretation of the Terms and Fulfillment of Obligations in the Keepwell Deed and the Equity Purchase Agreement (EIPU)

1. Disputed Focus: The specific meaning of the terms in the Keepwell Deed and EIPU, particularly regarding under what circumstances Tsinghua Holdings has the obligation to ensure that the Issuer and Guarantor maintain the appropriate financial status (such as maintaining net assets and liquidity) and perform the equity purchase, and whether fulfilling these obligations is conditional on obtaining regulatory approval and how to determine whether there was an effort to obtain such approval.

2. Judge’s Conclusion: Tsinghua Holdings failed to prove that it made an effort to obtain regulatory approval and cannot be exempted from fulfilling its obligations under the Keepwell Deed and EIPU solely on the grounds of not obtaining regulatory approval. The court concluded that Tsinghua Holdings violated the relevant terms.

3. Reasoning Basis: Clause 4 of the Keepwell Deed clearly stipulates that Tsinghua Holdings is required to ensure the financial condition of the Issuer and Guarantor, such as Clause 4.1, which requires ensuring that the Issuer and Guarantor maintain certain levels of net assets and liquidity. Clauses 4.2 and 4.3 impose net asset requirements on both Tsinghua Holdings itself and the Guarantor. Furthermore, Clause 15.1 emphasizes Tsinghua Holdings’ obligation to ensure that the Issuer and Guarantor comply with the bond terms and applicable laws and regulations. Clause 3.1 of the EIPU outlines Tsinghua Holdings’ obligation to purchase equity after a default event, contingent upon obtaining the necessary approval. These provisions constitute clear contractual obligations for Tsinghua Holdings. Additionally, Tsinghua Holdings failed to provide evidence showing that it had actively considered ways to fulfill its obligations or made substantial efforts to obtain regulatory approval. According to the testimony of Yang Xiaowen, after Tsinghua Holdings became aware of the bond maturity and financial issues in 2020, it did not formulate a plan to ensure funds were provided to the Issuer and Guarantor, nor did it inquire with the approval authorities or prepare application documents. Instead, it only defended itself after the fact by citing the failure to obtain approval, which does not meet the “best efforts” requirement. For example, in December 2020, when Tsinghua Holdings had the ability to allocate funds (such as those involved in the Guarantor’s loan agreement), it did not use those funds to fulfill the obligations under the Keepwell Deed or EIPU. Instead, the funds were used to resolve internal group debts, indicating that Tsinghua Holdings did not prioritize the interests of bondholders and its own contractual obligations.

（B）Whether Tsinghua Holdings’ Defense of Regulatory Approval is Valid

1. Disputed Focus: Tsinghua Holdings claims that it was unable to fulfill its obligations under the Keepwell Deed and EIPU due to the failure to obtain regulatory approval. The issue is whether this defense aligns with the contractual provisions and legal requirements, and how to determine whether Tsinghua Holdings made an effort to obtain the necessary regulatory approval.

2. Judge’s Conclusion: Tsinghua Holdings failed to prove that its inability to obtain regulatory approval was due to obstacles that could not be overcome despite making efforts. Therefore, the defense is not valid.

3. Reasoning Basis:Firstly, insufficient evidence. Although Tsinghua Holdings claimed that multiple departments (such as the State Administration of Foreign Exchange, Ministry of Commerce, National Development and Reform Commission, Ministry of Education, Ministry of Finance, etc.) required regulatory approval, it failed to provide evidence showing that it had applied to these departments or taken any specific actions to obtain the approval. Yang Xiaowen’s testimony indicated that he was not involved in the approval application process and did not receive instructions to explore or prepare for the relevant approval matters. His claim of being unable to obtain approval was based solely on assumptions, without concrete actions or supporting evidence. Secondly, contradiction with other evidence. According to the Guarantor’s loan agreement, Tsinghua Holdings had the ability to arrange funds in December 2020 but did not use those funds to fulfill its obligations under the Keepwell Deed. Instead, the funds were allocated for internal group debt arrangements. This contradicts Tsinghua Holdings’ claim that it could not provide funds due to regulatory restrictions, further undermining the credibility of its defense. Thirdly, inconsistency with the issuance documents. The “important notices” and related content in the bond issuance documents indicated that, while regulatory approval might affect Tsinghua Holdings’ ability to fulfill its obligations, it also gave investors the impression that obtaining approval was possible. This contrasts with Tsinghua Holdings’ current claim of being unable to obtain approval, and the statements in the issuance documents should be accurate; otherwise, they could be considered misleading.

（C）Whether Tsinghua Holdings’ Other Defenses Are Valid

1. Disputed Focus: Tsinghua Holdings raised several other defenses, such as the Trustee’s claim being discharged in the restructuring process, the failure to meet preconditions for fulfilling obligations, the expiration of the statute of limitations, the lack of substantial significance or enforceability of relevant terms, and that the Guarantor’s loan does not constitute a default or cause loss. The issue is whether these defenses align with legal provisions and the facts of the case.

2. Judge’s Conclusion: Except for the need for further analysis regarding whether the Trustee’s claim has been discharged and the issue of damages, the other defenses raised by Tsinghua Holdings are not valid.

3. Reasoning Basis: Firstly, the Trustee’s claim has not been discharged. Tsinghua Holdings argued that the Trustee’s claim had been discharged due to the submission of a proof of claim in the restructuring process. However, the Trustee did not have substantial involvement or handling in the restructuring process, and the claim was merely placed in a “pending” status. There is no evidence showing that the Trustee had voting rights, participated in creditors’ meetings, or received any notice of restructuring payments. Therefore, Tsinghua Holdings’ defense on this point is not valid. Secondly, the preconditions for fulfilling obligations do not exist. Tsinghua Holdings claimed that it needed to receive notice from the Issuer or the Guarantor before fulfilling its obligations. However, the judge had previously rejected this argument, stating that this is not a precondition for Tsinghua Holdings to fulfill its obligations under Clause 4 of the Keepwell Deed. Thirdly, statute of limitations issue. Tsinghua Holdings argued that the Trustee had no cause of action after a specific date. However, the Trustee had actively asserted its rights, and Tsinghua Holdings failed to provide sufficient evidence that the statute of limitations had expired or that the Trustee had been negligent in exercising its rights. Therefore, this defense is not supported. Fourthly, lack of proof regarding the significance and enforceability of the terms. Tsinghua Holdings’ defense that the terms lack substantial significance or enforceability lacks sufficient basis. The relevant terms were clearly stipulated in the contract and constitute part of the contractual obligations. Tsinghua Holdings did not prove that these terms were invalid or unenforceable under any legal grounds. Fifthly, issues with the Guarantor’s loan. Tsinghua Holdings argued that the Guarantor’s loan did not constitute a default and had not caused any loss. However, the judge found that the loan agreement indicated that Tsinghua Holdings, when it had funds available to allocate, did not prioritize fulfilling its obligations under the Keepwell Deed. Furthermore, Tsinghua Holdings failed to provide sufficient evidence regarding its financial condition and loss situation. Therefore, the defense regarding the loss was not valid.

（D）Determination and Calculation of Losses

1. Disputed Focus: Whether the losses claimed by the Trustee are valid, how to determine the scope of the losses, including the calculation of bond principal, interest, fees, and whether Tsinghua Holdings’ defense regarding the losses is reasonable.

2. Judge’s Conclusion: The Trustee is entitled to compensation, and the scope of the loss includes the bond principal, interest, and related fees. However, the specific calculation must be based on accurate financial data and legal provisions. Tsinghua Holdings’ defense regarding the loss is not valid.

3. Reasoning Basis: Firstly, Existence of Losses: Due to Tsinghua Holdings’ breach of the Keepwell Deed and EIPU obligations, the bondholders failed to receive timely payments of principal and interest, resulting in actual losses. According to contract law, the breaching party must compensate the non-breaching party for the losses caused by the breach. Therefore, the Trustee is entitled to seek compensation. Secondly, Loss Calculation Elements: The loss includes the bond principal of USD 449,200, accrued interest of USD 34,513,533.33, calculated at a 6% interest rate as of September 20, 2021, according to the bond terms, as well as unpaid fees of USD 130,000 incurred by the Trustee under Clause 9 of the Trust Deed as of September 20, 2021. Subsequent interest will be calculated from the judgment date at the statutory rate. Thirdly, Tsinghua Holdings’ Defense is Unreasonable: Tsinghua Holdings argued that the Guarantor’s loan agreement did not cause any loss. However, it failed to provide sufficient evidence to prove the financial situation of the Guarantor and the actual impact of the loss. Moreover, Tsinghua Holdings did not actively fulfill its obligations to prevent the loss. Therefore, this defense is not valid. Additionally, when determining the loss, the loss at the time of the breach (the bond maturity date on December 10, 2020) should be considered. However, Tsinghua Holdings did not provide evidence regarding its financial situation at that time, making it impossible to accurately assess the specific impact of its breach on the loss.

III. Analysis of the Application of Chinese Law

（A）Nature and Validity of the Keepwell Deed and EIPU in US Dollar Bonds under Chinese Law

1. Disputed Focus: Whether the Keepwell Deed and EIPU are guarantee contracts or other types of contracts under Chinese law, and whether they are valid and can be recognized and enforced by Chinese courts.

2. Conclusion: In terms of nature, according to the “Interpretation of the Civil Code” and relevant civil regulations such as the “Nine Civil Guidelines” and the “Interpretation of the Civil Code’s Guarantee System,” the Keepwell Deed and EIPU do not constitute guarantee contracts under Chinese law. They are considered credit enhancement measures outside of guarantees and debt assumption, and therefore, are independent contracts. Bondholders can claim the responsibility for breach of agreement from the signatories based on contract law and guarantee law.

Regarding validity, according to financial regulatory norms such as the “Notice on Promoting the Reform of Foreign Debt Issuance and Registration Management” and the “Foreign Exchange Management Regulations on Cross-Border Guarantees,” the external debt registration obligation and foreign exchange registration obligation must also be fulfilled. Failure to comply with the latter does not render the contract invalid, nor does it constitute a cross-border guarantee measure under the “internal guarantee, external loan” scheme, nor does it violate public interests.

3. Reasoning: To determine the validity of the Keepwell Deed and EIPU under Chinese law, it is necessary to consider both the type and validity of this credit enhancement measure in the context of the Civil Code, as well as whether it violates the public policy of China’s mainland financial regulatory system.

Firstly, The Determination of the Nature of the Keepwell Deed and EIPU in US Dollar Bonds under the Civil Code

（ B ）Legal Provisions Regarding Credit Enhancement Measures in the Civil Code and Its Judicial Interpretations

Article 91 of the “Nine Civil Guidelines” first categorized and distinguished the legal nature of credit enhancement measures: “If a third-party supplement, performance guarantee for repurchase obligations, liquidity support, or similar commitments are provided by a party other than a trust contract as credit enhancement measures, and their content complies with the legal provisions regarding guarantees, the people’s court should recognize the formation of a guarantee contract between the parties. If the content does not comply with the legal provisions on guarantees, the rights and obligations will be determined based on the specific content of the commitment documents, and the corresponding civil liabilities will be determined according to the facts of the case.” Article 681 of the Civil Code stipulates: “A guarantee contract is a contract in which the guarantor and the creditor agree that when the debtor fails to fulfill the due debt or other situations agreed upon by the parties arise, the guarantor will fulfill the debt or assume responsibility to secure the realization of the creditor’s claim.” Additionally, Article 36 of the Supreme People’s Court’s “Interpretation on the Application of the Civil Code’s Guarantee System” further refines this: “If a third party provides supplementary guarantees, liquidity support, or similar commitments as credit enhancement measures to the creditor, with the intention of providing a guarantee, and the creditor requests the third party to bear the guarantee responsibility, the people’s court shall handle the case in accordance with the relevant provisions on guarantees. If the third-party commitment document indicates an intention to join or jointly assume responsibility with the debtor, the people’s court shall recognize it as a “joining” as stipulated in Article 552 of the Civil Code. If it is difficult to determine whether the third-party commitment document falls under a guarantee or joining, the people’s court shall treat it as a guarantee. If the third-party commitment document does not fall under the above-mentioned categories, and the creditor requests the third party to bear the guarantee or joint responsibility, the people’s court will not support it, but this does not affect the creditor’s right to request the third party to fulfill the agreed obligations or assume the corresponding civil liability based on the commitment document.” Therefore, under the context of the Civil Code, credit enhancement measures can be divided into three categories: guarantee, debt assumption, and other measures that cannot be classified under the first two categories. []

（ C ）Determination of the Type and Nature of the Keepwell Deed Based on the Civil Code and Judicial Interpretations

Judge Fuwang believes that the Keepwell Deed and EIPU should be recognized as legally binding credit enhancement measures, rather than guarantees or debt assumption agreements. The reasoning is twofold: On the one hand, “The creditor adopts various credit enhancement measures instead of guarantees because their true intention is that ‘if certain conditions are triggered, the party obligated to provide supplementary payments should pay,’ without necessarily requiring the principal debtor’s non-performance. This approach can significantly reduce costs in cross-border transactions. If it were recognized as a guarantee, it would involve restrictive rules such as the guarantor’s right to claim priority, corporate guarantees to third parties, guarantee periods, and priority repayment in mixed guarantees, among others. These restrictions would bring many inconveniences to cross-border creditors and debtors, and may even harm the interests of both parties.” On the other hand, “Parties are generally unwilling to use standard guarantee methods for economic reasons, such as the fact that guarantee measures need to be recorded in the company’s financial reports. Listed companies must disclose contingent liabilities regarding guarantees, which would contradict the parties’ intentions. Additionally, in countries with foreign exchange and foreign debt controls, cross-border guarantees require approval or are subject to stringent review, increasing costs for the parties involved.” I also agree with this viewpoint. In this case, Clause 2.2 of the Keepwell Deed explicitly states that the agreement is not a guarantee contract, and its primary obligation is to ensure the Issuer and Guarantor maintain certain financial conditions and, under specific circumstances, provide funding or purchase equity, rather than directly assuming debt. As Professor Zhu Xiaozhe stated, “If contracts with guarantee functions are all interpreted in the direction of a guarantee, leading to the concept of ‘generalized guarantees,’ it will cause judges in judicial practice to neglect the specific characteristics of the transaction relationship, and even disregard the parties’ intentions by relying on the typical guarantee interpretation. The end result will be to limit the autonomy of civil subjects and suppress financial guarantee innovations in the market.” In conclusion, the Keepwell Deed and EIPU should be regarded as independent agreements, i.e., legally binding credit enhancement measures, and are not considered guarantees or debt assumption agreements. Bondholders can claim the responsibility for breaching such agreements from the signatories, and the court should support this claim based on contract law and guarantee law.

Secondly, Determination of the Validity of the Keepwell Deed and EIPU Based on Public Policy Considerations in Financial Regulation

In the case involving US dollar bonds, referred to as the “Time and Fund Case,” the plaintiff argued that although the Keepwell Deed explicitly states that it is not a guarantee, its substance meets the essential elements of a guarantee, and its purpose is to circumvent guarantee law and the Mainland financial regulatory system, which constitutes a violation of public social interests. Therefore, this case also requires consideration of the public policy review issue in the recognition and enforcement of such agreements. The following analysis is conducted from the perspective of foreign debt and foreign exchange regulation.

Firstly, Foreign Debt Management Policy Requires Debt Registration and Filing. In 2015, the National Development and Reform Commission (NDRC) issued the “Notice on Promoting the Reform of the Enterprise Foreign Debt Registration System” (Fagaiwaizi [2015] No. 2044), which abolished the quota approval system and implemented a registration system for managing foreign debt. If the registration process is absent, it is likely to be regarded as a violation of the relevant regulatory policies, and such a judgment may not be recognized or accepted by Mainland courts. In the present case, it is unclear whether the issuer has complied with the foreign debt registration obligation, and further factual details are needed to clarify this.

Secondly, Foreign Debt Repayment May Involve Foreign Exchange Usage, Hence Foreign Exchange Management Is an Important Practical Consideration. In 2014, the State Administration of Foreign Exchange (SAFE) issued the “Cross-border Guarantee Foreign Exchange Management Regulations” and its operational guidelines, which set out post-event regulatory management measures and abolished all pre-approval procedures. The most important point in these regulations is that it explicitly states that the approval, registration, or filing of cross-border guarantee contracts by the foreign exchange administration, along with other management matters and requirements stipulated in the regulations, do not constitute prerequisites for the effectiveness of a cross-border guarantee contract.

Therefore, under the above regulations, foreign guarantees containing Keepwell Deeds will not be directly deemed invalid based on contract law. However, whether such Keepwell Deeds constitute “internal guarantees for external loans” remains a matter of dispute. ^[]Article 7 of the 2014 “Cross-border Guarantee Foreign Exchange Management Regulations” stipulates: “An ‘internal guarantee for external loans’ refers to a cross-border guarantee where the guarantor is registered in Mainland China, and both the debtor and creditor are registered outside of China. ‘Internal guarantees for external loans’ and ‘external guarantees for internal loans’ are subject to registration management, while other forms of cross-border guarantees allow the parties to sign contracts without the need for registration or filing. A cross-border commitment that meets one of the following conditions will not fall under foreign exchange management as a cross-border guarantee:”

The Method of Fulfilling Commitment Obligations Does Not Include Monetary Payments or Property Discounting.

Fulfilling Commitment Obligations Does Not Simultaneously Create a Direct Claim from the Promised Party. From a literal interpretation, since the Keepwell Deed explicitly states that it is not a “guarantee,” there is no need for registration or filing. This avoids potential difficulties in registration practices, as well as restrictions on the use of funds in the case of internal guarantees for external loans. However, it is important to note that the aforementioned regulation states, “The method of fulfilling the commitment obligations does not include monetary payments or property discounting,” whereas the fulfillment of obligations under the Keepwell Deed is likely to involve payment obligations. Therefore, it should still fall under the cross-border guarantee foreign exchange management. Based on this analysis, the structure of the Keepwell Deed is essentially a cross-border guarantee measure that does not fall under the internal guarantee for external loans. Some argue that due to the unique nature of the Keepwell Deed structure, it should be regarded as part of the internal guarantee for external loans management and be subject to certain registration obligations. Otherwise, it should be deemed a violation of foreign exchange management policies, and thus not recognized or enforced according to Article 282 of the Civil Procedure Law of the People’s Republic of China. []However, I believe that violating foreign exchange management policies cannot be simply equated with violating public policy, and there should be a strict interpretation of public social interests. This spirit is also reflected in the Supreme People’s Court’s handling of foreign exchange and foreign debt-related judicial practices. For instance, in the response to ED\&F Man (Hong Kong) Limited’s application for recognition and enforcement of the London Sugar Association’s arbitration award, the Supreme People’s Court emphasized that violations of relevant foreign exchange approval and registration regulations do not violate China’s public policy. []In conclusion, the Keepwell Deed and EIPU structure are essentially cross-border guarantee measures that do not fall under internal guarantees for external loans. Failure to fulfill registration obligations does not constitute a violation of social public interests.

Preconditions for Tsinghua Holdings’ Obligation Performance and Determination of the “Best Efforts” Obligation

1. Disputed Focus: Whether Tsinghua Holdings’ fulfillment of the Keepwell Deed and EIPU obligations is contingent upon obtaining regulatory approval, and how to determine whether it has made best efforts to fulfill the “best efforts” obligation.

2. Conclusion: Tsinghua Holdings cannot be exempted from fulfilling its obligations solely on the grounds of not obtaining regulatory approval, and it has failed to fulfill its “best efforts” obligation.

3. Reasoning: Firstly, Analysis of the Regulatory Approval Precondition: Although the agreement mentions regulatory approval, Tsinghua Holdings cannot use this as an absolute excuse to be exempt from fulfilling its obligations. Chinese law encourages parties to actively perform their contractual obligations. Even if there is an approval process, the parties should proactively apply for and take reasonable measures to facilitate approval. According to Article 509 of the Civil Code, parties must fully perform their obligations as agreed. They must follow the principle of good faith and fulfill obligations such as notification, assistance, confidentiality, etc., based on the nature, purpose, and customary practices of the contract. In this case, Tsinghua Holdings, despite knowing the bond was approaching maturity and facing financial difficulties, failed to provide evidence that it proactively applied to the relevant regulatory authorities for approval or initiated any procedure to obtain such approval. For example, Yang Xiaowen, a senior financing manager at Tsinghua Holdings, did not mention in his testimony any actions taken by the company to apply for regulatory approval, such as preparing application documents or communicating with regulatory departments. This lack of action is inconsistent with the required proactive attitude for fulfilling contractual obligations. Additionally, Tsinghua Holdings did not conduct an in-depth study or assessment of the potential regulatory requirements, nor did it attempt to find legal and compliant ways to meet the regulatory conditions and fulfill its contractual obligations. This behavior is contrary to the principle under Chinese law that requires parties to actively perform their contractual obligations.

Secondly, Determination of the “Best Efforts” Obligation:

According to Chinese law, which emphasizes the principle of good faith and the performance of contracts, parties must exercise reasonable care and make active efforts in fulfilling their contractual obligations. From Yang Xiaowen’s testimony, it is clear that Tsinghua Holdings did not plan or explore any measures to fulfill its obligations, nor did it propose reasonable suggestions or take action to address the situation. For instance, in 2020, Tsinghua Holdings failed to consider the funding arrangements for the bond maturity in advance and did not prepare a contingency plan to address its financial difficulties. When funds were available to be allocated (e.g., funds from the Guarantor’s loan agreement), Tsinghua Holdings did not prioritize using these funds to fulfill its obligations under the agreement but instead allocated them to internal debt arrangements. This indicates that Tsinghua Holdings did not make active efforts to fulfill its “best efforts” obligation, violating both the contractual agreement and the principle of good faith. []Tsinghua Holdings cannot avoid its contractual obligations by claiming that it did not obtain regulatory approval, as it did not take proactive steps to try to meet the regulatory requirements and fulfill the contract. According to Article 7 of the Civil Code, civil subjects must adhere to the principle of good faith, act honestly, and honor their commitments when engaging in civil activities. Tsinghua Holdings’ actions violated this fundamental principle and should bear the corresponding legal consequences.

Determination of Breach of Contract and Responsibility for Liability

1. Disputed Focus: Whether Tsinghua Holdings has committed a breach of contract, and the causal relationship between the breach and the loss, as well as the method of responsibility allocation.

2. Conclusion: Tsinghua Holdings has committed a breach of contract and should bear the liability for the breach, compensating the Trustee and bondholders for the losses incurred.

3. Reasoning: Firstly, Basis for Determining the Breach of Contract: Tsinghua Holdings failed to ensure that the Issuer and Guarantor maintained sufficient liquidity to make timely bond principal and interest payments, as required by Clause 4.1(ii) of the Keepwell Deed. After receiving the triggering notice and purchase notice, Tsinghua Holdings also failed to purchase the equity as stipulated by the EIPU, constituting a breach of contract. According to Article 577 of China’s Civil Code, if one party fails to perform its contractual obligations or performs them in a manner inconsistent with the agreement, it must bear liability for continued performance, remedial measures, or compensation for losses. Throughout the entire process, Tsinghua Holdings did not take proactive and effective measures to avoid the breach, and its actions violated the obligations set forth in the contract. For instance, before the bond matured, Tsinghua Holdings did not effectively monitor or support the financial condition of the Issuer and Guarantor, nor did it plan in advance for the funding sources necessary to ensure the bond principal and interest payments. After the breach occurred, Tsinghua Holdings failed to respond proactively to the triggering notice and purchase notice as stipulated in the agreement, and did not fulfill its obligation to acquire equity. These actions constitute a violation of its contractual duties.

Secondly, Consideration of Causal Relationship and Liability Allocation: Tsinghua Holdings’ breach directly led to the bondholders’ failure to receive timely payments of principal and interest, resulting in economic losses. According to the provisions on breach of contract liability in China’s Civil Code, the breaching party must bear the responsibility for compensating losses. The scope of the loss should include the bond principal, interest, and other reasonable costs arising due to the breach (such as the costs incurred by the Trustee in handling the breach). Tsinghua Holdings should compensate the Trustee and the bondholders for their losses, restoring them to the economic state they would have been in had the contract been properly performed. According to the theories of mitigation and certainty, the causal relationship plays an auxiliary role in determining the standard of compensation for contractual damages, allowing for a more precise determination of the parties’ compensation responsibilities. Since Tsinghua Holdings’ breach is the direct cause of the bondholders’ loss, it should bear the corresponding liability for compensation. []Furthermore, Tsinghua Holdings has failed to provide evidence proving the existence of force majeure or other exempting circumstances, nor has it demonstrated that there is no causal relationship between its breach and the losses incurred. Therefore, Tsinghua Holdings should bear full liability for compensation. According to Article 590 of the Civil Code, if one party is unable to perform the contract due to force majeure, they may be partially or fully exempted from liability, depending on the impact of the force majeure, unless otherwise provided by law. The party unable to perform due to force majeure must notify the other party in a timely manner to mitigate the potential losses, and provide proof within a reasonable period. Since Tsinghua Holdings has failed to prove the existence of force majeure or other exempting circumstances, it should bear the breach of contract liability.

Statute of Limitations and Procedural Issues

1. Disputed Focus: Whether Tsinghua Holdings’ defense based on the statute of limitations is valid, and the impact of the Trustee’s actions during the restructuring process on the litigation in this case.

2. Conclusion: Tsinghua Holdings’ statute of limitations defense is not valid, and the Trustee’s actions during the restructuring process do not affect its litigation rights in the Hong Kong court.

3. Reasoning: Firstly, Consideration of the Statute of Limitations: Tsinghua Holdings argues that the Trustee no longer has a cause of action after a certain date. However, under Chinese law, the commencement and interruption of the statute of limitations must be determined based on the specific circumstances. According to Article 188 of the Civil Code, the statute of limitations for filing a lawsuit to protect civil rights is three years, unless otherwise stipulated by law. The statute of limitations period begins from the day the rights holder knows or should know that their rights have been infringed and the identity of the obligor. The Trustee has actively asserted its rights following the bond default, such as issuing notices, which constitutes an interruption of the statute of limitations. Furthermore, Tsinghua Holdings failed to provide sufficient evidence to prove that the statute of limitations has expired, and its defense does not align with legal provisions or the facts of the case. In this case, the Trustee sent a notice in December 2020, following the bond default, demonstrating that it has been actively exercising its rights. Therefore, the statute of limitations should be recalculated from the Trustee’s most recent assertion of its rights.

Secondly, The Impact of the Restructuring Process on the Litigation: The Trustee submitted proof of claim during the restructuring process, but it was not substantively processed, and its claim remained in a “pending” status. Furthermore, the Trustee did not have the appropriate participation rights or protection of its interests in that process. According to Chinese law, which emphasizes the fair and reasonable handling of creditor-debtor relationships, and Hong Kong law’s protection of creditor interests in cross-border cases, the Trustee has the right to continue asserting its rights in the Hong Kong court to obtain a fair judgment. Additionally, when handling cross-border cases, Hong Kong courts should comprehensively consider the interests of all parties and the rationality of the applicable law. In the absence of evidence indicating that the Hong Kong court’s proceedings would harm the interests of other creditors or violate legal principles, the court should allow the Trustee to continue exercising its litigation rights. For example, since the Trustee was not notified to participate in creditor meetings or given voting rights during the restructuring process, its rights were not adequately protected. In such circumstances, the Trustee’s right to seek relief in the Hong Kong court should not be restricted. According to the principles of fairness and the protection of creditors’ legitimate rights in the Civil Code, as well as the principles of jurisdiction and balancing creditor interests in Hong Kong law for cross-border cases, the Trustee is entitled to continue its litigation in the Hong Kong court to protect its legitimate interests.

References

[1] Yang Lixin: “Quasi-Guarantee: The Nature of Credit Enhancement Measures and Applicable Legal Rules,” Gansu Social Sciences, No. 2, 2023.

[2] Fu Wang, Zhao Danyang: “Analysis and Reflections on Legal Issues in U.S. Dollar Bond Default Cases,” Financial Law Forum, No. 1, 2023.

[3] Zhu Xiaozhe: “Rethinking and Reconstructing the Securitization of Credit Enhancement Measures—An Empirical Study Based on Judicial Decisions in China,” Modern Law Science, No. 2, 2022.

[4] Li Wenfeng: “Practical Disputes and Essential Analysis of Keepwell Agreements in Bond Issuance,” Western Finance, No. 10, 2020.

[5] Reply of the Supreme People’s Court (2003) Min Si Ta Zi No. 3, available on the LexisNexis website, https://www.lexiscn.com/law/law-chinese-1-257311.html, last accessed: January 11, 2025.

[6] Yu Fei: “Case Application of the Corrective Function of the Principle of Good Faith—An Analysis Based on the Supreme People’s Court’s ‘Huacheng Case’ Judgment,” Legal Studies, No. 2, 2022.

[7] Cui Jianyuan: “The Role and Doctrinal Evolution of Causation in Contractual Liability,” Jianghai Academic Journal, No. 9, 2022.

[8] Yu Zhaowei, Li Siming: “Beware of Debt Repayment Risks of Key Real Estate Enterprises’ USD Bonds,” Tsinghua Financial Review, No. 3, 2022.

[9] Liu Kun: “Jurisdiction Issues in Cross-Border Insolvency Assistance,” Application of Law, No. 12, 2021.

[10] Liu Baoyu, Liang Yuangao: “The Guarantee Characterization of ‘Credit Enhancement Measures’ and the Application of Rules for External Guarantees by Companies,” Legal Forum, No. 2, 2021.

[11] Xia Haohan: “Distinguishing Between Debt Assumption and Guarantee—An Analysis Based on Divergent Judicial Opinions,” Jurist, No. 6, 2019.

[12] Liu Guixiang: “New Developments and Applications of General Rules on the Guarantee System,” Comparative Law Studies, No. 5, 2021.

[13] Xu Haiyan, Wang Binghui: “A Study on the Over-Collateralization System in Asset Securitization,” Legal Forum, No. 1, 2012.

about the author:Sun Yuanqi.Date of Birth:August 2002.Gender:Female .Ethnicity:Han Native Place:Qingdao, Shandong.Professional Title:Education:Postgraduate Research Direction:International Commercial Law