DeHeng Successfully Represented China's First Case
about Cross-Jurisdiction Validity of the Keepwell Deed
2020-11-17
Recently, a court in Shanghai issued a verdict on an application for recognition and enforcement of a civil judgment of the High Court of Hong Kong Special Administrative Region, in favor of the applicant’s all requests. This case was represented by DeHeng Shanghai Office which had worked on it for 18 months.
This case provides a useful perspective on the situation where the domestic parent company of the offshore bond issuer assumes the keepwell responsibility to the bondholders by signing the keepwell deed.
Below is a review of the case.Basic facts:
Company A was established in the British Virgin Islands and is an overseas bond issuing entity of Group B in China. On October 23, 2017, A issued a bond with a principal of EUR 29,910,000, which Fund C purchased. On the same day, B issued a keepwell deed to C and promised to maintain A's combined net value and sufficient liquidity to protect C's rights as a bondholder. The keepwell deed also stipulates that British law shall apply and it is under the jurisdiction of the courts of the Hong Kong SAR.
On July 24, 2018, A breached the bond contract, and C filed a lawsuit in the High Court of Hong Kong SAR on the grounds that B violated the keepwell deed. The Hong Kong SAR High Court made a default judgment and ordered B to pay C the principal, interest and specific expenses. After the Hong Kong judgment took effect, B failed to perform the obligations under the judgment, so C applied to a court in Shanghai for recognition and enforcement of the Hong Kong judgment.
Disputed issues:
During the trial, B argued that (1) neither the domicile of the parties to the keepwell deed nor the place has actual connection with the dispute is in the Hong Kong SAR, and so the agreed term that the case is under the jurisdiction of the courts of Hong Kong SAR shall be deemed invalid; (2) C deliberately failed to serve the registered address of B intending to obtain the judgment by way of fraud; (3) the keepwell deed was essentially a guarantee, and the guarantee was not approved by the State Administration of Foreign Exchange in accordance with relevant regulations, and violated the prohibitive provisions regarding "overseas lending secured by domestic guarantee", and so the execution of the Hong Kong judgment would violate the mainland's public interest.
To the above defenses DeHeng lawyers provided a complete response which was accepted by the trial court. The trial court held that: in accordance with the Supreme People's Court's Arrangement for the Mutual Recognition and Enforcement of Judgments in Civil and Commercial Cases with Agreed Jurisdiction in the Courts of the Mainland and the Hong Kong Special Administrative Region, the default judgment made by the High Court of the Hong Kong SAR is an enforceable final judgment by courts of the Hong Kong SAR mentioned in the above Arrangement. According to Clause 1, Article 9 of the Arrangement, whether default judgment or adjudication, the trial standard for the recognition and enforcement of effective judgments made by Hong Kong courts is limited to procedural matters, and the substantive law issue of the legal validity of the keepwell deed in the mainland is not in the trial scope. According to the keepwell deed, the courts of the Hong Kong SAR have exclusive jurisdiction over disputes between the parties. During the trial of the High Court of the Hong Kong SAR, the complaint had been legally served on B, so B's claim that he was not legally summoned and that the Hong Kong judgment was obtained by fraud is untenable.
In response to B's defense that Hong Kong's judgment violated the public interest of the mainland, DeHeng lawyers detailed the evolution of China's foreign exchange administrative policies, and argued that the connotation of "public interest" should not be interpreted expansively. The trial court adopted the opinion of DeHeng lawyers and stated in the ruling: "First, the keepwell deed involved in the case is a civil legal relationship between equal subjects. The validity of the judgment made by the High Court of the Hong Kong Special Administrative Region on the dispute over the keepwell deed is limited to the two parties. The recognition and enforcement of its effectiveness will not involve the interests of all members of the mainland society or the unspecified majority of the society... B's argument that the Hong Kong Special Administrative Region's judgment violates the mainland's guarantee law and provisions on foreign exchange administration also lacks legal support. In this case, the applicable law agreed in the keepwell deed is not the mainland law, so the entity judgment of the mainland law regarding the nature and validity of the keepwell deed cannot be used to judge whether the recognition and enforcement of the Hong Kong SAR judgment violates the public interest of the mainland society; it should only consider whether the recognition and enforcement of the judgment is contrary to the public interest at the time of the trial of this case. The foreign exchange administrative system is related to a country's international balance of payments, and also closely related to the level of economic development. China's foreign exchange administration is an evolving process. During the trial of this case, B did not prove that the recognition and enforcement of the judgement made by Hong Kong SAR violated China's current public interest. Therefore, the recognition and enforcement of the Hong Kong SAR judgment does not lead to violations of the basic principles of mainland law, endangering public safety, violation of good customs, and other circumstances that endanger the public interests of the mainland society. The court also rejected B's defense."
The case was filed in May 2019 and lasted for 18 months. The core work was done mostly in an English-speaking environment, involving in-depth interpretation of Hong Kong law and mainland law.
On this case, the DeHeng team was led by partner Wang Junqi, with primary support from lawyers Wang Xiaoqian, Wang Ximing, Liang Yi and Hong Jian, and provided the client with valuable, professional legal services.
