Nuoxi Capital Ltd (in Liquidation in the British Virgin Islands) v. Peking University Founder Group Company Ltd

CACV 184, 185 & 186/2023, [2024] HKCA 652

On appeal from [2023] HKCFI 1350

(Heard together)

CACV 184/2023

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 184 OF 2023

(ON APPEAL FROM HCA NO 778 OF 2021)

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AND

CACV 185/2023

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 185 OF 2023

(ON APPEAL FROM HCA NO 1418 OF 2021)

________________________

________________________

AND

CACV 186/2023

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 186 OF 2023

(ON APPEAL FROM HCA NO 1442 OF 2021)

________________________

________________________

(Heard together)

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J U D G M E N T

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Hon Kwan VP (giving the Judgment of the Court):

1.On 10 May 2024, this court handed down our judgment (“CA Judgment”)[1] allowing the plaintiffs’ appeal from the judgment of Harris J on 18 May 2023 (“CFI Judgment”)[2]. For this judgment, we adopt the same terms and expressions as before.

2.We concluded that liability under the Keepwell Deeds is established as Ground 3 is made out and RN Ground 2(2) is rejected, and granted declaratory relief in these terms:

(1) In HCA 778/2021 and HCA 1418/2021, a declaration is made that PUFG breached the Nuoxi Keepwell Deeds on 16 April 2020 and became liable to Nuoxi and HKJHC in the sums of US$306,672,000, US$202,116,000 and US$404,816,000 as on that date.

(2) In HCA 1442/2021, a declaration is made that PUFG breached the Kunzhi Keepwell Deeds on 16 April 2020 and became liable to Kunzhi in the sums of US$312,647,400 and US$505,141,000.

3.By a notice of motion filed on 7 June 2024 in each of the appeals, PUFG seeks leave to appeal to the Court of Final Appeal from the CA Judgment on the ground that these questions as framed in the intended appeal are of great general or public importance and ought to be submitted to the Court of Final Appeal for determination:

Question 1

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

Question 2

5.Whether the Court of Appeal erred in finding that there were modes of performance available to PUFG which did not require Relevant Approvals under the Keepwell Deeds, in spite of the contrary evidence before the court and the trial judge’s contrary findings of primary fact.

6.PUFG also relies on the “or otherwise” limb, contending that the exceptional circumstances of this case merit consideration by the Court of Final Appeal in that the amount involved is significant. The question of the efficacy of Keepwell Deeds is of significant general interest and importance given that they have been commonly used in financing arrangements between business groups in Mainland China and foreign lenders.

Question 1

7.This question would appear to be PUFG’s main contention in the intended appeal and arose from its argument covered in the CA Judgment at §§211 to 213. In short, the contention was that the failure to inject liquidity into the plaintiffs in breach of clause 4.1(ii) of each of the Keepwell Deeds could only cause loss to the bondholders and could not cause loss to the plaintiffs, because the plaintiffs’ own net balance sheet position would not be affected. Insofar as the plaintiffs’ pleaded case is that the loss caused to them was their insolvency, a failure to lend to the plaintiffs would not cause loss (as the net balance sheet position would have been the same), and the plaintiffs would have been insolvent in any event. The alleged insolvency in any event does not give rise to any actionable loss, citing in support Stanford International Bank Ltd (in liquidation) v HSBC Bank Plc [2022] UKSC 34 at §§26 to 31, 40, 55 to 57.

8.We adopted in §212 the judge’s reasoning in §92 of the CFI Judgment. The judge considered PUFG’s argument to be flawed. If the advance made by PUFG did not improve the net balance sheet position because of the way the advance was treated in the books of the Issuer or the Guarantor, the Consolidated Net Equity would have remained at a deficit. The Keepwell Deeds required PUFG to ensure that the Consolidated Net Worth and/or the Consolidated Total Equity of the Issuer or the Guarantor was US$1, and if that meant PUFG had to make a gift to the Issuer or the Guarantor to achieve that result, that was what was required. In §213, we agreed with the judge and did not think the passages cited in Stanford International Bank Ltd dealing with damage suffered on the basis of loss of a chance and the discussion of the net loss rule on the facts of that case would apply to the present situation.

9.PUFG’s submission is that the CA Judgment erred in holding that its breach of the Liquidity Payment Obligation in clause 4.1(ii) caused actionable loss measured by the amount of pre-existing debts the plaintiffs owed to the bondholders which the plaintiffs failed to pay (ie the figures contained in the declarations). Without prejudice to the finding that PUFG could have performed this obligation without Relevant Approvals (challenged in Question 2), where this obligation could have been performed by PUFG (such as by lending, procuring the issuance of new bonds, or buying illiquid assets at fair value) without improving the net balance sheet position of the plaintiffs, a breach of that obligation would not cause actionable loss to the plaintiffs. As a matter of “but for” causation, if this obligation were performed, the plaintiffs would have incurred a corresponding obligation to repay PUFG or some other creditor(s) in the same amount, such that the plaintiffs’ net balance sheet position would have remained the same. There is no “net loss” in relation to the plaintiffs. It is therefore incorrect as a matter of law to hold that a failure to perform this obligation caused an actionable loss measured by the amount of debts the plaintiffs could have discharged. Reliance is placed on various passages in Stanford International Bank Ltd as before, in particular the observations of Lord Leggatt at §§54 to 55.

10.As to the judge’s reasoning mentioned earlier in §92 with which we agreed, PUFG’s answer is that this would only apply to a breach of the Balance Sheet Obligation in clause 4.1(i) but not to the Liquidity Payment Obligation in clause 4.1(ii).

11.It is contended by PUFG that Question 1 is of great general or public importance in that it raises issues of causation and loss generally applicable to contractual claims. Further, it involves the applicability of the recent judgment of the UK Supreme Court in Stanford International Bank Ltd, which this court has distinguished. The amount involved is substantial. While the use of Keepwell Deeds has been in decline, such deeds had previously been used and could still be in circulation.

12.We have no difficulty with the assertion that this question is of great general or public importance.

13.This question is premised on the assertion that “by receiving the liquidity the plaintiffs would have incurred a corresponding obligation to repay another creditor such as PUFG in the same amount”. PUFG’s argument is based on the assumption that the provision of liquidity to the plaintiffs would be balanced by a liability on the part of the plaintiffs. The plaintiffs have contended however that the provision of liquidity could be done by making a gift to the plaintiffs (as the judge had suggested, to comply with the Balance Sheet Obligation), or by making a loan from a related party followed by an appropriate waiver of repayment (as submitted by the plaintiffs). Hence, it would not be wrong to distinguish Stanford International Bank Ltd in the present situation.

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

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

16.For the above reasons, it would be appropriate to grant leave for this question.

17.PUFG also made the point that if and insofar as the declarations granted would mean that PUFG has to make four separate payments to the four plaintiffs (the three plaintiffs in the three actions that have been appealed, plus the action in which the judge made a declaration in favour of FIHK for which no appeal is brought), that would be another reason for the Court of Final Appeal to consider the CA Judgment. That is not the effect of the declarations granted by this court. Only one payment would be required to be made for the Nuoxi Keepwell Deeds. The same applies to the Kunzhi Keepwell Deeds.

Question 2

18.This question is premised on there being “contrary findings of primary fact” by the judge and “contrary evidence” before this court that do not support this court’s “finding” there were modes of performance available to PUFG which did not require Relevant Approvals.

19.We have difficulty with the way this question is formulated.

20.No “contrary findings of primary fact” by the judge for this purpose are identified in the notice of motion or the two submissions of PUFG. The evidence of Ms Du referred to by PUFG[3] has been addressed in the CA Judgment at §129.

21.More importantly, the CA Judgment only held that the judge’s holding absolving PUFG from breach of the contractual obligations cannot be supported because he failed to deal with the arguments on modes of performance not requiring Relevant Approvals and take into consideration relevant evidence. Hence, he could not have been satisfied that PUFG had established it would come within the escape clause in clause 2.2 (§§122, 123, 127 to 129, 132). As rightly pointed out by the plaintiffs, if this conclusion is challenged, the correct question is not whether “there were modes of performance available to [PUFG] which did not require Relevant Approvals under the Keepwell Deeds”, but whether PUFG had adduced sufficient evidence to prove that all potential modes of performance were impossible.

22.We decline to grant leave to appeal for this question.

“Or otherwise” limb

23.PUFG accepts that the Court of Appeal would defer to the views of the Appeal Committee of the Court of Final Appeal whether leave should be granted on the “or otherwise” limb. We would leave this for the consideration of the Appeal Committee if PUFG should renew its application on Question 2.

Other matters

24.During the period when submissions are lodged for this application, on 28 June 2024 the plaintiffs issued a summons in each of the appeals seeking an order under section 25 of the Hong Kong Court of Final Appeal Ordinance, Cap 484[4] and the inherent jurisdiction of the court as a condition of the leave application being heard and/or a condition of the substantive appeal being heard, the Administrator of PUFG or PUFG (if applicable) should give an undertaking that sufficient funds be reserved to meet the plaintiffs’ claims in PUFG’s reorganization including after the expiry of the asset preservation period in PUFG’s reorganization[5], until the final determination of the dispute between the parties. The plaintiffs’ solicitors sent a covering letter to the court on 28 June asking the court to read the summonses and supporting affidavits[6] with their submissions lodged on 27 June 2024 for opposing leave to appeal.

25.In its reply submissions lodged on 4 July, PUFG did not deal with the plaintiffs’ application for imposing a condition for granting leave to appeal. We shall treat the supporting affidavits as the plaintiffs’ submissions.

26.We do not think it is appropriate to exercise our discretion to impose the condition as sought by the plaintiffs, which may have significant impact on the distribution of assets by the Administrator of PUFG in its reorganization conducted in the Beijing Court. We have considerable doubts whether it is within the jurisdiction of the Hong Kong court to impose such a condition, quite apart from the fact that the asset preservation period has expired on 28 June 2024.

27.The plaintiffs have explained why they have not applied to the Beijing Court to ensure that the Administrator preserves sufficient assets pending the adjudication of their claims. Such an application can only be made after they commence an appeal to the Beijing Court against the Administrator’s rejection of their claims[7]. To do so would require the plaintiffs to pay a substantial court fee upfront (over RMB 30 million for a claim of RMB 6.3 billion), or to provide security for an amount equivalent to the value of assets to be preserved as a pre-condition for the court making an order for asset preservation, such as a letter of guarantee from a Mainland insurance company. The plaintiffs are apparently unable to comply with these requirements.

28.As there is no extant appeal to the Beijing Court, which is the forum that the dispute regarding the plaintiffs’ claims should be resolved, we see no reason to order the Administrator to preserve assets pending adjudication of an appeal which has not been brought, apart from the question of jurisdiction. It is not correct to say that by the CA Judgment, the plaintiffs have successfully established its rights against PUFG such that they should be entitled to participate in the onshore dividend distribution process in PUFG’s reorganization. It has been made clear from the very beginning when the judge refused to stay these actions on the basis that the disputes between the parties are resolved in the reorganization proceedings in Beijing. The Hong Kong judgment is only to assist the plaintiffs in advancing their claims in the reorganization. It is not to be enforced outside the reorganization proceedings.

29.We dismiss the summons filed by the plaintiffs in each of the appeals on 28 June.

Conclusion and costs

30.We grant leave to appeal to the Court of Final Appeal on Question 1 on the usual conditions. We order that the costs of each notice of motion are to be in the cause of the appeal to the Court of Final Appeal.

31.As for the costs of the plaintiffs’ summonses which we have dismissed, as PUFG did not respond to these summonses, we make no order as to costs.

Mr William Wong SC, Mr Look Chan Ho and Mr Tommy Cheung, instructed by Howse Williams, for the Plaintiffs in HCA 778/2021, 1418/2021 & 1442/2021 (Appellants)

Mr José Maurellet SC, Mr Tom Ng and Ms Jasmine Cheung, instructed by Freshfields Bruckhaus Deringer, for the Defendant in HCA 778/2021, 1418/2021 & 1442/2021 (Respondent)