(Bloomberg) -- A Beijing court is being asked to consider a case that may set precedents for the payment protection provided on some bonds — and also the sway of Hong Kong’s judiciary in mainland China.

Some holders of Peking University Founder Group Corp. bonds want Beijing No.1 Intermediate People’s Court to recognize a Hong Kong court ruling regarding so-called keepwell agreements, said a person familiar with the process. A petition was filed to the court on March 28, said the person, who requested anonymity discussing private matters.

Hong Kong’s High Court ruled last year that Founder Group, a business arm of the elite Peking University before its default in 2020, violated dollar bond keepwell deeds in one of four cases filed on creditors’ behalf. Founder Group caused 1.15 billion yuan ($159 million) of losses to the plaintiff who won the case, according to the Hong Kong court at that time.

The keepwell deeds are basically a gentleman’s agreement from the parent company of a unit issuing a bond to maintain the issuer’s solvency, while stopping short of guaranteeing payment. 

It’s unclear whether the Beijing court will accept the case. 

A media representative at New Founder Holdings Development Co., which is the post-restructuring entity of Founder Group and Founder Group’s restructuring administrator didn’t respond to requests seeking comment. The Beijing court didn’t immediately comment over phone when reached by Bloomberg. 

The keepwell mechanism, which has helped Chinese firms raise hundreds of billions of dollars in global credit markets in the past decade or so, has become a point of contention in recent years after a record wave of delinquencies have raised questions about how effective it can be to help investors recoup losses. 

The petition is also a test of to what extent Hong Kong court rulings are recognized in mainland China, where most of the defaulters’ assets are located.

Recognition of Hong Kong court rulings on insolvencies by mainland Chinese judicial authorities remains scarce. 

In one rare case of success, a court in Shanghai issued an order in November 2020 that recognized a previous ruling by its Hong Kong counterpart that validated the keepwell agreement attached to CEFC Shanghai International Group Ltd.’s euro-denominated bonds.

The latest petition against Founder Group is drawing more attention because the administrator of the conglomerate’s onshore restructuring, which was led by the same Beijing court, rejected creditors’ claims on five keepwell notes in 2020.

--With assistance from Yuling Yang.

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