Burdened by debt A court in Hong Kong has ordered the liquidation of Chinese property giant Evergrande.
Judge Linda Chan expressed frustration as the troubled developer continued to struggle with developing a plan to restructure its debts.
The company has become a symbol of China’s real estate crisis, burdened with over $300 billion (£236 billion) of debt.
When Evergrande defaulted two years ago, it caused significant ripples in global financial markets.
Shawn Siu, the executive director of Evergrande, expressed disappointment over the decision but assured that the company will maintain its operations in mainland China.
In a statement, it was mentioned that the Hong Kong arm of the firm operated separately from its mainland business.
Although the consequences of the ruling on Evergrande’s home building business remain uncertain, the company’s crisis has already resulted in numerous home buyers experiencing delays in receiving their new properties.
Beijing has made efforts to address public concerns regarding the property crisis, as individuals have expressed their frustrations about developers like Evergrande on Chinese social media platforms such as Weibo.
The court’s decision is expected to have a significant impact on China’s financial markets, adding to the ongoing efforts by authorities to stabilise the stock market.
China’s property sector plays a significant role in the world’s second largest economy.
Shares of Evergrande experienced a significant decline of over 20% in Hong Kong following the announcement made on Monday. Trading in the shares has been temporarily halted.
Liquidation is a procedure in which a company’s assets are taken over and sold. The funds can then be utilised to settle any outstanding obligations.
Nevertheless, the implementation of this procedure could be influenced by the Chinese government, and it’s important to note that the liquidation order does not automatically indicate the downfall and collapse of Evergrande.
Prior to Monday’s decision, the Supreme Court of China and the Department of Justice in Hong Kong reached an agreement to acknowledge and uphold civil and commercial judgements from both mainland China and Hong Kong.
However, there is still uncertainty among experts regarding the potential impact of the recent change that took effect on Monday, on Evergrande’s liquidation order.
The court document released on Monday revealed that the company had requested an additional three months to develop a new restructuring plan. However, the request was made quite late, at 4pm on Friday.
Judge Chan criticized the plan, stating that it lacked structure and was not fully developed.
A case was filed in June 2022 by one of its investors, Hong Kong-based Top Shine Global, alleging that Evergrande failed to fulfil an agreement to repurchase shares.
However, the amount they are entitled to is only a small portion of Evergrande’s overall liabilities.
The majority of the funds owed by Evergrande are to lenders in mainland China, who face limited legal options to recover their funds.
On the other hand, foreign creditors have the option to file lawsuits in courts outside mainland China. Some of them have opted for Hong Kong, where Evergrande and other developers are listed, to pursue legal action against the company.
After receiving a winding up order, the control of the company will no longer be in the hands of its directors.
According to Derek Lai, the global insolvency leader at professional services firm Deloitte, it is likely that the court would appoint a provisional liquidator, who could be either a government employee or a partner from a professional firm.
Following discussions with creditors, the formal liquidator will be appointed in a few months.
However, the majority of Evergrande’s assets are located in mainland China, which presents some complex jurisdictional challenges despite the “one country, two systems” slogan.
There has been an agreement reached between the courts of China and Hong Kong regarding the recognition of liquidators’ appointments. However, according to Mr. Lai, it seems that only a small number of applications have been recognised by the courts in three pilot areas in mainland China.
The Chinese Communist Party also appears determined to support developers in order to ensure that homebuyers who purchased property prior to construction receive the promised results.
That implies Beijing may decide to disregard the Hong Kong court order.
“When conducting approved liquidation-related matters in mainland China, the appointed liquidator, even if mutually recognised in Hong Kong and mainland China, must adhere to the laws of mainland China,” Mr Lai explains.
The liquidation order against the parent company does not imply an immediate halt to Evergrande’s construction work, either.
“This does not mean that all of the subsidiaries will be liquidated,” explains Nigel Trayers, the managing director of restructuring at business advisory firm Grant Thornton. He further mentions that liquidators might consider taking control of specific subsidiaries once they have completed their investigations.
“However, the necessary steps to achieve this would involve either initiating the process of liquidating the subsidiaries or assuming the role of directors for those subsidiaries,” he explains.
“As they navigate the corporate structure, they will encounter various obstacles that may pose challenges in practice.”
According to Mr. Lai, in cases where a company is insolvent, it is unlikely for unsecured creditors to recover the full amount of their claims, even with a liquidation order in place.
Mainland creditors are likely to receive their money before foreign creditors.
Even if Judge Chan’s orders are not implemented in China, it conveys a powerful message and provides insight into the potential challenges that other developers and creditors may encounter.
She is in charge of overseeing not only Evergrande, but also other developers who have faced financial difficulties, including Sunac China, Jiayuan, and Kaisa.
In May of last year, she made the decision to liquidate Jiayuan after its lawyers were unable to provide a satisfactory explanation for their request for additional time to finalise their debt restructuring proposal.
“The treatment of an offshore liquidator by onshore stakeholders in the presence of significant local creditors and considerations is yet to be determined,” comments Daniel Margulies, a partner at global law firm Dechert in Hong Kong, who specialises in restructuring matters in Asia.
Evergrande had been developing a fresh repayment strategy, but in August last year, it resorted to filing for bankruptcy in the US to safeguard its American assets while negotiating a deal.
In the following month, the chairman, Hui Ka Yan, came under police surveillance.