Evergrande: Crisis-hit Chinese real estate giant ordered to liquidate

Debt-ridden Chinese real estate giant Evergrande has been ordered by a Hong Kong court to liquidate.

Judge Linda Chan said “enough is enough” after the troubled developer repeatedly failed to come up with a debt restructuring plan.

The company has debts of more than $300bn (£236bn) and has become a symbol of China's property crisis.

Evergrande executive director Sean Siu said the company was “disappointed” by the decision, but said the company would continue to operate in mainland China.

He added in a statement that the company's Hong Kong division is independent from its mainland operations.

The Chinese government has previously sought to allay public concerns over the real estate crisis, as people share their frustrations with Evergrande and other developers on Chinese social media sites such as Weibo.

China's real estate sector accounts for about a quarter of the world's second-largest economy.

Evergrande shares fell more than 20% in Hong Kong after Monday's announcement.Trading in the stock is currently suspended.

Liquidation is the process of seizing and selling a company's assets. The proceeds can then be used to pay down outstanding debt.

However, it is up to the Chinese government to follow this process, and the liquidation order does not necessarily mean that Evergrande will go bankrupt and collapse.

Ahead of Monday's ruling, China's Supreme Court and Hong Kong's Ministry of Justice signed an agreement to mutually recognize and enforce civil and commercial judgments between mainland China and Hong Kong.

But experts say it remains to be seen whether the changes, which took effect on Monday, will affect Evergrande's liquidation order.

According to court documents released Monday, the company asked for an additional three months to develop a new restructuring plan, but the request was made Friday at 4 p.m.

Judge Chan said the new plan “is not even a restructuring proposal, much less a fully developed proposal.”

The lawsuit was filed in June 2022 by one of the investors, Hong Kong-based Topshine Global, which claimed Evergrande had not honored its share buyback agreement.

However, they only owe a fraction of Evergrande's total debt.

Most of the money Evergrande is owed goes to mainland Chinese lenders, who have limited legal recourse to claim the money.

By contrast, foreign creditors are free to sue outside mainland China, and some have chosen Hong Kong, where Evergrande and other developers are listed, to sue.

Once a winding up order is made, the directors of a company lose control.

Derek Lai, global insolvency leader at professional services firm Deloitte, said a provisional liquidator, either a government official or a partner in a professional firm, would likely be appointed by the court.

A formal liquidator will be appointed within a few months after meeting with creditors.

But most of Evergrande's assets are in mainland China, and despite its “one country, two systems” slogan, there are thorny jurisdictional issues.

Although there is an agreement between courts in China and Hong Kong that allows for the appointment of liquidators, to Lai's knowledge, courts in mainland China's three pilot regions have only granted “two out of six applications. ”. .

The Chinese Communist Party also appears to want to keep developers in business to ensure that homebuyers who buy properties before construction begins get what they paid for.

That means the Chinese government may choose to ignore the Hong Kong court's order.

“Even if the appointed liquidator is mutually recognized in Hong Kong and mainland China, it must comply with mainland China law when conducting liquidation-related matters approved in Hong Kong,” Lai added. .

The liquidation order against the parent company does not mean an immediate halt to Evergrande's construction work.

Nigel Treyers, managing director of restructuring at business advisory firm Grant Thornton, said: “This does not mean that all subsidiaries will be liquidated,” adding that liquidators will investigate and determine whether certain It added that there is a possibility that the company may try to take control of the subsidiary.

“But that would require either liquidating the subsidiary or appointing oneself as a director of the subsidiary,” he added.

“To do this, you have to move your corporate structure layer by layer, and there can be certain challenges in actually doing this.”

Lai points out that despite the liquidation order, “if a company goes bankrupt, it is unlikely that unsecured creditors will collect the full amount owed.”

It is also unlikely that foreign creditors will get their money before mainland creditors.

Even if Judge Chan's order is not implemented in China, it would send a strong message and give other developers and creditors a hint of what they may face.

She not only oversees Evergrande, but also other default developers such as Sunac China, Jiayuan, and Kaisa.

Last May, she ordered the company to be liquidated after Kaen's lawyers failed to explain why they needed more time to develop a debt restructuring plan.

“It remains to be seen how offshore liquidators will be treated by onshore stakeholders and the considerations involved when there are large local creditors,” said a Hong Kong-based global law firm. said Daniel Margulies, a partner at Tokoro Dechert who specializes in restructuring issues in Asia.

Evergrande had been working on a new repayment plan, but filed for bankruptcy in the U.S. last August to protect its U.S. assets as it worked on the deal.