Hong Kong’s High Court
China Evergrande Group was issued a wind-up order by Hong Kong’s High Court on Monday, setting in motion the liquidation of a company once ranked as China’s largest developer as it struggles with $329 billion in debts against $240 billion in assets.
The winding up order for Evergrande’s Hong Kong-listed vehicle came despite the developer led by tycoon Xu Jiayin having filed a request for an adjournment at 4:00 pm on Friday, asking for more time to work out a restructuring plan with its creditors, with the court pointing to deficiencies in the company’s last-minute proposal.
“I do not see any proper ground for the court to grant a further adjournment of the Petition, which has been ongoing for over 19 months,” judge Linda Chan said in the court ruling. “The Company has not demonstrated that there is any useful purpose for the court to adjourn the Petition – there is no restructuring proposal, let alone a viable proposal which has the support of the requisite majorities of the creditors. To the contrary, it seems to me that the interests of the creditors will be better protected if the Company is wound up by the court.”
In a separate hearing on Monday, the court also appointed Alvarez & Marsal – a restructuring advisory firm which previously oversaw the liquidation of Lehman Brothers – as Evergrande’s liquidator, a role which will see the specialist firm seeking control of the company’s assets, assuming management of the company, and handling negotiations with creditors.
Evergrande, which defaulted in 2021, expressed regret over the ruling, with chief executive Shawn Siu indicating that the company would continue to ensure home deliveries and communicate with the appointed liquidator.
Evergrande’s shares were suspended from trading after the stock plunged 21 percent on Monday, and are currently down 99 percent from their 2017 peak.
Uncertain Enforcement
With over 90 percent of Evergrande’s assets located onshore, according to the ruling, the case is likely to test the enforceability of the judgement in mainland China.
Evergrande boss Xu Jiayin (Image: Getty Images)
Despite China and Hong Kong inking an agreement in 2021 to recognise insolvency and restructuring proceedings in the mainland cities of Shenzhen, Shanghai and Xiamen, there is little precedent for offshore liquidators seizing onshore assets.
“The liquidator will not have onshore authority unless it can successfully apply to the Shenzhen court for approval under an existing agreement between Shenzhen and Hong Kong to mutually recognise insolvencies,” Brock Silvers, chief investment officer at Hong Kong-based Kaiyuan Capital told Mingtiandi. “Such approval is extremely unlikely to be granted, as China will prioritise the application of any available assets to the resolution of domestic obligations. The prospects for any significant recovery by offshore creditors are therefore ultimately quite low.”
China’s protracted housing market slump, which has seen many of the country’s developers default on offshore borrowings while struggling to make progress on a growing backlog of stalled projects, is also likely to affect the liquidator’s onshore legal reach, with the mainland government focused on ensuring completion and delivery of pre-sold homes.
“The winding up order only applies to the listed holding company which does not hold any significant assets except shares in other companies. It remains to be seen whether the liquidators will be able to take control of any of the subsidiaries in mainland China given that the focus of the Chinese authorities is on ensuring that developers complete and deliver the properties that they have sold,” Nigel Trayers, managing director of restructuring at Grant Thornton Hong Kong told Mingtiandi.
Most of Evergrande’s US dollar notes traded at around 1.5 cents on the dollar as of Friday, according to Bloomberg, a sign that investors have low expectations for repayment.
The company is still able to appeal the wind-up order, but the liquidation process would proceed pending appeal.
Sued by Subsidiary
In rejecting Evergrande’s last minute request for an additional three months to come up with a new restructuring plan, the court showed a willingness to put the company’s creditors out of their misery after a more than two-year process.
“There is simply nothing before the Court to explain or justify the delay and the lack of any progress in putting forward a restructuring proposal on the part of the Company,” Judge Chan said in the ruling.
The liquidation petition was filed in June 2022 by Top Shine Global Limited, which had invested in the developer’s Fangchebao online sales platform with the company saying that Evergrande had not honoured an agreement to buy back shares in the subsidiary. Other creditors later joined that petition.
Adding to Evergrande’s woes are lawsuits initiated by its property management subsidiary Evergrande Property Services, which announced on Friday that it had started legal proceedings against its parent to recover RMB 11.4 billion ($1.6 billion) worth of deposit certificate pledge guarantees.
Those lawsuits come after Evergrande Property Services’ Jinbi Property Management subsidiary in November launched proceedings against China Evergrande Group for the recovery of $1.9 billion in deposit certificate pledge guarantees.
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