When Hong Kong judge Linda Chan ordered China Evergrande’s liquidation on Monday, she opened a critical new phase in the slow collapse of the world’s most indebted property developer — and set a high-profile test of the reach of the former British colony’s courts.
How the liquidation of the Hong Kong entity will proceed, and the extent to which international investors will be able to recover the tens of billions of dollars they have invested in Evergrande, will depend mainly on the position of the cross-border authorities and courts in mainland China.
Almost all of the company’s homebuilding activity takes place in mainland China, where most of its more than $300 billion in liabilities are also due, and the real estate slowdown has become one of the most pressing challenges facing the government.
Just over two years after Evergrande defaulted, the liquidation ruling comes at a time of renewed international scrutiny of legal and political standards within mainland China, where foreign investment has slumped post-Covid. Beijing’s priorities, including completing unfinished housing projects, may conflict with the priorities of creditors inside and outside the country.
“It certainly won’t be easy to get money out of mainland China,” said Nigel Triers, a restructuring and insolvency specialist at Grant Thornton in Hong Kong. “It is fairly clear that the priority is to deliver the properties that have been sold.”
The Hong Kong court’s appointment of Eddie Middleton and Tiffany Wong, of restructuring firm Alvarez & Marsal, as liquidators for Evergrande should at least provide new information about the developer. Throughout the Chinese real estate crisis sparked by Evergrande’s default in late 2021, investors have struggled to get a detailed understanding of developers’ woes.
“When you have liquidators in Hong Kong, under Hong Kong law, you can ask the board to give you the books and records,” one restructuring specialist said. “You can take over the operations of Evergrande Group.”
However, these processes are far from straightforward. Like many other Chinese real estate groups that have taken on offshore financing, Evergrande is a sprawling group of companies based onshore and abroad, with total assets of nearly RMB1.7 trillion ($240 billion) as of September last year. It also has individual project-level units across the mainland, with its main entity known as Hengda.
“You can imagine that a lot of these mainland subsidiaries have their own creditors and bank debts, so a lot of them could be insolvent and unable to really provide any value to the structure that the liquidators sit in,” Triers said.
“Will they (the liquidators) get the facts about which projects have value or ownership rights? They will only get a real idea of what they are if the company cooperates,” he asked.
China Evergrande Group, the entity subject to the liquidation order, is a Hong Kong-based holding company that is one of the broader group’s “key external financing platforms,” according to court documents. Since listing in 2006, it has issued $132 billion in shares, in addition to more than $20 billion in external bonds raised by the company through several subsidiaries.
On five previous occasions, the world’s most indebted property developer has managed to delay a decision on whether it should dissolve, arguing that it needs more time to restructure international debt it was originally unable to repay.
But this time, Judge Chan’s patience ran out. She wrote in her final comment: “There is no proposal for restructuring.” “It seems to me that the interests of the creditors would be better protected if the court liquidated the company.”
The holding company has some assets in Hong Kong, such as an electric car company and a real estate services company, which could now be acquired, although it in turn has assets on the mainland. The vast majority of the company’s funds are believed to have flowed into cross-border real estate projects, where 90 percent of its assets are located and where liquidations require separate mainland court approval. Part of the task of Hong Kong liquidators is to determine the scale and nature of this cross-border exposure.
Hong Kong’s legal system, which is based on English common law and has for decades facilitated the flow of capital to the mainland, differs markedly from China’s socialist legal system, part of the country’s political infrastructure where the Communist Party holds absolute power.
The 2021 agreement between Hong Kong and mainland China, under which insolvency orders can be mutually recognised, presents a window of opportunity for creditors. But it requires Hong Kong liquidators to apply for approval to one of three trial courts in Shanghai, Shenzhen or the southeastern city of Xiamen.
“There may be cases where mainland courts refuse to recognize liquidation orders in Hong Kong,” Hong Kong’s Ministry of Justice said in November in response to a written inquiry from the Financial Times about the arrangement. In 2021, a court in Shenzhen recognized the authority of a liquidator appointed by a Hong Kong court in the Samsun paper case. But industry practitioners said there were few cases of successful applications.
“There were only two actual cases, and they were not of the size, scale or substance of (Evergrande),” Triers said.
If liquidation orders are granted on the mainland, their enforcement will still require cooperation with other creditors, and equity claims of the kind widely associated with foreign inflows will rank lower than domestic loans. Implementation may also be difficult given the fraught political backdrop, which has seen local property investors protest losses.
In nearby Guangzhou, where Evergrande has moved its headquarters from Shenzhen and which does not form part of any pilot scheme for mutual recognition, the company’s building was this month surrounded by police and a newly erected fence.
In September, Hui Kayan, Evergrande’s founder and formerly China’s richest man, was placed under “compulsory measures” on suspicion of unspecified crimes.
Speaking outside court on Monday, Wong, the liquidator, said she wanted “to see as much of the business retained, restructured or remain operational”.
Sean Siu, Hengda’s interim CEO, responded to the liquidation order on Monday by emphasizing that the matter was listed in Hong Kong and that local subsidiaries remained independent, adding to uncertainty about which assets creditors could seize.
Evergrande will continue to build homes, he said. “The group will continue to strive to do everything possible to ensure the stability of local business and operations.”
Additional reporting by Chan Ho-him in Hong Kong