Evergrande ordered to liquidate

April 2024 | DEALFRONT | BANKRUPTCY & CORPORATE RESTRUCTURING

Financier Worldwide Magazine

April 2024 Issue

In a landmark ruling, the High Court in Hong Kong ordered the liquidation of debt-laden Chinese property giant China Evergrande Group, after the developer repeatedly failed to come up with a plan to restructure its debts.

Justice Linda Chan made the decision to liquidate the world’s most indebted developer, which has more than $300bn of total liabilities, after noting Evergrande had been unable to offer a concrete restructuring plan more than two years after defaulting on its offshore debt and following several court hearings. The company defaulted in 2021 and announced an offshore debt restructuring programme in March 2023.

“It is time for the court to say enough is enough,” said Justice Chan. “It is indisputable that the company is grossly insolvent and is unable to pay its debts.” Evergrande had applied for another three-month delay, but this was rejected by the court. The plan was described by Justice Chan as “not even a restructuring proposal, much less a fully formulated proposal”.

The company’s financial difficulties have been well publicised in recent years. Evergrande, which has $240bn of assets, sent the struggling Chinese property sector into a panic and dealt a blow to the wider Chinese economy when it defaulted on its debt in 2021. Since court proceedings were first brought in June 2022, the company has been given seven extensions. The liquidation petition was lodged in June 2022 by Top Shine, an investor in Evergrande unit Fangchebao, which said the developer had failed to honour an agreement to repurchase shares it had bought in the subsidiary.

The ruling is another blow to China’s struggling property market – in 2023, investment in real estate declined by 16.5 percent, even as the national economy grew – and will undoubtedly create further uncertainty. But it is unlikely to see Evergrande close its doors anytime soon. The company can still appeal the ruling. Additionally, there is a significant political aspect to the case which will further complicate the process. China and Hong Kong are different jurisdictions, so it is unclear how exactly the Chinese courts will recognise Hong Kong’s ruling, given the authorities involved. A 2021 arrangement between Hong Kong and mainland China, under which insolvency orders can be mutually recognised, is one window of opportunity for creditors, but it requires the Hong Kong liquidators to apply for approval to one of three pilot courts in Shanghai, Shenzhen or Xiamen. Whether such an application would be successful remains to be seen. In 2017, Evergrande relocated its headquarters from Shenzhen to Guangzhou, which is not part of any mutual recognition pilot scheme.

Following the ruling, the court appointed Eddie Middleton and Tiffany Wong of Alvarez & Marsal as Evergrande’s liquidators. They will be required to take control of Evergrande’s subsidiaries in mainland China, a process which could take years. The liquidators said their intention was to “achieve a resolution that minimises further disruption for all stakeholders”.

“Our priority is to see as much of the business as possible retained, restructured, or remain operational,” said Ms Wong.

China Evergrande Group, the entity that is subject to the winding-up order, is a Hong Kong-based holding company that is one of the wider group’s “main offshore financing platforms”, according to court documents. The entirety of the Evergrande business is a sprawling collection of companies based onshore and offshore, which will create significant challenges for the liquidators. Trading was halted in China Evergrande, China Evergrande New Energy Vehicle Group and Evergrande Property Services, after the verdict.

Shawn Siu, executive director at Evergrande, described the decision to appoint liquidators as “regrettable”, but told Chinese media the company would ensure home building projects would be delivered. Indeed, the company intends to continue operating its construction projects as the restructuring continues.

In mid-January, China’s central bank and the Ministry of Finance announced measures to help boost liquidity available to property developers. The actions, which will be valid until end of 2024, have been designed to help ease the lingering cash crunch being experienced by Chinese developers after Beijing cracked down on the sector to address bloated debt levels in real estate.

Richard Summerfield