Evergrande Wind-Up Hearing Opens Bumpy Path Toward Liquidation

A hearing for China Evergrande Group in a Hong Kong insolvency court later this month will lay bare the once-unthinkable possibility of liquidating the property developer’s assets.

(Bloomberg) — A hearing for China Evergrande Group in a Hong Kong insolvency court later this month will lay bare the once-unthinkable possibility of liquidating the property developer’s assets.  

A wind-up order from Judge Linda Chan after the Oct. 30 hearing would wreak havoc on the struggling company that’s trying to finalize a restructuring plan to pay back creditors. Any efforts to wind up the world’s most indebted developer — even if difficult to enforce in mainland China — would provide a roadmap for other developers and creditors on how a liquidation of such magnitude may play out.

Evergrande, the poster child of China’s real estate debt crisis with about $327 billion of liabilities, comes to the hearing when more liquidations have been ordered. 

The Hong Kong court has issued at least three wind-up orders for Chinese property developers since the debt crisis began in 2021, despite thorny jurisdictional issues and China’s interest in keeping developers afloat to ensure home-buyers are made whole.  

“A liquidation order would have wide repercussions,” said Daniel Margulies, a partner at Dechert LLP who specializes in restructuring matters in Asia. The developer’s collapse “would show that problems of this size and complexity in China seemingly cannot be restructured and will likely end up in some form of liquidation, whether onshore or offshore.” 

The hearing originates from a wind-up lawsuit filed by a creditor, Top Shine Global Limited of Intershore Consult (Samoa) Ltd., who was a strategic investor in Evergrande’s online sales platform. 

Top Shine’s case was the first wind-up lawsuit against Evergrande and became the consolidated class action for other frustrated creditors.  

What happens if a liquidation order is issued?

If Chan’s court decides to issue a wind-up, Evergrande could still appeal the decision. But that wouldn’t stop the liquidation process from moving forward.

However, a liquidation order may not necessarily lead to an immediate suspension of Evergrande’s construction work, housing delivery and other activities.

After the order, the court could appoint a liquidator, who would seize control from directors and management to make major business decisions and seek gains for creditors from existing assets. 

That’s not an easy process in dealing with Chinese developers. Most Evergrande projects are operated by local units, which could be hard for the offshore liquidator to seize. 

“It’s impossible to expect liquidators to take control over every subsidiary of Evergrande. There could be a thousand of them,” said Nigel Trayers, managing director of restructuring at Grant Thornton LLP. “But the size alone is not the only thing that will prevent the liquidators from taking control onshore. China’s system is more focused on protecting the onshore stakeholders.”

The process of taking over companies could last for years for even routine cases. And none of the three wind-up orders involving the developers — including the first one in a case involving a Yango Group unit last year — comes close to Evergrande in complexity, asset size, and the number of stakeholders. 

“The property market hasn’t been good and it made liquidation works more difficult,” according to Derek Lai, the global insolvency leader at Deloitte, whose team was appointed as the liquidator of Yango’s unit.

What are some Evergrande assets in focus? 

Evergrande has more than 1,200 projects for sale, along with tourist resorts and land, according to its 2022 annual report. Chinese developers use a maze of subsidiaries to locally hold real estate projects, and Evergrande has over 100 major units onshore. 

The company also has a new energy vehicle unit, property service arm, and online housing sales platform. 

Fewer offshore real estate assets are up for grab. Evergrande’s prized tower in Hong Kong has been taken over by a lender. A land plot in the city’s Yuen Long area was sold for $637 million after it was seized by a receiver, an annual report shows. 

Another factor that would complicate a possible liquidation is Evergrande’s Chapter 15 bankruptcy filing in the US earlier this year. The filing enables the company to tap the US legal process designed to administer cross-border insolvencies and protect the debtor’s assets to a certain extent.    

How would China react to a Hong Kong court order? 

The Chinese government also would play an outsize role in any liquidation of onshore developers, and it may choose to shrug off the Hong Kong court order. And the vast majority of Evergrande assets — and other Chinese developers — are located onshore. 

“There is a layer of complexity as to whether China would actually recognize or assist foreign liquidators,” said Alan Tsui, a partner at JunHe Law Offices. “The recognition of Hong Kong wind-up order in mainland has been very limited.”

In 2021, the courts of China and Hong Kong agreed to an arrangement to recognize the appointment of liquidators. So far, the Hong Kong court allowed five cases to seek mainland’s recognition, and two of them were successfully recognized by Chinese courts, according to Deloitte’s data. 

But it could be a challenge to both jurisdictions to handle what would be the largest insolvency case in recent years.

Mainland courts could also appoint “administrators” to local jurisdictions where a distressed developer’s main properties are located, Tsui said. “Hong Kong-appointed liquidators will have to see if they could gain control,” he said. 

The China government also has other priorities, such as appeasing a mass of home-buyers by helping to deliver what they bought from developers. 

“Delivering houses is one of our jobs,” Deloitte’s Lai said. “Social welfare is what the government cares about the most.”

How likely is Evergrande’s liquidation? 

Evergrande’s recent fumbles have contributed to speculation that Chan has ample reasons to lean toward a wind-up. 

The company had planned to get court approval for its debt restructuring plan in mid-October, and hoped to usher in a camp of supportive creditors who would outnumber wind-up proponents. But a surprising delay in creditor voting left the plan in limbo. 

Its restructuring plan proposes to swap defaulted debt to new notes maturing in 10 to 12 years or a combination of new debt and equity-liked instruments. But as of April, a key class had still fallen short of gathering enough support within its own members to back the plan. Another group complained recently that they had been ‘left in the dark’, but didn’t say if they would pursue a wind-up. 

The face of the company, billionaire chairman Hui Ka Yan, also has been subject to “mandatory measures” related to “suspicion of illegal crimes,” according to a company statement. 

“There is a high risk that the company will face an unfavorable outcome at the next hearing.” Margulies said. The company’s proposal “seems far less viable given the recent postponements and announcements,” he added. 

Chan could turn skeptical without workable, realistic proposals from the debtor. 

In a wind-up order she issued earlier this year for Jiayuan International Group, she noted that the Chinese developer’s “so-called restructuring is really not a concrete proposal but just an idea put forward by the company.”  

More stories like this are available on bloomberg.com

©2023 Bloomberg L.P.