By Mariko OiBusiness reporter29 January 2024, 02:43 GMTUpdated 41 minutes agoImage source, Getty ImagesImage caption, China’s property sector contributes roughly a quarter of the world’s second biggest economyDebt-laden Evergrande, a Chinese real estate behemoth, has been instructed to go through the process of liquidation by a court in Hong Kong. The decision came after the struggling developer failed repeatedly to devise a plan to restructure its massive debts, which amount to over $300 billion (£236 billion).Evergrande’s executive director, Shawn Siu, expressed disappointment in the outcome but assured that the company’s operations in mainland China will persist, emphasizing that the firm’s Hong Kong arm operated independently from its mainland business. The announcement led to a more than 20% drop in Evergrande’s shares in Hong Kong, prompting the suspension of trading. Liquidation involves the seizure and sale of a company’s assets to settle its outstanding debts. However, the potential enforcement of this process remains uncertain, considering the influence of the Chinese government. The liquidation order does not automatically signify the collapse of Evergrande.Legal experts are unsure about the implications of a recent arrangement between China’s Supreme Court and Hong Kong’s Department of Justice, which aims to facilitate the recognition and enforcement of civil and commercial judgments between mainland China and Hong Kong. The latest court document revealed that Evergrande had requested a further three months to present a new restructuring plan, but the submission came only at 4pm on Friday, leaving the judge unimpressed.Judge Chan dismissed the proposal as inadequate and emphasized that it did not even qualify as a restructuring proposal, let alone a fully developed one. The case was instigated by Hong Kong-based investor Top Shine Global in June 2022, alleging that Evergrande failed to honor an agreement to repurchase shares. However, the sum owed to Top Shine Global represents only a fraction of Evergrande’s extensive debts. Although foreign creditors possess the liberty to file lawsuits against the company outside mainland China, the majority of Evergrande’s debt is owed to lenders within the country, who have limited legal recourse.Professional services firm Deloitte’s global insolvency leader, Derek Lai, outlined the potential appointment of a provisional liquidator following the issuance of a winding-up order, divesting the company’s directors of control. However, the process may encounter challenges due to the majority of Evergrande’s assets being located in mainland China. Furthermore, while Hong Kong and mainland China have an agreement to recognize the appointment of liquidators, this may face impediments prior to executing liquidation-related matters within mainland China.Evergrande’s liquidation order against the parent company does not prompt an immediate suspension of its construction activities. However, it may prompt the liquidators to seek authority over specific subsidiaries after conducting investigations. Nigel Trayers, managing director of restructuring at business advisory firm Grant Thornton, highlighted the potential hurdles in navigating the corporate structure to achieve this transition.Despite the liquidation order, the prospects of unsecured creditors recuperating the full amount of their claims from an insolvent company are slim. Additionally, foreign creditors are unlikely to receive payments ahead of their counterparts in mainland China. Judge Chan’s directives convey a resounding message and offer insight into the challenges that other developers and creditors may encounter. Notably, her rulings extend beyond Evergrande, encompassing other defaulting developers such as Sunac China, Jiayuan, and Kaisa.Last year, she ordered the liquidation of Jiayuan after its legal representatives failed to justify why more time was necessary to resolve their debt restructuring proposal. Amidst Evergrande’s efforts to devise a new repayment plan, the company filed for bankruptcy in the US in August last year to safeguard its American assets as it worked on a deal.
