A Hong Kong court has ordered the liquidation of the debt-ridden Chinese property giant Evergrande, marking a significant development in China's real estate crisis. Judge Linda Chan, expressing frustration with Evergrande's failure to propose a debt restructuring plan, stated, "enough is enough." The company, with over $325 billion in liabilities, has been a symbol of the challenges in China's property sector.
This decision is anticipated to impact China's financial markets, coinciding with efforts by authorities to curb a stock market sell-off. Evergrande's shares plummeted by more than 20% in Hong Kong, prompting a suspension of trading. The liquidation process involves seizing and selling a company's assets to repay outstanding debts, though it does not necessarily mean immediate bankruptcy.
The case, initiated by investor Top Shine Global in June 2022, accused Evergrande of failing to fulfill a share buyback agreement. However, the amount owed to this investor is a fraction of Evergrande's total debts, primarily owed to mainland Chinese lenders. Foreign creditors, with more legal avenues, have chosen Hong Kong for lawsuits.
Following a winding-up order, the company's directors lose control, and a provisional liquidator is likely to be appointed. Despite the Hong Kong court order, challenges may arise in enforcing liquidation-related matters in mainland China due to jurisdictional issues. The Chinese government, keen on sustaining developers to protect homebuyers, might downplay the court order's impact.
The liquidation order applies to the parent company and does not immediately halt Evergrande's construction work. Nigel Trayers from Grant Thornton notes that liquidators may seek control of subsidiaries after investigations, but challenges may arise in doing so.
Foreign creditors are unlikely to recover their funds before mainland creditors, and the order sends a message about potential challenges for other developers and creditors. Judge Chan, who has overseen cases involving defaulted developers like Sunac China, Jiayuan, and Kaisa, emphasizes the uncertainty of how offshore liquidators would be treated by onshore stakeholders in the presence of significant local creditors and considerations.
In August last year, Evergrande filed for bankruptcy in the US to protect its American assets during ongoing negotiations. The subsequent month saw the company's chairman, Hui Ka Yan, placed under police surveillance.