HONG KONG – A hearing for China Evergrande Group in a Hong Kong insolvency court later in October 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 is trying to finalise a restructuring plan to pay back creditors.

Any efforts to wind up the world’s most indebted developer – even if difficult to enforce on the mainland – would provide a road map for other Chinese developers and creditors on how liquidation of such magnitude may play out.

Evergrande, the poster child of China’s real estate debt crisis with about US$327 billion (S$447.6 billion) of liabilities, comes to the hearing at a time 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 Mr Daniel Margulies, a partner at Dechert LLP, who specialises 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”, he said. 

The hearing originates from a wind-up lawsuit filed by a creditor, Top Shine Global Limited of Intershore Consult (Samoa), which was a strategic investor on 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 Judge Chan’s court decides to issue a wind-up, Evergrande could still appeal the decision. But that would not 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, which would seize control from directors and management to make major business decisions and seek gains for creditors from existing assets. 

This is 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 Mr 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,” he added.

The process of taking over companies could last for years for even routine cases. None of the three wind-up orders involving developers – including the first one in a case involving a Yango Group unit in 2022 – 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 Mr Derek Lai, 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 more than 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 grabs. 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 US$637 million after it was seized by a receiver, an annual report showed. 

Another factor that would complicate a possible liquidation is Evergrande’s Chapter 15 bankruptcy filing in the United States earlier in 2023. 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. The vast majority of Evergrande’s assets – and those of other Chinese developers – are located onshore. 

“There is a layer of complexity as to whether China would actually recognise or assist foreign liquidators,” said Mr Alan Tsui, a partner at JunHe LLP. “The recognition of Hong Kong wind-up orders on the mainland has been very limited.”

In 2021, the courts of China and Hong Kong agreed to an arrangement to recognise the appointment of liquidators. So far, the Hong Kong court allowed five cases to seek the mainland’s recognition, and two of them were successfully recognised 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, Mr Tsui said.

“Hong Kong-appointed liquidators will have to see if they can gain control,” he said. 

The Chinese 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 Mr 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 Judge Chan has ample reasons to lean towards a wind-up. 

The company had wanted to get court approval for its debt restructuring plan in mid-October, and hoped to usher in a camp of supportive creditors that 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-linked instruments.

But as at 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 it had been “left in the dark”, but did not say if it would pursue a wind-up. 

The face of the company, billionaire chairman Hui Ka Yan, 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 unfavourable outcome at the next hearing,” Mr Margulies said.

He added that the company’s proposal “seems far less viable, given the recent postponements and announcements”.

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

In a wind-up order she issued earlier in 2023 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”. BLOOMBERG