HONG KONG – A Hong Kong court on Jan 29 ordered the liquidation of China Evergrande Group, a move likely to send ripples through China’s crumbling financial markets as policymakers scramble to contain the deepening crisis.

Evergrande shares plunged 20.9 per cent in Hong Kong before the hearing. Trading was halted in the company and its listed subsidiaries, China Evergrande New Energy Vehicle Group and Evergrande Property Services, after the verdict.

The decision to liquidate the world’s most indebted developer, with more than US$300 billion (S$402.3 billion) of total liabilities, was made by Hong Kong High Court Justice Linda Chan. She noted that Evergrande had been unable to offer a concrete restructuring plan despite months of delays.

“It is time for the court to say enough is enough,” she said.

The decision sets the stage for what is expected to be a drawn-out and complicated process with potential political considerations as investors watch whether the Chinese courts will recognise Hong Kong’s ruling, given the many authorities involved. Offshore investors will be focused on how the Chinese authorities treat foreign creditors when a company fails.

Justice Chan appointed Alvarez & Marsal as the liquidator, saying an appointment would be in the interests of all creditors because it could take charge of a new restructuring plan for Evergrande at a time when its chairman Hui Ka Yan is under probe for suspected crimes.

Evergrande, which has US$240 billion of assets, sent a struggling property sector into a tailspin when it defaulted on its debt in 2021. The liquidation ruling will likely further jolt already fragile Chinese capital and property markets.

Evergrande chief executive Siu Shawn said the firm will ensure home building projects will still be delivered despite the liquidation order. The ruling would not affect the operations of Evergrande’s onshore and offshore units, he added.

Ms Tiffany Wong, managing director of Alvarez & Marsal, said after the appointment: “Our priority is to see as much of the business as possible retained, restructured, and remain operational. We will pursue a structured approach to preserve and return value to the creditors and other stakeholders.”

Beijing is grappling with an underperforming economy, its worst property market in nine years and a stock market wallowing near five-year lows, so any fresh hit to markets could further undermine policymakers’ efforts to rejuvenate growth.

Evergrande applied for another adjournment on Jan 29 as its lawyer said it had made “some progress” on the restructuring proposal.

As part of the latest offer, the developer proposed creditors swap their debts into all the shares the company holds in its two Hong Kong units, compared with stakes of about 30 per cent in the subsidiaries ahead of the last hearing in December.

Evergrande’s lawyer argued liquidation could harm the operations of the company, and its property management and electric vehicle units, which would in turn hurt the group’s ability to repay all creditors.

Evergrande had been working on a US$23 billion debt revamp plan with a group of creditors known as the ad hoc bond holder group for almost two years.

A court document on Jan 29 showed Evergrande’s key offshore assets also include an unsecured interest-free loan of HK$2.1 billion (S$360.7 million) to a previous unit, China Ruyi, positions in the Greater Bay Area Homeland Investments and its fund with a total book value of HK$1.6 billion, bank balances of HK$3 million and receivables of 131.2 billion yuan (S$24.8 billion) owed by its subsidiaries.

Evergrande could appeal against the liquidation order, but the liquidation process would proceed pending the outcome of the appeal.

“We’re not surprised by the outcome and it’s a product of the company failing to engage with the ad hoc group,” said Kirkland & Ellis partner Fergus Saurin, who had advised the offshore bondholders. “There has been a history of last-minute engagement which has gone nowhere. And in the circumstances, the company has only itself to blame for being wound up.”

Evergrande cited a Deloitte analysis during a Hong Kong court hearing in July that estimated a recovery rate of 3.4 per cent if the developer were liquidated.

After Evergrande said in September that its flagship unit and its chairman were being investigated by the authorities for unspecified crimes, creditors now expect a recovery rate of less than 3 per cent.

The ruling is expected to have little impact on the company’s operations including home construction projects in the near term, as it could take months or years for the offshore liquidator appointed by the creditors to take control of subsidiaries across mainland China – a different jurisdiction from Hong Kong.

The liquidation petition was first filed 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.

Before Jan 29, at least three Chinese developers have been ordered by a Hong Kong court to liquidate since the current debt crisis unfolded in mid-2021. REUTERS