China’s debt-laden real estate giant Evergrande faces a court-ordered liquidation in Hong Kong, as Judge Linda Chan expressed frustration over the company’s failure to propose a viable restructuring plan.
Evergrande, with over $325 billion in liabilities, had already defaulted two years ago, causing global financial shockwaves.
The move is expected to impact China’s financial markets amid efforts to control a stock market sell-off.
Shares of Evergrande plunged more than 20% in Hong Kong following the court’s decision.
China’s property sector constitutes approximately a quarter of the world’s second-largest economy.
Liquidation involves seizing and selling a company’s assets to repay outstanding debts, but the outcome depends on the Chinese government, and the order does not guarantee Evergrande’s collapse.
The court case, initiated by investor Top Shine Global in June 2022, alleged Evergrande’s failure to fulfill a share buyback agreement.
However, the owed amount is a fraction of Evergrande’s massive debts, primarily owed to mainland Chinese lenders with limited legal recourse.
Foreign creditors, with more flexibility, often choose Hong Kong to bring lawsuits against developers listed there.
Upon a winding-up order, directors lose control, and a provisional liquidator is likely appointed.
Derek Lai from Deloitte notes that formal liquidator appointments follow creditor meetings within months.
However, jurisdictional issues arise, as Evergrande’s assets are mainly in mainland China.
While the Hong Kong court order may not immediately impact construction, Nigel Trayers of Grant Thornton explains that subsidiaries might face liquidation later.
Liquidators could gain control by appointing themselves directors or placing subsidiaries into liquidation.
Recovering full amounts for unsecured creditors, especially foreign ones, is unlikely in the case of insolvency.
Even if China ignores the order, the message sent could influence other developers and creditors.
Judge Chan, overseeing not only Evergrande but also defaulted developers like Sunac China, Jiayuan, and Kaisa, has a history of ordering liquidations.
The offshore liquidator’s treatment by onshore stakeholders, with local considerations, remains uncertain, according to Daniel Margulies, a restructuring specialist at Dechert in Hong Kong.
Evergrande had been working on a new repayment plan, but last August, it filed for bankruptcy in the US to safeguard American assets during negotiations.
