China's Evergrande ordered to liquidate by Hong Kong court

The ruling makes the homebuilder, which has $333 billion in liabilities, the most prominent symbol so far of China’s real estate crisis

Since its default in 2021, Chinese property developer Evergrande has proposed several restructuring plans. But the process has run into various troubles. AP

China Evergrande Group has received a liquidation order from a Hong Kong court, setting off what is expected to be a daunting process to carve up one of the biggest victims of a years-long and nationwide property debt crisis.

A wind-up will end up in the company being managed by provisional liquidators and addressing issues, including control by founder and chairman Hui Ka Yan, Judge Linda Chan said in the city’s High Court on Monday morning.

Trading in Evergrande shares was suspended after the stock tumbled 21 per cent, giving it a market value of just HK$2.15 billion ($275 million).

The ruling makes the homebuilder, which has 2.39 trillion yuan ($333 billion) in liabilities, as the most prominent symbol of a real estate crisis that led to slower economic growth and a slew of defaults.

The liquidation will be a test case of the legal reach of Hong Kong courts in China, where most of Evergrande’s assets reside, with any new management also needing to navigate asset sales in an industry lacking liquidity and confidence.

The developer had failed to reach an agreement with creditors even after years of negotiations, with Mr Hui placed under police control in September on suspicion of committing crimes.

People walk near an entrance of the High Court where a court hearing on property developer China Evergrande Group was being held, in Hong Kong, on January 29, 2024. Reuters

“The market will pay close attention to what the liquidators can do after being appointed, especially whether they can achieve recognition from any of the three designated PRC courts” under a 2021 arrangement between China and Hong Kong, said Lance Jiang, restructuring partner at law firm Ashurst.

“The liquidators will have very limited powers of enforcement over onshore assets in mainland China if they cannot get such recognition.”

While Hong Kong’s courts have issued at least three wind-up orders for other Chinese developers since the crisis began in 2021, none comes close to Evergrande in complexity, asset size, and the number of stakeholders.

There are also few signs that the liquidation of Jiayuan International Group and Yango Justice International, a unit of Yango Group, are moving forward much.

Hong Kong’s insolvency proceedings have limited recognition in China, whose courts may also appoint administrators in their own jurisdictions. That leaves open the question of the claims of the $17 billion of Evergrande’s dollar bond holders covered in its proposed restructuring plan.

Most of Evergrande’s dollar notes were traded at around 1.5 cents on the dollar as of last Friday, an indication that investors have little expectations on repayment, according to Bloomberg-compiled data.

“The company has made all efforts possible and is sorry about the winding-up order,” Evergrande chief executive Shawn Siu said in a statement.

“The company will ensure home deliveries and steadily promote normal operation of the group.” It will also communicate with the liquidator, he said.

The petition for liquidation was filed in June 2022 by Top Shine Global of Intershore Consult (Samoa), which was a strategic investor in the homebuilder’s online sales platform. Evergrande’s offshore restructuring plan also covers $14.7 billion debt claims of other offshore liabilities, according to its restructuring document dated March.

While creditors were not seeking a wind-up order, Judge Chan noted the lack of progress.

“The company said it will do one, two, three,” she said. “None of that has been done.”

Still, “even after a wind-up, it’s still possible for the company to put forward a scheme of arrangement”, said Judge Chan.

Evergrande, which first defaulted on a dollar bond in December 2021, was for a time in the last decade the country’s largest builder by sales.

The petition for liquidation was filed in June 2022 by Top Shine Global Limited of Intershore Consult (Samoa), which was a strategic investor in the homebuilder’s online sales platform.

Judge Chan, who has presided over a string of developer hearings, will conduct a hearing on a potential regulating order at 2.30pm on Monday, according to information on the city’s judiciary website.

Such orders mean that the court would regulate the winding-up process, potentially including appointing a liquidator.

Hui Ka Yan, chairman of Evergrande Real Estate Group, was placed under police control in September on suspicion of committing crimes. Reuters

Since its default in 2021, Evergrande has proposed several restructuring plans. But the process has run into various troubles. It scrapped its creditor meetings at the last minute in late September, saying the latest plans required reassessment.

The company proposed its last restructuring plan in January and aims to present new term sheets by March, according to participants in the Monday hearing that included legal representatives from Evergrande and its ad hoc bondholder group.

However, that effort failed to buy Evergrande more breathing room.

Even with the wind-up order, the liquidator is expected to face a tricky process in dealing with Chinese developers.

Most Evergrande projects are operated by local units, which could be hard for the offshore liquidator to seize. And construction work, housing delivery and other activities in mainland China could continue while the process unfolds.

The property market has continued to sag even as China introduced a series of new measures to stem sinking prices and sluggish demand.

“The macroeconomic impact should be limited as the liquidation itself is unlikely to exert more pressure on the battered property sector,” said Gary Ng, senior economist at Natixis.

“However, it will worsen sentiment as investors will be worried that there is a snowball effect on other pending cases.”