Chinese authorities ruled last year that troubles at its Hendga Real Estate unit had disqualified Evergrande from issuing new bonds, a key plank in the group debt reorganisation to repay offshore creditors. That essentially killed its March 2023 plan to rehabilitate almost US$20 billion of defaulted debts.
Shares of entities in the group plunged after the liquidation order. China Evergrande Group sank 21 per cent to HK$0.163 on Monday. Evergrande New Energy Vehicle Group slumped 18 per cent to HK$0.23, and Evergrande Property Services Group fell 2.5 per cent to HK$0.39, before trading was halted after the judgment.
Childhood dreams fuelled a debt binge that has taken Evergrande to the brink
Shares of other indebted developers like Country Garden Holdings rose amid optimism that Evergrande’s collapse would excise the industry’s biggest tumour and put a floor under the sagging sentiments in China’s multi-year property sector slump.
“Restructuring and winding-up of developers are necessary for cleaning up the excesses in the Chinese property sector,” Saxo’s chief China strategist Redmond Wong said.
Justice Chan said the appointment of the liquidators was based on the experience of the candidates. Candidates from EY and KPMG were also proposed by some creditors, but the judge said Middleton had a lot of experience in handling big liquidation cases.
Middleton was formerly a liquidator of Lehman Brothers’ operations in Asia after the Wall Street investment bank collapsed during the financial crisis in 2008.
Wong was appointed provisional liquidator of mainland Chinese coffee chain Luckin Coffee in July 2020, after the firm collapsed following a fake accounting scandal. She successfully restructured the firm and brought it out of bankruptcy two years later.
Alvarez & Marsal in 2022 were appointed receivers of Evergrande Centre, a 27-storey office-cum-retail tower in Hong Kong, which previously served as the headquarters of Evergrande’s business in the city.
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“Our priority is to see as much of the business as possible is retained, restructured, and remains operational,” Wong told the media outside the court after the appointment.
Wong and Middleton will now take over Evergrande’s management and handle its affairs. This includes negotiating debt restructuring with creditors and taking control of its assets, books and records, in accordance with the liquidation procedures in Hong Kong.
Two categories of creditors lay claim to Evergrande’s assets: class A and C. The company’s legal team proposed a “one-class scheme” to work out the group’s debt with both groups, to no avail.
Creditors will each have to complete and submit a proof of debt form to the provisional liquidators, the court said. They can also urge the liquidators to hold meetings to update them about the progress of the restructuring.
Evergrande’s Hong Kong staff can also claim certain unpaid salaries and dues from the Protection of Wages on Insolvency Fund, in accordance with relevant regulations.
“The company will ensure its normal operation in accordance with law and in accordance with the protection of the rights of our onshore and offshore creditors,” Evergrande’s executive vice-president Xiao En said in a statement. “We will keep communicating and work with the liquidators to work out the group’s debt in accordance with the relevant procedures and international practice.”
The court order, however, faces cross-jurisdictional challenges as most of the company’s assets are located in mainland China. Evergrande has more than 1,200 projects at different stages of progress, ranging from near completion to under construction, according to its 2022 annual report. The developer will “steadily push forward” to ensure homes under construction are delivered to buyers, Xiao said.
Evergrande: default alarms put thousands of suppliers, jobs and economy at risk
“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 courts in the People’s Republic China under the 2021 arrangement regarding cooperation on cross-border insolvency cases between the mainland and Hong Kong,” said Lance Jiang, a partner at Ashurst LLP.
The designated courts are in Shenzhen, Shanghai and Xiamen, according to the cooperation agreement.
“The liquidators will have very limited powers of enforcement over onshore assets in mainland China if they cannot get such recognition,” Jiang said.
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China real estate woes: Evergrande files for bankruptcy protection in New York
China real estate woes: Evergrande files for bankruptcy protection in New York
Monday’s order ended Evergrande’s repeated lease on life, where it had been able to persuade the authorities continuously to grant it more time to work out its debt. It won its seventh reprieve on December 4, when creditors surprisingly failed to push for a liquidation.
An ad hoc group of offshore creditors that collectively hold more than US$6 billion in offshore notes joined the petition to liquidate the company afterwards.
“While there could be certain offshore assets that provide more readily available recovery, the focus of offshore creditors will be whether the liquidator will succeed in obtaining recognition and help from mainland courts to seize assets [onshore],” Wong said. “For Hong Kong shareholders, the likelihood of obtaining anything from the winding-up process is very low.”
Deloitte Advisory (Hong Kong) performed a recovery analysis involving 80 per cent of Evergrande’s net asset value as of November last year. Offshore creditors may be able to recover 9.73 billion yuan in liquidation scenario. Offshore unsecured creditors may recover only 2.05 cents to 3.53 cents for every dollar owed, it estimated, while investors holding Evergrande’s defaulted dollar bonds may get back only 5.92 cents to 9.34 cents per dollar.
The lawsuit was initiated in June 2022 by Top Shine Global, whose ultimate beneficiary was Lin Ho-man, in an attempt to recover HK$862.5 million (US$110.4 million) from a botched investment in Evergrande made in March 2021.
Lin, 32, said in an interview with Tencent News earlier this month that he had offloaded his debt holdings in September by selling Top Shine, but did not offer details.
“The ruling highlights Hong Kong’s vital role as a superconnector between mainland China and the rest of the world,” said Byron Phillips, partner for litigation, arbitration and employment at Hogan Lovells.
It further dispels any myths advanced in some quarters regarding independence or robustness of the Hong Kong judiciary, he added.
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