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Ever Grande: Chinese property behemoth faces liquidation


Ever Grande: Chinese property behemoth faces liquidation


The court in Hong Kong has issued an order for the liquidation of Ever Grande, a prominent Chinese real estate company. Judge Linda Chan expressed her exasperation with the ailing developer's persistent failure to have a strategy for restructuring its debts, stating "Enough is enough". The company has exemplified China's real estate crisis, accumulating a debt of over $300 billion (£236 billion).


The insolvency of Ever Grande two years ago caused significant disruptions in global financial markets. Shawn Siu, the executive director of Ever Grande, expressed his disappointment with the decision but assured that the firm would continue its operations in mainland China.


In a statement, he clarified that the Hong Kong division of the company operated autonomously from its mainland operations.


Although the present consequences of the verdict on Ever Grande's house construction industry remain uncertain, the company's problem has already resulted in a significant delay for several homeowners eagerly awaiting their new residences.


Previously, Beijing has attempted to mitigate public apprehension on the property issue, as many have resorted to Chinese social media platforms like Weibo to express their discontentment with developers like Ever Grande.


The court's ruling is expected to have a significant impact on China's financial markets, particularly since officials are now attempting to control a decline in stock market prices.

The property industry in China accounts for around 25% of the world's second-largest economy.


Ever Grande's stock saw a decline of almost 20% in Hong Kong after the news made on Monday. Trading in the shares has now been halted.


Liquidation is the systematic procedure in which a company's assets are confiscated and then auctioned. Subsequently, the funds might be used to settle existing liabilities.


Nevertheless, the execution of this procedure is contingent upon the Chinese government, and the issuance of a liquidation order does not inevitably imply that Ever Grande will face financial ruin and collapse.


Prior to the verdict on Monday, the Supreme Court of China and the Department of Justice in Hong Kong agreed to formally acknowledge and uphold civil and commercial judgements from both mainland China and Hong Kong.


However, analysts remain uncertain about the potential impact of the modification, which took effect on Monday, on Ever Grande's liquidation order.

The court record, published on Monday, revealed that the corporation had sought an additional three-month extension to formulate a new restructuring plan. However, this request was made just at 4 pm on Friday.


Judge Chan criticised the new plan as insufficiently developed, lacking both a restructuring strategy and a completely articulated proposal.


In June 2022, a lawsuit was initiated by Top Shine Global, an investor located in Hong Kong, alleging that Evergrande failed to fulfil its obligation to repurchase shares as agreed upon.


However, the amount they are entitled to receive is just a small portion of Evergrande's overall liabilities.


Most of Evergrande's debt is owed to lenders in mainland China, who have little legal options to recover their funds.


On the other hand, foreign creditors have the freedom to initiate legal proceedings in jurisdictions outside mainland China. Some of them have opted for Hong Kong, where Evergrande and other developers are listed, to file litigation against the company.


Upon the issuance of a winding-up order, the directors of the corporations will no longer possess authority or power.


According to Derek Lai, the global insolvency head at professional services company Deloitte, the court is likely to appoint a temporary liquidator, who might be either a government official or a partner from a professional firm. The official liquidator will be appointed within a few months after discussions with creditors.


However, the majority of Evergrande's assets are in mainland China. Despite the tagline of "one country, two systems," there are complex legal difficulties regarding jurisdiction.


An agreement exists between the courts of China and Hong Kong to acknowledge the appointment of liquidators. However, Mr Lai states that, to his knowledge, only two out of six applications have been acknowledged by the courts in three pilot locations in mainland China.


The Chinese Communist Party also seems determined to support developers in order to ensure that pre-construction purchasers get the promised value for their purchases.

Consequently, Beijing has the option to disregard the Hong Kong court judgement.


"Although the liquidator appointed is acknowledged in both Hong Kong and mainland China, they must adhere to the laws of mainland China when carrying out approved liquidation-related tasks there," Mr Lai explains.


The liquidation order imposed on the parent company does not entail an immediate cessation of Evergrande's construction activities, either.


"The liquidation process does not include all of the subsidiaries," said Nigel Trayers, the managing director of restructuring at Grant Thornton, a business consultancy company. Trayers further explain that liquidators could assume control over certain subsidiaries after thorough inspections." "However, in order to accomplish this, they would have to either initiate the process of liquidating the subsidiaries or assume the role of directors for those subsidiaries," he further explains.


"To accomplish this, they will have to navigate the hierarchical corporate structure systematically, encountering potential obstacles in the process."


Mr Lai highlights that in the event of insolvency, unsecured creditors are unlikely to fully collect the amount they are owed, even with a liquidation order. Mainland creditors are likely to get their money before foreign debtors.


Although Judge Chan's directives may not be enforced in China, they nonetheless convey a powerful message and provide insight into the potential challenges that future developers and creditors could encounter.


She exercises authority over not just Evergrande, but also other delinquent developers such as Sunac China, Jiayuan, and Kaisa.


In May of last year, she issued the directive to liquidate Jiayuan after the attorneys' inability to provide a satisfactory explanation for their request for an extension to finalise their proposal for debt restructuring.


"The treatment of an offshore liquidator by onshore stakeholders, in the presence of significant local creditors and a consideration at stake, is yet to be determined," states Daniel Margulies, an expert in restructuring problems in Asia and a partner at the global law firm Dechert in Hong Kong.


Evergrande had been formulating a fresh repayment strategy, but in August of the previous year, it resorted to filing for bankruptcy in the United States to safeguard its American assets while negotiating a settlement.

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