Background
A Hong Kong court ordered China Evergrande Group, the world’s most indebted developer with nearly $300 billion in liabilities, to be liquidated after failing to reach agreements with offshore creditors for approximately 18 months.
Debt Restructuring Plan Expected
According to unnamed sources, offshore creditors anticipate that the liquidator, Alvarez & Marsal (A&M), will first propose a new offshore debt restructuring plan before pursuing the liquidation of the company if an agreement cannot be reached.
“If possible, it is generally better for a liquidator to restructure the company rather than liquidate it,” said Derek Lai, Deloitte’s global insolvency leader.
Regulatory Hurdles and Social Stability
Evergrande defaulted on its debt in 2021 and had several failed restructuring proposals due to an investigation into its flagship onshore unit and chairman. The appointment of a liquidator could help clear this regulatory hurdle and facilitate a new restructuring plan.
Given the company’s size and the potential impact on social stability, restructuring discussions are expected to involve extensive communication with authorities in Beijing and Guangzhou, where Evergrande is headquartered, as well as regulators like the China Securities Regulatory Commission and the National Development and Reform Commission.
Recognition by Mainland Courts
In the event that talks with creditors fail, the speed and progress of Evergrande’s liquidation will depend on whether mainland courts recognize the ruling from the Hong Kong court. This recognition would allow creditors to seize onshore Chinese assets that were not pledged as collateral, a process that may take several years to complete.
However, a potential conflict between onshore and offshore creditors may arise due to the majority of onshore assets being pledged as collateral to onshore creditors, including banks and business partners.
Challenges and Potential Support
Jonathan Leitch, a partner at Hogan Lovells in Hong Kong, explained that there are several ways in which PRC courts can refuse to recognize or assist Hong Kong liquidators under the cross-border protocol. While a pilot scheme was created in 2021 to recognize Hong Kong-ordered insolvency proceedings in certain cities, Evergrande’s situation involves subsidiaries spread across China, requiring the liquidator to go to court in each city where these subsidiaries are based to gain control.
Historically, Hong Kong courts have issued liquidation orders on numerous Chinese companies, but the cross-border procedure has presented challenges. Local governments have sometimes treated offshore creditors unfairly, although the involvement of provincial governments has facilitated smoother processes.
The Liquidator’s Course of Action
Following its appointment as the liquidator, A&M announced that it would promptly visit Evergrande’s headquarters to understand the company’s affairs and determine the best interests of the creditors and other stakeholders.
A&M is a global firm that specializes in financial consulting and restructuring.