A court in Hong Kong has ordered the liquidation of debt-laden Chinese property giant Evergrande.
Judge Linda Chan said “enough is enough”, after the troubled developer repeatedly failed to come up with a plan to restructure its debts.
The firm has been the poster child of China’s real estate crisis with more than $300bn (£236bn) of debt.
But it is unclear how far the Hong Kong ruling will hold sway in mainland China.
The property giant, which has been in hot water with its creditors for the last two years, filed a request for another three months’ leeway at 4pm on Friday.
But Judge Chan turned it down, describing the idea as “not even a restructuring proposal, much less a fully formulated proposal”. Instead she ordered the start of the process to unwind Evergrande, appointing liquidators at Alvarez & Marsal Asia to oversee it.
The liquidators said their intention was to “achieve a resolution that minimises further disruption for all stakeholders”.
“Our priority is to see as much of the business as possible retained, restructured, or remain operational,” said Wing Sze Tiffany Wong, one of the managing directors.
The slowburn crisis at Evergrande has sent shockwaves through the investment community, with its potential impact likened to the collapse of Lehman Brothers at the start of the financial crisis.
China’s property sector remains fragile as investors wait to see what approach Beijing will take to the court’s move.
The decision is likely to send further ripples through China’s financial markets at a time when authorities are trying to curb a stock market sell-off.
Evergrande shares fell by more than 20% in Hong Kong after the announcement, before trading was suspended.
The liquidators will look at Evergrande’s overall financial position and identify potential restructuring strategies. That could include seizing and selling off assets, so that the proceeds can be used to repay outstanding debts.
However, Beijing may be reluctant to see work halt on property developments in China, where many ordinary would-be homeowners are waiting for apartments they have already paid for.
Evergrande has come to symbolise the rollercoaster ride of China’s property boom and bust, borrowing heavily to finance the building of forests of tower blocks aimed at housing the millions of migrants moving from rural areas to cities. It ran into trouble, and defaulted on its debts in December 2021.
Evergrande’s chairman, Hui Ka Yan, hit the headlines for his lavish lifestyle, before it was announced last year that he was under investigation for suspected crimes.
Ordinary Chinese property buyers have limited options to demand compensation, but many have taken to social media to express their frustration about developers like Evergrande.
Big investors have turned to the courts, including in Hong Kong, where Evergrande’s shares are listed. The case that resulted in Monday’s ruling was brought in June 2022 by Hong Kong-based Top Shine Global, which said that Evergrande had not honoured an agreement to buy back shares.
Evergrande’s executive director, Shawn Siu, described the decision to appoint liquidators as “regrettable”, but told Chinese media the company would ensure home building projects would be delivered.
The unwinding is likely to take some time and construction is expected to continue in the meantime.
Most of Evergrande’s assets – 90% according to Judge Chan’s ruling – are in mainland China and despite the “one country, two systems” slogan, there are thorny jurisdictional issues.
Ahead of Monday’s ruling, China’s Supreme Court and Hong Kong’s Department of Justice signed an arrangement to mutually recognise and enforce civil and commercial judgements between mainland China and Hong Kong.
But experts are still unsure whether that agreement will have an impact on Evergrande’s liquidation order.
Derek Lai, the global insolvency leader at professional services firm Deloitte said the liquidator would need to “follow the laws of mainland China”, which could make it hard to take full control of Evergrande’s operations there.
Beijing may want to see mainland building projects completed to meet the expectations of Chinese buyers and investors.
Foreign creditors are unlikely to get their money before mainland creditors.
However, even if Judge Chan’s orders are not carried out in China, the decision sends a strong message and gives a clue on what other developers and creditors may face.
She presides over not just Evergrande’s case, but also other defaulted developers such as Sunac China, Jiayuan and Kaisa.
Last May, she also ordered the liquidation of Jiayuan after its lawyers failed to explain why they needed more time to iron out their debt restructuring proposal.