Any liquidation of troubled property giant Evergrande depends on Chinese authorities' recognition of the Hong Kong court's ruling, in a decision that may also impact the city's standing as a global financial center, legal practitioners said.
A Hong Kong court on Monday ordered China Evergrande Group, the world's most indebted developer with nearly $300 billion worth of liabilities, to be liquidated after around 18 months of failed negotiations with offshore creditors.
Offshore creditors expect Evergrande's liquidator, Alvarez & Marsal (A&M), to propose a new offshore debt restructuring plan and move to liquidate the company only if that cannot be agreed upon, two sources told Reuters.
"Typically, it is better for a liquidator to restructure the company than to liquidate if that can be done successfully," said Derek Lai, Deloitte global insolvency leader. "Creditors could usually get higher recovery this way."
Evergrande defaulted on its debt in 2021 and had worked on several restructuring proposals, which fell apart after the Chinese government ruled it could not issue new debt as its flagship onshore unit and chairperson were under investigation.
Hong Kong High Court Justice Linda Chan, who issued Monday's order, said a liquidator taking over Evergrande's management could help to clear that regulatory hurdle, paving the way for a new restructuring plan.
Given the sheer size of Evergrande and the potential impact on social stability from angry buyers who have paid for uncompleted and undelivered homes, restructuring talks are expected to involve close communications with authorities in Beijing and Guangzhou, where Evergrande is based, as well as regulators including China Securities Regulatory Commission and National Development and Reform Commission.
If restructuring talks with creditors fail, the progress and pace of Evergrande's liquidation will rely on whether mainland courts recognize the Hong Kong judgment. Recognizing the ruling would allow creditors to seize unpledged onshore Chinese assets, a process that could take a number of years to complete, according to lawyers.
The bulk of these onshore assets are land and property developments that have been pledged as collateral to onshore creditors, including banks and business partners, potentially creating a conflict between them and offshore creditors.
"The PRC courts can refuse to recognize or assist Hong Kong liquidators in a number of ways under the cross-border protocol," said Jonathan Leitch, a Hogan Lovells partner in Hong Kong.
"This includes if mainland creditors may be unfairly treated or if recognition would violate basic principles of PRC law or if it would offend public order or good morals."
China created a pilot scheme in 2021 in which courts in Shanghai, Xiamen, and Shenzhen can recognize Hong Kong-ordered insolvency proceedings.
However, as Evergrande is based in Guangzhou and many of its $240 billion assets are spread across China, the liquidator must go to court in every city where Evergrande's subsidiaries are based to take control.
Hong Kong courts have issued many liquidation orders on Chinese companies in the past and the cross-border procedure has challenged many.
Deloitte's Lai, who has been involved in a number of liquidation cases, said there were incidents where local governments treated offshore creditors unfairly, but the process went more smoothly when provincial governments stepped in to help.
"It would be very encouraging to international creditors if they see a prompt recognition from the mainland courts, which may help them rebuild confidence in Hong Kong as a regional financial center and hub to invest in China," said Lance Jiang, partner at law firm Ashurst.
After its appointment as liquidator on Monday, A&M said it would immediately head to Evergrande's headquarters.
"We will meet with the company officers to obtain an understanding of the company's affairs and determine next steps which serve the best interests of the creditors and other stakeholders," an A&M spokesperson told Reuters.
A&M is a global firm specializing in financial consulting and restructuring. It obtained an advisory mandate from the Swiss government last April, linked to the rescue of Credit Suisse.
Two officials from the firm also joined the restructuring of the Nasdaq-listed Luckin Coffee Inc. as joint provisional liquidators after an accounting scandal at the firm was revealed in 2020.
