The court in Hong Kong has told the struggling Chinese real estate company Evergrande to sell off its assets and pay its debts.
Judge Linda Chan said “stop doing this” because the developer kept failing to come up with a plan to fix its debts.
The company is a big example of China’s real estate problem because it owes more than $300 billion.
Two years ago, when Evergrande couldn’t pay its debts, it caused a big problem for financial markets around the world.
Evergrande’s executive director, Shawn Siu, said it’s sad, but the company will still do business in China.
The company’s branch in Hong Kong was separate from its business in mainland China, he said in a statement.
We don’t know yet how the ruling will affect Evergrande’s home building business. But the company’s crisis has already left many home buyers waiting for their new properties.
Beijing tried to calm people’s worries about the housing problem. Many people are using social media to talk about their anger at companies like Evergrande.
The court’s decision will probably have an impact on China’s financial markets because authorities are trying to stop the stock market from falling.
The property sector in China makes up about 25% of the world’s second largest economy.
Evergrande’s stock dropped by over 20% in Hong Kong after the news came out on Monday. Buying and selling of stocks has stopped for now.
Liquidation means when a company’s things are taken and sold. The money earned can be used to pay off any money owed.
However, whether this happens may depend on the Chinese government and the liquidation order doesn’t necessarily mean that Evergrande will go out of business and fail.
Before Monday’s decision, China’s highest court and Hong Kong’s Department of Justice made an agreement to acknowledge and uphold civil and business judgments from both mainland China and Hong Kong.
However, experts are not sure if the change that started on Monday will affect Evergrande’s liquidation order.
The company asked for more time to make a new plan to change their business. They asked for three more months, but only asked for it on Friday at 4pm.
Judge Chan said the new plan is not really a plan and is not well thought-out.
In June 2022, a company called Top Shine Global from Hong Kong, who is an investor in Evergrande, took Evergrande to court. They said that Evergrande did not keep their promise to buy back shares.
But they only deserve a small amount of Evergrande’s huge debts.
Most of the money Evergrande owes is to lenders in China and they have limited ways to ask for their money back.
People who lend money from other countries can take legal action against Evergrande in Hong Kong, where the company is listed, instead of in mainland China.
After a winding up order, the directors of the companies will no longer be in charge.
The court would probably choose a temporary liquidator, who could be a government worker or a professional from a company like Deloitte, says Derek Lai, who is in charge of handling bankruptcies at Deloitte.
After talking to the people the company owes money to, a person will be chosen to handle the closing of the company in a few months.
However, most of Evergrande’s belongings are in mainland China and there are difficult legal issues despite the slogan “one country, two systems. ”
China and Hong Kong have an agreement to accept the appointment of liquidators. However, Mr Lai says that only two out of six applications have been approved by the courts in three pilot areas in mainland China. The Chinese Communist Party wants to make sure that developers stay in business so that people who bought homes before they were built can still get what they paid for.
This means Beijing might decide to ignore the Hong Kong court’s decision.
Mr Lai says that even if the liquidator is accepted in both Hong Kong and mainland China, they have to obey the laws of mainland China when doing liquidation work there.
The parent company’s order to sell off assets right away doesn’t mean that Evergrande’s building projects will stop right now.
Nigel Trayers, who helps companies reorganize at Grant Thornton, says not all the smaller companies will be shut down. Some of them could be taken over by liquidators.
“But they would have to either close the subsidiaries or become the directors of those subsidiaries,” he says.
“To do this, they have to go through each level of the company and there might be some difficulties when they actually try to do it. ”
Mr Lai says that if a company is broke, it’s unlikely that creditors will get all their money back.
People who are owed money from other countries probably won’t get paid before people who are owed money from the same country.
Even if Judge Chan’s rules are not followed in China, it still shows others what they could expect to happen to them.
She is in charge of Evergrande and other companies that couldn’t pay their debts, like Sunac China, Jiayuan, and Kaisa.
In May, she made the decision to close down Jiayuan because its lawyers couldn’t explain why they needed more time to work on their plan to fix the company’s debt.
Daniel Margulies, a partner at the global law firm Dechert in Hong Kong, who specializes in restructuring matters in Asia, said it’s unclear how offshore liquidators would be treated by onshore stakeholders when there are many local creditors and factors to consider.
Evergrande was trying to come up with a new way to pay back its debts, but in August last year, it officially declared that it was unable to pay its debts and filed for bankruptcy in the United States to protect its American assets while it tried to make a deal.
The next month, the chairman Hui Ka Yan was watched by the police.
