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Two years after its first default, the world’s most indebted property developer Evergrande faces its biggest legal test so far in its slow-motion collapse.
On Monday, a Hong Kong court will address a winding-up petition, brought by offshore investor Top Shine Global, against a company that has embodied the turmoil that has engulfed China’s property sector and whose fortunes have worsened dramatically in recent months.
In September, the authorities said its founder and chair Hui Ka Yan was suspected of crimes, while plans to restructure its international debts were derailed by a lack of approval from the China Securities Regulatory Commission (CSRC). The wider real estate sector has also been shaken this month by a default by the developer Country Garden, adding to dozens of missed payments by its peers.
The prospect of an Evergrande liquidation, with its hundreds of projects across the mainland, gives added urgency to Beijing’s effort to address the problems of the country’s paralysed real estate sector.
“I do think the Chinese government looks at Evergrande as unique,” said one person familiar with the restructuring sector in China.
Top Shine’s winding-up lawsuit, initially brought in mid-2022 but repeatedly delayed, accuses Evergrande of failing to honour claims of HK$863mn (US$110mn) in relation to stakes Top Shine bought in the Evergrande unit Fangchebao, its online real estate and automobile marketplace platform.
The lawsuit could also be a further blow to any hopes of a restructuring deal between Evergrande, which had more than $300bn in liabilities at the time of its failure in 2021, and its international bondholders. A deal that would have seen new notes issued to replace old bonds was thrown off course at the last minute in September because of a lack of regulatory approvals.
International bondholders have yet to state a clear position on any liquidation, but earlier this month said it was “the base case” if no restructuring deal was reached. Their advisers have attended previous hearings brought by Top Shine.
Meanwhile, the fate of Hui has highlighted uncertainty over the government’s views on Evergrande, bringing with it implications for future restructuring plans or the process of liquidation.
The person familiar with the restructuring sector in China said criminal proceedings were likely to take precedence over civil cases. “We have been involved in other cases where the chair has been locked up and nothing really happens in the restructuring in that period until the dust settles,” the person said.
Beijing has so far emphasised the need to complete unfinished projects and has not openly intervened in Evergrande’s case, with local authorities in the southern province of Guangdong, where Evergrande is based, instead spearheading restructuring discussions.
International bondholder advisers Kirkland & Ellis and investment bank Moelis complained in a statement earlier this month about the company’s failure to gain regulatory approval for the restructuring plan.
The advisers noted that “despite repeated requests” from the bondholder group, Evergrande “has not provided copies of the filings made with CSRC and a detailed account of the efforts made to obtain the CSRC’s approval which led to the current situation”.
In contrast to Evergrande, another developer, Sunac, received approval for its own restructuring in recent weeks in a Hong Kong court.