Cross-border tool for insolvencies faces test with China’s Evergrande
- Under pilot scheme, Hong Kong liquidator can work with Shanghai, Shenzhen and Xiamen courts, potentially allowing international creditors access to some mainland China assets
The recent High Court order to liquidate indebted developer China Evergrande Group provides an important litmus test for a fledgling measure handling insolvencies between courts in mainland China and in Hong Kong. The measure is critical for a key reason: Evergrande amassed billions of US dollars by selling bonds, mainly to international investors keen to cash in on the once booming Chinese property market.
With Evergrande’s failed bid to stave off liquidation, those international investors are now creditors lining up to recoup some of their losses.
The catch is that Evergrande’s assets to back this debt are overwhelmingly domestic projects denominated in yuan, and hitherto would be considered to be far out of reach of international creditors. Enter the Mutual Recognition of and Assistance to Insolvency Proceedings signed between mainland China and Hong Kong in May 2021, which allows for bankruptcies or liquidations on either side to be recognised across the border.
Court-appointed liquidators in Hong Kong can work with courts in Shanghai, Shenzhen and Xiamen under a pilot scheme to enforce the ruling. In essence, some mainland China assets of the once high-flying developer will be accessible to Evergrande’s liquidator in Hong Kong.
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Only a few of Evergrande’s 1,200 nationwide projects are located in the three cities, and there may be little to go around after onshore investors pick through the developer’s carcass, but the precedent bodes well for other liquidation cases. Up to now, all of the cases that have been handled through the mutual recognition mechanism have been comparatively minuscule.
But with Evergrande, which amassed a staggering US$328 billion in debt to fuel its growth before ultimately failing, the stakes are through the roof.
Previously, most international creditors would have been out of luck. But the mechanism offers an important precedent on how to handle an insolvency of such a huge scale, and a test of transparency and corporate governance for both Hong Kong and mainland China.
With hundreds of mainland China companies listed in Hong Kong, international investors will no doubt be scrutinising how successfully this cross-jurisdictional case is wound up. No creditor is ever satisfied with what they regain from an insolvency.
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But recouping something is always better than getting nothing back. If the liquidation is handled transparently and effectively across the jurisdictions, it should provide a tested mechanism for handling other high-profile insolvencies, and ease the concerns of some bruised investors.
It also would burnish Hong Kong’s credibility and role as China’s financial hub by offering international investors an additional bit of legal recourse to bolster their confidence.
