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In January, journalists, company consultants and restructuring specialists stuffed up a Hong Kong courtroom in a uncommon scene to attend Evergrande’s winding-up listening to the place decide Linda Chan declared “sufficient is sufficient” and handed down a liquidation order.
The landmark case involving China’s once-biggest property developer by gross sales with greater than $300bn in liabilities has put the territory’s authorized framework for resolving debt issues again within the highlight. Greater than 20 Chinese language builders have been slapped with winding-up petitions in Hong Kong since China’s actual property disaster started in 2021, with at the least 5 being ordered to be wound up by a Hong Kong decide.
This isn’t a terrific outcome for any of the events concerned. Usually described as a “nuclear possibility” and a lose-lose situation by attorneys, these winding-up courtroom proceedings go away collectors with little to no return. And proceedings can drag out for a lot of months.
Attorneys and restructuring specialists say Hong Kong’s authorized framework for different debt restructuring choices is missing in contrast with monetary jurisdictions akin to London, New York and Singapore.
A restructuring invoice to treatment this has been in dialogue for greater than 20 years within the Asian monetary hub however different legislative priorities have taken priority amid a scarcity of consensus on what it ought to comprise. The final push to introduce one got here in 2020 when a draft legislative proposal was made because the Covid-19 pandemic struck.
The Hong Kong authorities carried out a session however later put the plan once more on maintain. Though it mentioned it will proceed to seek the advice of stakeholders to refine the legislative proposals, there doesn’t look like a timeframe for that.
Attorneys mentioned there was a urgent want to lift the proposal again up the agenda, significantly as offshore collectors more and more use Hong Kong courts to power distressed Chinese language builders into rushing up their restructuring plans.
Chinese language builders have defaulted on a large $115bn of $175bn in excellent offshore greenback bonds since 2021, in line with Bloomberg knowledge. And property developer Shimao final month turned one of many newest to face a winding-up petition, unusually from a Chinese language state-backed financial institution. Nation Backyard, which defaulted in October, acquired a winding-up petition in February involving greater than $200mn price of debt.
A key ingredient of a restructuring invoice is that after the appointment of a supervisor for a debt restructuring, a statutory moratorium could be imposed to halt events from dashing off to courtroom and asking for a winding up.
Beneath the present authorized system in Hong Kong, collectors are free to go after distressed firms by submitting wind-up petitions earlier than a scheme of association for a restructuring is agreed after which accepted by a courtroom, in line with Jamie Stranger, a Hong Kong-based accomplice at Stephenson Harwood.
Legislation agency Herbert Smith Freehills says this provides “dissenting collectors important leverage to carry the corporate and different consenting collectors to ransom and in any other case encourages ‘rogue’ behaviour by them, which in flip jeopardises the restructuring efforts”. It provides: “This usually results in a worse end result for all events the place there’s a real prospect that the restructured enterprise would be capable to commerce out of its difficulties.”
One downside is to what extent would a restructuring invoice cowl mainland Chinese language belongings. Beneath the present winding-up course of in Hong Kong, it is rather unlikely for offshore collectors to get again any onshore mainland belongings. That is regardless of a “mutual recognition settlement” on insolvency and restructuring rolled out in 2021 that applies in some elements of mainland China. Offshore collectors stay sometimes subordinated to onshore stakeholders, attorneys say.
A invoice “would want to interface with the mainland legal guidelines and supply some potential for a provisional supervisor to be recognised and assisted within the mainland”, Jonathan Leitch, a Hong Kong-based accomplice at Hogan Lovells, advised me. In any other case, the roles of a Hong Kong-based provisional supervisor generally “could be severely hampered”.
Lance Jiang, a accomplice in restructuring and insolvency at regulation agency Ashurst, says: “Most practitioners wish to have the brand new restructuring invoice, as a result of it undoubtedly mitigates the hole between Hong Kong and different worldwide centres and would give the businesses and likewise the collectors facet with extra choices to do consensual restructuring.”
“It’s Hong Kong, you already know, the legislative council can do it shortly, effectively,” says Jiang, including that this could profit everybody available in the market.
thomas.chan@ft.com
