In January, journalists, company consultants and restructuring specialists crammed up a Hong Kong courtroom in a uncommon scene to attend Evergrande’s winding-up listening to the place choose 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 choose.
This isn’t an important outcome for any of the events concerned. Usually described as a “nuclear choice” and a lose-lose state of affairs by attorneys, these winding-up courtroom proceedings depart collectors with little to no return. And proceedings can drag out for a lot of months.
Legal professionals and restructuring specialists say Hong Kong’s authorized framework for different debt restructuring choices is missing in contrast with monetary jurisdictions reminiscent of 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 an absence 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 could proceed to seek the advice of stakeholders to refine the legislative proposals, there doesn’t look like a timeframe for that.
Legal professionals mentioned there was a urgent want to boost the proposal again up the agenda, significantly as offshore collectors more and more use Hong Kong courts to pressure distressed Chinese language builders into dashing up their restructuring plans.
Chinese language builders have defaulted on a large $115bn of $175bn in excellent offshore greenback bonds since 2021, based on Bloomberg knowledge. And property developer Shimao final month grew to become 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, obtained a winding-up petition in February involving greater than $200mn price of debt.
A key factor 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 speeding off to courtroom and asking for a winding up.
Underneath the present authorized system in Hong Kong, collectors are free to go after distressed corporations by submitting wind-up petitions earlier than a scheme of association for a restructuring is agreed after which authorised by a courtroom, based on Jamie Stranger, a Hong Kong-based accomplice at Stephenson Harwood.
Regulation agency Herbert Smith Freehills says this provides “dissenting collectors vital 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 final 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 property. Underneath the present winding-up course of in Hong Kong, it is vitally unlikely for offshore collectors to get again any onshore mainland property. 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 wish 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 typically “could be severely hampered”.
Lance Jiang, a accomplice in restructuring and insolvency at legislation 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 in addition the collectors facet with extra choices to do consensual restructuring.”
“It’s Hong Kong, you recognize, the legislative council can do it shortly, effectively,” says Jiang, including that this may profit everybody out there.
thomas.chan@ft.com
