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In January, journalists, corporate consultants and restructuring specialists packed a Hong Kong courtroom in an unusual setting to attend the Evergrande liquidation hearing, where Judge Linda Chan declared “enough is enough” and issued an order of settlement.
The landmark case involving what was once China’s largest real estate developer by sales, with more than $300 billion in liabilities, has put the territory’s legal framework for resolving debt problems back in the spotlight. More than 20 Chinese developers have received liquidation petitions in Hong Kong since China’s property crisis began in 2021, and a Hong Kong judge has ordered at least five to be liquidated.
This is not a great outcome for any of the parties involved. These judicial liquidation proceedings, often described by lawyers as a “nuclear option” and a lose-lose scenario, leave creditors with little or no return. And the procedures can last for many months.
Lawyers and restructuring specialists say Hong Kong’s legal framework for other debt restructuring options is poor compared to financial jurisdictions such as London, New York and Singapore.
A restructuring bill to remedy this has been under discussion for more than 20 years in the Asian financial hub, but other legislative priorities have taken priority amid a lack of consensus on what it should contain. The latest push to introduce one came in 2020, when a draft legislative proposal was tabled as the Covid-19 pandemic hit.
The Hong Kong government held a consultation but then suspended the plan again. Although he said he would continue to consult with interested parties to refine the legislative proposals, there does not appear to be a time frame for this.
Lawyers said there was a pressing need to put the proposal back on the agenda, particularly as offshore creditors increasingly use Hong Kong courts to force struggling Chinese developers to accelerate their restructuring plans.
Chinese developers have defaulted on a whopping $115 billion of the $175 billion in offshore dollar bonds outstanding since 2021, according to Bloomberg data. And property developer Shimao last month became one of the latest to face a winding-up petition, unusually from a Chinese state-backed bank. Country Garden, which defaulted in October, received a liquidation request in February involving more than $200 million of debt.
A key element of a restructuring bill is that after the appointment of a supervisor for a debt restructuring, a legal moratorium would be imposed to prevent parties from going to court and requesting a liquidation.
Under Hong Kong’s current legal system, creditors are free to pursue distressed companies by filing liquidation petitions before a restructuring deal is agreed and then approved by a court, according to Jamie Stranger, a lawyer based in Hong Kong. in Hong Kong. Partner at Stephenson Harwood.
Law firm Herbert Smith Freehills says this gives “dissident creditors significant leverage to hold the company and other consenting creditors to ransom and otherwise encourages ‘dishonest’ behavior on their part, which at times in turn jeopardizes restructuring efforts. He adds: “This often leads to a worse outcome for all stakeholders when there is a genuine prospect that the restructured company can emerge from its difficulties.”
One issue is the extent to which a restructuring bill would cover mainland Chinese assets. Under Hong Kong’s existing liquidation process, offshore creditors are highly unlikely to recover mainland assets. This is despite a “mutual recognition agreement” on insolvency and restructuring implemented in 2021 that applies in some parts of mainland China. Lawyers say offshore creditors often remain subordinate to domestic stakeholders.
A bill “would have to interact with mainland laws and provide some ability for an interim supervisor to be recognized and assisted on the mainland,” Jonathan Leitch, a Hong Kong-based partner at Hogan Lovells, told me. Otherwise, the functions of a Hong Kong-based interim supervisor would in most cases “be severely hampered.”
Lance Jiang, restructuring and insolvency partner at law firm Ashurst, says: “Most professionals would like to have the new restructuring bill, because it definitely mitigates the gap between Hong Kong and other international centers and would give the companies and also the creditors side with more options to carry out a consensual restructuring.”
“It’s Hong Kong, the legislative council can do it quickly and efficiently,” Jiang says, adding that this would benefit everyone in the market.