Two years after its bankruptcy, China Evergrande may finally meet its end

China Evergrande, once China’s most prolific real estate developer, could soon become its biggest and messiest corporate bust.

On Monday, a bankruptcy judge in a Hong Kong courtroom could force Evergrande to liquidate and repay creditors owed tens of billions of dollars.

It would end two years of uncertainty for investors who have lent Evergrande money in Hong Kong and tried to negotiate a stake in the debt-saddled corporate giant that filed for bankruptcy in early December 2021.

A liquidation of Evergrande was once unthinkable. For twenty years it was an example of China’s embrace of capitalism. It was one of China’s most successful companies and played a central role in the real estate sector, which powered a third of the country’s economic growth. But years of overexpansion left it financially insecure, and when it went bankrupt it had more than $300 billion in past due accounts.

Evergrande’s bankruptcy plunged China’s housing market into crisis, leaving other developers in trouble and leaving many Chinese households despondent about housing, the main source of wealth for most families. As Evergrande’s financial position has deteriorated in recent months, investors expect little in return.

Many questions would remain after the Hong Kong court ruling – for the hundreds of thousands of buyers who paid in advance and still owe for their homes, for the many workers who built and sold the apartments and have not yet been paid , and for the Chinese banks and investors who lent the money.

In Hong Kong, lawyers for Evergrande and a group of its creditors have been arguing for more than a year over how to pay off billions of dollars in debt the company owes them. They are expected to convene for the seventh time before Judge Linda Chan to deliver their final appeal in a small and cramped room on the 12th floor of the High Court in Hong Kong’s business district.

Judge Chan has indicated that this time could be the last. At a hearing on Oct. 30, a lawyer for the creditor who first filed the lawsuit expressed annoyance at the lack of progress, telling Ms. Chan, “enough is enough.” While Ms Chan then adjourned the court, she said this was “very likely” the last reprieve for the company.

There is a small chance that Evergrande will live to see another day. Last-minute negotiations could lead to Evergrande presenting a new restructuring deal or a concrete plan for a new deal on Monday. If the creditors agreed, the hearing could be postponed again.

On Friday, a group of creditors issued a statement in support of Hengda, Evergrande’s main company, saying they were against any form of bankruptcy for the company. None of the players in China with a financial stake in Evergrande, from customers to suppliers, would benefit from what it called a “multi-year, value-destroying bankruptcy process,” according to the group.

The group acknowledged that China’s real estate sector and economy were struggling, but added that it welcomed the “extensive efforts of the Chinese government” and the company’s management to “revitalize the company and the sector for the benefit of all stakeholders”.

The Chinese real estate market has been in a downward spiral for several years. Although authorities have tried to stem falling sales with measures such as relaxing home-buying requirements and lowering interest rates, these efforts have not made much difference.

Despite the bleak outlook for housing, the company had been working with foreign creditors on a repayment plan this summer, but in September the deal was suddenly put into jeopardy when Evergrande’s founder and chairman, Hui Ka Yan, was arrested by authorities.

A liquidation, supervised by a specialized company appointed by the court, would be messy and take years. Evergrande has a complicated corporate structure. There are three companies listed on the Hong Kong Stock Exchange outside the jurisdiction of China, including the holding company. It also has thousands of subsidiaries in China and more than a thousand real estate projects – assets that would likely be beyond the reach of Hong Kong investors.

Ultimately, a liquidation would be a litmus test for how the Chinese Communist Party plans to treat foreign creditors of real estate companies. Under a 2021 mutual agreement between Hong Kong and Beijing, a court in mainland China could recognize the receiver, allowing creditors to take control of Evergrande’s mainland assets.

“It will be the biggest test yet to determine whether the mainland courts are prepared to grant recognition under the cross-border protocol,” said Jonathan Leitch, restructuring partner at Hogan Lovells.