In the Matter of China Evergrande Group (HCCW 285/2024)

The High Court of the Hong Kong Special Administrative Region

Analysis of the Legal Significance of the Hong Kong Liquidation Order in China Evergrande 

Written by Man Sing Siu

Edited by Luca Visacpi

Man Sing (Matthew) is an undergraduate student in the Dual BA Program between Sciences Po and Columbia University, studying Politics and Financial Economics. His academic interests include economics, international relations, and history.

Introduction

The Hong Kong High Court's January 2024 liquidation order against China Evergrande Group (HCCW 285/2024)  marks a pivotal moment in cross-border insolvency law [1]. In the Matter of China Evergrande Group (HCCW 285/2024), the Hong Kong High Court directed liquidation following Evergrande's failure to present a viable restructuring plan for its enormous offshore debt obligations [2]. The ruling was based on the inability of Evergrande to meet its financial commitments alongside the absence of a credible plan to address its insolvency [3]. The Hong Kong courts' liquidation order against China Evergrande Group poses serious legal questions, in particular over the enforcement of cross-border insolvency, creditor protection, and regulation. These have implications that extend beyond Evergrande itself and have the potential to set precedents for the resolution of analogous cases in the future against Chinese companies with offshore borrowings [4].

Hong Kong's insolvency framework, rooted in the Companies Ordinance (Cap. 622) and the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32), adopts a creditor-oriented approach, enabling creditors to initiate liquidation for unpaid debts [5]. While Hong Kong has not adopted the UNCITRAL Model Law on Cross-Border Insolvency, its courts apply common law principles to recognize foreign insolvency proceedings, as affirmed in Re Pacific Andes Enterprises (BVI) Ltd [6]. Conversely, Mainland China's Enterprise Bankruptcy Law of 2007 governs domestic insolvencies but lacks mechanisms to recognize Hong Kong judgments, often prioritizing local creditors and economic stability [7]. The 2021 Hong Kong-Mainland Arrangement on Mutual Recognition offers limited cooperation, allowing Hong Kong liquidators to seek recognition in select Mainland courts (Shenzhen, Shanghai, and Xiamen), though inconsistent judicial practices and sovereignty concerns hinder its effectiveness [8].

This article argues that the Evergrande ruling tests Hong Kong’s jurisdictional authority in cross-border insolvency, underscoring enforceability challenges due to the absence of a robust recognition framework with Mainland China, leading to a reshaping of creditor strategies and legal cooperation for Chinese firms with offshore debts [9].

Legal Implications

Firstly, the Evergrande ruling tests Hong Kong’s jurisdictional authority by asserting its ability to order the liquidation of a major Chinese company with significant offshore ties [10]. Unlike jurisdictions operating under the UNCITRAL Model Law on Cross-Border Insolvency, China operates under a stricter legal framework [11]. The 2021 pilot program on mutual recognition of insolvency proceedings is at present the only statutory framework for Hong Kong-Mainland China cross-border insolvency cooperation [12]. Prior to its introduction, there was no statutory mechanism of mutual recognition, such that liquidators appointed in Hong Kong had no guaranteed power of enforcing court orders or recovering property in the Mainland [13]. Under the scheme, Shanghai, Shenzhen, and Xiamen courts are now able to recognize and assist Hong Kong insolvency practitioners in the restructuring and winding-up of companies [14]. The pilot scheme enables Hong Kong liquidators to apply for recognition, which, if granted, allows them to take over Mainland assets, seek judicial assistance, and collaborate with Mainland administrators [15]. The framework is, however, greatly handicapped and flawed. It covers only three individual Mainland cities, so Hong Kong liquidators handling companies with assets in other regions of China may have difficulty getting recognition [16]. Furthermore, recognition is not per se—Hong Kong liquidators must apply ad hoc, and Mainland courts have unfettered discretion to accept or reject applications [17]. Notably, politically sensitive cases or ones touching on significant Chinese enterprises, state-owned enterprises (SOEs), or entities that are considered key to the financial health of China can be withheld from recognition if Mainland courts find enforcement to be contrary to PRC law, public policy, or state interests [18]. Therefore, while the 2021 scheme represents progress in cross-border insolvency cooperation, its actual efficiency is questionable, particularly for large insolvency cases like Evergrande, where recognition faces significant legal and political obstacles [19]. Unless the Mainland courts give effect to Hong Kong's winding-up order, Evergrande's vast assets in China may remain inaccessible to offshore creditors, and debt recovery would be extremely difficult [20]. By proceeding with liquidation, the Hong Kong courts sent a clear message of encouragement to creditor rights, aiming to set a precedent for offshore creditors to seek legal recourse in Hong Kong against financially distressed Chinese companies [21].

Evergrande's experience is reflective of a global trend where creditors have chosen to pursue multinational conglomerates in the courts of global financial centres [22]. Previously, creditors have applied restructuring agreements and negotiations with the Mainland government because foreign decrees have proven hard to impose [23]. However, Hong Kong auctioning off Evergrande’s assets, if successful, would encourage more aggressive creditor strategies before making concessions in Mainland courts [24]. On the other hand, any failure or setback in Hong Kong’s strategy may cause creditors to lose confidence in enforcing obligations through Hong Kong courts [25]. This could detract from Hong Kong's image as an effective dispute resolution center for China-related financial disputes [26].

Legal Precedent

Hong Kong’s cross-border insolvency framework has developed through cases that test its jurisdictional authority, reveal enforceability challenges, and highlight efforts toward cooperation, all of which contextualize the Evergrande ruling. Hong Kong's strategy towards cross-border insolvency has evolved through a series of judicial precedents, attempting to preserve the jurisdictional authority of Hong Kong courts despite the challenge of enforcing their judgements in Mainland courts [27]. In Re Z-Obee Holdings Limited, the Hong Kong court exercised jurisdiction over a Bermuda-incorporated company listed on the Hong Kong Stock Exchange with substantial business operations in Mainland China [28]. The court exercised jurisdiction by invoking the substantial Hong Kong nexus of the company, i.e., listing and situs of the creditors. This ruling gave Hong Kong courts insolvency jurisdiction over foreign-incorporated companies with substantial connections to Hong Kong (Akin Gump) [29]. The Evergrande ruling is based on the same logic: even though Evergrande was Cayman Island-incorporated, listing on the Hong Kong exchange and substantial amounts of offshore debt obligations were adequate legal bases for liquidation processes in Hong Kong [30].

However, despite the precedent of jurisdictional assertions, enforceability remains a persistent challenge. For example, in Re China Huiyuan Juice Group Limited, Hong Kong courts sought to exercise jurisdiction over a Cayman Islands-incorporated company with significant holdings in Mainland China [31]. Notwithstanding the company’s commercial presence in Hong Kong, the court conceded that its ability to enforce insolvency orders against Huiyuan's assets located in Mainland China was considerably limited due to the absence of a formal cross-border recognition framework [32]. Hence, jurisdiction alone does not necessarily result in enforceability within Mainland China [33].

Efforts to foster legal cooperation have shown progress, as seen in the Re CEFC Shanghai International Group Limited case, which bears similarities to the Evergrande case. The Re CEFC Shanghai International Group Limited was a landmark case for Hong Kong-Mainland China cross-border collaboration in insolvency [34]. CEFC Shanghai International Group had to reorganize on a bankruptcy basis in Mainland China. The firm had incurred massive debts, and Mainland liquidators sought Hong Kong recognition of the Mainland proceedings to obtain control over its cross-border assets and more effectively co-ordinate the creditors' claims [35]. The Hong Kong High Court supported and recognized the Mainland liquidators in May 2021 under the common law doctrine of modified universalism according to which the courts assist a foreign insolvency proceeding where appropriate [36]. Judicial assistance under modified universalism encourages judicial assistance to foreign insolvency proceedings where there is a close connection to Hong Kong, such as incorporation, listing, or considerable assets, but allows courts to shield domestic creditors and public policy. This comity of the judiciary principle enables courts in Hong Kong to aid foreign liquidators to deal with cross-border assets, as demonstrated in previous cases against Mainland China, to pursue coordinated solutions in spite of the different legal structures. This ruling was the first to involuntarily recognize a Mainland insolvency proceeding by a Hong Kong court [37]. First, it determined that Mainland insolvency representatives could request judicial assistance in Hong Kong, creating a precedent for cross-border collaboration. Second, it allowed liquidators to take control of CEFC Shanghai’s Hong Kong assets, marking a departure from past practice, where the legal divide between the two jurisdictions made such enforcement difficult. Thirdly, it sent the message that Hong Kong courts would be willing to recognize and assist Mainland bankruptcy proceedings, with a view to further enhancing confidence in Hong Kong as a welcoming center for the administration of China-related insolvencies [38]. However, as aforementioned, the judgment has also highlighted the discretionality of mutual recognition. Hong Kong courts have absolute discretion whether or not to grant ad hoc recognition. Also, the scope is confined to the three Mainland cities specified in the 2021 agreement [39]. The CEFC Shanghai case is particularly notable in the Evergrande context since it raised expectations that Hong Kong liquidators might gain access to Mainland assets in other cases as well, although the success of such a strategy in the end remains uncertain—especially in politically charged cases like Evergrande [40].

Current Developments

Recent developments in the Evergrande case highlight ongoing enforceability challenges while suggesting potential shifts in legal practices. Besides the parent petition in Hong Kong, independent liquidation petitions have also been filed against Evergrande subsidiaries within Mainland China, further undermining the effectiveness of Hong Kong insolvency orders in the Mainland and the fluidity of cross-border cooperation [41]. A shareholder had submitted a winding-up petition in August 2024 against one of Evergrande's flagship subsidiaries, Guangzhou Kailong Real Estate, over a dispute over an investment of 200 million yuan [42]. The matter awaits determination by a court in Guangzhou. If the Mainland court proceeds to summarily liquidate unilaterally, isolated insolvency proceedings will be triggered that create another hurdle for cross-border asset recovery coordination [43]. This again demonstrates the lack of coherence and coordination between Hong Kong and Mainland China in resolving insolvencies involving multinational companies [44].

Efforts to reform legal accountability are also present. The Evergrande liquidation order is already influencing Hong Kong and general insolvency law, with serious legal repercussions that have played out in the months since the court decision [45]. Liquidators Edward Middleton and Tiffany Wong of Alvarez & Marsal Asia have brought legal action to recover some $6 billion from Evergrande billionaire founder Hui Ka Yan and other senior executives [46]. The lawsuit seeks repayment of funds that are trapped in dividends and bonuses paid out on the basis of allegedly fake financial reports between 2017 and 2020. This aggressive pursuit of executive liability promises a potential sea change in the way Hong Kong courts approach corporate governance collapse in the context of insolvency [47]. If the effort succeeds, this will set a precedent for holding directors to account on an ad hoc basis on mass-scale insolvencies, codifying standards of corporate responsibility [48].

Conclusion

Overall, cases like Re China Huiyuan Juice reveal that Hong Kong court orders face serious enforceability issues in Mainland China, leaving creditors vulnerable when assets are primarily located in the Mainland. The Evergrande liquidation will provide a test case for the practical application of the 2021 Mutual Recognition Arrangement, but its success is far from guaranteed. Re CEFC Shanghai suggested increasing cooperation, but Evergrande's political and financial significance may influence how Mainland courts approach the case. A refusal to recognize the liquidation order could discourage international creditors from relying on Hong Kong courts for insolvency matters involving Chinese firms. The Evergrande case could further trigger calls for greater legal harmonization between Hong Kong and Mainland China to provide more certainty for investors and creditors. If cross-border recognition mechanisms remain unreliable, offshore creditors may demand alternative legal protections or seek jurisdictional reforms to prevent similar uncertainties in future insolvencies. In sum, Evergrande’s liquidation is not merely an isolated insolvency event; it is a litmus test for the effectiveness of Hong Kong's insolvency jurisdiction in cross-border cases and may reshape the legal landscape for handling distressed Chinese firms with offshore debts.

Bibliography

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[2] In the Matter of China Evergrande Group, HCCW 285/2024 (H.K.).

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