Authors: Wang Lingjun, Ye Zixuan.ForewordOn January 29, 2024, the High Court of Hong Kong against Evergrande (03333.).HK) to make a winding-up order. The judge noted that the order was made in the context of China Evergrande's insolvency and lack of sufficient progress on its debt restructuring programme. This incident has also aroused widespread concern among the creditors of Evergrande's mainland project construction money, and whether the claim and repayment of the construction payment claim will be affected by this incident? Will the underlying assets be included in the scope of liquidation? In view of the fact that our firm has also conducted a number of lawsuits on the Evergrande project, we have done some research on the above questions, and now we will share the Hong Kong law involved in the incident and its impact on the mainland project through this article.
1. Background of the problem:
Sorting out the relationship between China Evergrande and its mainland project companies
"China Evergrande" is a Cayman company listed in Hong Kong with a red-chip structure, and its outbound investment structure is more complex, as briefly summarized as the Hong Kong listing and investment in the mainland through the "China Evergrande (Cayman Company)-Anji Company (BVI Company)" structure.
Evergrande's mainland projects "are basically owned and developed by project companies established and registered in the location of the projects, and the project companies do not have a direct equity investment relationship with China Evergrande."
The following is the structure of the relationship between China Evergrande and the mainland project companies based on publicly available information:
Referring to the equity relationship shown in the above diagram, the contractor's claims for the construction money of Evergrande's Mainland projects may be divided into two categories, depending on the debtor's entity: one is the claims enjoyed by the mainland project company indirectly held by China Evergrande (multi-layered nested equity relationship); The other category is claims enjoyed by affiliated companies that cannot be discovered from the equity investment relationship, but which China Evergrande may control in the Mainland through agreements or other arrangements. However, there is no direct equity investment relationship between the project company and China Evergrande under these two types of relationships.
2. The essence of winding-up:
The property of the Mainland project company is not within the scope of the property that is liable for the winding-up proceedings
In our view, given that there is no direct equity investment relationship between the Mainland project company and China Evergrande, neither the equity interest of the Mainland project company nor the property owned by the Mainland project company fall within the scope of liability property in the Hong Kong winding-up proceedings.
"Winding-up" in Hong Kong law refers to the legal proceedings for the dissolution of a company, which ceases all business activities and within a short period of time** realises all assets, pays outstanding debts in priority and is eventually struck off the Companies Registry's register. According to the "Inside Information – Winding-up Petition" notice issued by China Evergrande on 28 June 2022, pursuant to section 182 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32 "Companies Winding Up Ordinance")[1], if it is eventually wound up as a result of the petition, any disposition of property directly owned by China Evergrande (excluding property owned by subsidiaries of the Company), any transfer of shares or any change in the status of shareholders of the Company from the date of liquidation will be null and void. It is a different matter if an order of recognition is granted only by the High Court. [2] It can be seen that the scope of liability property involved in the liquidation of China Evergrande should in fact be limited to the property directly owned by China Evergrande, excluding the property owned by its subsidiaries and companies with multiple layers of nested shareholdings.
(1) The liquidator may dispose of China Evergrande's equity interest in BVI, but the disposal will not have a direct impact on the creditors of the construction funds of the Mainland project
China Evergrande has achieved control over the Evergrande Group through its control of its wholly-owned subsidiary, BVI Company, which is subject to the property of liquidation liability and is disposed of by the Hong Kong administrator under section 182 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32 "Companies Winding Up Ordinance"). However, the disposal process will not directly affect the claims and enforcement of the claims of the creditors of the Mainland project funds. If the disposal can be successfully completed in the future, the change of ownership of the actual controller of Evergrande may only cause the adjustment of the overall business strategy of Evergrande Group, including the adjustment of the Mainland debt resolution plan, and only then may it have a more indirect impact on the creditors of the construction funds of the Mainland project.
(2) The equity and property owned by the mainland project company are not within the scope of liquidation liability, and the liquidation of China Evergrande will not cause the mainland project company to also enter bankruptcy proceedings
As mentioned above, combined with China Evergrande's shareholding structure and Hong Kong law, since there is no direct equity investment relationship, the equity of the mainland project company itself is not the property of the company directly owned by China Evergrande and will not be included in the liquidation liability property. Correspondingly, it is even more unlikely that the property owned by the mainland project company (including currency, real estate, construction in progress, equity interest, etc.) will be included in the scope of the property for liquidation.
In addition, according to Article 14(3) of the Opinions of the Supreme People's Court on Launching a Pilot Project on Recognising and Assisting Bankruptcy Proceedings in the Hong Kong Special Administrative Region (hereinafter referred to as the "Pilot Opinions")[3], if China Evergrande's winding-up proceedings are recognized and enforced by the Mainland courts, China Evergrande's liquidation-liability assets are also subject to PRC laws and regulations. Article 1 of the Provisions of the Supreme People's Court on Several Issues Concerning the Application of the Enterprise Bankruptcy Law of the People's Republic of China (II) clearly enumerates the debtor's property and limits its scope to property, such as money, physical goods, creditor's rights, equity, intellectual property rights, usufruct rights, and other property and property rights and interests. Therefore, under the framework of PRC law, only the property directly owned by China Evergrande in the Mainland (if any) can be enforced, and the property in the name of the mainland project company indirectly owned or controlled by China Evergrande does not fall within the scope of the property of China Evergrande's liquidation liability.
Therefore, the liquidation of China Evergrande will not necessarily lead to the bankruptcy of the mainland project company, and the creditors of China Evergrande have no right to directly file bankruptcy liquidation and other claims against the mainland project company over China Evergrande.
3. Procedural questions:
The extraterritorial effect of Evergrande's liquidation may also face procedural obstacles
Even if the liquidation of China Evergrande involves the disposal of the Mainland property directly held by the Mainland, according to Article 5 of the Enterprise Bankruptcy Law, the liquidation decision in Hong Kong must be recognized and enforced by the Mainland People's Court before it can finally take effect. At present, the procedural assistance rules for the winding-up of Hong Kong courts by Mainland courts are set out in the Pilot Opinions in May 2021. In light of the above provisions and judicial practice, we believe that the procedure for obtaining assistance from the Mainland courts in the liquidation proceedings of China Evergrande is also relatively complex, and whether it can be assisted, as well as the extent and extent of the assistance, still faces certain legal obstacles and disputes.
(1) China Evergrande's liquidation proceedings may not meet the applicable conditions set out in the Pilot Opinions
Article 4 of the Pilot Opinions stipulates that the conditions for the application of the Opinions are that the debtor's COMI is located in Hong Kong, China, and has been in existence for more than 6 consecutive months. At the same time, it provides that the debtor's COMI is generally considered to be its place of incorporation. China Evergrande is a special place of incorporation, on the one hand, it is a company registered and established in the Cayman Islands; On the other hand, in order to meet the requirements for listing in Hong Kong, it also applies for business registration in Hong Kong, which is a "registered non-Hong Kong company"[4]. In practice, there is controversy as to whether the COMI of a "registered non-Hong Kong company" can be identified as Hong Kong, with some views holding that a "registered non-Hong Kong company" that has applied for a Hong Kong business registration certificate, especially a company that has been listed in Hong Kong, should be identified as Hong Kong, and the Pilot Opinions can also be applied to the winding-up proceedings of such companies. However, in the judicial practice of the Mainland, there are currently only two adjudication cases in which the Pilot Opinions have been applied for recognition and assistance in Hong Kong bankruptcy proceedings, and the liquidated enterprises are all companies incorporated in Hong Kong,[5] and so far there are no adjudication cases in which a "registered non-Hong Kong company" has been recognized and assisted by the Mainland courts, so there is still a possibility that China Evergrande's liquidation will be found to be "COMI not in Hong Kong" and cannot provide judicial assistance in accordance with the Pilot Opinions.
(2) Even if the Mainland courts are able to provide assistance, the extent of their impact may be limited
First, Article 1 of the Pilot Opinions provides that the Supreme People's Court has designated the people's courts of Shanghai, Xiamen in Fujian Province and Shenzhen in Guangdong Province to carry out pilot projects to recognise and assist Hong Kong bankruptcy proceedings. Therefore, the area of application itself is limited, and these three cities are not areas with serious debt crisis of Evergrande projects in the mainland.
Second, Article 8 of the Pilot Opinions provides that interested parties have the right to object to the recognition and assistance of Hong Kong winding-up proceedings; Article 20 also clarifies that "if the people's court recognizes and assists the bankruptcy proceedings in Hong Kong, the remaining property of the debtor shall be distributed and repaid in accordance with the bankruptcy proceedings in Hong Kong after the bankruptcy estate of the Mainland has paid off its debts that should be paid off in priority under the laws of the Mainland in accordance with the laws of the Mainland." Therefore, if the creditor of the construction money of the mainland project has the priority right to be repaid, it can still be better protected.
IV. Conclusion
Based on the analysis of the above-mentioned substantive and procedural issues, we believe that:
First, China Evergrande's liquidators will face many legal obstacles if they seek to dispose of mainland projects, so the impact of the liquidation event on Evergrande's creditors of the construction funds of Evergrande's mainland projects is limited, and the impact is far less than that under the current policy of "guaranteed delivery", it is necessary to think about how to achieve the unity of its own commercial interests and social benefits through multiple paths.
Second, the liquidation of China Evergrande may also indicate that the Evergrande project company in the mainland may also go into bankruptcy liquidation after the completion of the work of guaranteeing the delivery of the building, so it is now a window period for claiming and realizing the creditor's rights as soon as possible.
1] Section 182 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance [Invalidity of Disposal of Property after Commencement of Winding-up] provides that "in a winding-up by the court, any disposition of property (including property in law) of the company made after the commencement of the winding-up, and any transfer of shares or any change in the status of a member of the company, shall be void unless otherwise ordered by the court." ”
2] See.
The last visit date is January 31, 2024.
3] Paragraph 3 of Article 14 of the Opinions of the Supreme People's Court on Launching the Pilot Project of Recognizing and Assisting Bankruptcy Proceedings in the Hong Kong Special Administrative Region stipulates that "the performance of duties by a Hong Kong administrator shall not exceed the scope prescribed by the Enterprise Bankruptcy Law of the People's Republic of China or the scope prescribed by the laws of the Hong Kong Special Administrative Region." ”
4] Division 2 of Part 1 of the Hong Kong Companies Ordinance: "Registered non-Hong Kong company means a non-Hong Kong company registered on the Companies Register as a registered non-Hong Kong company. "A non-Hong Kong company means a company incorporated outside Hong Kong that if- a) has a place of business in Hong Kong on or after the effective date of Part 16; or (b) has established a place of business in Hong Kong prior to the Effective Date and continues to have a place of business in Hong Kong on the Effective Date; ”
5] Recognition and Assistance to Senxin Company in Hong Kong Bankruptcy Proceedings, (2021) Yue 03 Recognition of Hong Kong Po No. 1 Civil Ruling; Li Jiaen et al. v. Hong Kong Ozer International Group*** Application for Recognition and Enforcement of a Civil Judgment of the Hong Kong Special Administrative Region Court, (2022) Hu 03 Zhi Hong Kong Po No. 1 Application for Review of Inter-regional Judicial Assistance Ruling.
Intern Gao Lin also contributed to the writing of this article.
About the Author:
Wang Lingjun: Senior Partner, Director of Business Department II, Master's Degree from East China University of Political Science and Law. With more than 10 years of experience in lawyer practice, he has rich experience in handling difficult and complex cases, handled many classic cases for clients to reverse unfavorable situations, and often provides legal advice to clients in the fields of infrastructure development, general contracting, foreign-related projects, and administrative supervision. At present, he also serves as a consulting expert for civil and administrative cases of the Supreme People's Procuratorate, an arbitrator of the Shanghai Arbitration Commission, a member of the second Shanghai New Federation, a standing member of the 10th Shanghai Changning District Youth Federation, a member of the Housing Construction Committee of the All China Lawyers Association, the deputy director of the Construction Engineering and Infrastructure Business Research Committee of the Shanghai Bar Association, and the vice president of the Law Branch of the Real Estate Chamber of Commerce of the Shanghai Federation of Industry and Commerce. Recommended by Chambers Greater China Law Guide, "The Legal 500" and other international lists.
Ye Zixuan: Paralegal of Business Department II, Master of Laws of Tsinghua University, Bachelor of Laws of Southwest University of Political Science and Law, JD Exchange Student of University of California, Davis. Mainly engaged in the field of dispute resolution and non-litigation legal services in the fields of foreign-related engineering, administrative supervision, and infrastructure.
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