China Evergrande Group, which amassed debt equivalent to 2% of China’s GDP in 2022, has filed for Chapter 15 bankruptcy protection in New York.
Evergrande is a large Chinese conglomerate headquartered in the Shenzhen Special Economic Zone and founded in Guangzhou in 1996 by Xu Jiayin.
The group is one of China’s largest real estate developers, with over 1,300 projects in more than 280 cities across the country. It is also involved in other industries, such clean energy vehicles, tourism, sports, finance, healthcare, and pensions.
The conglomerate entered the Fortune Global 500 list in 2020 and ranked 152nd in 2021. However, by September of the same year, its debt crisis had come to light, with reports of the company being late on payments to suppliers, creditors, and investors for around $300 billion. This led to the suspension of its shares on the Hong Kong Exchange in 2022.
Chapter 15 Bankruptcy Protection Provisions, issued in this case on August 17, are part of the US code on bankruptcy cases involving multiple countries. It allows foreign companies time to reorganize their affairs and prevent their assets from being seized or frozen.
In addition to the Evergrande Group itself, its subsidiaries Skyline Holdings and Scenic Tour also filed for Chapter 15 bankruptcy protection.
Evergrande’s announcement arrived amid growing fears that troubles in China’s real estate sector could spill over to other parts of the country’s economy.
Interest rates have been reduced to stimulate the economy, but this has also weakened the yuan, making overseas mortgage costs, such as in the United States, more expensive.
What are the implications?
Evergrande’s filing refer to ongoing restructuring proceedings in Hong Kong and the Cayman Islands. The Chinese developer has been working for months to finalize its offshore debt restructuring plans.
In July, Evergrande received approval from a Hong Kong court to vote on an offshore debt restructuring plan this month.
Yang Shiru, a lawyer at Shanghai Gaopeng law firm, explained to the Taiwanese media outlet United Daily News that Evergrande and its subsidiaries sought bankruptcy protection in the US, because the company believes it is insolvent and can’t fully pay its debts. The move, he added, is a move to prevent the company’s assets from being decimated by the company’s creditors, so that litigation could be centralized and the company could have time to propose a reorganization plan in an orderly fashion.
After commencing bankruptcy procedure, bankruptcy reorganization, bankruptcy agreement, and bankruptcy liquidation can take place.
Yang explained that once the bankruptcy application is accepted by the court, all legitimate creditors must adhere to the legal process to claim their dues. The lawyer believes that the probability of Evergrande’s restructuring ultimately succeeding is relatively high.
“Because in the case of restructuring, the distribution index for creditors will be significantly higher than that for bankruptcy liquidation.”
A recent bankruptcy case that was filed in a US court was Luckin Coffee, another Chinese company. The announcement states that the company filed for bankruptcy protection under Chapter 5 Petition with the U.S. Bankruptcy Court for the Southern District of New York.
At that time, Luckin Coffee also explained its bankruptcy protection application, stating that the procedure filed in the U.S. court is common practice in the corporate restructuring process, as it aims to seek recognition of the relevant judicial proceedings conducted by US courts.
