Evergrande liquidators challenge Hong Kong watchdog in court

A Hong Kong court began hearing arguments on whether a deal that set up a fund to compensate China Evergrande minority shareholders is valid.

The city's Securities and Futures Commission struck the HK$1 billion ($127.6 million) deal with PricewaterhouseCoopers' Hong Kong affiliate in April to settle investigations into the firm's auditing work for the developer, whose downfall was emblematic of China's property crisis. The agreement resolved the matter without an admission of liability by PwC HK, the SFC said at the time. 

During the hearing Wednesday, lawyers for PwC and Evergrande's liquidators said the auditor's Hong Kong affiliate had already set aside HK$1 billion for the fund in a separate bank account. Lawyers for the liquidators also asked to see the terms of the agreement between the SFC and PwC, and sought details of shareholders who would be eligible for compensation. The watchdog said that was confidential information, adding that it is still uncertain that liquidators will prevail in their claims against PwC.

High Court Judge Russell Coleman said he would make a decision on whether the agreement should be disclosed by Oct. 30. After that, liquidators will be able to submit further arguments and a final decision on the validity of the compensation deal will be made later. 

The case is a test of whether a Hong Kong court is willing to quash a regulator's decision after legal pushback from creditors. It also underscores the battle over seniority in winding-up cases, and could affect how much money creditors are eventually able to recover. 

Liquidators say the SFC's deal to compensate shareholders prioritizes them over creditors. Under Hong Kong law, shareholders are paid last in liquidation cases and only if there is any surplus after all creditors are satisfied.

Evergrande's liquidators had earlier sought the judicial review of the compensation deal, saying that the SFC lacks the statutory authority to enter into a settlement with a non-regulated entity like PwC HK, arguing that responsibility lies with the city's accounting watchdog. They are seeking to have the SFC's decisions, including the fund, declared "unlawful, void and/or invalid."

The SFC said in June that it was proceeding with its plan, despite the legal challenge.

According to liquidators' assessment, Evergrande's liabilities will far exceed any assets recovered, so "there is no possibility" shareholders will receive any payout. Evergrande's debt burden is larger than previously estimated, reaching HK$350 billion, they have said.

Different parties are seeking to extract funds from PwC. The firm is already under significant financial and regulatory pressure due to its audits of Evergrande. Its mainland China affiliate was previously fined 441 million yuan for its role in auditing the Chinese developer.

Evergrande liquidators are seeking 57 billion yuan ($8.4 billion) in a lawsuit against PricewaterhouseCoopers International Ltd. and its mainland China and Hong Kong affiliates, among the largest corporate claims ever sought in the city. 

Meanwhile, some partners at PwC's local affiliates are exploring strategies to safeguard their personal assets, in case the escalating legal and regulatory challenges facing the firm ultimately translate into financial or legal liabilities for them individually.