Evergrande liquidators seek to quash regulator's PwC HK deal

China Evergrande's liquidators have asked a court to void a HK$1 billion ($127.6 million) shareholder compensation deal a regulator struck with PricewaterhouseCoopers' Hong Kong affiliate.

The fund was part of an agreement with Hong Kong's Securities and Futures Commission in April to settle investigations into the firm's auditing work for Evergrande. Hong Kong's Accounting and Financial Reporting Council also levied a HK$300 million fine at the time.

Liquidators of the collapsed developer said the SFC lacks statutory authority to settle a market misconduct claim against a non-regulated entity such as PwC HK in the manner it did, according to a court document seen by Bloomberg News. They are seeking to have the SFC's decisions, including the fund, declared "unlawful, void and/or invalid."

The case highlights the battle over seniority in winding-up cases. 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. 

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.

The development also comes after liquidators said they were 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.

There may be grounds for liquidators to challenge the deal because the SFC didn't go through the courts to arrive at the agreement with PwC HK, said Jimmy Chan, a Hong Kong-based partner at law firm Jingtian & Gongcheng and a former SFC enforcement official.

The local securities ordinance allows the SFC to grant compensation orders to protect investors and remedy market misconduct, but it requires going through the courts. Liquidators say the SFC's action thus "avoided judicial oversight and misapplied its powers," according to the filing.

Representatives for the SFC and PwC HK declined to comment. Evergrande's liquidators didn't immediately respond to request for comment. 

The SFC had said the agreement with the PwC affiliate resolved the matter "fully and finally" without an admission of liability. The regulator said it would take no further action against the firm, provided all terms of the agreement were met.

Evergrande's liquidators had urged the SFC not to take action on the April agreement or distribute the HK$1 billion until final resolution of liquidators' claim against PwC, but the request was rejected by the SFC, the court document said. 

Different parties are racing 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.

Meanwhile, some partners at 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.