China Evergrande Gets an Unexpected Reprieve From Liquidation

Once China’s most prolific property developer, China Evergrande has narrowly averted a long-expected liquidation.

A Hong Kong bankruptcy judge on Monday gave Evergrande another two months to work out a deal with foreign investors who lost money when the company defaulted two years ago with hundreds of billions of dollars in debt. The judge set another court hearing for Jan. 29.

It was an unexpected development in a bankruptcy lawsuit filed 18 months ago by one investor so desperate to get paid that he sued to dismantle Evergrande. The judge, Linda Chan, had said in October that she was ready to order the liquidation of Evergrande if it could not reach an agreement with its creditors on how to divide some of the company’s remaining assets.

But on Monday, Judge Chan gave Evergrande one more chance after a lawyer for the investor who originally sued the company, known in court as the petitioner, said his client was no longer actively seeking a liquidation, setting off confusion among the lawyers and advisers for other creditors who had gathered in court.

“We thought the company was going to be wound up today,” said Neil McDonald, a partner at the law firm Kirkland & Ellis, which is advising the creditors. “The petitioner changed its position and didn’t push to wind up the company, which was a surprise to us,” said Mr. McDonald, adding that he was informed of the change 15 minutes before the hearing on Monday. He and another adviser to the creditors indicated that had they been given more notice, they would have opposed an adjournment.

The split among the creditors was another inconclusive turn in a long and still unresolved case that will eventually determine how Evergrande will meet its final fate.

For two decades, Evergrande was held up as an example of success in China. It was among the country’s most powerful companies, at the center of a real estate industry that was critical to the nation’s economic growth. But years of overexpansion led to its default on more than $300 billion of overdue bills.

Evergrande’s default plunged China’s housing market into crisis, leaving many Chinese households despondent about the property market, the main store of wealth for most families. As Evergrande’s financial position has gotten progressively worse in recent months, investors have come to expect little in return.

Since then, Evergrande has operated in limbo — unable to meet its obligations but not formally defunct. Numerous questions remain for the hundreds of thousands of Evergrande home buyers who are still owed their unfinished properties, for the many workers who built and sold its apartments but who have not been compensated, and for the Chinese banks and investors who gave it money expecting to be paid back.

Of all the people who are owed money by Evergrande, foreign creditors who are battling the company in court have been the most public. But they are owed the smallest piece of what will be the largest dismantling of any Chinese company in history.

Behind the scenes, the Chinese authorities and regulators, who are scrambling to stabilize the broader real estate sector, will have the ultimate say in what happens to Evergrande.

Evergrande had worked with offshore creditors this summer on a repayment plan, but it scuttled the deal in September when the company’s founder and chairman, Hui Ka Yan, was detained by the authorities. A deal, Evergrande said at the time, was no longer possible because of new regulations that prevented it from issuing the stock or selling the bonds it would need to fund a restructuring deal.

On Monday in court, Evergrande’s lawyer described its proposed plan to go around these rules. Judge Chan interrupted to caution him to involve the Chinese government in the company’s plans to make sure such a deal would be possible. “I would have thought that the more reliable source would be a direct discussion with the relevant authorities,” Judge Chan said.

Going into Monday, most people involved thought that this time would be the last hearing. When Judge Chan adjourned a prior hearing on Oct. 30, she said it was “highly likely” the last reprieve for the company.

Liquidation is still possible, though, despite the latest adjournment. If creditors are unhappy with the new restructuring plan, which many appeared to be on Monday, they can press their case on Jan. 29 to break up Evergrande.

Any liquidation of Evergrande would be messy and could take years. Evergrande has a tangled business structure. It has three companies listed outside of China’s jurisdiction on the Hong Kong Stock Exchange, including its holding company. It also has thousands of subsidiaries in China and more than 1,000 real estate projects — assets that would likely to be out of reach to investors in Hong Kong.