Land Research | Legal Reflections on Evergrande's US Bankruptcy Filing

Authors: Chen Xia & Shi Tianqi

According to reports from Bloomberg, CNN, and other media outlets, China Evergrande Group filed for Chapter 15 bankruptcy protection in New York on August 17 (US time). External speculation suggests this move aims to protect its non-US entities undergoing restructuring from creditor lawsuits or asset seizures in the US. However, Evergrande subsequently issued a clarification stating that its application to the US court does not involve bankruptcy.

On the evening of August 10, 2023, Evergrande Group released several reports, including the 2022 annual report on corporate bonds and the 2022 audit report.

According to the financial statements, Evergrande Real Estate's net loss for 2022 was RMB 52.72 billion. As of December 31, 2022, total current liabilities amounted to RMB 1,678.75 billion, while the company's monetary funds (including cash and cash equivalents and restricted funds) totaled only RMB 9.17 billion. Total liabilities were RMB 1,833.82 billion, and total assets were RMB 1,468.56 billion.

In addition, the report shows that as of the end of 2022, Evergrande Real Estate had land reserves of 170 million square meters. Evergrande Real Estate stated that it will concentrate its efforts on resuming work and production and ensuring the delivery of homes, striving for understanding and support from various parties, including local governments and upstream and downstream partners; increase the intensity of asset disposal to actively revitalize funds; streamline its organization, optimize personnel and salary structures to further reduce costs; and actively communicate with domestic and foreign creditors, hiring financial advisors to assess the company's situation and explore the optimal overall debt solution for all stakeholders. However, the overall financial data is not optimistic, with a net loss of 52.7 billion last year and current liabilities of 1.6 trillion. Evergrande Real Estate is insolvent!

Evergrande, caught in turmoil, has been making headlines recently. On August 16, Evergrande Real Estate was investigated by the China Securities Regulatory Commission for suspected violations of information disclosure regulations.

First, let's understand the legislative origins of Chapter 15 of the US Bankruptcy Code. In 2005, the US Congress comprehensively revised the Bankruptcy Code and added Chapter 15, "Ancillary and Other Cross-Border Cases," specifically addressing recognition and relief in cross-border bankruptcy cases. Its main content allows foreign companies to apply for bankruptcy protection in the US to handle cross-border bankruptcy cases. This chapter provides a basic framework for handling cross-border corporate bankruptcy cases, assisting in the processing of bankruptcies of foreign companies. Evergrande applied for bankruptcy protection under this provision to avoid and prevent creditors from filing lawsuits or seizing assets in the US. This allows Evergrande more time and space for asset restructuring to improve its precarious situation.

Second, we need to understand and differentiate between "bankruptcy" and "bankruptcy protection." Essentially, "bankruptcy" and "bankruptcy protection" have distinctly different meanings and legal effects, the most significant difference being whether the company can continue operations. According to Article 33 of the "Supreme People's Court's Provisions on Several Issues Concerning the Trial of Enterprise Bankruptcy Cases" (Interpretation No. 23 [2002] of the Supreme People's Court), "The debtor shall cease production and operation from the date of the declaration of bankruptcy. If it is indeed necessary to continue production and operation for the benefit of creditors, permission must be obtained from the people's court." Therefore, once a company enters bankruptcy proceedings, it usually needs to cease normal operations. However, in "bankruptcy protection" proceedings, the company can still conduct normal business operations. This is the essential difference between "bankruptcy" and "bankruptcy protection".

If, as reported online, Evergrande Group filed for bankruptcy protection in the US, its purpose is quite clear. It is undeniably a meaningful attempt. Although Evergrande has issued a denial, there are precedents of companies successfully using "bankruptcy protection" to be reborn. In 2021, Luckin Coffee was reborn after applying for "bankruptcy protection" in the US. Before that, in 2020, Luckin Coffee, under the relevant legal system of the Cayman Islands, maintained stable operations under court supervision, retaining its original management team. This gave Luckin Coffee time to negotiate a restructuring plan with various stakeholders without immediately facing the threat of malicious lawsuits from creditors.

Finally, China's bankruptcy system has gradually matured. The introduction of the "Shenzhen Special Economic Zone Personal Bankruptcy Regulations" has raised the application of the bankruptcy system to a new level. However, China still faces challenges in handling cross-border bankruptcy cases. The 2022 draft amendment to the Bankruptcy Law has been formed, and it is believed that in the near future, China's bankruptcy system will become more sound and reasonable!

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