Evergrande liquidators challenge watchdog’s HK$1 billion settlement with auditor PwC

Hong Kong’s securities market regulator has defended a HK$1 billion (US$128 million) settlement with an accounting firm at the centre of an auditing scandal involving developer China Evergrande Group, saying it has unfettered powers to enforce discipline and a duty to protect the interests of independent investors. In a judicial review hearing on Wednesday, lawyers for the Securities and Futures Commission (SFC) asked the High Court to dismiss a challenge by the developer’s liquidators, who are seeking to have the agreement with PricewaterhouseCoopers (PwC) Hong Kong quashed on the grounds of an abuse of power. They argued that the watchdog had broad powers under the Securities and Futures Ordinance to settle disciplinary actions through pre-litigation settlements. The lawyers suggested that the liquidators’ challenge was driven by a grievance that China Evergrande’s minority shareholders had been allowed to “jump the queue” and receive payment first when PwC’s ability to compensate the developer and its creditors remained in doubt. The applicants’ legal counsel accused the regulator of circumventing judicial safeguards by threatening to take legal action against PwC Hong Kong and forcing it to make a payment, thereby preventing the court from determining the merits of the SFC’s requests. The judicial challenge came as the liquidators sought 57 billion yuan (US$8.4 billion) from three PwC entities in a separate corporate lawsuit, one of the largest claims ever filed in Hong Kong. PwC Hong Kong agreed with the SFC in April to set aside HK$1 billion to compensate Evergrande’s minority shareholders on the basis that the auditor did not admit liability for alleged breaches of its professional duties. It was the first time the watchdog had disposed of an alleged breach of financial regulations by way of a settlement without seeking court orders to ensure compliance under section 213 of the ordinance. China Evergrande’s liquidators, Tiffany Wong Wing-sze and Eddie Middleton of Alvarez & Marsal, expressed concerns that the agreement would leave creditors HK$1 billion worse off because PwC Hong Kong might not have enough assets to cover both the agreement and the separate lawsuits brought by the plaintiff. They also argued that the agreement would unfairly prejudice the company and its creditors. Jin Pao SC, representing the liquidators, said the SFC did not have the express power under the ordinance to enter into a settlement with an offending party in lieu of legal action. “Without the threat and the significant amount of money that can be ordered against PwC, they would never have had the HK$1 billion. It’s not a small sum,” Pao said. The lawyer highlighted the SFC’s board minutes and papers showing that the watchdog had been aware that PwC Hong Kong could become insolvent if it failed to meet the financial obligations under court judgments entered against it. Pao said the agreement would prejudice China Evergrande and its creditors and undermined their ability to recover their losses from the accounting firm in the future. Paul Shieh Wing-tai SC, representing the SFC, said the liquidators’ challenge was premised on the assumption that it was necessary to preserve PwC Hong Kong’s financial assets as far as possible in the event they succeeded in their 57 billion yuan claim against the accounting firm. But Shieh said that suggestion was highly problematic because nobody would know whether PwC Hong Kong would indeed become insolvent in the future. He stressed that it was rational for the SFC to negotiate a settlement with PwC Hong Kong in light of the uncertainties of litigation, adding that any aggrieved parties could still seek redress from the court in judicial review proceedings. Mr Justice Russell Coleman reserved his judgment at the end of the 5½-hour hearing. Formerly the world’s largest developer by sales, China Evergrande collapsed with liabilities exceeding US$300 billion, leaving creditors facing heavy losses. The company was also found to have overstated its revenue and profits in its annual reports by recognising income from property sales before projects had been completed and delivered to buyers. The High Court ordered the winding-up of Evergrande in January 2024.

Evergrande liquidators challenge watchdog’s HK$1 billion settlement with auditor PwC

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}Developer’s liquidators are seeking to have agreement with PricewaterhouseCoopers Hong Kong quashed on the grounds of an abuse of power

Developer’s liquidators are seeking to have agreement with PricewaterhouseCoopers Hong Kong quashed on the grounds of an abuse of power