China Evergrande liquidators sue PwC for 'negligence', 'misrepresentation'

China Evergrande defaulted on more than $300 billion of its international debts in 2021, triggering a financial crisis within China's property sector

China Evergrande's liquidators have initiated legal proceedings against PwC, accusing the Big Four auditing firm of "negligence" and "misrepresentation" in its work for the now-collapsed property giant. This legal action targets both PwC Hong Kong and PwC Zhong Tian, the firm’s mainland China division, according to court documents obtained and reported by the Financial Times on Tuesday.

China Evergrande’s financial collapse

China Evergrande, once the world’s most indebted property developer, defaulted on its international debts in 2021, owing more than $300 billion. This default triggered a broader financial crisis within China’s property sector, impacting the country’s financial system.

In January, a Hong Kong judge appointed Middleton and Wong as liquidators for Evergrande’s Hong Kong-listed arm after the company’s offshore restructuring plans fell through. However, experts indicate that the liquidators might struggle to recover substantial assets, as most of Evergrande’s holdings are in mainland China, which has a different legal framework.

 

China Evergrande liquidation and legal actions

On Monday, Evergrande’s liquidators announced via a Hong Kong stock exchange filing that they had initiated court proceedings to recover approximately $6 billion in funds, including dividends and remuneration, from the company’s founder Hui Ka Yan and other top executives. Another court document, as reported by FT, revealed Hui’s global assets, estimated to be worth up to $7.7 billion, including luxury cars, jets, yachts, and properties in London and Los Angeles.

The liquidators, represented by restructuring specialists Eddie Middleton and Tiffany Wong from Alvarez & Marsal, filed a writ of summons with Hong Kong’s High Court in March. This document set the stage for a lawsuit that adds to PwC’s mounting troubles, especially as it anticipates penalties from Chinese authorities over its auditing practices for Evergrande. PwC had served as Evergrande's auditor for over a decade, providing clean audit reports until the company’s collapse.

The legal filing against PwC includes claims for losses and damages related to breach of contract, duty, misrepresentation, negligence, and unjust enrichment. The case focuses on a PwC auditor’s report from March 2018, covering Evergrande’s financial year ending in December 2017. Such claims typically need to be filed within six years of the events in question, according to Hong Kong legal procedures.

In addition to the case against PwC, the liquidators have also initiated court proceedings against CBRE and Avista Valuation Advisory. These firms produced valuation reports for Evergrande and its subsidiaries in 2018, which are now under scrutiny.

PwC faces fines in China

Separately, PwC faces potential fines from Chinese authorities for its audit of Evergrande’s mainland operations. China’s securities regulator revealed in March that Evergrande's mainland property unit had inflated revenues by $78 billion in 2019 and 2020. Partners at PwC fear that the penalties could be some of the largest ever imposed on a Big Four firm in China.

Last week, Hong Kong’s High Court lifted a confidentiality order on court proceedings related to Evergrande's liquidation, allowing more transparency in the ongoing legal processes.