Is this the end of Evergrande? Here’s what may happen next

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The legal systems of Hong Kong and mainland China remain distinct. CNNHong KongCNN — 

The liquidation of Evergrande as ordered by a court this week has raised more questions than answers about how the collapse of the poster child of China’s real estate crisis will affect investors, thousands of workers, and homebuyers waiting for their apartments

On Monday, a court in Hong Kong ordered the winding up of the embattled Chinese company, the world’s most indebted property developer. The ruling comes more than two years after the real estate giant ran into a liquidity crisis, which ultimately led to it defaulting on its debt and filing for bankruptcy in the United States.

Dozens of other major Chinese developers have defaulted on their debt since Evergrande’s troubles began. These include Country Garden, Shimao Group, and Kaisa Holdings.

But there is still little clarity over how the liquidation of Evergrande will unfold. That’s because the legal systems of Hong Kong and China remain distinct, despite Beijing’s growing control over the former British colony in recent years.

While the court-appointed liquidator, Alvarez and Marsal, will have powers to seize Evergrande assets in Hong Kong, and sell them to raise funds to repay foreign creditors, the implications for the company’s vast business in mainland China are unclear.

The picture is further muddled by the fact that there is no precedent. No Chinese company as huge as Evergrande — which was once China’s second largest developer— has been wound up by a Hong Kong court.

The process will be watched keenly by international investors, who have been fleeing China over concerns ranging from the real estate crisis and slowing growth, to Beijing’s shift towards ideology-driven policies.

“For international investors, this is a pivotal moment and what happens next will help them determine their legal strategies to recover anything from other developers that have defaulted,” said John Bringardner, head of Debtwire, a New York-based data provider covering global debt and bankruptcies.

Here are some of the big questions China will need to answer.

Who runs Evergrande now?

According to Hong Kong’s laws, the liquidators are legally in control of the company, including its subsidiaries in China.

Hong Kong and the mainland city of Shenzhen — where Evergrande is based — have a mutual insolvency recognition agreement, but courts in the city are unlikely to recognize the offshore liquidator, experts have said.

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This means there is going to be ambiguity for a while over who actually controls Evergrande’s mainland operations.

The company was founded in 1996 by Hui Ka Yan, also known as Xu Jiayin in China. Once the second-richest person in Asia, Hui has seen his life change drastically in the last couple of years. His fortune has collapsed and he was detained by authorities last September on suspicion of committing unspecified “crimes.”

It’s unclear what has happened to Hui since his detention. But Xiao En, the company’s CEO and executive director, has been in charge since last year.

FILE PHOTO: Hui Ka Yan, chairman of property developer China Evergrande, attends a news conference on annual results in Hong Kong, China March 29, 2016. REUTERS/Bobby Yip/File Photo

Hui Ka Yan, chairman of property developer China Evergrande. Bobby Yip/Reuters/FILE

Earlier this week, Xiao told Chinese state media he was sorry about Hong Kong court’s decision, and would cooperate with the liquidator while trying to maintain the company’s operations.

He also said that the liquidation order doesn’t affect the operations of subsidies that are “independent legal entities,” including its main property development business, Hengda Real Estate Group, which has most of its assets in mainland China.

“At present, the management and operation systems of Hengda Real Estate Group and other domestic and overseas subsidiaries as independent legal entities remain unchanged,” he told the 21st Century Business Herald.

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