Hong Kong’s securities market regulator has defended a HK$1 billion (US$128 million) settlement with PricewaterhouseCoopers Hong Kong over an auditing scandal involving China Evergrande Group, as the developer’s liquidators seek to have the agreement overturned.
The dispute was heard in the High Court on Wednesday, where lawyers for the Securities and Futures Commission (SFC) asked the court to dismiss the liquidators’ judicial review challenge. The liquidators argue that the regulator abused its powers by reaching the agreement with PwC Hong Kong rather than pursuing legal action.
The SFC maintained that it has broad powers under the Securities and Futures Ordinance to resolve disciplinary proceedings through pre-litigation settlements. Its lawyers also argued that the regulator has a duty to protect the interests of independent investors.
The liquidators, Tiffany Wong Wing-sze and Eddie Middleton of Alvarez & Marsal, have raised concerns that the agreement could leave Evergrande and its creditors HK$1 billion worse off. Their concern centres on whether PwC Hong Kong will have sufficient assets to meet the settlement while also facing separate legal claims brought by Evergrande’s liquidators.
PwC Hong Kong agreed with the SFC in April to set aside HK$1 billion to compensate Evergrande’s minority shareholders. The agreement did not involve an admission of liability by the accounting firm for alleged breaches of its professional duties.
The settlement was significant because it marked the first time the watchdog had disposed of an alleged breach of financial regulations through a settlement without seeking court orders under section 213 of the ordinance to ensure compliance.
Jin Pao SC, representing the liquidators, argued that the SFC did not have express powers under the ordinance to enter into such a settlement instead of taking legal action. He said the regulator’s approach had effectively prevented the court from determining the merits of its requests against PwC Hong Kong.
“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 liquidators also argued that the settlement could unfairly prejudice Evergrande and its creditors by reducing the assets available to satisfy their claims against PwC Hong Kong. Their challenge came as they separately sought 57 billion yuan (US$8.4 billion) from three PwC entities in a corporate lawsuit, one of the largest claims ever filed in Hong Kong.
Pao highlighted SFC board minutes and papers indicating that the regulator was aware PwC Hong Kong could become insolvent if it failed to meet financial obligations arising from court judgments against it. The liquidators argued that preserving the accounting firm’s assets was therefore important to their ability to recover losses in the separate proceedings.
The SFC rejected that reasoning. Paul Shieh Wing-tai SC, representing the regulator, said the liquidators’ case was based on an assumption that PwC Hong Kong’s financial assets had to be preserved as far as possible in anticipation of a successful 57 billion yuan claim.
Shieh argued that the assumption was highly problematic because it was impossible to know whether PwC Hong Kong would become insolvent in the future. He said it was rational for the SFC to negotiate a settlement given the uncertainties associated with litigation, while stressing that aggrieved parties remained able to seek redress through judicial review proceedings.
Mr Justice Russell Coleman reserved his judgment after the 5½-hour hearing.
The case unfolds against the collapse of China Evergrande, formerly the world’s largest developer by sales. The company collapsed with liabilities exceeding US$300 billion and left creditors facing heavy losses. It was also found to have overstated 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, leaving its creditors and liquidators to pursue recoveries amid one of Hong Kong’s most consequential corporate insolvency disputes.
