Why do Evergrande liquidators want the court to overturn PwC’s HK$1 billion settlement for minority shareholders?

The Securities and Futures Commission (SFC) and PwC Hong Kong reached an agreement in April over the audit of China Evergrande Group (former stock code: 3333), under which PwC, without admitting any legal liability, set aside HK$1 billion to compensate eligible independent minority shareholders. The Evergrande liquidators challenged the arrangement and applied to the High Court for a judicial review in June. SFC executive director of enforcement Alan Lin said on September 24 that the court was expected to deliver its ruling around the end of October.

What the agreement says: a reserve, not a fine

The SFC announced on April 23 that PwC had agreed to set aside HK$1 billion, to be distributed to eligible independent minority shareholders through a process overseen by an independent administrator. Details of the compensation arrangements will be announced later. The SFC said it would take no further action against PwC if the firm complied with the terms of the agreement. SFC chief executive Julia Leung said it was the first time an auditor of a collapsed company had compensated independent minority shareholders who suffered losses as a result of false financial statements.

On the same day, the Accounting and Financial Reporting Council separately fined PwC HK$300 million and barred it from taking on new public-interest entity clients for six months. Two former registered responsible individuals were fined a total of HK$10 million. The two arrangements involved about HK$1.3 billion in all. The HK$1 billion was compensation, not a fine.

The SFC’s allegations: inflated revenue and audit failures

The SFC found that Evergrande’s results announcements and annual reports for the 2019 and 2020 financial years contained false or misleading information. The main method involved recognising sales revenue before properties had been completed and delivered. According to the SFC’s findings, audited revenue for the two years was overstated by about 213.9 billion yuan (about HK$233 billion) and 350.2 billion yuan (about HK$382 billion), representing increases of 44.79% and 69.03% respectively. The profits originally reported for the two years — 33.5 billion yuan and 31.4 billion yuan (about HK$36.5 billion and HK$34.2 billion) — should instead have been losses of 7.12 billion yuan and 19.9 billion yuan (about HK$7.8 billion and HK$21.7 billion), the SFC said.

The SFC also said PwC had failed to maintain its independence during the audit, lacked sufficient professional scepticism, failed to design and carry out effective site inspections, and had “actively acquiesced” in Evergrande management’s manipulation of audit samples. PwC said it did not admit to the allegations and disagreed with the SFC’s conclusions.

On the mainland, the Ministry of Finance and China Securities Regulatory Commission fined PwC’s mainland member firm, PricewaterhouseCoopers Zhong Tian, 441 million yuan (about HK$480 million) in September 2024 over its audit of Evergrande, and suspended its operations for six months.

The central dispute: who gets paid first?

Evergrande’s liquidators — Annie Wong of Alvarez & Marsal and Edward Middleton — filed a petition with the High Court on June 12 seeking to set aside the agreement. They advanced two main arguments. First, PwC is an accounting firm rather than a regulated person under the Securities and Futures Ordinance, making the AFRC the responsible regulator; the SFC therefore had no independent power to settle with it. Second, the SFC had failed to consider whether the agreement would unfairly prejudice creditors.

The liquidators also said Evergrande had brought claims of about 57 billion yuan (about HK$62 billion) for audit negligence against PwC Hong Kong, PwC Zhong Tian and PricewaterhouseCoopers International. If PwC paid the HK$1 billion to shareholders first, it might later be unable to meet the civil claims, they said. Evergrande’s total liabilities stood at about 2.4 trillion yuan (about HK$2.6 trillion).

The SFC countered that the Securities and Futures Ordinance gave it broad powers to resolve disciplinary matters by settlement, and that it had a duty to protect independent investors. According to the South China Morning Post, counsel for the SFC described the liquidators’ complaint at the August 19 hearing as opposition to minority shareholders “jumping the queue” to receive compensation first.

Lin reiterated at a seminar on September 24 that the compensation would come from PwC, not Evergrande’s estate. The money had never formed part of the assets available to repay Evergrande’s creditors and therefore did not alter the priority of creditors’ claims, he said. The liquidators’ alleged “circumvention of the statutory order of priority” had therefore not occurred. He said the argument was currently under the court’s consideration.

What to watch next

• The High Court’s judicial review ruling: Lin said it was expected around the end of October, while other reports said the judge indicated a decision would be handed down before October, leaving some discrepancy between the accounts.
• The SFC’s release of detailed compensation arrangements, including how eligible shareholders can make claims.
• Progress in the liquidators’ 57 billion yuan claim against PwC. On August 26, the High Court rejected PwC International’s application to be removed from the list of defendants, finding that it owed a duty of care to Evergrande.