Liquidators trying to recoup at least a fraction of creditors’ investments in defaulted Chinese builders are running into dead-ends.

They have encountered a host of challenges, from trying to get paid to scouring for financial documents and elusive executives, according to people with knowledge of the matter. Creditors in three cases, including Sinic Holdings Group Co and Yango Justice International Ltd, haven’t seen any significant distribution, they said, declining to be identified discussing private matters.

Sinic’s case stalled, for example, after representatives from Kroll (HK) Ltd didn’t land funding for an investigation to recover the financial books, the people said. Since China’s property crisis started, at least six developers with combined assets of more than US$300 billion have been ordered by Hong Kong courts to liquidate.

The struggles reflect the complexities of winding up Chinese developers which have most of their assets in the mainland, a credit risk highlighted when their high-yield dollar bonds took off about two decades ago. While there’s an agreement between Hong Kong and Beijing to recognise insolvency proceedings, it’s limited to a few cities in China. These test cases raise a thorny question for creditors on whether a winding-up order is preferable to attempts to keep negotiating.

While liquidation anywhere in the world can be long-drawn out and complicated, the scale of the tasks is unlike previous restructurings in Hong Kong given the jurisdiction question and the amount of assets involved. Country Garden Holdings Co and seven other Chinese builders - with about US$389 billion in combined assets - are in the midst of legal battles with creditors looking to wind them up. China Evergrande Group, the poster child for the sector’s difficulties, was ordered into liquidation in January.

“We have never seen anything of this scale before, where a whole sector has sunk,” said Foreky Wong, founding partner at Fortune Ark Restructuring Ltd, a Hong Kong-based restructuring solution firm. “Liquidators who are seemingly powerful could end up powerless.”

Some offshore bonds of developers in liquidation, including Sinic and Yango Justice, are indicated at below one cent on the dollar recently, according to Bloomberg-compiled data. That’s lower than bonds of other defaulters, which have been trading between five to 10 cents.

Funding has been a problem. In Hong Kong, liquidators are paid from asset sales, and only turn to creditors and other lenders when the money runs out, according to a note by law firm Dentons Hong Kong LLP.

Unlike in the US, where debtors often file bankruptcy voluntarily and are willing to fund it, Chinese builders listed in Hong Kong have been dragged into liquidation. They have little incentives to aid a process they had opposed from the start.

Representatives from Deloitte Touche Tohmatsu, who are Yango Justice’s liquidators, have been working on the case without receiving payment from the debtor, according to people familiar with the matter. The team seized a small amount of cash in the company’s offshore account, but the funds were barely sufficient to cover administrative fees, they said.

Earlier this month, Jiayuan International Group Ltd said in a filing that its liquidators didn’t get a loan from an investor to fund the case. They’re seeking other investors but acknowledged that may be difficult. The case is also being handled by representatives from Deloitte.

“If there are no resources and no one is interested in funding the case, sometimes you have to close the case,” said Wong, who isn’t involved in the cases mentioned in this story. “No one will throw good money after bad,” he said.

A representative from Jiayuan declined to comment. Calls made to the securities department of Shanghai-based Yango Group Co Ltd, the parent of Yango Justice, over two working days weren’t answered, while email inquiries weren’t responded to during that period.

“While it’s true that some creditors in liquidation cases like Sinic, Yango, and Jiayuan have yet to see significant distributions, it’s important to note that the liquidation process can vary considerably from case to case,” Deloitte said in an email in response to questions. “The challenges encountered by court-appointed liquidators can be highly dependent on the specific circumstances and complexities involved.”

Deloitte said its representatives were able to recover and distribute a significant amount of funds in the liquidation of Peking University Founder Group.

The funding issues are often tied to the obstacles in the way of liquidators. Routine procedures get held up for reasons including hard-to-find financial records and uncooperative executives.

Sinic’s liquidators were rejected by its creditors when they sought HK$430,000 for a court injunction to recover financial documents, according to one of the people familiar with the matter. Earlier, the liquidators had reached out to some board members for the records with limited success, the person said.

Sinic’s investor relationship team didn’t reply to emailed questions. The stock has been delisted in Hong Kong. A Bloomberg visit to an office previously listed as its address in the city found that the company has vacated the premise. Kroll declined to comment.

The ultimate roadblock relates to enforcing legal actions in China. Debtors’ real estate assets are often housed under their onshore units, and local courts and governments want their say.

For example, Jiayuan’s liquidators said in January that a controlling stake in an onshore property project had been “transferred” to a local firm. The move may have been made by onshore creditors and/or the local government, the statement had said.

In refusing to lend to Jiayuan’s liquidator, the prospective lender cited “the challenges in managing creditors, government relations and resources (including manpower) for onshore operations,” according to the company filing.

Hong Kong has an agreement with Shanghai, Xiamen and Shenzhen in China to recognise its insolvency proceedings. That raises the question over the enforcement mechanism liquidators can resort to. And while Sinic’s headquarters is in one of those cities, it has projects in Nanchang, in Jiangxi province where the builder was founded, Hangzhou in Zhejiang province as well as other cities.

That home ownership is a sensitive political and economic issue in China also complicates liquidation.

“There’s no clarity on the real estate market,” said Alexander Tang, a partner at law firm Stephenson Harwood LLP, who advises on corporate restructuring and insolvency litigation. “Investors need to see solid return prospects before they put money in anything. The lack of funding could be detrimental to liquidation procedures and creditors’ eventual recovery.”

  - Bloomberg