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Liquidators of property developer China Evergrande have told PwC partners in Hong Kong that they could pursue them personally for any damages over audit failures and warned them not to use methods such as divorce to shield assets.
Evergrande’s liquidators have sued PwC for at least $8.5bn, citing “negligence” and “misrepresentation” in the firm’s audit of the group, whose 2021 default precipitated a crisis in China’s property sector.
In a letter to individuals who were equity partners during the firm’s Evergrande audit from 2017 to 2020, the liquidators said that, while they expected “PwC will be able to meet in full any monetary judgment”, they warned that they would look to the partners “personally to recover any shortfall”.
The letter, sent on June 30 and seen by the FT, also warned partners against taking steps to “shield assets from execution of judgment, including by divorcing spouses or placing assets in the names of other family members” after reports of partners contemplating such steps.
“We are therefore concerned to ensure that you have made adequate provision for [Evergrande’s] claims in your personal financial affairs and will not do anything outside of the ordinary course to put your assets beyond [Evergrande’s] reach,” Eddie Middleton and Tiffany Wong, the liquidators from restructuring firm Alvarez & Marsal, said in the letter.
While a trial date has not been set and the lawsuit could take years to conclude, a person who had seen the letter said the liquidators were putting the partners “on notice” that they “might be asking you for some money”. Evergrande’s liquidators can only pursue individuals if the firm does not pay any damages in full.
Evergrande was China’s largest property developer when it defaulted on its debt and collapsed with more than $300bn in liabilities. Its downfall exposed a sector-wide cash crunch that took down other developers and sent shockwaves through China’s financial system, as most households carried much of their wealth in property.
Hui Ka Yan, Evergrande’s founder, pleaded guilty in April to charges of bribery, embezzlement and fraud. PwC’s mainland China business was fined Rmb441mn ($62mn), while Hong Kong’s securities regulator ordered the firm to set aside HK$1bn ($128mn) for Evergrande’s minority shareholders. The Accounting and Financial Reporting Council imposed a HK$300mn penalty.
Evergrande’s liquidators have requested a judicial review of the HK$1bn compensation, arguing that the Securities and Futures Commission did not have the authority to negotiate such a settlement, according to a court document seen by the FT.
The settlement also circumvented “the statutory priority of creditors” by compensating minority shareholders, argued the liquidators.
PwC declined to comment, while the SFC said it could not comment on ongoing litigation. Middleton and Wong did not respond to requests for comment.