Will the top-level penalties of Evergrande Real Estate and Xu Jiayin affect the repayment of creditors' debts?

Beijing News

2024-05-31 22:00Posted on the official account of Beijing News

On May 31, the website of the China Securities Regulatory Commission showed that recently, the China Securities Regulatory Commission made an administrative penalty decision on the illegal case of fraudulent issuance and information disclosure of Evergrande real estate bonds in accordance with the law, ordered Evergrande Real Estate to make corrections, gave warnings and fined 4.175 billion yuan, and imposed a maximum fine of 47 million yuan on Xu Jiayin, the then chairman and actual controller of Evergrande Real Estate, and took a lifetime ban on the securities market.

Will the punishment of Evergrande Real Estate and Xu Jiayin affect the repayment of creditors' debts? In the eyes of industry insiders, general private law creditors can claim that their claims have priority over the CSRC's fines for repayment.

The maximum fine is the strictest since the launch of unified law enforcement in the bond market

On March 18 this year, Evergrande Real Estate issued an announcement on receiving the prior notice of administrative punishment and market ban from the China Securities Regulatory Commission. Due to suspected financial fraud, fraudulent issuance and other violations of laws and regulations, the China Securities Regulatory Commission plans to decide to impose a fine of 4.175 billion yuan on Evergrande Real Estate, and decide to impose a lifetime ban on the securities market against Xu Jiayin, then chairman of the company, and Xia Haijun, then vice chairman of the board of directors and president of China Evergrande Group.

Now, with the announcement of the China Securities Regulatory Commission (CSRC) disclosing the "Administrative Penalty Decision" (hereinafter referred to as the "Decision"), the punishment of Evergrande Real Estate and Xu Jiayin and others has finally landed.

According to the "Decision", in accordance with the relevant provisions of the "Securities Law of the People's Republic of China" (hereinafter referred to as the "Securities Law"), Evergrande Real Estate has been investigated and tried for fraudulent issuance of bonds, illegal information disclosure and other acts, and the parties have been informed of the facts, reasons, basis and rights of the parties in accordance with the law. The parties, Evergrande Real Estate and Qian Cheng, did not submit statements or defense opinions, nor did they apply for a hearing; The other parties (except Xia Haijun) all submitted statements, defenses and applications for hearings. At the request of the parties, the Commission held a hearing on April 16, 2024, and heard the statements and defenses of the parties and their representatives.

Regarding the defense opinions put forward by the five Evergrande parties, the "Decision" shows that the CSRC will not accept them. The CSRC said that the investigation and trial of this case have now been concluded.

The CSRC determined that between 2019 and 2020, Evergrande Real Estate inflated its revenue and profits by recognizing revenue in advance, resulting in fraudulent issuance of bonds in the public offering of bonds in the exchange market, and the relevant annual reports disclosed contained false records. At the same time, Evergrande Real Estate also failed to disclose periodic reports on time, failed to disclose major litigation and arbitration as required, and failed to disclose the failure to pay off due debts as required.

The China Securities Regulatory Commission punished Evergrande Real Estate for fraudulent issuance of bonds according to 20% of the funds raised, and imposed a maximum fine on its information disclosure violations, which is the strictest scale since the unified law enforcement of the bond market, which not only severely punishes financial fraud in accordance with the law, but also fully considers the overall work such as the scale of Evergrande real estate bonds and the battle of "guaranteeing the delivery of housing", and adheres to the unity of political effect, social effect and legal effect. At the same time, the CSRC is moving forward with an investigation into the relevant intermediaries.

Yan Yuejin, research director of the E-House Research Institute, said that the CSRC also promoted the investigation of relevant intermediaries, which also means that the investigation and punishment of relevant institutions continues.

Previously, the Hong Kong Accounting and Financial Reporting Council had issued an announcement saying that it had noticed that a whistleblower letter was circulating and was widely reported by the media. The letter expressed serious concerns about the quality management system of PricewaterhouseCoopers (i.e. PricewaterhouseCoopers Hong Kong) and the potential deficiencies in the quality of the audits conducted by China Evergrande Group.

In view of the seriousness of the allegations, the AFRC has a duty to investigate in order to protect the wider public interest in the investment public and the audit of listed entities, and to safeguard public confidence in the integrity of the accounting profession, according to the AFRC. If any misconduct or contravention of the AFRCO is detected, the AFRC will not hesitate to take stringent enforcement action against the firms and individuals involved.

Yan Yuejin said that the central government has previously issued the "Provisions on the Accountability for the Prevention and Resolution of Financial Risks (Trial)", which also shows that the follow-up real estate field will emphasize strict investigation of rights and responsibilities in terms of preventing and resolving risks. Especially in this round of property market adjustment, some high-risk and illegal operations are bound to face strict management. Regulatory law enforcement is "toothy and thorny", angular, and obviously will better implement the "post-autumn settlement". And Evergrande's example is not just a warning, but a beginning. It is expected that in the past two years, real estate companies with serious risks, causing large debt defaults and housing delivery problems, will face strict investigation. This step reflects the orientation of strict management and strict investigation of real estate financial risks.

In 2020, the inflated income was 350.157 billion, and Evergrande Real Estate was involved in three violations of laws and regulations

Why were Evergrande Real Estate and Xu Jiayin punished?

What are the specific violations of laws and regulations behind the fines of Evergrande Real Estate and Xu Jiayin and other management personnel?

According to the "Decision Letter", there were false records in the 2019 and 2020 annual reports disclosed by Evergrande Real Estate. Evergrande Real Estate implemented financial fraud by recognizing income in advance, and inflated revenue of 213.989 billion yuan in 2019, accounting for 50.14% of the current operating income, corresponding to inflated costs of 173.267 billion yuan, and inflated profits of 40.722 billion yuan, accounting for 63.31% of the total profit of the current period; In 2020, the inflated revenue was 350.157 billion yuan, accounting for 78.54% of the current operating income, corresponding to the inflated cost of 298.868 billion yuan, and the inflated profit was 51.289 billion yuan, accounting for 86.88% of the total profit of the current period.

At the same time, Evergrande Real Estate's public issuance of corporate bonds was fraudulently issued. Evergrande Real Estate issued 20 Evergrande 02 bonds on May 26, 2020, with an issuance scale of 4 billion yuan; On June 5, 2020, 20 Evergrande 03 bonds were issued, with an issuance scale of 2.5 billion yuan; On September 23, 2020, 20 Evergrande 04 bonds were issued, with an issuance scale of 4 billion yuan; On October 19, 2020, 20 Evergrande 05 bonds were issued, with an issuance scale of 2.1 billion yuan; On April 27, 2021, 21 Evergrande 01 bonds were issued, with an issuance scale of 8.2 billion yuan.

In the process of issuing the above-mentioned bonds, the issuance documents of the announcement cited the relevant data of the 2019 and 2020 annual reports with false records, respectively, and there was fraudulent issuance.

In addition, Evergrande Real Estate failed to disclose relevant information as required, among which, Evergrande Real Estate failed to disclose the 2021 annual report, 2022 interim report and 2022 annual report as scheduled; Failure to disclose the circumstances of major litigation and arbitration as required; Failure to disclose the failure to pay off debts as they fall due.

Industry: In terms of the order of repayment, private law claims take precedence over public law claims

The market is concerned about whether this penalty will affect the repayment of creditors' debts.

According to Article 113 of the Bankruptcy Law, the order of repayment of ordinary claims is after bankruptcy expenses, common debts, employee debts, social insurance premiums and taxes owed by bankrupts, while the fines imposed by the CSRC are administrative penalties and do not belong to the aforementioned amounts. Therefore, in conjunction with <全国法院破产审判工作会议纪要>the provisions of Article 4, Paragraph 28 of the Circular of the Supreme People's Court on Printing and Distribution, in terms of the order of repayment, the principle of priority of private law claims over public law claims and compensatory claims over punitive claims can be followed.

"Therefore, for ordinary private law creditors, they can claim that their claims have priority over the CSRC's fines for repayment." Wang Yuchen said.

Beijing News reporter Duan Wenping

Edited by Chen Zhewan

Proofreading by Zhai Yongjun