Evergrande Liquidators Suing PwC, CBRE for Negligence, Misrepresentation

China Evergrande Group’s liquidators have launched legal proceedings against the company’s former auditor PricewaterhouseCoopers (PwC) and valuer CBRE as part of an ongoing effort to recoup losses on behalf of the collapsed mainland developer’s creditors, as the firms face accusations of misrepresenting the bankrupt builder’s books.

Lawyers representing Evergrande’s liquidators have filed claims against PwC Hong Kong and PwC Zhong Tian, the Big Four accounting firm’s mainland China arm, for losses and damages caused by “breach of contract, breach of duty…misrepresentation, negligence by, and/or unjust enrichment” relating to their auditing work for the developer, according to a Financial Times report on Tuesday citing court documents obtained by the FT.

The liquidators have also initiated proceedings against real estate services provider CBRE and Hong Kong-based advisory firm Avista Valuation Advisory over valuation reports they had produced for Evergrande and its subsidiaries in 2018, according to a separate court document seen by the FT.

“Foreign service providers in China, such as PwC and CBRE, are increasingly at risk in a worsening onshore environment,” Brock Silvers, chief investment officer at Hong Kong-based Kaiyuan Capital told Mingtiandi.

Ongoing Fallout

Evergrande’s joint and several liquidators – Edward Simon Middleton and Tiffany Wing Sze Wong of restructuring firm Alvarez & Marsal – are suing PwC on the basis of its audits of Evergrande and its subsidiaries for the 2017 financial year and the first six months of 2018.

The lawsuit, which was filed in March and had not previously been made public, does not indicate how much money the liquidators might sue for. PwC Hong Kong declined to comment, while PwC Zhong Tian, CBRE, and Avista Valuation Advisory had not responded to Mingtiandi inquiries by the time of publication.

PwC’s auditing work has faced scrutiny since the China Securities Regulatory Commission found in May that Evergrande had committed fraud by inflating revenue at its Hengda onshore unit by RMB 564 billion in 2019 and 2020.

With mainland authorities probing PwC’s role in those accounting irregularities, Shanghai-registered PwC Zhong Tian is facing a potential fine of RMB 1 billion or more, according to a May account by Bloomberg citing people familiar with the matter.

PwC had audited Evergrande’s financials for nearly 14 years until it stepped down in January 2023, citing the developer’s failure to provide information required to conduct the audit of its then still-unreleased 2021 financials.

Last month, Hong Kong’s Accounting and Financial Reporting Council (AFRC) cleared PwC of allegations of having failed to establish and maintain effective quality controls, failed to adhere to professional standards regarding its client relationship with Evergrande, and failed to assign appropriate personnel to key positions, following accusations circulated in the media.

As part of an investigation begun in April, the AFRC continues to look into the quality of PwC’s auditing of Evergrande.

Client Exodus

News of the legal action against PwC comes as mainland regulators, including the Ministry of Finance, have reportedly in recent months asked state-owned PwC clients – including Bank of China, China Life Insurance, PICC, China Taiping Insurance and China Cinda Asset Management – to drop the auditor.

Amid the client exodus and regulatory probe, PwC is reportedly considering slashing up to half of its financial services auditing staff in China as well as reducing headcount in other onshore business units by 20 percent. The company has also reportedly asked its China-based partners to take pay cuts of as much as 50 percent. The firm had 781 partners and nearly 19,000 employees in mainland China as of last September, according to its website.

Aside from its work with Evergrande, PwC had served as auditor for other major mainland developers, including Country Garden Holdings, Shimao Group, Guangzhou R&F Properties and Sunac China Holdings, before those companies also defaulted on debt.

Evergrande’s liquidators commenced the lawsuit against PwC the same month that they launched legal proceedings against Evergrande founder Xu Jiayin, his ex-wife, and the company’s former CEO and CFO, in an effort to recover $6 billion in dividends and remuneration, with that amount based on the company’s allegedly misstated financials from 2017 through 2020.

The legal actions are among the liquidators’ latest attempts to recoup some of Evergrande’s $329 billion in debt on behalf of creditors, after Hong Kong’s High Court ordered in January that the company be wound up.

With over 90 percent of Evergrande’s balance sheet located onshore and little precedent for offshore liquidators seizing onshore assets, the bankruptcy process is testing the enforceability of Hong Kong court decisions and the legal reach of offshore liquidators in mainland China.

“Auditor lawsuits are notoriously difficult, and Evergrande’s Hong Kong-based liquidators would need multi-million dollar support over a number of years in order to push this effort to a highly uncertain conclusion. That seems unlikely,” said Kaiyuan Capital’s Silvers.

Realisations of the company’s assets have been “modest”, according to an update in May, with the liquidators now seeking investors for the company’s restructuring.