Evergrande’s founder is under investigation for ‘crimes’, adding to the pressure on $300 billion debt.

Evergrande’s announcement on Thursday was both ominous and short. Hui Ka Yan was placed under ” compulsory measures ” for suspicions of “illegal crime”.

The company’s one-page press release, which was usually short on information from a company who has been in limbo since defaulting on international debts over two years ago, was no exception. It was a subtle shift in the mood, but it was there.

The investors had hoped that this would be the moment where, after many fractious discussions, they were closer to a final deal. Hui’s uncertainty is only one of many indicators that make it difficult to predict the fate of Evergrande .

Police in Shenzhen reported that employees of its wealth management subsidiary had also been detained during this month. This week, an official investigation derailed its restructuring plan and the company also missed payments for onshore bonds.

Beijing appears to be more important than ever in determining the future of the Chinese developer, which with its $300bn of liabilities has become synonymous both with the excesses and recent collapse of China’s multi-decade real estate boom.

The policymakers are being pressed to address a property slump that is showing no signs of abating. The sector, which accounts for over a quarter in economic activity, has been a drag on growth since Evergrande defaulted.

One person who is involved in real estate projects on the Chinese mainland said that the investigation of Hui was standard. He said, “The whole thing has collapsed. People are being held accountable.”

The debt restructuring of the most indebted developer in the world has been scrutinized even more.

One person who is familiar with restructuring discussions said, “It is very clear what will happen without a restructuring.” This will be a massive liquidation with far-reaching implications for all those involved in the company’s history: directors, advisors, auditors.

Evergrande investors who hold billions of dollars in offshore debt had to vote this week on a plan which would have resulted in them receiving new notes tied to the equity of Hong Kong listed subsidiaries of the group. Evergrande shares had been suspended since March 20, 2022. Trading resumed in late August, in anticipation of approval.

Evergrande’s estimated total liabilities are $300bn

The scheme, however, was derailed in the final moments. The company stated that the delay was due to an “official investigation” in a filing with the Hong Kong Stock Exchange. The company did not specify who conducted the investigation. In August, the report said that there was an investigation by the China Securities Regulatory Commission into information disclosure.

Those familiar with the situation said that they were told by people who are knowledgeable about the matter that the CSRC rejected a request to issue new equity-linked securities. This application’s rejection is not clear.

Evergrande has hired US law firm Sidley Austin and Houlihan Lokey to represent it during its discussions over the offshore restructuring.

Investors , who had around $20bn of international debt when the default occurred, and are represented both by Kirkland & Ellis, and Moelis Investment Bank, , threatened to take legal action and complained about a lack engagement in 2022. In March, the tone changed when the plan was revealed.

A person said that this week there was a lot “of strategizing” to try and “reconstruct the plan” in a manner to avoid any conflict with CSRC.

Brock Silvers said that the restructuring suffered a setback, but added that “all parties are anxious to avoid winding up”.

Investors who hold dollar bonds “are not in a good position”, but their legal claims “could dramatically worsen Evergrande’s situation”, he added. Regulators “need Evergrande” to survive in order to boost the economy and appease domestic investors and suppliers.

The erasure of dollar bonds would also “ruin the outlook for overseas debt issuance, at a moment when China desperately seeks foreign investment”.

Evergrande missed Rmb4bn (548mn) of payments due on a mainland Bond this week, according to Shenzhen’s filing. Silvers said authorities are “very sensitive” to domestic market turmoil.

Beijing implemented policies to cool the housing market early in the pandemic. These included limiting the leverage of developers and other measures. As sales have dropped at the major developers, Beijing is showing signs that it will ease its policy. In recent weeks, the city authorities removed some restrictions on first-time home buyers.

Fitch, a rating agency, said on Thursday that the stress in China’s real estate sector will “continue” to “pose cross-sector risks in the near future”, and that the “government’s modest policy easement to date is not likely to drive a dramatic turnaround in homebuyers’ sentiment”.

The government’s position is not clear on Evergrande or its restructuring, but the announcement regarding Hui suggests that there will be consequences for those involved.

Hui, born in 1958, launched Evergrande in 1990 and was known for his political connections. However, he was expelled from the Chinese People’s Political Consultative Conference (an advisory body to government) in 2022.

The uncertainty about his whereabouts adds to the confusion surrounding the restructuring. The person familiar with restructuring said that “no one wants to publicly be responsible for this name, in any form or shape.”

The person continued, “You don’t know who controls the company.” She pointed out that a board of directors, executive management team, and risk committee were all involved in restructuring. “It is difficult to determine who the decision makers are.”