Big trouble in Liverpool Chinatown

The troubled New Chinatown development in Liverpool has been beset by difficulties for a number of years.

The latest issues between the freeholder, Liverpool City Council, and the developer, Chinatown Development Company (CDC), are likely to have reputational, financial and legal consequences for those involved in the project over the months, and potentially years, ahead. As the various participants try and limit and/or recover their losses they are likely to be presented with difficult decisions about whether, and how, they pursue their claims.

The development is a £200m regeneration project. The scale of the New Chinatown development, and the involvement of Liverpool council, which owns the freehold of the site, means much of its trouble has been played out in public.

The recession led to the previous developer of the site, Urban Splash, withdrawing. CDC, a special purpose vehicle in the North Point Global (NPG) group, took over the project in 2015. In 2016 NPG reported that it had secured substantial foreign investment for the project through off-plan sales.

The fallout from the scheme is unlikely to produce any real winners

Unfortunately, progress on, and confidence in, the development unravelled. Allegations of fraud against NPG’s selling agent in the Far East, Hong Kong Homes, are reported to have damaged the confidence of investors. Cash flow difficulties saw CDC’s first contractor, PHD1, become insolvent and eventually go into administration. The replacement contractor, the Bilt Group, also became insolvent and eventually went into liquidation.

NPG started to explore its exit strategy. However, a proposed sale to Your Housing Group had to be abandoned in March 2017 after five months of negotiations. Matters escalated as Liverpool council expressed increasing dissatisfaction with the continued delay and lack of progress. Relations between NPG and the council deteriorated as allegations and counter-allegations, including in relation to criminal conduct, were aired in the press.

Liverpool council is then reported to have objected to NPG agreeing terms for selling the site without having marketed it on the open market. The council considered whether it would obtain a compulsory purchase order to purchase the site before issuing a statutory demand against CDC for £950,000 in relation to two unpaid stage payments and serving a forfeiture notice for two leases on the site.

Although CDC has challenged the statutory demand, NPG has announced that the damage to its brand means that it would be unrealistic to return to site on any of its projects and so it will seek to dispose of all of its property interests, return monies to buyer clients and then cease operations either on a private basis or following the appointment of insolvency practitioners.

The New Chinatown development demonstrates the risks in a large development project. The fallout from the scheme is unlikely to produce any real winners. All participants will now be looking to limit their overall losses and protect their interests. The individuals involved will need to consider whether they have discharged, and are continuing to discharge, the duties they owe personally.

The threatened forfeiture risks CDC’s continued involvement in the project if the site reverts to Liverpool council. The statutory demand threatens the continued existence of CDC as a winding up order will lead to a liquidator being appointed to realise CDC’s assets and distribute these to its creditors. The liquidator will also investigate CDC’s affairs and can pursue claims in respect of certain alleged misconduct and/or transactions

Whatever the outcome, the funders and investors in both Liverpool council and the New Chinatown development are now unlikely to secure the return on their investment they were hoping to achieve, if indeed they receive any return at all.

NPG has announced that it is seeking to cease operations and so appears to already be engaged in a damage limitation exercise to limit its exposure. The off-plan buyers at the New Chinatown development are parties to contracts that will not be fulfilled.

The council remains significantly exposed. As the freeholder and the main contracting party with CDC, it has a direct financial interest in the project and may need to agree terms with a new developer. As the city council it will also have broader considerations about securing future investment into the city.

The failure of the New Chinatown development will leave insufficient money to satisfy the expectations and claims of all the participants. Unless parties can increase either the total funds available, or their share of those funds at the expense of others, there is a real risk that taking further action will be throwing good money after bad.

Mark Fletcher is a senior associate in the commercial litigation team at Russell-Cooke