By Xie Yu

HONG KONG (Reuters) - A group of creditors of China South City has filed a lawsuit in Hong Kong against the developer's biggest state-owned shareholder to recover $1.4 billion, according to a court filing and a source familiar with the matter.

The lawsuit is the first such case against a Chinese state shareholder of a developer for recovery of payments owed to creditors under the keepwell provision since the property sector tipped into a debt crisis in 2021.

A keepwell provision, while not an outright guarantee, is a credit enhancement mechanism that has been used by Chinese companies in recent years for issuance of offshore bonds, according to lawyers.

The lawsuit is the latest in a growing list of legal cases filed against defaulted Chinese developers in Hong Kong, as offshore creditors look to recover their investments amid an unprecedented debt crisis in the country's property sector.

In response to the China South City lawsuit, summons have been issued against Shenzhen SEZ Construction and Development Group Co. Ltd (SZCDG), a state-owned shareholder of the developer, a filing to Hong Kong High Court dated June 3 shows.

The creditors' group is demanding at least $1.4 billion as damages, the filing showed. The group, represented by Citicorp and law firm Mayer Brown, used a keepwell provision to file the case, it showed.

SZCDG and the creditors' solicitor Mayer Brown did not immediately respond to Reuters request for comment.

The filing said that SZCDG entered into a keepwell deed with creditors on Aug 9, 2022, to assist China South City in meeting repayment obligations of the developer under a series of senior bonds it issued.

China South City missed a principal payment of $11.25 million on a dollar bond due on Feb. 9, 2024. The issuer later failed to make payments in relation to another two tranches of notes in April, the filing showed.

The state shareholder, the filing said, failed to perform its obligations in offering credit support. The group of creditors, therefore, are pushing for the SZCDG to repay the outstanding principals, accrued interest and other fees, it added.

SZCDG is the biggest shareholder of China South City, holding 29%, the developer's 2023 annual report shows.

Focused on construction and operation of infrastructure and industrial parks, SZCDG is owned by the Shenzhen government, its official website shows.

A group of bondholders proposed making use of the Hong Kong law governed keepwell deed to sue the state shareholder for dues earlier this year, Reuters reported in February.