Navigating Corporate Restructuring and Insolvency: Insights and the Role Played by Accountants

My colleague Alex Chan and I had the privilege of participating in an interactive webinar hosted by the The Hon Edmund Wong, a member of the Legislative Council and the representative of the accountancy functional constituency. The webinar provided a valuable platform for professionals in the industry to delve into the significance of corporate restructuring and insolvency within the realm of accounting.

Participants offered insights into the restructuring and insolvency system in Hong Kong, emphasised the necessity of a corporate rescue framework, examined recent legislative advancements, and shared case studies from the field. 

Overview of the Restructuring and Insolvency Regime in Hong Kong 

The first segment of the event shed light on the existing restructuring and insolvency framework in Hong Kong. One key aspect discussed was the Companies (Winding Up and Miscellaneous Provisions) Ordinance, which provides the legal basis for winding up companies and administering the process of liquidation. This ordinance outlines the procedures and requirements for initiating the winding-up process, appointing liquidators, and distributing assets to creditors.

Additionally, participants gained insights into the roles of various stakeholders in the restructuring and insolvency process. These stakeholders include not only company directors and management but also creditors, shareholders, insolvency practitioners, accountants in different aspects of professional work, and regulatory authorities. Understanding the responsibilities and interests of each party is crucial for accountants, as they often act as companies’ trusted advisors or financial experts in such situations.

The event also covered the procedures involved in corporate restructuring and insolvency. Participants learned about the different options available for distressed companies, such as schemes of arrangement or other out-of-court informal workout. They explored the advantages and challenges associated with each option and gained a deeper understanding of the criteria and processes involved in implementing them.

Accountants have a vital role to play in assisting companies during financial distress. They can provide valuable guidance on financial restructuring, cash flow management, and cost reduction strategies. By understanding the basics of the restructuring and insolvency regime in Hong Kong, accountants can effectively navigate the legal and regulatory landscape and provide sound advice to their clients.

Additionally, accountants from different disciplines can contribute to the success of restructuring and insolvency. These contributions are not limited to the work of insolvency practitioners alone, but also includes other accounting professionals such as auditors, tax accountants, reporting accountants, valuers, corporate finance practitioners, as well as the in-house finance team, including the corporate treasurer or financial controller.

Participants also explored the importance of early detection and proactive measures in addressing financial distress. Accountants can help conduct timely financial assessments, implement robust internal control systems, and develop contingency plans to mitigate risks. By emphasising the importance of preventive measures, the event highlighted the role of accountants in helping companies avoid insolvency situations altogether.

The Need for a Corporate Rescue Regime and Legislative Developments 

The absence of a comprehensive corporate rescue regime was identified as a significant concern. This pain point refers to the lack of a robust legal framework that allows for the rescue and rehabilitation of financially distressed companies, thus potentially leading to insolvencies and job losses. Moreover, the absence of such a rescue regime undermines Hong Kong's standing in various international rankings and diminishes its appeal for international investors considering investment opportunities.

The participants were provided with an overview of the legislative developments that have taken place over the past two decades to address this issue. This signifies that governments and policy-makers have recognised the importance of having effective mechanisms to deal with distressed companies and have been working towards implementing appropriate measures.

The latest initiative highlighted was the government's introduction of a corporate rescue bill in late 2020. The proposed bill represents a significant step towards establishing a comprehensive legal framework for corporate rescue. Its purpose would be to provide an uncomplicated, non-judicial procedure that is both cost-effective and efficient. Its primary aim is to assist financially distressed companies in their recovery efforts and prevent them from falling into insolvency.

Benefits of a Proposed Corporate Rescue Bill 

By facilitating the restructuring and reorganisation of distressed businesses, a corporate rescue bill would preserve jobs, maintain economic stability, and protect the interests of various stakeholders, including creditors and shareholders and attract international investors to invest in Hong Kong.

The emphasis placed on the importance of the proposed bill indicates that there is a recognition of the need for a proactive approach to address financial distress. By enacting such legislation, the aim would be to create an environment where companies facing financial difficulties would have the opportunity and support to turn their situations around and regain viability.

The discussion delved into key features and provisions of the bill, which included mechanisms such as debt restructuring, asset sales, and the appointment of an independent provisional supervisor to oversee the rescue process. The draft bill also establishes clear guidelines and timelines for the initiation and execution of rescue plans, ensuring that the process is efficient, effective and accessible by the companies that are in need.

Overall, the discussions surrounding the need for a corporate rescue bill highlighted the importance of having a legal framework that enables distressed companies to navigate financial difficulties and emerge as viable entities. The introduction of such legislation would represent a positive step towards promoting business resilience, preserving jobs, and fostering economic stability.

Insights from the Field

Case studies which were presented during the event served as valuable learning experiences, showcasing the multifaceted nature of corporate restructuring and insolvency. By examining real-world examples, participants were able to delve into the complexities involved, understand the potential pitfalls, and explore possible strategies and solutions for navigating these challenging situations.

One case study discussed focused on the resumption of trading for long-suspended listed companies, which highlighted the challenges faced by companies that have experienced significant financial distress and have had their trading suspended for an extended period, in view of the changes made to the resumption guidelines imposed by the Stock Exchange of Hong Kong. Participants learned about the various legal, financial, and operational hurdles that need to be overcome to restore the trading of these companies’ shares.

Another case study explored the lessons learned from the collapse of a Bitcoin exchange in Hong Kong. Participants gained insights into the legal issues surrounding the insolvency of the digital asset exchange, as well as the implications for affected stakeholders and potential solutions. The cased study shed light on the unique challenges associated with insolvencies in the cryptocurrency sector and the recent ruling by the High Court of Hong Kong regarding the treatment of exchange company’s cryptocurrency holdings. The ruling considered whether these assets should be regarded trust assets, allowing customers to assert proprietary title claim, of if they should be regarded as assets belonging to the collapsed exchanged, enabling customers to file a monetary claim against the liquidation estate.

We also discussed different instances of insolvency and disputes across various sectors.  One notable case centered around the handling of pre-paid services during an insolvency. This matter arose following the closure of an educational institution, where parents and students had already paid significant tuition fees in advance. Similar scenarios have occurred previously with fitness centres and beauty salons. Furthermore, we explored Court-appointed receiverships that emerged from disputes among shareholders or family members. We examined the approaches employed by the receivers to safeguard the interests of the companies affected by the disputes or encountering non-operational conditions or a deadlock in management decision-making.

The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting, Inc., its management, its subsidiaries, its affiliates, or its other professionals. 

FTI Consulting, Inc., including its subsidiaries and affiliates, is a consulting firm and is not a certified public accounting firm or a law firm.