Issue 8 Volume 16 August 2020 DRIVING BUSINESS SUCCESS RESTORING ORDER PLUS: PROFILE Terry Kan, Partner at ShineWing ACCOUNTANT PLUS -KVV[ (WPI %JKGH (KPCPEKCN 1HƂEGT of West Kowloon Cultural District Authority SECOND OPINIONS What are key tax considerations for an M&A transaction? Special report: The lives and work of one of the most in-demand professionals – insolvency practitioners HK$70.00
PRESIDENT’S MESSAGE APLUS August 2020 1 The year continues to throw up new challenges. While August is typically a quiet month for both the Institute and Hong Kong, this year has been even more so due to all the COVID-19 pandemic restrictions, which were ramped up to suppress the third wave of the virus. In preparing for a few upcoming (virtual) speaking engagements, I’ve been considering how we can learn lessons from these challenges and overcome the adversity of the pandemic, and look forward to a brighter future. Working from home – I’ve mentioned this topic in these messages before but it is worth repeating. The pandemic has shown us how we can work from home and, with technology and planning, contribute effectively to our organizations. While the office is not dead, the meetings, informal discussions and act of gathering really do help to create a stronger team. I hope your organizations are considering how you can implement more flexible working policies in the future. The world is changing, and as we welcome to the workforce the next generation, Gen Z – a digitally native, always-on, generation – we must consider how we can best support them at the start of their careers. Engaging with colleagues – messaging apps, virtual meeting tools and even an old-fashioned phone call are all tools to help us engage with each other. Think about how you can engage your team, but try not to expect instantaneous replies. Work-life balance should still exist even though we can always be messaged. Communicating with our clients – meeting our clients is an important way to maintain business relationships. But in the age of COVID-19, it has been more of a struggle. With businesses across Hong Kong struggling to stay afloat, consider letting your clients know you’re there and thinking of them. Responding to opportunities – while it may seem like the end of the world as we know it, there are still opportunities for businesses. Consider your service offering, the pain points your clients or employers have raised in discussions, and how you can help them. As CPAs we should consider how we can take what we see in the financial data and analyse it to develop solutions. Staying healthy and positive – being healthy is a way we can help our bodies to fight off viruses and illnesses. Regular exercise and a healthy diet are vital, and with the Internet it is easy to access some simple workout tips and routines you can do from home and healthy recipes to cook. It is also important not to forget our mental health. There are professionals out there you can speak to if you encounter stresses and troubles. The Financial Services Development Council has announced a new job creation scheme, with a quota of 1,500 full-time jobs, for the finance industry. The Financial Industry Recruitment Scheme for Tomorrow (FIRST) will support eligible employers in four regulated sectors, including CPA firms and corporate practices regulated by the Institute, through subsidies of HK$10,000 per month for 12 months for the wages of one to 25 new employees (eligibility based on existing employee numbers). Registrations for FIRST start soon. I’m always pleased to see the Institute’s members giving back. On 31 August, members of the Restructuring and Insolvency Faculty Executive Committee were invited by Caritas to discuss individuals’ debt restructuring and bankruptcy-related issues in a webinar. There’s another webinar on 24 September. Details are available on the website of Caritas Family Crisis Line and Education. This month, my specialization of restructuring and insolvency is also featured in A Plus. I hope you read and enjoy the special report to better understand one of the profession’s many specialisms. If you’re interested in it as your specialty and are inspired by the stories shared, take the Insolvency Preparatory I course starting in September. Finally, congratulations and best of luck to the Institute’s longest-serving Council member, Ada Chung, who becomes the Privacy Commissioner for Personal Data in early September. As a Council member since 2007, Ada has devoted her time to our profession, and I would like to deeply thank her for her contributions. “While it may seem like the end of the world as we know it, there are still opportunities for businesses.” Johnson Kong President Dear members,
CONTENTS Issue 8 Volume 16 August 2020 NEWS 01 President’s message 04 Institute news 08 Business news FEATURES 10 The problem solvers A special report on how restructuring and insolvency professionals pick up the pieces for companies when everything falls apart 20 Second opinions What are key tax considerations for an M&A transaction? 22 Leadership: Terry Kan The Partner at ShineWing on his experience preserving jobs and building relationships as an insolvency practitioner 28 How to Allan Lee, a rope skipping coach, on how to properly exercise at home with a skipping rope 29 Thought leadership: Auditing and COVID-19 Current circumstances mean enhanced considerations and new procedures by auditors 30 Accountant Plus: Kitty Fung The Chief Financial Officer at the West Kowloon Cultural District Authority on how she leads her team through a highly complex project 37 Meet the speaker What to expect from an e-Series on the latest international and Hong Kong tax regulations SOURCE 38 IRD issues revised practice note explaining the tax ÌÀi>ÌiÌ v w>V> instruments under HKFRS 9 Notable clarifications detailed in the revised DIPN 42 40 Hong Kong revises DIPN on APAs to help manage tax uncertainties Key changes and aspects of the revised DIPN 48 44 Technical news 22 10 The problem solvers Charting a new course Terry Kan, Chairman of the Institute’s Restructuring and Insolvency Faculty Executive Committee, on the challenges insolvency practitioners in Hong Kong face
DRIVING BUSINESS SUCCESS About our name A Plus stands for Accounting Plus. It represents a profession that is rich in career options, stays relevant amid rapid changes, and adds value to business. This magazine strives to present the global mindset and varied expertise of Institute members – Accountants Plus. Editor Gerry Ho Email: gerry.ho@mandl.asia Copy Editor Jemelyn Yadao Junior Copy Editor Jeremy Chan Contributor Nicky Burridge, Louise Tam ,i}ÃÌiÀi` "vwVi 2/FWang Kee Building, 252 Hennessy Road, Wanchai, Hong Kong Advertising enquiries Advertising Director Derek Tsang Email: derektsang@mandl.asia President Johnson Kong Vice Presidents LamChi Yuen, Nelson, FongWan Huen, Loretta Chief Executive and Registrar Margaret W. S. Chan Director of Corporate Communications Dr Wendy Lam Head of Corporate Communications and Member Services Rachel So Editorial Manager Paul Smith Editorial Coordinator Maggie Tam "vwVi č``ÀiÃà 37/F, Wu Chung House, 213 Queen’s Road East, Wanchai, Hong Kong Tel: (852) 2287-7228 Fax: (852) 2865-6603 Member and Student Services Counter 27/F, Wu Chung House, 213 Queen’s Road East, Wanchai, Hong Kong Website: www.hkicpa.org.hk Email: hkicpa@hkicpa.org.hk A Plus is the official magazine of the Hong Kong Institute of Certified Public Accountants. The Institute retains copyright in all material published in the magazine. No part of this magazine may be reproduced without the permission of the Institute. The views expressed in the magazine are not necessarily shared by the Institute or the publisher. The Institute, the publisher and authors accept no responsibilities for loss resulting from any person acting, or refraining from acting, because of views expressed or advertisements appearing in the magazine. ©Hong Kong Institute of Certified Public Accountants August 2020. Print run: 7,310 copies The digital version is distributed to all 46,185 members, 17,514 students of the Institute and 2,358 business stakeholders every month. WORK-LIFE BALANCE 46 Putting pen to paper Institute members share how they became published authors and the unique subjects they write about 52 Young member of the month Fiesta Ho, Finance Manager at a multinational technology company 54 Leisure Plus Spotlight on TV shows; what members are currently reading and listening to 56 i̽à }iÌ wÃV> Prepare for a zombie apocalypse, says Nury Vittachi The art of planning Kitty Fung, Chief Financial Officer at the West Kowloon Cultural District Authority, on how she is preparing her team and the authority as the district’s landscape continues to evolve 54 46 Putting pen to paper Leisure Plus 30
NEWS The Institute has published a quick guide advising auditors about the key issues and considerations impacting an audit of financial statements as a result of the COVID-19 pandemic. The guide also includes links to resources from global accounting bodies to help members navigate some of the challenges. For more details, read this month’s Thought Leadership column on page 29. With the pandemic particularly having a significant impact on small- and medium-sized entities, the Institute has also issued educational guidance highlighting key considerations when preparing financial statements under the Small and Medium-sized Entity Financial Reporting Framework and Financial Reporting Standard. It can be found on the Institute’s website. The Institute’s Standard Setting Department welcomes comments and feedback on this guidance, which should be sent to commentletters@hkicpa.org.hk. 2020 Compliance Forum – A closer look at professional scepticism The Compliance Forum is now available to watch online free-of-charge. The forum takes a closer look at applying professional scepticism in audits. It also explains the concept of professional scepticism and shows how it works in practice by taking viewers through some commonly encountered situations in the audit process. Register online via the Institute’s website. HKFRS live webinars in September Next month, members can access live webinars on three Hong Kong Financial Reporting Standards (HKFRS). They cover tips for performing impairment tests and preparing the disclosures under Hong Kong Accounting Standard (HKAS) 36 Impairment of Assets, the revised definition of a business and optional concentration test in HKFRS 3 Business Combinations, and how to apply HKFRS 16 Leases and the practical expedient for COVID-19-related rent concessions. Course and enrolment details are available on the Institute’s website. Annual taxation conference 2020 e-Seminar now available Missed the annual taxation conference 2020? The archived session is now available. Speakers, including the Inland Revenue Department’s Deputy Commissioner (Technical), discuss the latest changes in the Hong Kong domestic tax legislation and new tax practices, decisions from court cases and the Board of Review, and other popular international tax topics. It also includes a lively panel discussion on a hypothetical merger and acquisition transaction. Read the highlights of this discussion in this month’s Second Opinions on page 20. Collaboration with Caritas on debt counselling services Caritas is offering a series of webinars to the public to discuss individuals’ debt restructuring and bankruptcy-related issues. The Institute’s Restructuring and Insolvency Faculty Executive Committee has been invited to provide guest speakers for the webinars on 31 August and 24 September. Interested members can refer to the details on the Caritas Family Crisis Line and Education website: debt.caritas.org.hk. Employee Assistant Programme for SMEs With social distancing and quarantining being the new norms during the coronavirus pandemic, interacting with the world around us has changed. People might feel uneasy or even anxious. The Institute is mindful of the needs of our members and has arranged access to the Employee Assistant Programme run by The Hong Kong Council of Social Service, serving SMEs in Hong Kong. Through counselling services including interviews, talks and workshops and other professional support, the programme assists employees to relieve the negative impacts of work and personal difficulties and stresses. Join as a member of the Caring SME Alliance to enjoy a preferential by completing the application form available at caringcompany.org.hk/en_sme_pro.php Volunteer via Time Bank app Volunteering is a way to make a difference. With Time Bank, a recently launched app initiated by the Hong Kong Inheritage Foundation and supported by the Institute, your volunteer service hours are redeemable for other services or commercial products. It also serves as a matching platform between volunteers and beneficiaries. Join us to build a better society by downloading the app at App Store or Google Play. Institute news Business news Institute releases new guides on COVID-19-related issues 4 August 2020
APLUS Resolution by Agreement Kong Kam Yu, CPA Complaint: Failure or neglect to observe, maintain or otherwise apply the fundamental principle of professional behaviour in sections 100.5(e) and 150.1 of the Code of Ethics for Professional Accountants. Kong was formerly an executive director, qualified accountant and company secretary of Golden Meditech Holdings Limited, a Hong Kong-listed company. As a director, Kong was responsible for ensuring the company’s compliance with the Rules Governing the Listing of Securities (listing rules) of The Stock Exchange of Hong Kong Limited (stock exchange). In 2018, Kong was sanctioned by the stock exchange for a breach of the listing rules and his director’s undertakings. The breach arose as a result of Kong’s failure to ensure that the company made timely disclosure and obtained shareholders’ approval of a series of transactions and events which occurred in 2011 and 2014, involving the company’s interest in a foreign listed company. Kong was reprimanded by the stock exchange and ordered to attend 24 hours of training on listing rules compliance and director’s duties. The Institute concluded that the public censure of Kong by the stock exchange for the above matter would negatively affect the public’s view of the professional competence of a CPA. Regulatory action: In lieu of further proceedings, the Council concluded the following action should resolve the complaint: 1. Kong acknowledges the facts of the case and his noncompliance with the relevant professional standards; 2. Kong be reprimanded; and 3. Kong pay an administrative penalty of HK$50,000 and the Institute’s costs of HK$15,000. Disciplinary finding Wong Tam Yee, CPA Complaint: Failure or neglect to observe, maintain or otherwise apply the fundamental principle of integrity under sections 100.5(a), 110.1 and 110.2(a) of the Code of Ethics for Professional Accountants, and the fundamental principle of professional behaviour under sections 100.5(e) and 150.1 of the Code of Ethics. The respondent was also guilty of professional misconduct. Wong was the sole director and shareholder of a foreign private company, which was holding shares of two Hong Kong listed companies with a market value of HK$146 million as at September 2013. The identity of the beneficial owners of the company and the shares was in dispute among Wong and certain other parties. In September 2013, Wong caused the company to sell the shares to a number of individuals at a substantial discount to their market price. A cheque drawn by one of the buyers for HK$4 million was given to the company as part of the purchase consideration, but Wong never cashed it. In the sold notes for the shares submitted for stamp duty purposes, Wong falsely stated that the shares were sold for full market value and that the consideration had been received. Subsequently, a purported beneficial owner of the company initiated legal proceedings against Wong and others (the buyers and transferees of the shares) in relation to the disposal of the shares. The court found that Wong had been in breach of his fiduciary duties as a director when he caused the company to sell the shares at a substantially discounted price without first attempting to sell them in the open market, and there was no security for payment other than the HK$4 million deposit. The court also found that Wong had in effect misappropriated the shares, and had made a false and misleading statement in the sold notes. As a result, the court ordered Wong and some of the others to pay substantial equitable compensation to the company. Decisions and reasons: Wong was removed from the register of CPAs for two years with effect from 21 August 2020. In addition, Wong was ordered to pay costs of the disciplinary proceedings of HK$128,202. When making its decision, the Disciplinary Committee noted that integrity and honesty are the cornerstones of the accountancy profession, but Wong had breached those fundamental principles in the dereliction of his duties as a director of the company. The committee also noted that the court’s findings and Wong’s blatant disregard for his fiduciary duties to the company had damaged the reputation of the accounting profession. Details of the Resolution by Agreement and disciplinary finding are available at the Institute’s website. August 2020 5
What are practice promotion pitfalls and section 42 offences? Practice promotion pitfalls Section 42 offences disapproval letters issued 19 cases in which the Institute proactively identified improper conduct 10 cases reported by the Institute to the police 15 cases in which the Institute proactively identified section 42 offences 8 How can you help? In the three years ended 30 June 2020, the Institute has handled more than 45 cases concerning improper practice promotion and alleged offences under section 42 of the Professional Accountants Ordinance. Members and registered students should: • adhere to the ethical requirements concerning practice promotion activities in section 900 Practice Promotion in the Code of Ethics for Professional Accountants (previously section 450) • refrain from conducting improper practice promotion activities directly or indirectly • take immediate corrective actions upon being notified of possible breaches by the Institute Members of the public are advised to: • ensure service providers are licensed CPA practices before engaging them • discontinue engagements with unlicensed CPA practices for regulated services (e.g. statutory audits under the Companies Ordinance) • promptly report suspected section 42 offences to the police or the Institute How does the Institute deal with the offences? • report suspected offences to the police for investigation • issue warning letters requesting removal of misleading promotional information • monitor the progress of corrective actions • assess conduct of members who might be associated with unlicensed CPA practices to identify improper conduct How does the Institute deal with the pitfalls? • disapproval letter for minor cases • Resolution by Agreement for moderate cases • disciplinary proceedings for serious cases • individuals or companies fraudulently holding themselves out as CPAs or CPA practices • offering services that only practising CPAs can provide • maximum penalties - HK$25,000 fine - 12-month imprisonment term • offering to provide audit services without proper credentials • sending unsolicited promotional materials • including service fee information in promotional materials or websites Key figures (three years ended 30 June 2020) Key figures (three years ended 30 June 2020)
NEWS Business WORKING FROM HOME TO CONTINUE EVEN AFTER CORONAVIRUS, SAYS PWC U.K. PwC in the United Kingdom expects the majority of its 22,000 members of staff to alternate between working at the office and working from home, even after the coronavirus pandemic is over. Usage of its U.K. offices saw a steep decline during the crisis, according to PwC U.K. spokesman Richard Pain, who noted that just over a quarter of its employees showed up for work on average across its more than 20 offices. With upwards of 330,000 cases of COVID-19 reported in the U.K. so far, the firm hopes to have its offices operating at half capacity by the end of next month, with returning made voluntary. “A blend of office and home working is the future – but there’s still very much a place for the office,” said Kevin Ellis, Chairman and Senior Partner at PwC U.K. CATHAY PACIFIC REPORTS HK$9.9 BILLION LOSS Cathay Pacific Airways confirmed a loss of HK$9.9 billion for the first six months of the year, citing the coronavirus pandemic and geopolitical conditions as factors that continue to hamper passenger demand. The loss, compared to a profit of HK$1.34 billion seen during the same period last year, has seen the embattled airline forcing staff to take pay cuts and resorting to cost savings plans. The flag carrier is undergoing a restructuring which will see job cuts and a further reduction in aircraft and available routes. Its management has described the losses as the biggest challenge in the carrier’s 73-year history. “I don’t think we are expecting the second half to be better than the first half at this point in time,” said Cathay Pacific Chairman Patrick Healy at a press conference. Global dividend payments plunged US$108 billion to US$382 billion in the three months to June, as companies failed to meet payouts in response to the coronavirus pandemic. Asset management group Janus Henderson, which tracks dividends globally, found that total shareholder payouts fell by 22 percent year-on-year, the worst decline since it launched its global dividend index in 2009. The group expects dividends to fall further by 19 percent this year in the best-case scenario. It previously forecasted falls of up to 35 percent. The worst affected country was the United Kingdom, which saw companies paying US$15.6 billion between April and June, down from US$34 billion during the same period last year. GLOBAL DIVIDENDS EXPERIENCE WORST DECLINE IN A DECADE Credit Suisse Group AG is facing a criminal investigation amid allegations that it helped more than 2,600 clients hide untaxed earnings in Swiss accounts, according to prosecutors in Belgium. Investigators are looking for evidence of money laundering and whether the Swiss bank acted as an illegal financial intermediary, said Eric Van Duyse, a spokesman for Belgium’s Federal Prosecutor’s office, on 24 August. He confirmed that prosecutors obtained the bank details of Belgian clients with Credit Suisse accounts between 2003 and 2014. The probe comes as Swiss banks have come under more global tax evasion crackdowns over the past decade. A new survey conducted by Standard Chartered finds that many young and self-employed people feel their jobs are at risk amid a weakening economy caused by the COVID-19 pandemic. The study, which surveyed 1,000 people in Hong Kong, Taiwan and Mainland China, found that Hongkongers were most pessimistic about their prospects of the three markets and foresee changes to their unemployment over the next three to six months, including reduced pay and working hours. The city saw its unemployment rate soar to its highest level in more than 15 years, hitting 6.2 percent in June, while its economy contracted 9 percent in the second quarter of the year. 41%OF HONG KONG'S WORKFORCE FEEL THEY COULD BE LAID OFF AT ANY TIME CREDIT SUISSE FACES PROBE “I don’t think we are expecting the second half to be better than the first half at this point in time.” 8 August 2020
APLUS Ant Group, Mainland China’s largest digital payments provider and operator of Alipay, has filed applications to sell shares simultaneously in both Hong Kong and Shanghai. The listing is expected to be the largest fundraising in history and to surpass Saudi Aramco’s US$29.4 billion listing last year, the current record holder. Ant plans to raise more than US$20 billion from the dual-listing, which could take place in October, valuing the group at over US$200 billion. The offering size could reach US$30 billion if market conditions allow, reported Reuters, citing people with knowledge of the matter. The prospectus said JackMa is Ant’s “ultimate controller,” holding a 50.52 percent stake in the company. ANT GROUP ANNOUNCES PLANS FOR DUAL LISTING HKEX ANNOUNCES RECORD HK$5.23 BILLION PROFIT The Hong Kong Exchanges and Clearing (HKEX) reported on 19 August that its profit rose by 1 percent to HK$5.23 billion or HK$4.15 per share in the first six months of the year. It is the highest increase the HKEX has seen since its establishment in 2000, and the third year in a row it has broken its record for earnings during the first six months. The figure comes after 64 companies raised a combined HK$92.8 billion in the city in the first half of the year, making Hong Kong the world’s second most popular destination to list, according to the South China Morning Post. “With robust trading volumes, a strong IPO pipeline, and an expanding product portfolio, including the suite of newly launched MSCI index futures, I am confident that HKEX will continue to play a major role in connecting China and connecting the world,” said HKEX Chief Executive Charles Li in a statement. CHINESE COMPANIES TO COMPLY WITH NEW RULES OR FACE DELISTING IN THE U.S. Chinese companies must comply with new rules issued by a regulator in the United States or be forced to delist fromU.S. exchanges by January 2022. In a report released on 6 August, the President’s Working Group on Financial Markets recommended the Securities and Exchange Commission to order U.S. bourses to adopt new rules for foreign issuers, which includes a new requirement that they provide access to their audit working papers to sell new shares and continue listing in the U.S. In the report, Mainland China was the only country mentioned by name among non-cooperating jurisdictions. The new rules follow the delisting of Luckin Coffee, which was caught in a US$300 million accounting fraud case this year. The move also comes amid fresh U.S.-China tensions that could see more companies fromMainland China opting to list locally or in Hong Kong. Companies around the world have moved their operations online and made recruiting and retaining employee their top priority since the COVID-19 pandemic struck, according to The KPMG 2020 CEOOutlook survey, released on 25 August. The survey found that 80 percent of chief executive officers had sped up their digital expansion plans, and adjusted to staff working remotely and dealing with customers online as a result of the pandemic. Sixty-nine percent of CEOs surveyed were planning to cut office space in the short termwhile 73 percent noted that the shift to working from home had increased the pool of job candidates, a move that could see teams more spread out globally and interacting online. OF CEOs HAVE SEEN THE DIGITAL TRANSFORMATION ACCELERATING DURING THE PANDEMIC TheMTRCorporation reported a net loss of HK$334million in the first six months of the year, as the coronavirus pandemic has shut schools and forced citizens, including 170,000 civil servants, to work from home, leading passenger numbers to fall by 37.7 percent. The net losses, announced on 6 August, are a sharp decrease from a net profit of HK$5.5 billion seen during the same period in 2019. It is the rail operator’s worst performance since it went public 20 years ago. MTR Chief Executive Officer Jacob Kam said the outlook for the rest of the year remains unfavourable. “The challenge of the COVID-19 pandemic has been unprecedented to the company and Hong Kong. A lot of companies and industries have suffered significantly... it is hard to forecast the outlook for the rest of this year, which depends on the development of the pandemic,” he said. MTR CORPORATION ANNOUNCES HK$334 MILLION IN NET LOSSES AMID PANDEMIC Fines imposed by regulators for anti-money laundering (AML) failures for the first six months of the year topped the amount issued for the whole of 2019. A review of global authorities’ enforcement actions by multinational financial consultancy firm Duff & Phelps found that fines reached a total of US$706 million for the year until June, compared with 2019’s overall amount of US$444 million. The review found that the penalties issued this year were for the same procedural deficiencies that regulators FINES FOR AML-RELATED FAILURES ON THE RISE GLOBALLY 80% have underlined since 2015, which include due diligence on new customers, management of AML measures, monitoring of suspicious activity and ensuring compliance with the rules. August 2020 9
SPECIALISMS Restructuring and insolvency Restructuring and insolvency practitioners are in demand like never before. The economic downturn brought by the coronavirus pandemic has led to an uptick in financially-distressed companies seeking experts to turn things around – and to do it quickly. Jeremy Chan speaks to insolvency practitioners and finds out how they are dealing with more complex companies, and why rescuing them requires much more than just insolvency know-how, but a true strength of character Illustrations by Gianfranco Bonadies Around the world, the pandemic has pulled the shutters down on businesses – and for many, it’s permanent. In Hong Kong, 3,600 bankruptcies were registered in the first five months of the year, up by 12.5 percent compared to the same period in 2019, according to the Official Receiver’s Office (ORO) in June. Winding-up petitions went up by 25 percent with almost 150 companies forced into liquidation. With all this happening, restructuring and insolvency professionals are experiencing a busy time. They are being called on to help troubled businesses navigate lawfully and quickly through the pandemic to hopefully more stable times ahead. But even in times of no economic downturn, Hong Kong’s vibrant business environment will inevitably see some companies fail. Insolvency practitioners thrive in this area with their specialized knowledge and ability to bring order to chaotic situations and advise anxious company owners on how to avoid the worst. The nature of this already taxing job has become more complex with the increase of cases involving companies across multiple jurisdictions, a lack of a formal corporate rescue procedure in Hong Kong and, nowadays, more companies to restructure. Insolvency practitioners need to be highly skilled and knowledgeable in a range of technical areas and equipped with soft skills in order to help maintain Hong Kong’s status as one of the most trusted business environments in the world. If a company gets into trouble, these professionals can be trusted to make ethical and fair decisions. As the city’s economy continues to be mired in uncertainty, this special report looks at the work processes of restructuring and insolvency specialists, how they are navigating new challenges, the expertise needed to rescue companies in increasingly difficult environments, and the role they play in upholding Hong Kong’s status as a respected international finance and business hub. RESCUE AND RECOVERY Kenneth Yeo, Director and Head of Specialist Advisory at BDO, a Hong Kong Institute of CPAs member and Deputy Chairman of the Restructuring and Insolvency Faculty Executive Committee (RIFEC), says insolvency specialists are very much used to seeing and helping companies that have hit rock bottom. “By the time we are appointed, the company’s usually on its last legs,” he adds. With impatient creditors hoping to obtain as much money as possible from insolvent companies, practitioners must explore ways to recover assets. “We look at every possible asset that can be recovered – even ones that have already been transferred out. If assets have been transferred out, we need to speak with the recipients and try to assess whether we can recover such assets from the transferees on the grounds that there was an unfair preference.” Liquidations involve thorough investigations into a company and its owners. As Yeo notes, the process can be both lengthy and tricky when it comes to identifying assets that can be recovered. Listed companies might have already dissipated all of their assets 10 August 2020
APLUS THE SOLVERS PROBLEM August 2020 11
SPECIALISMS Restructuring and insolvency or transferred them all out. In cases like these, insolvency practitioners would have to find an investor who is willing to inject capital, known as a white knight, into the company to prevent it from collapsing. An investigation would first involve looking at the company’s financial history. This can reveal a lot, according to Yeo. “We try to identify why the company failed in the first place and whether there were any assets transferred out during the last two years to related or unrelated parties,” he says. “And if there were, we can take action against the directors and transferees and try to claw back the assets.” Yeo and his team would also have to determine which transfers were legitimate, and which were not. “If it was a genuine arms-length sale, that makes things more complicated because it was done in good faith.” Dick Tang, Manager, Strategy and Transactions at EY, an Institute member and a member of the RIF, agrees that the process of recovering assets is further complicated if company owners deliberately conceal them. “Not all directors want to disclose everything,” he says. If insolvency practitioners aren’t able to encourage company owners to reveal valuable information, this would prompt further investigations into the background and transactions of the company. “In one case, we eventually found out that the director concealed a valuable overseas investment held by the company.” Some members of management, Tang notes, will even go out of their way to mislead investigators. “There are cases of management showing us fake accounts,” he adds. Insolvency practitioners often work closely with legal professionals in investigations, which may involve courts in ongoing hearings and eventual prosecutions. Lawrence Chan, Partner at Wilkinson &Grist, an Institute member and a member of the RIFEC, explains how they work with accountants. “Accountants can help to highlight fraudulent or dubious transactions and then discuss them with the lawyers in deciding how to proceed,” he says. “Lawyers can then determine the proper way to obtain more information or documents pertaining to those transactions and how to pursue the wrongdoer.” Lawrence acts as a legal advisor in liquidations. He says that though insolvency practitioners are expected to have a basic understanding of legal terminology, lawyers can help liquidators interpret legislation in investigations if need be and also help to launch claims against company auditors for professional negligence. Conversely, he says lawyers who have a basic knowledge in accounting are an advantage. “As an insolvency lawyer, a firm grasp of financial reporting helps us to understand a company’s financial accounts from a legal perspective,” he explains. “This helps us to determine the legal implications for management in how they have disclosed the company’s financial affairs in their accounts, and also whether the company’s auditors are in breach of auditing standards in giving the auditor’s opinion.” Jessica Zhao, Senior Associate, Restructuring, at Grant Thornton and an Institute member, says legal advisors play an important part in the asset recovery process of a liquidation. “To maximize the benefit to the liquidation estate, it is important that a clear scope of work is agreed on between the lawyers and insolvency practitioners,” she says. “There also needs to be clear communication between the parties about the merits and costs that come with pursuing any particular course of action.” A practitioner also needs to decide early on whether rescuing and restructuring an insolvent company is viable. “We’re a bit like doctors trying to save patients – the question is how to save them, and whether it will cost an arm and a leg,” says Kenny Tam, Founder of Kenny Tam & Co. CPA Limited, an Institute member and a member of the RIFEC. “In some cases, by keeping a company alive, they will experience more issues, especially with landlords. Company offices, shops and property all occupy space. If they are unable to pay rent, rescuing them isn’t the best choice.” Failure to rescue a distressed company could also incur costs that practitioners have to personally bear. Lawrence adds that small- and medium-sized enterprises (SMEs) will also make up a large chunk of foreseeable bankruptcies, despite the loans announced by the Hong Kong government this year. Lawrence cautions: “The existing debts of SMEs could continue to accumulate over time,” he says. “And once that grace period passes, we expect to see a surge in bankruptcies and liquidation cases.” Indeed, half of SMEs do not expect to survive beyond the next six months, according to a survey conducted this month by the Hong Kong General Chamber of Commerce. There are over 340,000 SMEs in Hong Kong, accounting for 98 percent of the city’s businesses, and 45 percent of the city’s employment in the private sector, according to the Trade and Industry Department. Galaxy Chan, Director, Restructuring and Disputes, at Duff & Phelps, an Institute member and an RIFEC member, also warns of more bankruptcies for sole proprietors. She is dealing with more cases involving businesses owned by sole proprietors who have been forced to shut down their restaurants or shops due to a lack of business brought on by the pandemic. “At the end of the day, they’ll be sued by creditors who want to put them into bankruptcy. It’s becoming more difficult for us to help these creditors – most of these bankrupts don’t have any assets left in their estate,” she says. Galaxy’s role also sees her “In some cases, by keeping a company alive, they will experience more issues, especially with landlords.” 12 August 2020
APLUS managing family disputes. Often, it concerns the estate, or an individual’s property, possessions, financial securities, cash, and other assets that an individual owns or has a controlling interest in. “I come across this the most when I deal with high-net-worth individuals who have passed away, have dementia or are mentally incapacitated,” she adds. “These disputes usually happen when a family patriarch passes away and a long list of relatives are all trying to claim a share of the person’s estate.” She notes how her experience working with difficult individuals as an insolvency practitioner comes into play especially when she has to facilitate family meetings. “Emotions are running high, which is something we must deal with,” adds Galaxy. “These people have just lost a relative, and they’re sad, but on the other hand, they are all fighting for a share of the estate. There are meetings where they shout and argue with each other, and it’s my job to calm them down. It’s not an easy task.” COMPLEX CASES Galaxy has also been caught in a f lurry of work, dealing with more bankruptcies than usual. She expected this. What she didn’t expect was just how complex the cases would be, and how heavily she would be relied on as an insolvency practitioner to turn the situation around. In an ongoing case, she is tasked with helping to liquidate a clothing and footwear company. Already, she has been helping to quell endless worries from suppliers. With the company’s main retail stores based in France and its suppliers located in regions such as Mainland China, India and Bangladesh, it has been a case of dealing with one frustrated supplier after the other. “With the lockdown in France earlier this year and an increase in its unemployment rate, people have been spending a lot less, which severely impacted the retail business there,” explains Galaxy. “This forced the company into liquidation two or three months ago.” With the suppliers left with little or no business, Galaxy has been bombarded with daily emails and calls from them. “It was really challenging the first two weeks. There were also lockdowns in China, India and Bangladesh, so employees there were really struggling,” she says. It’s expected that the pandemic will lead to more companies going under for a foreseeable time. Galaxy, who has worked in insolvency for over 20 years, saw similar spikes in the months after the Asian Financial Crisis of 1997 and the Global Financial Crisis of 2007-2008. This pandemic is no different, she says. “We’re still waiting for the worst to come and expect to see a lot more cases within the next six to 12 months.” August 2020 13
SPECIALISMS Restructuring and insolvency The economic downturn has also led to insolvency practitioners being called into troubled companies to try to rescue and restructure them. A restructuring often involves reorganizing the operational, financial, and organizational structures of a company facing financial pressures with the aim of improving its business. While a company restructuring changes a company’s structure or operations to cut costs or sell viable assets to new owners to improve its operations, a debt restructuring sees a company consolidating its debts to make them easier to discharge by changing the payment terms. For example, Hong Kong’s flag carrier Cathay Pacific announced plans in July to restructure by, among other things, forcing its older pilots into early retirement in a bid to cut pilot costs. The airline saw losses of almost HK$10 billion in the first six months of the year, also brought on by COVID-19, which has crippled air travel worldwide. By providing rapid assistance, practitioners are able to identify the nature and severity of a company’s issues, develop solutions and find investors. They must work closely with members of management and creditors to ensure a smooth restructuring. Zhao at Grant Thornton has been handling more restructuring cases than usual. “The social unrest of 2019 and the COVID-19 pandemic this year has severely affected the cash flow of many companies,” she says, adding howmost cases involved companies seeing sudden drops in their revenue over a short period of time. When assigned a new restructuring case, Zhao says it is crucial for restructuring experts like herself to put on their detective hats and find out the cause of the company’s problems, and most importantly, any underlying issues. This helps to formulate strategies and provide sound advice to company owners. “We need to investigate whether the company is facing issues related to its management, policies, investment failures, or whether their strategies are at fault,” she explains. “For example, are they seeking to expand its operations when the economy is facing a downturn? They may not have done enough research prior to expanding.” Other issues that can hamper a company’s performance, Zhao adds, include whether the company’s policies are effective enough or whether frontline staff is indeed performing well. While most company owners are eager to help during the interview stage, restructuring and insolvency practitioners often have to deal with uncooperative members of management. “Not all of them choose to cooperate,” she says. “They refuse to disclose the problems they are facing, or worse, provide us with limited information. This stops us from coming to real conclusions, and that stops us from providing themwith the best possible advice.” Company directors may feel wary or even intimidated with the idea of revealing sensitive information to people they haven’t met before. Therefore, Zhao stresses the need to build rapport early on. “We remind the management that we are professionals and that we are there to help them. We try to build their confidence in us,” she says. “We also tell them that refusing to cooperate makes both our and the RENOVATE... OR LIQUIDATE 14 August 2020
APLUS Corporate rescue bill Insolvency practitioners are waiting eagerly for the introduction of the long-awaited corporate rescue bill. The bill, which was first mooted in 1996 just before the Asian Financial Crisis of 1997, seeks to introduce a procedure like the United Kingdom’s administration or the Chapter 11-procedure in the United States into the city’s laws. The latest draft of the bill was released in July by the Hong Kong government, which contains detailed legislative provisions for a statutory corporate rescue regime and insolvent trading. A key aspect of the bill includes a moratorium of up to six months, which could protect debt-stricken companies from winding-up or liquidation proceedings. Currently, businesses are at risk of receiving winding-up petitions from multiple creditors as soon as they face major financial difficulties, due to a lack of any statutory “breathing space.” Kenny Tam, Founder of Kenny Tam & Co. CPA Limited, welcomes the proposed moratorium. “The moratorium will provide time for liquidators and creditors to go through everything together,” he says. “As insolvency practitioners, it’s our objective to help companies continue. But right now, the lack of a moratorium means there isn’t enough time for practitioners to help in restructuring proceedings. This might make it easier for practitioners to turn down cases due to a lack of time.” The bill also proposes the initiation of “provisional supervision,” which aims to provide distressed companies with an opportunity to have their business or part of their business saved as opposed to going into liquidation. This will see insolvency practitioners appointed as provisional supervisors (PS) and a moratorium put in place. As Lawrence Chan, Partner at Wilkinson & Grist, notes, companies currently have to be put into provisional liquidation, which can further complicate their situation. “Putting a company into provisional liquidation attaches a stigma to the company, and that can lead creditors, shareholders and stakeholders to lose confidence,” he says. “But with provisional supervision, the company, strictly speaking, hasn’t been put in any form of liquidation yet. So without this stigma, the insolvency practitioner will be in a better position to restructure the company.” However, a few insolvency practitioners are concerned about increased personal liabilities that may come with taking on the role of a PS. As Kenneth Yeo, Director and Head of Specialist Advisory at BDO, explains, this may include shouldering liabilities such as a company’s rent, employee wages and creditor claims incurred by the company after the appointment of a PS, which might discourage some practitioners from taking on new rescue cases. “Generally, we are all supportive of the bill – which has been long overdue – but the draft bill imposes too many obligations on the insolvency practitioner,” Yeo says. A PS would only have 16 days to negotiate with the company owners and creditors on how their liabilities could be waived or capped under any existing contracts that they take on. “Unlike a receivership appointment where the insolvency practitioner is indemnified by the client against all claims, the PS would only be indemnified by the assets of the group,” adds Yeo. Tam agrees. “The moment we commit to rescuing a company, everyone’s counting on us and the clock starts ticking. Another passing day is a day’s worth of liability incurred – so this adds more pressure on those stepping into the rescue,” he says. “It’s about saving a company as soon as we can, while also balancing the needs of its stakeholders. If we’re forced to accept all these personal liabilities with the risk of not being fully compensated by a company’s assets, it will make things more difficult.” The government is expected to hold more consultations before introducing the bill in the next legislative session. Yeo ultimately hopes amendments are made before its finalization. “The bill is still in its draft stage, so I am hoping changes to do with the PS’s liabilities are made during the review.” company management’s lives harder, as well as the lives of creditors, the banks and suppliers.” Lawrence at Wilkinson & Grist says insolvency practitioners can remind members of management that their decisions are strictly impersonal. “It’s important for directors to know that the actions we take or propose are for the best interests of the company and its stakeholders,” he explains. “Once they understand that other directors would be similarly advised in other cases, they would be more willing to cooperate.” Tang at EY agrees that joint action is vital during the initial stages of a restructuring. “During interviews with management, we get them to explain their business models, critical assets and their financial position,” he says. “We request them to provide their latest financial accounts, which we analyse to determine what happened to the company.” Restructuring experts then work closely with the management and the white knight to devise a restructuring plan, which needs to be agreed upon by all parties. Therefore, he says, it is imperative for insolvency practitioners to remind directors that it is their duty to cooperate from the beginning. “Under the statutory framework, directors already have a duty to cooperate with liquidators or trustees, otherwise their misconduct can be reported to the ORO for further action.” Yeo at BDO agrees: “If the directors of insolvent companies have nothing to hide and the failure of the company was purely a commercial matter, they should be cooperating with the liquidators – but unfortunately that is more the exception than the norm.” He notes that the lack of a corporate rescue bill (see sidebar on the right) in Hong Kong still adds a degree of uncertainty to restructurings. “In any informal restructuring without the involvement of the court, any creditor can still file a winding-up petition or take legal action against the debtor and derail the entire restructuring,” he says. With companies in debt, insolvency practitioners also often find themselves kneedeep in negotiations with creditors. There are a fewways to deal with tricky creditor negotiations, says Yeo. “I first present the company’s financial position to the key creditor or creditors who have taken action. I tell them: ‘if the company were to be wound up, this is what we expect as a result of assets that won’t be recovered in full or at all.’ I inform them whether they’ll get anything back at the end of the day.” In cases where the creditor has already filed action, Yeo might resort to a debt restructuring and ask if the creditor is willing to accept equity in exchange for capital. “We’ll also explain the prospects of the company to the creditor such as its future plans and whether or not we can expect a capital injection from a white knight.” August 2020 15 May
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