HK$70.00 Experts at the Institute’s Annual Taxation Conference 2020 discuss changes to international tax rules and how they could reshape Hong Kong’s tax landscape Issue 9 Volume 16 September 2020 DRIVING BUSINESS SUCCESS PLUS: PROFILE Phyllis McKenna, the Official Reciever INSOLVENCY Roundtable discussion on the draft corporate rescue bill ACCOUNTANT PLUS Edmund Wong, Practising Director of Patrick Wong CPA Ltd. CAN HONG KONG’S TAX REGIME STAY COMPETITIVE?
PRESIDENT’S MESSAGE APLUS September 2020 1 Happy Mid-Autumn Festival. While our celebrations – like everything this year – will more low-key in nature, we can still celebrate the event with our loved ones, and be thankful that the third wave of COVID-19 appears to have subsided. Before marking Mid-Autumn, we have the 71st Anniversary of the Founding of the PRC. Regrettably, the Institute had to cancel the National Day celebration dinner this year due to COVID-19, yet this is still a time of commemoration and joy for the future. This month, the Institute held one of its first in-person events at Wu Chung House this year. The QP Top Student Award and Scholarship Presentation Ceremony 2020 celebrated, in an appropriate socially-distanced manner, the achievements of top performing Qualification Programme (QP) students and university scholarship recipients. Also, in memory of the late Past President Edward Chow, a new memorial prize in his name was established with donations from his family. It was an enjoyable afternoon meeting with the winners and discussing their careers and how COVID-19 has affected their lives with them. I would like to thank the Institute staff for arranging the ceremony, as it required significant thought and consideration to ensure that all the recipients and guests could attend while managing social distancing requirements. Speaking to the award recipients reminded me of the importance of the QP examinations. Passing the examinations and obtaining the CPA designation is what these students were striving for. After the cancellation of the June session it is vital that we hold the December examination session, so as to not deprive these young accountants in training of the opportunity to prove themselves. Holding the examinations is also necessary for the long-term health of the profession in ensuring that there are enough newly qualified accountants for the market. This month, the Institute announced a refined contingency plan for the examinations. This contingency plan provides the necessary reserve dates in case the original dates are affected by a new wave of COVID-19 while balancing the needs of the stakeholders. Today’s virtual world may feel disconnected, but there are still opportunities to connect with others. This was demonstrated by the Institute’s PAIB Virtual Conference 2020, which was co-hosted with Bloomberg this month. The professional accountants in business (PAIBs) who watched the conference got to hear from renowned speakers about responding to the COVID-19 pandemic and the economic situation, how technology is transforming business models, and how to succeed in uncertainty by managing organizational risks during the pandemic. Margaret Chan, the Institute’s Chief Executive and Registrar, and I met with the Financial Reporting Council’s (FRC) Chairman, Kelvin Wong, and Florence Wong, Acting Chief Executive Officer. We discussed the work of the two bodies – the Institute’s Strategic Plan 2020-2022 in particular – and our continued cooperation in the future. A good working relationship with the FRC is important for maintaining Hong Kong’s status as a leading global financial centre. The Financial Industry Recruitment Scheme for Tomorrow (FIRST) was launched on 30 September. The job creation scheme will support 1,500 new full-time jobs in the financial services sector through a subsidy of HK$10,000 per month for 12 months for each eligible new hire to employers. CPA firms and corporate practices are able to register for the scheme, which is administered by the Financial Services Development Council. Please consider applying to the scheme and creating new positions in your firms to support the development of the profession. Finally, being an insolvency practitioner, I took part in a roundtable this month hosted by A Plus on the government’s draft corporate rescue bill. You can read the thoughts of the panel in the article Rethinking the restart process. As CPAs, it is important for us to provide our professional opinions during consultations in order for regulations and laws to be appropriately drafted. The weather feels like it is changing, which means cooler days are ahead. In this time of COVID-19 it is important that when the weather changes, we stay healthy, take care of ourselves and our families, and prepare for our futures. “A good working relationship with the FRC is important for maintaining Hong Kong’s status as a leading global financial centre.” Johnson Kong President Dear members,
CONTENTS Issue 9 Volume 16 September 2020 NEWS 01 President’s message 04 Institute news 06 Business news FEATURES 08 Leadership: Phyllis McKenna The Official Receiver on the future of insolvency in Hong Kong 14 Second opinions How can companies do better in diversity and inclusion in the workplace? 16 Rethinking the restart process A look at the implications of the newly proposed corporate rescue bill 22 How to Edward Au, Southern Region Managing Partner at Deloitte China, on how to build virtual relationships with clients 23 Meet the speaker What to expect from an e-learning course on professional scepticism 24 Rules are changing: Will Hong Kong stay competitive? Experts discuss tax strategies at the Institute’s virtual Annual Taxation Conference 30 Accountant Plus: Edmund Wong The Practising Director of Patrick Wong CPA Ltd. on running an SMP and helping clients in difficult times 37 Thought leadership: Kevin Dancey The Chief Executive Officer of International Federation of Accountants on why the time is now for a new International Sustainability Standards Board SOURCE 38 Time to reflect – Don’t be the next “test case” in Hong Kong on the Reflective Loss Principle A look at the justification of the Reflective Loss Principle 39 Proposed tax concession for carried interest A summary of the Institute’s submission in response to the 16 24 Rules are changing: Will Hong Kong stay competitive? Rethinking the restart process With the draft of the Companies (Corporate Rescue) Bill out for consultation, experts discuss the city's insolvency regime and how the new bill might change the work for insolvency practitioners going forward
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 Contributors Nicky Burridge, Eric Chiang, Paul Smith and Louise Tam Registered Office 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 Office Address 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 September 2020. Print run: 7,330 copies The digital version is distributed to all 46,183 members, 18,157 students of the Institute and 2,358 business stakeholders every month. FSTB consultation 40 Upfront lump sum spectrum utilization fees held as capital in nature and not deductible Examining the Court of First Instance judgment 42 Technical news WORK-LIFE BALANCE 46 Keeping an eye on the ball Four CPA tennis players on the key to always hitting a good shot 52 Young member of the month Leanne Law, Accounting Manager at Ednovators 54 Leisure Plus Spotlight on what to eat; what members are currently reading and listening to 56 Let’s get fiscal Being an accountant comes with a whole list of responsibilities these days, says Nury Vittachi 08 A balancing act Phyllis McKenna, Official Receiver, on her foray into insolvency, and what a new rescue regime means for companies and restructuring and insolvency practitioners in the city 54 46 Keeping an eye on the ball Leisure Plus
NEWS The Institute this month announced the refined contingency plan for the December 2020 Session of the Qualification Programme (QP). The decision came following QP students expressing their views with the Institute and thorough deliberations. The contingency plan has been set up to maintain the date of the Final Examination on 22 November. This is less than 10 days before the original schedule and allows for two reserve dates should the November date no longer be feasible. Meanwhile the Module Examinations (Modules A-D) will be held on 28 and 29 December. The Institute devised the contingency plan to ensure this examination session can go ahead amid the changing COVID-19 situation. It aims to continue developing Hong Kong’s accounting profession while balancing the needs of stakeholders. To assist enrolled students, the Institute will provide additional support, including organizing a series of free module preparation and examination technique seminars. A new online information portal for the examinations is now live, and provides the latest information on the examinations and workshops, frequently asked questions and enquiry information, as well as links to study materials and webcasted seminars. Members and students can refer to the email sent to them regarding the refined contingency plan for more details. Membership renewal for 2021 The 2021 renewal notice will be emailed to members and practice units in midNovember. Members are required to pay their annual fee and submit their continuing professional development declaration to renew their membership for 2021. If necessary, members can update contact details via the Institute’s website or opt in for hardcopy renewal notice by 31 October. Practice units will also only receive a hardcopy renewal notice on request if they opt in by 31 October. New video on Strategic Plan 2020-2022 launched Members can now watch the new video introduction to the Institute’s Strategic Plan 2020-2022, featuring Institute President Johnson Kong and Chief Executive and Registrar Margaret Chan, to learn about the strategic objectives and related initiatives set out in the plan. The three-minute video can be found on the Institute’s website and the Institute’s YouTube channel. Council meeting minutes The abridged minutes from the July Council meeting are now available for members to read. They can be found in the “Members’ area” of the Institute’s website. Institute news Business news Refined contingency plan announced for December 2020 QP session Resolution by Agreement Ng Tsz Wing, CPA Complaint: Failure or neglect to observe, maintain or otherwise apply the fundamental principle of professional competence and due care in sections 100.5(c) and 130.1 of the Code of Ethics for Professional Accountants. Ng issued an accountant’s report for a solicitor’s firm under the Accountant’s Report Rules (Cap. 159A). In conducting the reporting engagement, he failed to comply with the rules and the Institute’s Practice Note 840 (Revised) Reporting on Solicitors’ Accounts under the Solicitors’ Accounts Rules and the Accountant’s Report Rules. The deficient procedures related to obtaining bank certificates for client accounts, circularizing client ledger accounts, and documenting evidence of the firm’s monthly reconciliation of balances of client accounts. Regulatory action: In lieu of further proceedings, the Council concluded the following action should resolve the complaint: 1. Ng acknowledges the facts of the case and his non-compliance with professional standards; 2. Ng be reprimanded; and 3. Ng pays an administrative penalty of HK$50,000 and costs of the Institute of HK$15,000. Details of the Resolution by Agreement are available at the Institute’s website. 4 September 2020
NEWS Business SFC TAKES LEGAL ACTION AGAINST TIANHE CHEMICALS GROUP FOLLOWING ACCOUNTING SCANDAL The Securities and Futures Commission (SFC) in Hong Kong is taking legal action against Tianhe Chemicals Group, China’s largest lubricant additives producer, to recover HK$3.52 billion of proceeds from its 2014 initial public offering (IPO) following an accounting scandal. The group overstated its revenue by 53 percent or 6.7 billion yuan from 2011 to 2013, according to a statement issued by the SFC on 7 September. The group had hoped to encourage investors to subscribe for its stock offering or boost its stock price by overstating its sales, according to the SFC. The watchdog stated that it has started proceedings in the Market Misconduct Tribunal against Tianhe Chemicals Group and Wei Xuan, its Executive Director, for issuing an IPO prospectus, which contained inf lated sales. HONG KONG UNDEREMPLOYMENT RATE HITS 17-YEAR HIGH Hong Kong’s underemployment rate hit 3.8 percent in August, its highest since the 2003 SARS outbreak, with the number of underused workers climbing by 13,200 to reach a total of 149,200. The jobless rate, meanwhile, remains the same as the May to July period at 6.1 percent, according to figures released by the Census and Statistics Department on 17 September. Those underemployed work mainly in the tourism, transport, insurance and education sectors. The food and beverage services sector was the worst-hit, with the jobless rate rising to 14.4 percent and the underemployment rate reaching 8.3 percent. The third wave of the coronavirus pandemic in early July led to more stringent social distancing measures imposed by the government, which included banning dine-in services at restaurants and closing entertainment venues, health and beauty parlours and sports facilities. The Financial Services and the Treasury Bureau (FSTB) has launched a new scheme aimed at creating jobs in the financial services industry. The Financial Industry Recruitment Scheme for Tomorrow (FIRST) scheme falls under the government’s second round of the anti-epidemic fund. The scheme, which is now open for applications, allows eligible employers to apply for a salary subsidy of up to HK$10,000 per month for each new full-time position for 12 months, with all subsidies capped at 5 percent of the employer’s existing headcount. Each employer may receive a subsidy for up to 25 new positions. The FSTB has set aside HK$180 million for the FIRST scheme and hopes to create 1,500 new jobs in the financial services industry, which has been hard-hit by the coronavirus pandemic. NEW SCHEME TO BOOST HONG KONG’S FINANCIAL SERVICES SECTOR OPEN FOR APPLICATIONS The Big Four have joined forces to unveil a reporting framework for environmental, social and governance (ESG). The move was announced on 22 September at the World Economic Forum and is led by the International Business Council (IBC), run by Brian Moynihan, Chief Executive of Bank of America. The plan hopes to encourage more than 130 large global companies in the IBC to adopt the standards for their 2021 accounts. The ESGmetrics centre around four pillars of principles of governance, planet, people and prosperity. The metrics and disclosures aim to align the existing standards to enable companies to collectively report non-financial disclosures. The move, if successful, would mark the first coordinated approach to ESG reporting and would encourage investors to move more money into the sector, which is currently thought to be worth around US$32 trillion, according to the Financial Times. Hong Kong’s Customs and Excise Department (C&ED) arrested a family of five this month accused of laundering more than HK$3 billion through more than 100 personal bank accounts, in the biggest case of its kind. The family had funnelled the funds through accounts they had opened at nine different banks to handle the amount in alleged crime proceeds since 2018, according to investigators. Officers began probing the family’s eldest son early this year following a tip-off from a bank. “The assets held by this family are not commensurate with their profiles and backgrounds,” said MarkWoo, Senior Superintendent of the Syndicate Crimes Investigation Bureau at the C&ED on 14 September. HK$3 BILLION HONG KONG FAMILY ARRESTED IN BIG FOUR FIRMS UNVEIL ESG REPORTING STANDARDS MONEY LAUNDERING PROBE 6 September 2020
The Hong Kong stock debut of YumChina Holdings, the owner of the KFC, Pizza Hut and Taco Bell restaurant chains inMainland China, opened at a loss when it began trading on 1 September. Shares of the Shanghai-based company started trading at HK$410 per share, down from the HK$412 offered at their HK$17.27 billion secondary listing on the Hong Kong Stock Exchange. The company went public on the NewYork Stock Exchange in 2016. The stock dropped by as much as 6.3 percent to an intraday low of HK$386.20 before ending its first trading day at HK$390.20 to record an unexpected loss for retail investors who subscribed to it. The lacklustre listing, which sits at HK$401 per share as of 29 September, comes in comparison with Nongfu Spring’s initial public offering (IPO), which completed its HK$8.35 billion IPO on 8 September, setting the record as the most oversubscribed stock in Hong Kong’s financial history. APLUS Her Majesty’s Revenue and Customs (HMRC) in the United Kingdom received 73,000 tax evasion whistleblowing reports during its 2019 and 2020 financial year, an increase of 10 percent. According to U.K.-based accounting firmUHY Hacker Young, the increase indicates an increasing view among the U.K. general public that tax evasion is unacceptable behaviour. “It appears that more people than ever are choosing to report a neighbour, employer or business partner for tax evasion,” said Sean Glancy, Partner at UHYHacker Young. Glancy added that more stringent requirements for accountants to report suspected tax fraud had also contributed to the uptick. The findings come as HMRC continues to bolster its crackdown on tax evasion and avoidance and follow its probe into 250 wealthy individuals and 23 of the 2,100 largest businesses in the U.K. for tax evasion last month. HMRC SEES A 10 PERCENT JUMP IN TAX EVASION REPORTS YUM CHINA HOLDINGS IPO OPENS AT LOSS SINGAPORE AIRLINES TO LAY OFF OVER 4,000 EMPLOYEES Singapore Airlines is to eliminate 4,300 positions to cope with losses brought on by the coronavirus pandemic. The cuts will be made at Singapore Airlines and its SilkAir and Scoot units, whichmainly focus on short-to-mediumhaul flights. The COVID-19 pandemic has led to countries shutting their borders and has especially impacted Singapore Airlines, which relies on income derived from its international routes. The airline has no domestic network and anticipates it will operate less than 50 percent of its normal capacity by the end of the first quarter of 2021. “This is not a reflection of the strengths and capabilities of those who will be affected, but the result of an unprecedented global crisis that has engulfed the airline industry,” Singapore Airlines Chief Executive Officer Goh Choon Phong said in a statement. Distributing a coronavirus vaccine around the world will require the equivalent of 8,000 Boeing 747s, in what would be “the mission of the century” for the air cargo industry, according to the International Air Transport Association (IATA). Despite no vaccine being currently available, the IATA indicated this month that it is already working with airlines, airports, global health bodies and drug companies on a global airlift plan. The plan assumes only one dose per person is needed. Challenges include finding aircraft capable of keeping vaccines at a temperature of between two and eight degrees celsius and storing them in cooling facilities once they arrive. “Safely delivering COVID-19 vaccines will be the mission of the century for the global air cargo industry. But it won’t happen without careful advance planning. And the time for that is now,” said IATA’s Chief Executive Officer Alexandre de Juniac. 8,000 JUMBO JETS NEEDED TO DELIVER VACCINES GLOBALLY Alibaba Group Holding Ltd. is in talks to invest US$3 billion in Grab Holdings Inc, Southeast Asia’s biggest ride-hailing company. The move, announced on 14 September, will make the Chinese conglomerate the sole investor in the funding round. Alibaba will also spend a portion of the funds to acquire Grab’s stock, which is held by Uber Technologies Inc, according to a report by Bloomberg. The deal is one of Alibaba’s biggest bets on Southeast Asia since its US$1 billion investment in e-commerce company Lazada in 2016, which was followed by another US$2 billion injection in 2018. Grab, which has an estimated valuation of US$14 billion and counts Softbank Group as one of its backers, has expanded into financial services, food delivery and mobile payments over the last few years. ALIBABA LOOKS TO INVEST US$3 BILLION IN RIDE-HAILING COMPANY Employees will continue working from home in England, as the government reversed plans to encourage more people to return to work following a recent spike in coronavirus cases. The sudden decision, which came on 22 September, follows a warning made by scientists in the United Kingdom a day earlier that COVID-19 cases were doubling every week and could rise to 50,000 per day in mid-October if action was not taken. Prime Minister Boris Johnson, who says the U.K. has reached “a perilous turning point,” also announced a new raft of measures on 23 September, which include restrictions that could last for up to six months. This includes imposing fines on those not wearing face masks and a 10 p.m. curfew on pubs, restaurants and bars, which will be restricted to table service only. WORKING FROM HOME TO CONTINUE IN ENGLAND FOLLOWING COVID-19 CASES SPIKE September 2020 7
LEADERSHIP PROFILE Ken Siong 8 September 2020
APLUS Photography by Calvin Sit P hyllis McKenna, the Official Receiver, was just four months into a new post as a senior solicitor at the Official Receiver’s Office (ORO) in July 1997 when the Thai baht collapsed, and the Asian Financial Crisis began. “My introduction to insolvency was fast and furious. Those first two years in the ORO were really a baptism of fire,” she remembers. But she adds that for a young lawyer, it was a great opportunity to learn quickly and be involved in some of the exciting legal issues that were arising. The cases she handled during this time included the collapse of Peregrine Investments Holdings, which required cross-border coordination with the liquidations in the Cayman Islands and Bermuda, and CA Pacific. “In those days, provisional liquidation applications would often be made urgently, out of court hours. It might be midnight up at the judge’s house or in an Italian restaurant in Wanchai. It was a very busy and tough time in the ORO,” she says. A chance encounter McKenna had never planned to come to Hong Kong. She studied law at the University of Edinburgh, and started her career as a solicitor in Edinburgh, specializing in commercial and corporate law. She later moved in-house with a merchant bank. But after a chance encounter with an old family friend who was a long-term Hong Kong resident and government lawyer, she made the decision to come to the city, securing a position as a solicitor with the Commercial Division of the Registrar General’s Department (RGD). “I arrived in Hong Kong on 1 December 1988 with the intention of completing my two-and-a-half-year contract, then taking the Trans-Siberian Railway back to London to really start my legal career,” she remembers. But 32 years later, she is still here. “It is very hard to leave Hong Kong.” The RGD was restructured in 1993, and its legal officers were rotated around the four government departments of the Land Registry, Companies Registry, Lands Department and the ORO. McKenna started out working in the Companies Registry, before being posted to the ORO in 1997, where she worked for 11 years. She went on to do stints in the Lands Department and Companies Registry in various positions, returning to the ORO as Official Receiver in February 2017. Challenging times McKenna’s role as the Official Receiver involves overseeing the government’s insolvency service across five divisions, including case management, legal services, financial services and departmental administration. She says every day of her work is different, particularly this year, when, as head of department, she has had to help her team adapt to COVID-19, balancing the need to continue delivering services, with keeping staff safe. “Implementing Official Receiver Phyllis McKenna talks to Nicky Burridge on her work in closing the gap in Hong Kong’s insolvency infrastructure, balancing the needs of different stakeholders, and what she loves most about dealing with failure A BALANCING ACT September 2020 9
LEADERSHIP PROFILE Phyllis McKenna effective strategies to allow work from home, because we are still paper-based here, preparing and implementing contingency plans in case anyone came down with COVID, making sure we had personal protective equipment, putting in place business continuity plans, working with the court to manage the expectations of all stakeholders – this year has been very challenging and very different,” she says. Even during a normal period, she says the office is incredibly busy and staff work very long hours. As a result, she has a strong focus on managing workloads and supporting staff, always keeping an eye on the numbers to ensure they can manage what is coming in, particularly when the economy is fragile. “It is quite a challenging environment dealing with bankruptcy cases because we are dealing with people in a really difficult time of their life. A lot of people are angry and believe you are persecuting them, so you try to make sure everyone feels supported in the process while getting the information you need to do the administration.” McKenna likes to get to work early in the morning at around 7:30 a.m. so that she has a couple of hours before her meetings and phone calls start to catch up with emails, study new cases and generally get up to speed with what is happening in the insolvency space worldwide. “Otherwise, every day brings new problems, lots of meetings and discussions about everything from new computer systems, to difficult cases, to all sorts of complaints. It is always very varied. I can assure you that there is never a dull moment,” she says. One aspect of her current role that McKenna really enjoys is working collaboratively with her team or around 40 lawyers and 80 insolvency officers. “I love to see improvements and progress when our solutions do work. Insolvency is an area that demands pragmatic solutions and sometimes creative ideas, and I do enjoy that aspect of the job.” She describes the biggest challenge as being the lack of control over the number of cases they have to deal with, as a significant part of her work involves refining processes and trying to find ways to deliver more effective results. McKenna also takes part in the International Association of Insolvency Regulators, a body that brings together government insolvency regulators from around the world. “Despite the many diverse systems in place across the member jurisdictions, the problems that we face as insolvency regulators and Official Receivers are strikingly similar,” she says. She gives the example that while government fiscal stimuli are in place, members around the world have not seen a big increase in cases, but they all anticipated a strong rise once the effects of the support end. “We are all watching and waiting and debating the best ways to deal with a huge influx of cases,” she says. Hong Kong had been due to host the association’s annual conference in November this year, but has had to change it to a scaled-down virtual event as a result of the pandemic. A new option Unsurprisingly, McKenna’s department has been highly involved in the new draft Companies (Corporate Rescue) Bill. She explains that it is the third attempt to pass legislation on the issue, which stems from a recommendation made by the Law Reform Commission in 1996. After attempts failed in 2000 and 2001, mainly due to conflicting views over the treatment of outstanding employees’ entitlement, the government revisited the initiative in 2009 as part of its response to the Global Financial Crisis, publishing a package of detailed proposals in May 2014. A draft bill, largely based on the 2014 proposals, is currently out for consultation with stakeholders. “We have a team of lawyers in the ORO supporting the Financial Services and the Treasury Bureau technically, who work alongside the Department of Justice and the Law Draftsman in this process. Everyone is working incredibly hard to get the legislative exercise completed,” says McKenna. The draft legislation proposes a predominantly out-of-court process to make assistance more accessible, faster and less expensive for companies. It involves an independent provisional supervisor, who must be either a CPA or a qualified solicitor, being appointed to provisionally displace the board of directors. The provisional supervisor will then put together a proposal to be voted on by the company’s creditors, with the aim of maximizing the company’s chances of continuing as a going concern. If this is not reasonably practical, they will look to achieve “Insolvency is an area that demands pragmatic solutions and sometimes creative ideas, and I do enjoy that aspect of the job.” 10 September 2020
APLUS a better return for the company’s creditors than if the company was wound up immediately. An important part of the procedure is a moratorium, which initially lasts for 45 business days, although it can be extended, during which creditors cannot take action to have the company wound up or to sue for the debts. At the end of this period, the company should either have agreed a voluntary arrangement with its creditors, ended the provisional supervision and returned to trading, or moved into voluntary liquidation. “Balancing the interests of all stakeholders in the process is always going to be challenging, but I think this time we have done a fine balancing act and are hopeful that we have the support from all stakeholders, with the recognition that in a restructuring situation, everyone needs to come to the table and manage their expectations if there is to be a successful outcome,” says McKenna. She is aware that some practitioners are concerned about the increased personal liabilities of the provisional supervisor, but she stresses that the personal liability is not automatically imposed upon taking office. Instead, she says, the provisional supervisor will only be liable for any pre-appointment contracts that are adopted in writing by the provisional supervisor within 16 business days of appointment, or contracts that they enter into after assuming office. In both cases, the provisional supervisor has the option to contract out of the liability or agree with the other party on the extent of the liability. “The bill also provides for the provisional supervisor to be indemnified out of the assets of the company for any such personal liability, remuneration and expenses properly incurred, and such indemnity will generally have priority over unsecured debts and those secured by floating charge,” McKenna says. She adds that the provisions on liability and the right of indemnity are largely similar to those applicable to a receiver under section 298A(2) of the Companies As the Official Receiver, Phyllis McKenna oversees the government’s insolvency service across five divisions, including case management, legal services, financial services and departmental administration. September 2020 11
LEADERSHIP PROFILE Phyllis McKenna (Winding Up and Miscellaneous Provisions) Ordinance. The need for a robust regime McKenna believes a robust insolvency regime is essential for Hong Kong to retain its position as an international finance centre. “It is important for investor confidence that business failure will be dealt with effectively and efficiently, and that wrongdoing will be investigated and dealt with.” She adds that with Hong Kong’s increased focus on innovation, it is also key to have a safe and established way to deal with failure. “If we want to have a start-up culture here, we need to have the ability for people to put their failure behind them and continue to contribute to the economy.” But McKenna points out that, while everyone accepts there is a gap in Hong Kong’s insolvency infrastructure due to the lack of a formal restructuring process, the courts and the development of common law principles in this area over the past 10 years have served Hong Kong well, and kept it relevant as a restructuring hub in Asia. “The expertise of Hong Kong professionals working in this field also cannot be overlooked. Success often results from the people involved in the process and how they apply their knowledge and experience,” she adds. A digital legacy While McKenna says her office has not yet seen a huge increase in business failures, with bankruptcy numbers around 10 percent up from last year, she is anticipating challenges ahead if the economy does not rebound quickly. “We are monitoring the environment very closely and reviewing our procedures and processes to streamline them and ensure we can continue to progress the majority of insolvency cases in a timely manner.” Even so, she warns that the difficulties involved in liquidation and bankruptcy administration can lead to long delays in finalizing matters. “The complexities can’t be underestimated. The procedures are, for the most part, mandated by statute and there are few shortcuts. That said, we have created a fasttrack system to handle the most straightforward cases.” She adds that they are also working to enhance their use of technology, and funding has just been approved by the Legislative Council (LegCo) for the introduction of an electronic submission system. Creating a more technologically advanced environment for her colleagues at the ORO to make their work more manageable is something McKenna would like to achieve during her tenure as Official Receiver, alongside leaving a legacy of a strong learning environment. A satisfying career McKenna says the most memorable moment of her career was working with the team in Companies Registry and the Financial Services and the Treasury Bureau on the rewrite of the Companies Ordinance in 2013. “The moment the bill was passed, after 44 Bills Committee meetings and over 140 hours of deliberations in LegCo, was magical. We all celebrated with champagne, even though we still had the subsidiary legislation to deal with,” she remembers. She has seen a number of significant changes in the field of insolvency during her career, including the development of the recognition and assistance in corporate cross-border insolvencies. “When we dealt with the Peregrine collapse, we used protocols and parallel liquidations. It was very different,” she says. The introduction of automatic discharge for bankruptcy in 1996, which was introduced shortly before the Asian Financial Crisis struck, also brought about what she describes as “a seismic change” to the work of the ORO. “The number of bankruptcy orders made in 1997 when I was first posted to the ORO was 639, but by 2002, the number of orders had increased to 25,328 annually. You can imagine the impact on the workload of our teams.” Numbers have since fallen back to around 7,000 to 9,000 a year. To Institute members who are interested in working as insolvency practitioners, McKenna advises: “Get as much experience as you can. Nothing beats practice and experience for developing and refining the skills necessary to be a good insolvency practitioner.” She adds that insolvency and restructuring is an exciting area of the profession that calls for creative and innovative solutions. “It is tough, and no doubt involves hard work, but at the end of the day, it can be very satisfying,” she says. When she is not working, McKenna enjoys spending time with her family. She is a keen hiker and likes active holidays, such as walking the Everest Highway in Nepal, sailing in Croatia, or cycling in Italy or France, as well as city breaks in cities like Hanoi or Bangkok. She is also a qualified yoga instructor, and while she no longer teaches, she tries to still practice every day, even if it is only for 20 minutes at lunchtime. “It helps to keep me calm and positive.” “If we want to have a start-up culture here, we need to have the ability for people to put their failure behind them and continue to contribute to the economy.” Phyllis McKenna’s department has been highly involved in the new draft Companies (Corporate Rescue) Bill to introduce a statutory corporate rescue procedure and insolvent trading provisions in Hong Kong. It is currently out for consultation. Read more about the bill and its potential impact on businesses and insolvency practitioners on page 16. 12 September 2020
APLUS McKenna, who studied law at the University of Edinburgh, previously worked with the Companies Registry and the Financial Services and the Treasury Bureau on the rewrite of the Companies Ordinance in 2013. September 2020 13
SECOND OPINIONS: HOW CAN COMPANIES DO BETTER IN DIVERSITY AND INCLUSION IN THE WORKPLACE? SECOND OPINIONS Diversity and inclusion IRENE CHU PARTNER, REGIONAL LEADER OF INCLUSION AND DIVERSITY COUNCIL, KPMG CHINA AND AN INSTITUTE MEMBER Many organizations approach the subject of diversity and inclusion by focusing only on gender, age, ethnicity, religion or sexual orientation. While having a representative workforce is important, teams with diverse backgrounds do not necessarily translate into true diversity. True diversity refers to differences at a much deeper level. They lie in the way we think, our attitudes, perception or tendency towards the external environment, and how we learn, obtain, process and apply knowledge etc. This type of diversity can be referred to as cognitive diversity. Cognitive diversity allows individuals and teams to not only apply what we have learned from the past (what most people do) but also to discover what we don’t know and learn from others or new knowledge. A 2017 Harvard study also showed that teams with a high level of cognitive diversity deliver high performance. It supports accelerated learning and is particularly important to businesses, especially as they operate in highly uncertain environments and face highly complex problems today. To nurture a diverse and inclusive culture, businesses should develop better ways to identify cognitive differences in their recruitment process and avoid hiring people who think the same way. For instance, at KPMG, we hire many graduates who do not major in accounting or business subjects and have different personalities, traits and cognitive styles. Our experience shows that having a truly diverse team to tackle complex client issues can often yield better and more innovative solutions. It is also important to cultivate an environment where people feel comfortable and safe to speak up and ask difficult questions. We encourage our people to challenge the status quo and also propose new ideas. Many of our firm-wide initiatives and programmes such as religious and lesbian, gay, bisexual, and transgender-support groups originated and are being led by our younger colleagues. As our people are empowered to make decisions, we not only share and celebrate successes, but we also want them to feel safe to fail and try again. Last but not the least, diversity and inclusion is a journey, and we need to maintain a growth mindset so that we keep learning and improving. When employees feel comfortable to be themselves and appreciate each other’s differences, they can leverage those differences by collaborating and tackling problems more creatively. Achieving diversity requires leaders to lead with purpose and commit to taking action to bridge the gap between their aspirations and reality. Leaders should also recognize that they do not have all the answers. By consistently drawing on a diverse range of capabilities, skills, experiences, personalities of their people, leaders can achieve better outcomes. 14 September 2020 “Businesses should develop better ways to identify cognitive differences in their recruitment process and avoid hiring people who think the same way.”
APLUS Diversity should be encouraged at every level of an organization. Here are three things for organizations to consider to improve their diversity. Top of the tree: Hire differently. When the next board seat opens up, look around the room. Are you all alike? As part of transformation, could you bring in a different expertise or background? Beyond simply going for more women on the board, could we explore being truly inclusive in the way we evaluate potential new members? Someone who brings a retail experience to a table of bankers and lawyers? Accountants have moved to environmental, social and governance (ESG) due diligence work and some fund managers who have come from accounting backgrounds have found themselves better equipped in navigating ESG reporting. Lawyers have become vice chairs of technology companies, retail leaders have moved to banks and grassroots charity members have moved to corporate roles. It’s possible to push for diversity in the boardroom by mixing functional expertise with a variety of backgrounds and perspectives – and they all lead to a healthier decision-making process. Trunk: Junk the silos. If there are challenges in the accounting team, could we ask sales or human resources for outside-the-box solutions? Create “intrapreneurial” projects that promote crossfunction collaboration across departments that otherwise would never work together. Pair up different roles from different markets, so employees learn about other cultures, and get best practices to be shared, etc. At the roots: Revamp the recruitment strategy to drive the future-proofing of business. PwC went on an acquisition spree with design and innovation companies in cities including Hong Kong, Stockholm and Dubai as part of its global push to strengthen its digital innovation, experience consulting and service design portfolio. With experts in ESG, sustainable finance, and climate change and decarbonization, KPMG has launched “KPMG Impact” to bring in partner organizations and build “an experienced network of professionals from across the globe to deliver industry leading practices, research and trusted client solutions to address the biggest issues facing the planet, having a real and positive impact today and for our collective future.” STEVE NG AUDIT PARTNER, HEAD OF PEOPLE AND CULTURE GRANT THORNTON HONG KONG AND AN INSTITUTE MEMBER PATRICIA DWYER FOUNDER AND DIRECTOR THE PURPOSE BUSINESS Nowadays, the human resources department is not just a supporting role in an organization. It is part of the management team with value-added functions like training, talent retention and corporate culture development. Therefore, we renamed our human resources department as “People and Culture.” People and culture are important to the sustainable growth of an organization. One of the key elements of this is diversity and inclusion. Diversity of thought, background and experience enable great decision-making, innovation and help us meet and understand the needs of our clients. Here are a few tips for creating a diverse and inclusive organization. Inclusion isn’t fluffy: To advise your clients effectively, it’s vital that you offer diverse perspectives – this goes beyond gender and ethnicity. You have to be committed to making sure that the opportunities within your organization are accessible for everyone and that you are representative of society. Diverse teams perform better than expert teams: Evidence shows that diverse teams actually perform better than expert teams. If you have previously relied on a homogenous and expert team to make decisions, go and seek more views and you may find that better decisions will be made. For example, we work closely alongside secondees from our member firms and implement their ideas in serving our clients locally. Creating an inclusive workplace starts at the top: According to our recent survey, just one in 661 people believe that an unconscious bias affects decision-making. However, we all have biases. You need to challenge biases when you identify them and create an environment where people feel safe to speak up. Top management has to render full support in getting staff to call it out. Data helps you understand what you need to change: Sometimes little things, like making sure that you have the right data, can help you really understand the challenges you face. For example, by identifying the ethnicity of the employees, one can effectively calculate the ethnicity pay gap within a firm. Transparency is key:You need to be really honest with yourself about where you are and make realistic and pragmatic commitments to change that you can actually deliver. With the recent outbreak of COVID-19, many organizations allow their staff to work from home, which makes maintaining diversity and inclusion within the business a big challenge. Do not drop this issue from your agenda and try not to make your staff feel isolated during this difficult period. “Beyond simply going for more women in the board, could we explore being truly inclusive in the way we evaluate potential new members?” “You need to challenge biases when you identify them and create an environment where people feel safe to speak up.” September 2020 15
ROUNDTABLE Insolvency RETHINKING THE LUDWIGNG Senior Partner, ONC Lawyers DANIEL CHOW Senior Managing Director, FTI Consulting TERRY KAN Partner, ShineWing TIFFANYWONG Managing Director, Alvarez &Marsal Asia JOHNSONKONG President, Hong Kong Institute of CPAs MAT NG Partner, Strategy and Transactions, EY 16 September 2020
APLUS The draft Companies (Corporate Rescue) Bill, currently out for consultation, aims to introduce a statutory corporate rescue procedure and insolvent trading provisions for the first time in Hong Kong. A Plus brought experts together to discuss the current strengths and weaknesses of Hong Kong’s insolvency framework, what they would like to see in the new bill, and the impact a new framework could have on the city and its companies, big and small RESTART PROCESS Photography by Calvin Sit Hong Kong is set to introduce a procedure, similar to the company administration process in the United Kingdom and elsewhere to give struggling companies the opportunity to get back on their feet. The draft Companies (Corporate Rescue) Bill, which is currently out for consultation, would introduce a statutory framework for corporate voluntary arrangements for the first time in the jurisdiction. While Hong Kong already has a number of options for companies that run into difficulties, its lack of a formal restructuring regime has long been seen as an issue. Ludwig Ng, Senior Partner at ONC Lawyers and a member of the Hong Kong Institute of CPAs’ Restructuring and Insolvency Faculty Executive Committee (RIFEC), points out that in the World Bank Group’s Doing Business 2017 rankings, Hong Kong moved down one place because of its lack of a corporate rescue statutory framework. Mat Ng, Partner, Strategy and Transactions at EY, an Institute member and former Chairman of RIFEC, added that the World Bank Group survey is important, noting that Singapore was upgraded after it amended its insolvency laws. Hong Kong’s ranking can also affect borrowing costs. When banks assess risk factors in a jurisdiction in setting their interest rates, the Doing Business report is one of the things that they reference. The lack of a proper framework for corporate rescue is a disincentive for investors, as insolvency laws are one consideration when they decide where to invest, says Daniel Chow, Senior Managing Director at FTI Consulting, an Institute member and RIFEC member. If companies end up having to be wound up when they face liquidity problems, this is not good for Hong Kong’s reputation as business-friendly environment. There is also another economic cost to not having a mechanism to enable companies that have run into difficulties to turn themselves around. “When a company is in financial distress, if you rescue it instead of liquidating it, the company’s losses can be minimized, jobs can be saved, and valuable intangible assets can be preserved,” Ludwig Ng says. Current restructuring options Johnson Kong, the Hong Kong Institute of CPAs’ President, and Managing Director – Non Assurance at BDO, points out that while there are currently a number of options for corporate restructuring in Hong Kong, they all have drawbacks. For example, there are voluntary workouts driven by the banks, on which the Hong Kong Monetary Authority issued the guidance Hong Kong Approach to Corporate Difficulties in 1999. Although this works pretty well it only applies to banks and not other creditors. Under the Companies Ordinance, a company may reach September 2020 17
ROUNDTABLE Insolvency a compromise with its creditors on a voluntary basis, or go through a scheme of arrangement, but the scheme must be sanctioned by the court and approved by a majority of creditors. However, these procedures lack a moratorium, meaning that an individual creditor can still petition for a winding up order. Another option involves appointing a provisional liquidator, a route that has been developed through case law. But Kong points out that while insolvency practitioners are able to use this option to carry out a restructuring, courts have reminded practitioners that it is not the main purpose of the provisional liquidation provisions. Chow adds that Hong Kong’s current insolvency regime is also very creditor-friendly and focused on the recovery of assets, leaving limited scope for companies that want to turn themselves around. “What we need in Hong Kong is more tools for companies on the verge of bankruptcy or insolvency so that the company can survive, rather than allowing the creditor to liquidate it and realize all the assets,” he says. Mat Ng says on the plus side, the existing framework is transparent and predictable, as it follows the common law approach, but he also agrees that because it still follows the U.K.’s old insolvency regime, Hong Kong is losing ground to other jurisdictions, such as Singapore, which is promoting itself as a restructuring hub. “Everyone else has been modernizing their insolvency regime except us, so it is very difficult for us to compete with other major financial centres around the world when we still have an outdated system,” he says. Despite the drawbacks, Terry Kan, Partner at ShineWing, an Institute member and Chairman of RIFEC, says the current system does have strengths, pointing out that it is efficient and there are many top professionals in Hong Kong looking after the interests of stakeholders. Recently, the court has also recognized a “light touch” provisional liquidation procedure, enabling the provisional liquidator to work with the management to find a solution, which is a kind of hybrid arrangement between the Chapter 11 procedure in the United States and a voluntary arrangement. Even so, he agrees the new framework would offer a valuable additional option to companies in distress. Ludwig Ng supplemented that the “light touch” provisional liquidation was actually a procedure developed in Bermuda and the Cayman Islands, but the Hong Kong court has taken the initiative to recognize it. Given that many Hong Kong businesses are incorporated in those jurisdictions, they have the option to make use the procedure. The Hong Kong court’s flexibility is helpful because Hong Kong has not so far adopted the United Nations Commission on International Trade Law (UNCITRAL) model law on cross-border insolvency, which is a widely-adopted framework to encourage cooperation and coordination between jurisdictions in cross-border cases. A long history The journey to the current draft bill has been a long one. It began in 1996, following recommendations from the Law Reform Commission on the need to introduce a formal corporate rescue and insolvent trading framework in Hong Kong. Attempts to pass the bill in 2000 and 2001 failed in the Legislative Council over disagreements about the way outstanding entitlements to employees should be handled. “What we need in Hong Kong is more tools for companies on the verge of bankruptcy or insolvency so that the company can survive.” 18 September 2020
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