Corporate Restructuring, Insolvency and Strategic Advisory CLIENT ALERT

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Corporate Restructuring, Insolvency and Strategic Advisory

Over two months since the first cases of Coronavirus Disease 2019 (COVID-19) were identified in China’s Hubei province, the effects on worldwide business have been significant.

It is a particularly testing time for many Hong Kong businesses, especially those in the tourism, hotel, food and beverage and retail environment who, at the end of 2019, were already suffering from declines in revenue brought on by six months of ongoing protests. Official statistics published by the Hong Kong government indicate that visitor numbers to Hong Kong in December 2019 declined by 51% compared to the previous year. Visitors from mainland China to Hong Kong have also dropped significantly to a few hundred visitors per day, a figure that previously could reach over 30,000 per day.

How Duff & Phelps Can Help

Duff & Phelps has significant experience helping clients deal with the destructive effects of major business disruptions. Our team of experts is ready to assist and provide advice during these challenging times.

Below are some critical issues confronting our clients and how we can help to address:

Problem Faced: Cash Flow Constraints Arising From Reduced Revenue

One of the most common problems faced by many businesses in the wake of COVID-19 is reduced revenue from the general downturn in business. This, particularly for undercapitalized businesses, gives rise to reduced cash flow and the ability to meet payment obligations.

When faced by a major business disruption, directors and senior management must be mindful of their obligations to key stakeholders and ensure that that they do not trade whilst insolvent by continuing to incur debt, such as placing orders with key suppliers, that the company is not able to repay. Insolvent trading potentially exposes the directors and senior management to risk of prosecution.

Where Duff & Phelps Can Help

  • Assisting in the assessment of business viability
  • Preparing profitability analyses and forecasts based on reduced revenue to determine working capital requirements going forward
  • Revising business plans including providing for restructuring scenarios around reduced revenue levels
  • Acting as an independent third party in negotiations with financiers, suppliers and landlords for extended or revised payment terms
  • Seeking independent advice from professional restructuring advisers such as Duff & Phelps provides evidence that the directors and/or senior management are taking proactive steps to address insolvent trading concerns, thereby minimizing the risk of future prosecution.

 

Problem faced: Breach of contract

One of the consequences of any form of business disruption is the inability to meet contract obligations. Examples include:

  • Inability to meet payments due under commercial property lease agreements
  • Failure to manufacture and deliver goods on time
  • Failure to achieve designated revenue targets under franchise, partnership or joint venture agreements

Where Duff & Phelps Can Help

Under such situations we encourage the parties to try and negotiate an amicable commercial solution given the unforeseen nature of the disruption. However, in some situations, this is not possible, particularly where the disruption simply brings to a head pre-incident problems facing the underlying business. In these situations, Duff & Phelps is often called in to assess, quantify and document the financial impact of the breach of contract for the purpose of legal proceedings or an insurance claim.

Problem Faced: Fraud

Our experience demonstrates that business disruption can also give rise to increased incidents of fraud. Examples include businesses that seek to falsify revenue to meet required ratios pursuant to finance facilities and thereby ensuring retention of existing credit lines.

Similarly, employees may be pressured to falsify revenue targets to achieve bonus/commission targets or simply to justify their continued employment.

Where Duff & Phelps Can Help

Duff & Phelps can assist key stakeholders including management, shareholders, financiers or other investors to identify and quantify fraud or assist in the implementation of measures to prevent fraud.

Problem Faced: Downsizing Surplus Entities

The current economic downturn provides an ideal opportunity for many businesses to take stock of their operations and address non-performing parts of their business including surplus entities.

Where Duff & Phelps Can Help

Our expertise includes assisting in the winding down and subsequent liquidation of unprofitable non-core entities and ensuring the delivery of significant cost savings in the process. We have particular expertise in working across jurisdictions on restructuring complex corporate structures in conjunction with existing service providers, including lawyers and tax advisors.

Should you require any assistance with disruptions stemming from the COVID-19 outbreak or any other crises, please feel free to contact any of our team members.

Having advised companies on crisis situations, our experience suggests that the sooner proactive steps are taken, the greater the likelihood of mitigating the negative outcomes of a major business disruption.

We will continue to monitor the development of the COVID-19 situation, and report on its financial impact on businesses across impacted sectors in the region. We understand that this is a difficult time for all our clients, their staff and families, and our thoughts are with everyone affected.

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