HK: the future of restructuring; the future of the profession
3 June 2020: There are two key issues on Johnson Kong’s mind: what will COVID-19 mean for corporate restructuring; and what is the new norm of the profession once the pandemic has passed.
Johnson Kong is the Managing Director, Non-Assurance Services, BDO Hong Kong; he is also President of the Hong Kong Institute of Certified Public Accountants and an ICAEW Fellow member.
Kong is an insolvency practitioner and specialises in restructuring, receivership, liquidation, forensic and litigation support. These are skills that are going to be in high demand once this virus has swept through the world’s economies.
“The Hong Kong sectors hit hardest are international trade, retail, tourism, catering, construction and logistics,” says Kong. “Over the last two to three months, hundreds of catering businesses have actually closed down.”
“We have had a lot of enquiries at our firm in recent months about restructuring, liquidation and receivership because of the free-fall in business volume, and borrowers have been in default of their loan repayments,” says Kong. “So far, the courts have not opened fully and court appointments are being held up. However, we are expecting many more business failures in the second half of this year.” Hong Kong insolvency professionals are going to be busy.
The Hong Kong legal system is largely based on the common law and thereby has adopted much of the UK’s insolvency regime. However, there is no equivalent process in Hong Kong to the UK’s administration procedure and the US’s Chapter 11. A proposal to instigate a similar regime, which is known as provisional supervision, has been floating around since some 25 years ago but still nothing has materialised.
“As far as restructuring is concerned, we are still somewhat hand-tied,” says Kong. He is hopeful there will be new legislation in the not too distant future, perhaps some time next year.
“The importance of having a corporate rescue regime is that it would provide a moratorium period during which legal actions against the insolvent company are stayed so that there is a breathing space for restructuring,” says Kong. Without such a scheme, if a creditor takes legal action while a struggling company tries to work through its problems, in Hong Kong, hopes of restructuring that distressed company are largely dashed."
Kong says that businesses in Hong Kong have been under tremendous pressure for around 12 months. “It is not just COVID-19, but also the China/US trade dispute and the social unrest here that have affected businesses,” he says.
There is only so much that businesses in certain sectors can take, especially SMEs, so liquidations at the smaller end of the spectrum will be a reality. At the larger end, many sizeable ailing companies may be restructured; Kong expects a raft of insolvency cases in the second half of this year.
However, the Hong Kong government has not stood by and let the economy flounder. It has introduced three rounds of stimulus packages and established an Anti-epidemic Fund of HK$287.5bn in total to support businesses to tide over the crisis. About HK$80bn has been ear-marked for employment support to encourage employers to preserve jobs. Low interest with 100% government-guaranteed loans are also available – a total of HK$50bn has been set aside for these. And there are technology support initiatives to enable remote working. Nevertheless, unemployment is up at 5.2% and the GDP forecast of this fiscal year has been significantly adjusted downward from -4% to -7%. Not good signs.
But there are good signs for the new norm of the profession. Kong points to the poor work/life balance accountants often experience, especially around year-end.
“Normally, for us in Hong Kong, our busy season is February until May. Long working hours and a lot of travel are the result,” says Kong. “Because of COVID-19 lockdowns, social distancing and working from home restrictions, since Chinese New Year there has been zero travelling in between Hong Kong and mainland China. But we have still managed,” he says.
“In fact, of the 1,792 issuers in Hong Kong with December year-ends, only five did not achieve the 31 March 2020 preliminary results announcement deadline under various options/concessions offered by the Hong Kong Stock Exchange. To achieve this, the majority of accountancy firms have had to review urgently their operational regimes and move outside their comfort zones. We have relied heavily on technology to conduct our work remotely and there has been no travel.”
“Even when the virus is over, I encourage firms to continue to move in this direction. We should remodel and fine-tune our mode of operation based on our recent experience, allowing our staff to work flexi-hours with travel largely reduced and work-from-home arrangements in place, perhaps for one or two days a week,” says Kong.
“In this way, perhaps the long-standing problems our profession labours under can be redressed to a large extent.”