Liquidators in corporate rescues

Intheblack, Apr 2009

Asian liquidation: DELOITTE'S DEREK LAI, ASIA LEADER, REORGANISATION SERVICES, ADVISES COMPANIES IN FINANCIAL TROUBLE TO TAKE ACTION BEFORE THE PRESSURE OF INSOLVENCY EMERGES.

THE GLOBAL FINANCIAL CRISIS has led to the collapse of financial Institutions and other corporations worldwide. Hong Kong, as an open economy, is not immune to the crisis. Corporate failures are starting to emerge and are likely to continue. A slew of listed companies have been placed in provisional liquidation since September 2008, including fashion retailer U-Right International, toy manufacturer Smart Union Group, watch retailer Peace Mark Holdings, and jewellery retailer 3-D GOLD Jewellery.

Provisional liquidators have been appointed to these companies by the court to take control of their assets and businesses.

In Hong Kong, after a petition is presented against a company, a provisional liquidator can be appointed to the company under section 193 of the Companies Ordinance and have the powers set out In the court order appointing him. The main objective of appointing provisional liquidators In the past was to preserve the assets of the company and to maintain the status quo pending the hearing of the windingup petition. More recently, provisional liquidators have been appointed with additional powers of exploring the possibility of restructuring the company's businesses, operations or indebtedness, and if it's considered to be in the interests of creditors, entering into negotiations perhaps resulting in the implementation of a scheme of arrangement for the benefit of its stakeholders.

Once a winding-up petition has been presented, the company or any creditor or contributory can apply to the court to stay any legal proceedings against the company. This can provide the space within which a scheme of arrangement can be developed and approved. For a listed company, its listing status may be a valuable asset whose value could be maximised for the benefit of creditors (and shareholders) via a restructuring rather than in an actual liquidation.

Notwithstanding the advantages of appointing provisional liquidators in rescuing a (listed or unlisted) financially troubled company, the appointment of provisional liquidators is generally a last resort in an effort to rescue the company. The company should consider alternative strategies to cope with expected financially tough times ahead.

Strategic options

In order to survive in the financial downturn, the company should implement measures to ensure It has a healthy cash flow and it should ensure it has the ability to detect any potential cash flow problems at an early stage.

The following are tips for management on how to survive the downturn:

Cash flow

1. Review the short-term cash flow requirements and forecast long-term cash flow.

2. Negotiate longer credit terms with suppliers and/or seek acceptance of discounted settlement of the liabilities due to them.

3. Negotiate for shorter credit terms to be granted to customers.

4. Pay attention to the financial ratios that matter, such as debtors' and creditors' turnover.

5. Manage stock cycles efficiently to generate cash.

Cost control

1. Conduct cost structure analysis.

2. Pay particular attention to variable costs.

3. Identify the cost drivers that can influence the value of the business.

4. Renegotiate the terms of leases/ contracts where possible.

5. Keep staffing requirements under review as the level of business changes.

Revisit your business strategy

1 . Identify the core capabilities of the business and where your business opportunities exist.

2. Consider the disposal of non-core assets and business streams.

3. Consider the acquisition of assets, expertise or competitors if financing is available.

4. Keep a close eye on shifts in currencies.

Establish and maintain a good relationship with your bank

1. Maintain regular contact with your bank on the current state of your business.

2. Consult your professional advisers on ways of improving a plan's acceptance and success.

3. Consider alternative sources of finance.

Revisit investment plans

1. Defer new plans if they are not critical to the business.

2. Negotiate more favourable terms for critical assets.

3. Try borrowing money instead of using all cash.

Considering these steps may help a company to maintain a healthy cash flow and cope with the risks brought about by the financial crisis.

It is vitally important for the management of a company to recognise and tackle problems at an early stage and to take effective corrective action before the pressure of insolvency or near insolvency emerges. The earlier action is taken, the higher the chance a company can survive.

When a company has cash flow problems, it is likely to receive pressure from lenders and creditors demanding repayment. Bankers are likely to call for updated financial Information and may seek full/ partial repayment of loans. At this point, the company in financial difficulties may consider employing an independent financial adviser (IFA) who can seek the cooperation of creditors pending a review of company's financial position and a plan by management on how to deal with the current financial pressures. The next step will be for the IFA to conduct a business/ financial review and report on its assessment of the current and prospective financial position of the company and the underlying viability of Its operations. Then, based on the business/financial review, the IFA can make recommendations to management as to the way forward.