Financial Distress, Insolvency, Restructuring & Recovery

Financial Distress, Insolvency, Restructuring & Recovery

With the rise in global economic uncertainty and the downturn in the market, we have witnessed a surge in early indicators of financial distress. We define financial distress as a situation whereby a company failed to generate sufficient revenue or income, causing failure to meet its financial obligations.

There are common early indicators that a company is in financial distress, from shrinking business and industry growth, operational obstructions caused by aging account receivables and suppliers, high management and key employee turnover, inability to raise funding, auditors unwilling to sign on accounts, change of auditors, and many more. The impacts of financial distress can be generally categorized into 3 groups – (i) Operational impact, (ii) Financial impact, and (iii) Regulatory impact. Examples of operational impact include a decline in productivity as a result of disruption in the purchasing cycle, staff retrenchment, etc. Immediate financial impact includes negative cash flow, a severe decline in profitability, breach of loan covenants, etc. Examples of regulatory impact include regulatory issues caused by mass employee retrenchment actions, a surge in failing to comply with corporate governance requirements, and more. Should a company experience these impacts and/or have demonstrated the abovementioned indicators, the company should consider introducing business restructuring in order to revive the financial health of the company as early as possible before any formal creditor actions, before shareholders lose their confidence in the business, and ultimately the erosion in company’s value, which in turn will create a vicious cycle which further erodes the financial and operational aspects of the company.

Our teams specialize in financial and operational restructuring and depending on the specific requests, existing business model, corporate structure, and management team of the company, we shall assist with tailor-making our proposed solutions which include but are not limited to the following aspects:

• Working capital management;
• Negotiation with key stakeholders;
• Introducing cost-cutting measures (for more details of cost-cutting measures, please refer to Cost Control and Reduction);
• Cash flow infusion.

The steps involved in the process are outlined below:

• Step 1: Identify and recognize signs of financial distress;
• Step 2: Assist with performing a business review;
• Step 3: Identify debt restructuring options and solutions based on the existing financial position and forecasted financing needs;
• Step 4: Setting up the restructuring plan;
• Step 5: Negotiating with key stakeholders; and
• Step 6: Executing the restructuring plan

There are legal issues and liabilities surrounding the financial distress of a business which our team could assist with working closely with in-house and/or externally appointed legal teams. These issues include the legal issues and liabilities of directors of a company in the course of ensuring the directors fulfilling their duty of care, skill, and diligence, as well as any related statutory provisions applicable to the company with prospects of being wound up. It is relevant to note that directors in breach of director duties could be liable for civil and criminal liabilities, and possibly adverse orders from courts or regulators which may affect the director’s reputation and ability to act in the company or other entities. Furthermore, should court-assisted restructuring is the only option available to the company, our team will work with the appointed legal team to ensure the success of the restructuring exercise.

In these challenging times, it is important for a company experiencing financial distress to act quickly in order to improve profitability and save the business from shutting down.  Our team could assist with introducing finance and operational restructuring exercises, and identify a capital structure that meets the core business needs of the company. Please contact us to find out more about how we could assist your business in this respect.