The benefits of corporate simplification to the shipping sector are many and include releasing capital through restructuring, reducing costs and saving management’s time.
The COVID pandemic has created a new set of headwinds for the shipping sector which was already weathering the familiar challenges, including vessel over capacity, volatile charter rates, trade wars, currency fluctuations, new regulation, etc.
Whilst many vessels have remained active through the pandemic, others have been impacted and are lying idle. Often those idle vessels have been at fixed locations for a considerable period of time without undertaking any commercial activities and reactivating a vessel can take time and will be expensive for the industry. As a result, extracting ‘trapped’ capital and effecting cost reduction measures are more critical than ever for groups in the shipping sector.
Corporate simplification remains on our clients’ agendas as they look at ways to better utilise capital, as well as to reduce costs and wasted management time, by streamlining the number of entities in their corporate group, or by exiting from non-core businesses. Our clients estimate that the costs of holding a dormant entity in terms of management time and regulation can be up to £20,000 per annum and an active entity would be significantly more. Careful consideration must be given to legal and jurisdictional complexities when designing an optimal structure in the shipping sector. However, by eliminating redundant entities, whether dormant companies or companies undertaking duplicate activities, significant costs could be mitigated resulting in year on year savings.
There are also a number of other market issues that are driving corporate simplification. Substance requirements in overseas jurisdictions and increasing anti avoidance legislation, including the Base Erosion and Profit Shifting (BEPS) initiative, are also requiring groups to consider their structure to ensure it is fit for future purpose from a tax perspective. Meanwhile, boards are increasingly focused on transparency, risk management and good corporate governance. The increasing burden of regulation can also be mitigated by a simplified group structure.
Where clients are considering a divestment, a transparent and simplified corporate structure will help to maximise investor value. Where clients are winding down, legally hiving up or selling the business and vessel to a third party, an organised exit will help manage commercial and reputational risk and maximise the return to the group. Whilst simplification can be constrained due to commercial considerations, for example, where funders require a group to have a single ship owning entity per vessel, or in order to limit claims leaking into the group, this is not always the case and it is necessary to look at each scenario on its own merits.
BDO’s Corporate Simplification team specialises in corporate simplification, exit planning and solvent liquidation processes and has experience of helping shipping groups simplify their group structures in the UK and overseas, via the BDO International network. We have advised clients on the elimination of redundant entities using solvent liquidation and have also helped shipping clients exit from a business by providing advice regarding the wind down and elimination of trading and vessel owning subsidiaries.
For further information about the points covered in this article please contact Stacey Brown or Sue Bill.