(a) Problems and Costs of Severe Financial Difficulties
When a company undergoes severe financial difficulties, several problems and costs can arise, including:

1. Liquidity Crisis: The company may struggle to meet its short-term obligations, causing delays in payment to suppliers and possible loss of credit lines.
2. Increased Borrowing Costs: High-risk perception can lead lenders to charge higher interest rates or limit additional funding, further straining the company’s cash flow.
3. Asset Liquidation and Underinvestment: The company may need to sell off valuable assets at a loss to generate cash, while limiting essential investments, impacting future growth.
4. Employee Morale and Retention Issues: Financial distress can lead to layoffs, reduced benefits, and low morale, resulting in loss of skilled employees.
5. Operational Disruption: Financial constraints can hinder production processes, affecting quality and the ability to fulfill orders, which may harm customer relationships.
6. Legal and Restructuring Costs: Debt restructuring or bankruptcy proceedings bring legal expenses and administrative costs, adding financial burden.
7. Reputational Damage: Financial difficulties can erode market confidence, affecting customer loyalty and supplier relationships

(b) Impact of High Financial Gearing on Stakeholders and Protective Measures
High financial gearing, indicating a high proportion of debt relative to equity, can affect various stakeholders beyond bondholders:

1. Shareholders: Increased debt obligations can reduce dividends as profits are redirected to interest payments. Shareholders face higher risks, as financial distress or insolvency can erode equity value.
   • Protective Measure: Shareholders can advocate for prudent debt management policies and monitor the company’s debt-to-equity ratio.
2. Employees: High gearing may lead to job cuts, benefit reductions, and wage freezes, as the company attempts to manage its debt obligations.
   • Protective Measure: Unions and employee representatives can negotiate protective clauses in employment contracts for severance packages or continuity guarantees.
3. Suppliers and Creditors: Suppliers might be hesitant to offer favorable credit terms, fearing delayed payments or defaults. This can strain relationships and disrupt supply chains.
   • Protective Measure: Suppliers can require upfront payments, secure credit insurance, or include clauses in contracts for timely payments.
4. Customers: If financial constraints lead to lower product quality or service delays, customers might lose confidence in the company, affecting sales and market share.
   • Protective Measure: Customers can request performance guarantees, conduct due diligence, and establish contingency plans with alternative suppliers.
5. Government and Regulatory Bodies: High gearing levels raise concerns about tax compliance and regulatory adherence, especially in times of financial distress.
   • Protective Measure: Regulatory bodies can require regular financial disclosures and establish financial stability standards for companies.

By adopting these measures, stakeholders can mitigate potential risks associated with high financial gearing and protect their interests​