Alternative Corporate Rescue Mechanisms under the Companies Act 2016

 

This article is fourth in a series entitled A New Corporate Landscape: Key Changes under the Companies Bill 2015 that our clients should know about.

As indicated in our previous issue, this time we will be discussing the changes relating to insolvency rescue.

Key Change 9: New Corporate Rescue Mechanisms introduced

Under the present provisions of the Companies Act 1965, an insolvent company can only enter into receivership, wind-up or commence a scheme of arrangement with its creditors. The new Act sets out two further alternative corporate rescue mechanisms to assist companies in restructuring their debts and avoid a winding up scenario.

1. Judicial Management

The Judicial Management process helps a financially distressed company to regain its financial health. It is a mechanism based on the Singapore provisions and the UK’s administration model. Pursuant to the new Act, a company or its creditor may apply to Court for a grant of a Judicial Management Order and for an appointment of a judicial manager where the company is unable to pay its debt and the company can be rehabilitated or preserved as a going concern, or where the interest of creditors would be better served.

Once a Judicial Management Order is made by the Court, the Order shall remain in force for a period of six (6) months during which time the company cannot be wound-up and the company will be protected from any legal proceedings, and no security can be enforced or shares transferred. This period can be extended, on application, for another six months.

During the period for which the Judicial Management Order is in force, the judicial manager shall do all such things as may be necessary for the management of the affairs, business and property of the company and do all such other things as the Court may order. Further, the judicial manager will prepare a restructuring plan for the company which must be approved by a majority of 75% of the total value of creditors whose claims have been accepted by the judicial manager, present and voting at the creditor’s meeting either in person or by proxy. Once approved by the creditors, the judicial manager will apply to Court for the plan to be sanctioned and thereafter the restructuring plan can be implemented.

2. Corporate Voluntary Arrangement

The other alternative mechanism introduced by the new Act is the new Corporate Voluntary Arrangement (“CVA”) process which allows directors of a company to make a proposal to the company and its creditors for a voluntary arrangement. Voluntary arrangement means a composition in satisfaction of a company’s debts or a scheme of arrangement of a company’s affair. It is a requirement that the scheme be supervised and implemented by a qualified insolvency practitioner appointed by the directors or Official Receiver (“nominee”).

The proposal for a corporate voluntary arrangement shall be made and submitted to the nominee for an initial assessment. The nominee will then submit to the directors a statement indicating whether or not in his opinion inter alia the proposal has a reasonable prospect of being approved and implemented, and the company is likely to have sufficient funds available.

As opposed to judicial management, the new Act sets out the eligibility for a CVA moratorium which shall remain in force for a period of twenty-eight (28) days to sixty (60) days from the time of filing of the required documents (e.g. the proposed voluntary arrangement, statement of company’s affairs, statement from nominee and other necessary documents to the Court) during which time the company cannot be wound up, no judicial manager can be appointed, no shares can be transferred etc.

Unlike judicial management, it is important to note that under CVA, a secured creditor may appoint a receiver to deal with its secured property during the moratorium.

During the period where a moratorium is in force, the nominee shall summon a meeting of the company and a meeting of its creditors at the time, date and place as the nominee thinks fit. The proposed CVA must be approved by a simple majority of shareholders and at least a majority of 75% in value of the creditors present and voting at the creditor’s meeting either in person or by proxy. If this is passed, it then binds all the creditors.

What do the above Key Change mean for you?

The CA 2016 moves Malaysia’s insolvency laws towards the higher standard of other countries, and the introduction of these two new corporate rescue mechanisms provides you with more flexibility in dealing with your debts while avoiding the death knell of winding up. Conversely, these new options should also be kept in mind when recovering from your debtors.

 

CCLC Corporate and Commercial advises and supports clients on an extensive range of matters including in mergers and acquisitions, takeovers, security dealings, capital and fund raising, restructuring, joint ventures, financial instruments, and general regulatory and compliance issues. Our team is ready to be of service to you.