Overview on restructuring and corporate rescue options for businesses in Malaysia

With the current economic climate in Malaysia, many Small Medium Enterprises (SMEs) have experienced a significant drop in income and many business owners are considering to wind up or close down the business entirely due to increasing pressure from creditors on outstanding payments and staff payroll commitments.

WeCorporate have outlined several methods to rescue a business (other than winding up) through our high level summary on the restructuring and corporate rescue options below.

In Malaysia, there are 6 key restructuring and corporate rescue options  contained in the Companies Act 2016 (CA 2016). We have outlined the 6 key options below in this article:
1. Corporate voluntary arrangement
2. Judicial Management
3. Scheme of Arrangement
4. Members voluntary winding up
5. Creditors voluntary winding up
6. Compulsory winding up

1. Corporate voluntary arrangement (“CVA”) (only For Private Companies with no Secured Debt)

CVA is a new corporate rescue mechanism made available under CA2016 and it is a quick out of court process. The process is as such:

  • * Initiated by the directors of the company who will make a proposal for CVA to the creditors, and to appoint a nominee to act as trustee/supervisor for the implementation of the CVA.
  • *   Once the CVA is approved by the creditors, the nominee shall notify the Court and the company shall be able to implement the CVA.
  • *   Upon filing of the application to the Court, the company is entitled to delay performing certain legal obligations or to delay payment for 28 days to 60 days (Moratorium period) subject to the consent of the nominee, shareholders of the company and 75% in value of the creditors.
  • *   However, CVA only applies to private companies and does not extend to companies regulated under the purview of the Central Bank of Malaysia or the Capital Markets and Services Act 2007. Further, it is also not available to companies with secured debt (e.g. property or undertaking charged to creditors). As such, this limits the use of CVA amongst businesses in Malaysia.

2. Judicial Management (“JM”)

It is another method of corporate rescue mechanism provided under Section 392, CA2016. Unlike CVA, under JM the management of the company will be hand over to an insolvency practitioner.

The key features of JM are as follow:
a) the filing of the court application for JM triggers an automatic moratorium which prevents the company from being wound up and also prevent any legal proceedings to initiate against the company. This will much needed breathing space to the distressed company.

b) Second, the application must demonstrate to the Court

  • *   the company is or will be unable to pay its debts;
  • *   the survival of the company as a going concern;
  • *   the approval of a compromise between the company and the creditor; and
  • *   a more advantageous realisation of the company’s assets would be effected than on a winding up.

c) Any secured creditor can veto the JM application

Once the JM order is granted, the judicial manager has an initial term of 6 months to try to put forward a restructuring proposal to the company’s creditors. The moratorium continues on during the judicial management order.

The judicial manager’s proposal aims to achieve 75% in value of the creditors’ approval. The judicial manager takes over all management powers of the directors. The initial 6 months term may only be extended for a further 6 months.

3. Scheme of Arrangement (“SOA”)

This arrangement will require the company gets 75% approval by classes of creditors and the management power will remain with the existing board of directors.

Below are the stages of the SOA:

  • I. Apply to the Court to hold a Creditors’ Meeting where the creditors must be classified into different class based on their legal rights. The company may also apply for a Court Order for a restraining order as it is not automatically granted like CVA or JM. The initial restraining order will last for not more than 90 days, and can be extended.
  • II. Once the court order is granted, the company will hold the different meetings based on the creditor classes and the aim is to achieve 75% in value of creditors’ approval for each class.
  • III. The company will need to apply for sanction from the Court. The Court will approve the scheme once it is satisfied that all the statutory requirements have been met. The scheme will then become binding on all the creditors listed in the scheme.

For SOA, it is not mandatory for a company to engage an insolvency practitioner but it is common to have one to assist on the process.

Read the full version of this article at this WeCorporate blog.


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