The Covid-19 pandemic and the Movement Control Order have caused distress to many companies due to the suspension of business operations and suppression of consumer demand. In Malaysia, the Companies Act 2016 offers three corporate rescue mechanisms which can be used to avail distressed companies. Corporate rescue mechanisms that are found under the Companies Act 2016 include Scheme of Arrangements, Corporate Voluntary Arrangement and Judicial Management. This article provides an overview of each mechanism and will focus on private limited companies. Division 8 of Part III of the Companies Act 2016 came into force on 1 March 2018, together with the Companies (Corporate Rescue Mechanism) Rules 2018, which aim to facilitate financially distressed companies and rehabilitate business viabilities which provide alternatives to liquidation.
Scheme of Arrangements
Section 366 of the Companies Act 2016 gives the Court the power to order a compromise or arrangement with creditors and members in the form of an approved debt-restructuring arrangement. The term "arrangement" includes reorganization of the share capital of a company by the consolidation of shares of different classes, by the division of shares into different classes or by both of these methods. The arrangement or reconstruction provisions under Section 366 of the Companies Act 2016 is commonly referred to as "Scheme of Arrangements" and is commonly used by companies to restructure its debt with creditors. The Court may, upon application by either the company, any creditor or member of the company, liquidator (if the company is wound up) or judicial manager (if under judicial management), order a meeting to be summoned in such manner as the Court directs.
If the compromise or arrangement is approved by 75% majority of the total value of creditors or members present and voting and has been approved by the Court, it shall be binding on all creditors, members and the company (or liquidator if the company is wound up). It is pertinent to note that there is no automatic moratorium for scheme of arrangements unlike a corporate voluntary arrangement and judicial management. The equivalent to a moratorium is a restraining order which must be applied to Court. However, the requirements to fulfil for a restraining order is burdensome and difficult to satisfy.
Application for a scheme of arrangement:
- Company applies to Court for an order to hold meetings of the company's creditors based on their class. Secured and unsecured creditors must be distinguished.
- The Company holds different meetings based on the creditors' classes, which must be based on 75% majority of the total value of creditors present and voting for each class.
- Company applies to the Court to sanction the scheme of arrangement. The Court will only approve the scheme once all statutory requirements have been met which in turn will be binding on all creditors listed in the scheme.
- A copy of the Court order approving the scheme of arrangement must be lodged with the Registrar of Companies and shall take effect on the date of lodgement or such earlier date as the Court may determine.
Effects of a compromise or scheme of arrangement:
A copy of every scheme of arrangement order made shall be annexed to every copy of the constitution of the company issued after the order has been made.
Corporate Voluntary Arrangement
A corporate voluntary arrangement is a procedure which allows a company to put up a proposal to its creditors for voluntary arrangement. Voluntary arrangements are eligible to private limited companies and are supervised by an independent insolvency practitioner who would report to the Court on the viability of a proposal. Corporate voluntary arrangements is a management-driven restructuring process with minimal Court involvement which is quick and encompassess low costs.
Public listed companies, license holders or operators of a designated payment system regulated by Bank Negara Malaysia or subject to the Capital Markets and Services Act 2007 and companies with charges over its property are ineligible to undertake corporate voluntary arrangements.
Application for voluntary arrangement:
An application for voluntary arrangement may be proposed by either the directors of a company, the judicial manager (if the company is under a judicial management order) or the liquidator or official receiver (in the event the company is wound up).
Proposal for voluntary arrangement:
The proposal for voluntary arrangements is prepared by the company's directors, judicial manager, liquidator or official receiver (as the case may be). The proposal must include (i) nomination of a nominee either as a trustee or supervisor under Section 396(2) of the Companies Act 2016; and (ii) a statement that the company's information is up to date and that the company is not under any striking off process.
Main documents that should accompany the proposal include the following:
- Proposal setting out the terms of the proposed voluntary arrangement;
- Statement of company's affairs containing a list of creditors, debts, liabilities and assets;
- Statement of consent to act by the nominee;
- Details of the creditors; and
- Any other relevant information or documents that are required (which will differ on a case to case basis).
Procedure and effects of a Voluntary Arrangement:
- Upon the filing of the relevant documents in Court either by the directors, judicial manager, liquidator or official receiver, an automatic moratorium commences and remains in force for 28 days (during which no legal proceedings can commence against the company);
- The moratorium period may be extended for a further period of 32 days (in addition to the automatic 28 days, making the total moratorium period not more than 60 days) with the approval of 75% majority of creditors at a meeting and with the consent of the nominee and members of the company;
- The nominee is required to summon a meeting of the company and its creditors by issuing a notice of meeting to every creditor and member of the company;
- A company's meeting is required by simple majority of the members present and voting to approve the proposed voluntary arrangement;
- A creditor's meeting is also required with approval by 75% majority of the creditors meeting present and voting; and
- Upon approval, the voluntary arrangement takes effect and will be binding on all creditors.
Judicial management allows a distressed company or its creditors to apply for an order to place the company under the management of a qualified insolvency practitioner ("Judicial Manager"). The role of a Judicial Manager is to prepare and table a restructuring plan for creditor's approval.
Either the company itself, directors of the company or creditors of the company are eligible to make an application for judicial management. Licensed institutions, operators of a designated payment system regulated under the laws enforced by Bank Negara Malaysia or subject to the Capital Markets and Services Act 2007, and companies in liquidation are ineligible to make an application for judicial management.
Factors the Court will consider for Judicial Management:
(a) That the company is, or is likely to become, unable to pay its debts; and
(b) That the order is likely achieve one or more of the following purposes:
- the survival of the company, where the whole or part of its undertaking is a going concern;
- if it is a more advantageous realisation of the company's assets than on a winding up; or
- the interests of the creditors will be better served than a winding up.
Effects of a Judicial Management Order:
- An automatic moratorium order to stay legal proceedings for 180 days;
- Within 60 days, the restructuring plan will be tabled at the creditors' meeting;
- The approval level required is 75% in value of the creditor's claims accepted by the Judicial Manager; and
- Upon approval, the proposals tabled will be binding on all creditors.
It is often argued that, under the Companies (Corporate Rescue Mechanism) Rules 2018, unsecured creditors are not allowed to oppose a judicial management application with only secured creditors allowed to appear and oppose a judicial management application. The High Court decision in Million Westlink Sdn Bhd v Maybank Investment Bank Berhad & Ors 1 specifically did not allow the intervention of a secured creditor in a judicial management application.
However, on 10 June 2020, the High Court in Goldpage Assets Sdn Bhd v Unique Mix Sdn Bhd (unreported) held that unsecured creditors may intervene and oppose a judicial management application. It was held that the Companies Act 2016 does not prevent any unsecured creditor from attempting to oppose a judicial management application and that there is no restrictive wording or provision that only applies to secured creditors. Based on this decision, it would now appear that unsecured creditors may apply to intervene in a judicial management application under the Rules of Court 2012 instead. Nevertheless, this certainly raises a conflict or contradiction between both cases on whether an unsecured creditor may intervene in judicial management applications.
1  MLJU 1721
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.