Malaysia: insolvency and restructuring under the Companies Act 2016

Summary

There have been welcome developments in the law governing corporate restructuring and insolvency introduced by the new Malaysian Companies Act 2016.

The new Companies Act marks major legislative changes to Malaysian corporate law. Two significant developments introduced under the Companies Act 2016 relate to judicial management and corporate voluntary arrangements.

Judicial management

A company facing imminent insolvency proceedings may now resort to judicial management, a concept which has long been available in other common law countries. This provides a temporary reprieve from debt recovery proceedings.

In this procedure, the management of a company hands over its duties to an independent court-appointed judicial manager. For a company to obtain a judicial management order, the court must be satisfied that the following are fulfilled:

• The company is or will be unable to pay its debts;
• There is a reasonable probability of rehabilitating the company’s finances and operations; and
• It would be more beneficial, in the interest of creditors, than resorting to winding up proceedings.

Where the above requirements have been fulfilled, the court is empowered to grant a judicial management order which is valid for a period of six months; this may be extended for a further six months. Upon the granting of such order, the court-appointed judicial manager takes control of the company’s affairs, business and property in order to prepare a restructuring scheme which is then presented to creditors for their approval. A protection automatically available to a company upon submission of a judicial management application to court is a moratorium on all enforcement proceedings.

The judicial manager will prepare a scheme for creditors’ approval for which a 75% majority sanction is required.

Corporate voluntary agreements (CVA)

This is a new provision where the company can enter into a compromise or arrangement with its creditors under the supervision of an insolvency practitioner with minimal court intervention.

This corporate voluntary arrangement is not applicable to public companies; licensed institutions or operators of a designated payment system regulated by Bank Negara Malaysia; companies which are subject to the Capital Markets and Services Act 2007 or companies with encumbered assets.

The application for a corporate voluntary arrangement must be lodged with the courts via a proposal by either the directors of the company; or the liquidator; or a judicial manager. Upon such application, an automatic moratorium on any creditor action is imposed. The moratorium ends on the day the meeting of creditors is called unless extended for a period of up to 60 days with the consent of 75% majority in value of creditors present at the meeting of creditors.

The proposal for a corporate voluntary arrangement has to be accompanied by a statement of an insolvency practitioner who has agreed to act as a nominee. This should indicate whether or not, in his or her opinion, the debt restructuring proposal has a reasonable prospect of being approved and implemented, and whether the company is likely to have sufficient funds during the proposed moratorium to carry on business. The nominee would then call for a creditors' meeting to obtain a 75% majority vote in support of the proposal. Once approved, the proposal becomes binding on all creditors and members, and the nominee or another insolvency practitioner functions as the supervisor of the voluntary arrangement to see to its implementation.

Other developments

Refinement of winding up provisions

• The debt threshold for statutory demands by a creditor to wind up a debtor has increased from RM500 to RM10,000 to avoid trivial claims.
• The period during which a liquidator may carry on the business of the company after the date of the winding up order has increased from four weeks to 180 days.
• A liquidator can make necessary payments in carrying on the affairs of the company e.g. utility bills and statutory fees.
• A liquidator can appoint an advocate to assist in his/her duties.

Enhancement of provisions on arrangements and reconstructions

• An approved liquidator may be appointed by the court to assess the viability of the proposed scheme or arrangement.
• Extension of the court-granted restraining order is limited to 12 months to prevent potential abuse. An applicant may seek for an initial three month restraining order which may be extended up to a further nine months only.
• The court-granted restraining order is not applicable against the Registrar or Securities Commission Malaysia.

Enhancement of creditors' rights

• The threshold of priority payments in respect of employees’ wages has increased from RM1,500 to RM15,000 in a receivership or winding up. This is seen as an increased social obligation of a company for the welfare of its employees.
• Recognition of employee social security contributions as part of the priorities with respect to contributions payable in a receivership or winding up.
• Introduction of statutory rights for secured creditors, allowing such parties to better realise and/or deal with the security on the charged asset in the event of winding up. Secured creditors are allowed to deal with the assets through realisation or valuation of the asset.
• Secured creditors have the power to veto an application for a judicial management order and seek instead to proceed with the appointment of a receiver or receiver and manager, subject to the following:
• the overriding discretion of the Court to make a judicial management order if public interest requires it and, if appropriate, to appoint an interim judicial manager; and
• the moratorium that would be in place from the time an application is made for a judicial management order until the grant or dismissal of the order.