The unprecedented health crisis brought on by the outbreak of COVID-19 pandemic has caused the world to be in a state of panic and such crisis has now been translated to an economic crisis. In the midst of facing low oil prices, political crisis and now, a pandemic, the global economy including Malaysia have also been greatly affected. In this time of crisis, companies especially the small and medium enterprises are finding it difficult to stay afloat as many companies are facing operational disruption and low demand.
Struggling companies may want to consider the need to restructure their debts by relying on corporate rescue mechanisms which are available under the Companies Act 2016 (“Act”). Restructuring of debt can be done via (a) a scheme of arrangement, (b) company voluntary arrangement, or (c) judicial management in accordance with the Act.
Scheme of Arrangement
A scheme of arrangement process may be used for insolvent and solvent companies for restructuring purposes. Section 366 of the Act allows the companies to propose a work out arrangement with its creditors in a court-ordered meeting. A scheme may also be initiated by a creditor, Member of the companies, liquidator or judicial manager. Under such scheme, the board of directors of the companies will still continue to manage the companies provided that the companies are not under judicial management or insolvency administration.
The applicant is required to seek an order of the court to convene meeting of the Members and various classes of creditors of the companies. When applying to the court to convene such meeting, companies often resorts to applying for an order restraining further proceedings in any action or proceeding for a period of three (3) months provided there is no winding-up order or resolution to wind up the company. Such period may be extended for up to nine (9) months. However, the companies must meet stringent criteria stipulated under Section 368 of the Act, failing which, the restraining order will not be granted by the court.
In order to achieve agreement to the terms of a scheme, a vote of seventy-five per centum (75%) of the total value of creditors or class of creditors and Members, or class or Members present and voting at the court-convened class meeting, either in person or by proxy, are required. A scheme that has achieved the aforementioned statutory voting majorities requires approval from the High Court.
Under the previous Companies Act 1965, a company in financial distress can only restructure by a scheme of arrangement under Section 176 of the Companies Act 1965. During the 1997 financial crisis in Malaysia, many financially distressed companies had utilised the scheme of arrangement under Section 176 of the Companies Act 1965 as a corporate rescue measure and the restraining order provisions to secure extended judicial protection from creditors’ actions. The provisions under Section 176 of the Companies Act 1965 also provides for adjustment of the rights of Members and creditors or reorganisation of the share capital of companies. As per Section 366 of the Act, a debt restructuring scheme under Section 176 of the Companies Act 1965 generally involves a compromise proposed between a company and its creditors or any class of them.
Judicial management is also another restructuring mode that involves court process. There will be a judicial manager who takes control of the management of the companies and prepares the restructuring proposal for consideration by creditors. Pursuant to Section 403 of the Act, companies that hold licenses under the Financial Services Act 2013 (“FSA”) and companies which are subject to the Capital Markets and Services Act 2007 (“CMSA”) are ineligible for judicial management.
The companies or the creditors may make an application for the appointment of a judicial manager and the applicant must show that it is unable to pay debts and there is a reasonable probability of preserving all or part of the company as a going concern, and that the interests of creditors would be better served than with a winding up. Upon application to the court, a moratorium sets in immediately and all legal proceedings against the company cannot continue. A judicial management order has an initial term of six (6) months. As such, the restructuring proposal must be put forward for the creditors’ approval during this period. The judicial manager may make an application to court for an extension of time of up to six (6) months.
If the proposal is accepted by seventy-five per centum (75%) of the majority of creditors in value whose claims have been accepted by the judicial manager, it binds all parties. Upon achievement of the judicial management, the judicial manager may apply to discharge the order. If a proposal is not approved at the creditors’ meeting, the court would normally discharge the order.
Corporate Voluntary Arrangement
The corporate voluntary arrangement is intended to be a quick and cost-effective mechanism with minimal court intervention. However, such procedure is only available to private companies and excludes companies that are holders of licenses issued under the FSA and the CMSA. Companies who have created a charge over their assets are also ineligible.
The management of the companies will still be in the control of the board of directors. The companies shall appoint a nominee who is a licensed insolvency practitioner to provide an opinion, amongst others, as to whether the proposed scheme is viable and whether it is likely to be accepted by the creditors. If the nominee is of the view that the scheme should be tabled for consideration by the creditors, a written opinion would be provided by the nominee and the nominee will file the documents setting out the terms of the proposed voluntary arrangement, a statement of assets and liabilities and a statement that the company is eligible for a moratorium. While the papers relating to the voluntary arrangement are filed in court, the court only acts as a depository of documents and there is no court hearing before the voluntary arrangement can take effect.
An automatic moratorium of twenty-eight (28) days sets in upon filing of the requisite papers. A meeting of creditors shall then be called within such moratorium period. If the proposal is voted in favour by seventy-five per centum (75%) in value of the creditors present or voting by proxy, the proposal will bind all parties.
Even though there are corporate rescue mechanisms provided under the Act, these modes are not exactly easy and friendly. The corporate rescue mechanisms provided under the Act require court’s approval or involving court’s process. There are also certain companies who will not be eligible for the mechanisms and this, will no doubt significantly reduce the availability of such mechanisms to the said companies. With the current situation in Malaysia, there will be a rise in the number of companies who will opt for the corporate rescue mechanisms. The courts will not be able to cope with such huge numbers and there may be a delay in the granting of order. The companies, especially the small and medium enterprises will suffer even more due to such delay. As such, a centralised agency should be established to deal with all viable restructuring methods to manage the numbers. A special administrator can be appointed to oversee the distressed businesses without having to obtain court’s approval.
In order to implement the availability of a centralised agency, an act of parliament should be urgently passed to provide assistance to the struggling companies. Such act will provide temporary relief measures to support businesses during this difficult time. The act should also address temporary relief from legal actions arising from the inability to perform obligations in contracts and freezing demands for payment for a period of time. Singapore has recently passed a similar act which is known as the COVID-19 (Temporary Measures) Act 2020 that came into force on 20 April 2020. This will also provide clarity and certainty to any legal issue arising from this pandemic.
It is uncertain as to when this pandemic will end. The World Health Organisation has warned that this virus may never go away and populations around the world will have to learn to live with it. Therefore, time is of the essence and it is important for companies to act quickly to minimise the impact the pandemic has on their businesses. It is also imperative for the government to take an action to pass a legally binding framework to assist companies to recover and emerge stronger during this tough time.