The
Companies (Amendment) Act 2024 (“
Amendment Act”) came into operation on 1 April 2024, with the exception of four provisions.
1
The Amendment Act, among others, introduces a framework for reporting of beneficial ownership of companies and enhances the existing provisions on schemes of arrangement and reconstruction, and corporate rescue mechanisms in the Companies Act 2016 (“
Principal Act”).
In the
press release issued on 13 October 2023, the Companies Commission of Malaysia stated that the Amendment Act “
aims to introduce provisions to accord a more comprehensive framework at par with international practices to ensure that scheme of arrangements and compromise could be used as a more effective rehabilitation tool for companies facing financial difficulties”.
We will provide a summary of the main amendments that are introduced under the Amendment Act in our two-part article. Part 1 examines the new framework for the reporting of beneficial ownership of companies, whilst this Part 2 highlights the key amendments to the restructuring and insolvency laws under the Principal Act.
2
Amendments relating to scheme procedure
First, pursuant to the new section 366(2A) of the Principal Act, the scheme meeting shall be chaired either by an insolvency practitioner appointed by the Court under section 367(3) or if no insolvency practitioner as aforesaid has been appointed, by a person elected by the majority in value of the creditors or class of creditors or members or class of members.
The law as it stood previously did not expressly provide who is to be the chairperson of the scheme meeting. The chairperson is typically appointed by the applicant scheme company, hence raising concerns as to the impartiality of the appointee.
Second, pursuant to the new section 369A(1), the Court will have the power to order the company to hold another scheme meeting of the creditors or class of creditors for the purpose of putting the scheme to a revote, subject to such terms as the Court thinks fit. For the purposes of voting at the further meeting, the Court may also make provisions in respect of, among others, the classification of any creditor, the amount of any creditor’s debt to be admitted and the weight to be attached to the vote of any creditor (new sections 369A(2)(b) to 369A(2)(d)).
If the Court does make an order for a revote, the scheme meeting shall be chaired either by an insolvency practitioner appointed by the Court under the new section 367(3) or if no insolvency practitioner as aforesaid has been appointed, by a person elected by the majority in value of the creditors or class of creditors or members or class of members.
Third, the new section 369B now sets out extensively the procedure to be followed
vis-à-vis the proof of debt process. For instance, under the new section 369B(2), if a creditor does not file its proof of debt in the manner and within the period stated in the notice summoning the meeting, the creditor is not allowed to vote, whether in person or by proxy, at the meeting. However, the Court may, on an application made by the scheme company or the creditor, grant an order extending the period stated in the notice summoning the meeting for the proof of debt to be filed. This would put to rest the question of whether a scheme chairman has the power to extend the time for filing of proof of debt without the Court’s approval, an issue which was raised in the High Court case of
Top Builders Capital Bhd & Ors v Seng Long Construction & Engineering Sdn Bhd & Ors [2022] 8 MLJ 604 (“
Top Builders”).
The new section 369B(6) confers a right on a creditor who has filed a proof of debt to inspect the whole or any part of a proof of debt filed by any other creditor, provided that the proof of debt does not contain any information that is subject to any obligation as to secrecy. In
Top Builders, the High Court agreed with the Singapore Court of Appeal in the case of
The Royal Bank of Scotland NV (formerly known as ABN Amro Bank NV) and others v TT International Ltd and another appeal [2012] 2 SLR 213 that a scheme creditor is only entitled to examine the proofs of debt submitted by other scheme creditors if he had produced
prima facie evidence of impropriety in the admission or rejection of the proofs of debt. This requirement has been omitted from the new section 369B(6).
Fourth, pursuant to the new section 369D, the Court has the power, upon application by a scheme company or a creditor who is bound by the scheme that has been sanctioned, to clarify the terms of such scheme. The Court also has the powers to grant certain orders in cases where the scheme company has committed an act or omission, or made a decision that results in any breach of the terms of the sanctioned scheme.
Amendments to provisions pertaining to restraining order under a scheme of arrangement
A restraining order is typically seen as an important tool to allow a company in distress to preserve its assets and allow it to focus its efforts and resources to restructure and rehabilitate itself. However, a restraining order has also been subject to abuse where the applicant company applies for a restraining order over an extended period without a genuine scheme being proposed.
There is also the question of the types of proceedings which are restrained.
The Amendment Act introduces amendments that address the above concerns.
First, the types of proceedings and actions to be restrained are specifically set out in the new sections 368(1A) and 368(3A). This differs from the existing section 368(1) of the Principal Act which merely provides that “
the Court may, in addition to any of its powers, on the application in a summary way of the company or any member or creditor of the company, restrain further proceedings in any action or proceeding against the company” without explaining what are the types of proceedings or actions to be restrained.
Second, the Amendment Act now provides for an automatic restraining order which will take effect upon the filing of an application for a restraining order. This automatic restraining order will take effect for a period of two months or until the application for a restraining order is decided by the Court, whichever is earlier (new section 368(1A)).
Third, there is also no longer a need for the pre-conditions under the existing sections 368(2)(a) to 368(2)(d) of the Principal Act to be fulfilled for the initial automatic restraining order. Under the current law, the High Court has confirmed in numerous cases that for the initial grant of a restraining order in a scheme of arrangement, the applicant must meet all the pre-conditions set out in section 368(2) of the Principal Act. These pre-conditions place distressed companies with a challenging hurdle in obtaining urgent moratorium protection.
Fourth, a restraining order can also now be extended to a related company (i.e. a company which is a subsidiary, holding company or an ultimate holding company of a scheme company) if the Court is satisfied that, among others, the related company plays a necessary and integral role in the scheme (new section 368A(3)). This appears to be a codification of case laws where the Court has allowed a restraining order to be extended to a related company. For example, the High Court in the case of
Sentoria Bina Sdn Bhd v Impak Kejora Sdn Bhd & Ors [2021] 12 MLJ 690 had held that the current section 368(6)(b) does not prohibit a restraining order from extending to a guarantor where the guarantor is “
an integral component to the scheme to the extent … that the proposed scheme would not be workable without” the guarantor.
Finally, the new section 368(3B) does not allow the Court to grant a further restraining order if a restraining order has already been granted within the preceding period of 12 months. This means that there will be a cooling off period of 12 months before the next restraining order can be granted.
The new pre-pack scheme of arrangement
The new section 369C introduces what is known as the pre-pack scheme of arrangement which essentially allows the Court to sanction a scheme of arrangement without a scheme meeting. What this means is that instead of having to make two applications to the Court, the scheme company will have to make only one application to the Court for sanction/ approval.
As a pre-pack scheme of arrangement does not involve a scheme meeting, it typically involves a scheme which has been pre-negotiated and agreed by the major creditors of the scheme company.
In order for the pre-pack scheme to be sanctioned/ approved by the Court, the scheme company must, among others, make all the necessary disclosures on the proposed scheme to the affected creditors and the Court must be satisfied that had a meeting of the creditors or class of creditors been summoned, the scheme would have been approved by the requisite majority.
A pre-pack scheme of arrangement is intended to generate significant savings in terms of time and costs.
In Singapore, pre-pack schemes of arrangement first came into force on 23 May 2017. The new section 369C contains provisions that are similar to the pre-pack scheme of arrangement provisions contained in section 71 of
Singapore’s Insolvency, Restructuring and Dissolution Act 2018.
The new cross-class cramdown mechanism in schemes of arrangement
In a scheme of arrangement, creditors must be separated into different classes based on their rights. Typically, a scheme can only be successfully implemented if the requisite majority of all the different classes of creditors vote in support of the scheme.
With the cross-class cramdown mechanism introduced by the new section 368D, as long as there is at least one class of creditors who has voted in favour of the scheme, there can be an application to the Court to bind all the other dissenting classes of creditors of the scheme, provided that the following requirements are met: It is pertinent to note that for the purposes of calculation of votes under the new section 368D(3)(a), the votes are not split according to the different classes.
The factors to be considered in deciding whether the scheme is fair and equitable to a dissenting class are set out in the new section 368D(4).
Involvement of insolvency practitioner in schemes of arrangement
A scheme is typically drawn up with the assistance of the scheme company’s own financial advisers. Scheme creditors may not be equipped to assess the viability of the proposed scheme. This is why it is important for an independent court-appointed insolvency practitioner to be involved. Under the existing section 367(1) of the Principal Act, the Court may, on an application for approval of a scheme, appoint an approved liquidator to assess the viability of the proposed scheme and the approved liquidator shall prepare a report for submission to the applicant.
The Amendment Act puts in place further enhancements vis-à-vis the involvement of insolvency practitioners in schemes of arrangement.
First, the new section 367(3) imposes a mandatory obligation on the Court to appoint an insolvency practitioner in cases involving the following:
Second, where it is mandatory for the Court to appoint an insolvency practitioner, the said insolvency practitioner shall also be the chairperson of the scheme meeting (new section 366(2A)).
Third, under the new section 367(4), the court-appointed insolvency practitioner shall have the right to access to all records of the scheme company at all reasonable times and is entitled to require from any officer of the scheme company any information and explanation as he may require for the purposes of his duty.
The new super priority rescue financing under schemes of arrangement and judicial management
The Amendment Act (in particular, the new sections 368B and 415A) introduces the concept of super priority rescue financing
vis-à-vis schemes of arrangement and judicial management.
Super priority rescue financing allows rescue financiers to obtain better priority or security over other creditors of the company in distress. With this, financiers may be more willing to provide companies in distress with further financing.
There are three types of priority or security which the Court can grant where the company in distress is to receive rescue financing.
First, the Court can order that the debt arising from any rescue financing obtained by the company in distress shall be paid immediately after the costs and expenses of the winding up has been paid. This priority sits above preferential debts (new sections 368B(1)(a) and 415A(1)(a)).
Second, the Court can make an order to secure a debt arising from any rescue financing by the creation of security over unsecured assets (new sections 368B(1)(b) and 415A(1)(b)).
Third, the Court can make an order to secure a debt arising from any rescue financing by the creation of security interest of the same priority or even higher priority over existing security provided that the interests of the existing security interest holder are adequately protected (new sections 368B(1)(c) and 415A(1)(c)).
Amendments to judicial management
There are two main amendments to the judicial management mechanism.
First, section 403 of the Principal Act is amended to preclude the following types of companies from applying for judicial management: (i) a company which is a licensed institution or an operator of a designated payment system regulated under the laws enforced by the Central Bank of Malaysia; (ii) a company which is approved or registered under Part II, licensed or registered under Part III, approved under Part IIIA, or recognised under Part VIII of the Capital Markets and Services Act 2007; and (iii) a company which is approved as a central depository under Part II of the Securities Industry (Central Depositories) Act 1991.
Prior to the above amendment, section 403(b) provided that a company which is subject to the Capital Markets and Services Act 2007 is precluded from applying for a judicial management order. There have been debates as to what amounts to a company which is subject to the Capital Markets and Services Act 2007, in particular, whether public listed companies would fall under the definition.
The Court of Appeal confirmed in
Re Scomi Group Bhd [2022] 7 MLJ 620 that public listed companies do fall within the category of a company that is subject to the Capital Markets and Services Act 2007, and hence, are precluded from applying for a judicial management order.
With this amendment, only public listed companies that come within the categories of companies set out in section 403 will be precluded from applying for judicial management.
Second, an amendment to section 406 gives the Court discretion to extend a judicial management order for more than six months. This would be useful in cases where there is a genuine proposal to turn the distressed company around but more time is required.
Restriction on the exercise of rights to terminate a contract
It is common for contracts to contain clauses which gives a counterparty the right to terminate the contract in the event a party is involved in insolvency proceedings.
The new section 430A provides for some form of restriction to a counterparty’s right to terminate the contract insofar as the contract relates to the supply of essential goods and services. The list of essential goods and services is set out in the new Ninth A Schedule, namely the supply of water, electricity or gas, point of sale terminals, computer software and hardware, information, advice and technical assistance in connection with the use of information technology, data storage and processing and website hosting.
A supplier who wishes to exercise his rights to terminate a contract involving the supply of essential goods or services due to the company being involved in an insolvency related proceeding must inform the company in writing of his intention of preserving his rights under the insolvency related clause at least 30 days before exercising his right under the insolvency related clause (new section 430A(2)).
Deferred enforcement
Companies excluded from corporate voluntary arrangement mechanism
The existing section 395 of the Principal Act specifically excludes the following companies from undergoing a corporate voluntary arrangement:
When the amendment to section 395 comes into operation, a public company which does not come within the three categories of companies listed in the amendment to section 395, and any company, whether private or public, which creates a charge over its property or any of its undertaking will not be precluded from using the corporate voluntary arrangement mechanism. This will significantly enhance the utility of the said mechanism.
Comments
While the amendments under the Amendment Act mirror the current restructuring and insolvency framework in Singapore, one significant difference is the provision on the restriction on the right to terminate a contract relating to the supply of essential goods or services. In this regard, the restriction in the new section 430A is considered to be mild when compared to section 440(1) of Singapore’s Insolvency, Restructuring and Dissolution Act 2018, which restricts the ability of contractual counterparties to terminate or amend, or claim an accelerated payment under any agreement with the company by reason only of the insolvency of the other party or the commencement of insolvency proceedings.
In some cases, the continuation of certain contracts would be essential to the survival of the company in distress. To allow a party to unilaterally terminate such contracts by reason only of the insolvency of the company or the fact that the company is involved in insolvency proceedings, would no doubt hamper a company’s efforts to restructure or to turn around. If the new section 430A is to properly support the rehabilitation efforts of distressed companies, it should contain provisions that mirror section 440(1) of the Singapore’s Insolvency, Restructuring and Dissolution Act 2018.
Overall, the amendments introduced under the Amendment Act to the restructuring and insolvency provisions in the Principal Act are welcome.
Article by Janice Ooi (Partner) of the Restructuring and Insolvency Practice of Skrine.