Corporate Insolvency, Corporate Rehabilitation and Receivership

Lee Shih and Nathalie Ker highlight the main changes to the corporate insolvency and rehabilitation procedures under the Companies Act 2016.

The Companies Act 2016 (“Act”) was gazetted on 15 September 2016. It will come into operation on a date to be appointed by the Minister, which is expected to be in 2017 and replace the Companies Act 1965 (“Existing Act”). The Act is based on the recommendations made by the Corporate Law Reform Committee (“CLRC”) back in 2008 and takes into account feedback received on an exposure draft released by the Companies Commission of Malaysia in 2013.
This article will highlight areas of the Act which will reform the existing areas of receivership, winding up and schemes of arrangement. It will also discuss the new mechanisms of the judicial management scheme and the corporate voluntary arrangement which are being introduced to better promote a corporate rehabilitation framework.
The receivership provisions in the Act substantially expand on the existing provisions in the Existing Act. Sections 375 and 376 of the Act set out the manner of appointing a receiver or a receiver and manager (“R&M”) under an instrument or by the Court.
Section 375(2) of the Act expressly sets out the agency status of a receiver or an R&M appointed under a power conferred by an instrument. The present legal position is that a receiver or R&M becomes an agent of the debtor company by virtue of the inclusion of provisions to that effect in the debenture under which he is appointed. The codification of the agency status of the receiver and R&M helps to remove some of the present ambiguities on the status of the receiver or R&M.
In the case of a Court appointment, section 376 of the Act lists out three specific grounds upon which the Court may appoint a receiver or R&M, which are essentially where the company has failed to pay a debt due to a debenture holder, or the company proposes to sell the secured property in breach of the charge, or it is necessary to do so to preserve the secured property. The common law right to appoint a receiver or R&M has been expressly preserved by section 376(4) of the Act.
Personal Liability of the Receiver and R&M
Sections 381 and 382 of the Act deal with the liability of the receiver or R&M. The receiver or R&M is to be liable for debts incurred by him or other authorised person in the course of the receivership or possession of assets unless otherwise provided in the instrument appointing the receiver or R&M.
Similarly, a receiver or R&M is personally liable for a contract entered into by him in the exercise of any of his powers unless specifically provided otherwise in his instrument of appointment. The terms of a contract may however exclude or limit the personal liability of the receiver or R&M appointed under an instrument but this is not applicable to a receiver or R&M appointed by the Court.
Powers of Receiver and R&M
Section 383 of the Act introduces a welcomed codification of the express powers of a receiver or R&M which are set out in the Sixth Schedule of the Act. Presently, a receiver or R&M appointed through a debenture derives his powers solely from the provisions of that instrument and it is not uncommon to encounter situations where the powers listed in the debenture are inadequate or ambiguous.
This codification of a minimum list of default powers exercisable by a receiver or R&M is in line with the approach taken in the United Kingdom, Australia and New Zealand.
Presentation of a Petition
Section 466(1)(a) of the Act empowers the Minister to prescribe the threshold of the debt for the statutory demand in order for a company to be deemed unable to pay its debts for the purposes of a compulsory winding up. The threshold of RM500.00 under the Existing Act is likely to be increased to RM5,000.00.
Further, section 466(2) of the Act requires a winding up petition to be filed within six months from the expiry date of the statutory demand. The aim of this is to reduce the possibility of the statutory demand being abused and to prevent the threat of a winding up petition from continuing to hang over the debtor company for an inordinately long period of time.
Powers of Liquidators
The powers of the liquidator in a court winding up are set out in section 486 read with the Twelfth Schedule of the Act. Part I of the Twelfth Schedule lists out the powers that the liquidator may exercise without the authority of the Court or the committee of inspection (“COI”) while Part II of the Twelfth Schedule lists out the powers that may be exercisable only with the aforesaid authority.
In particular, the Act permits a liquidator to carry on the company’s business so far as necessary for the beneficial winding up of the company for a period of 180 days after the making of the winding up order. Thereafter, the liquidator must obtain the authority of the Court or the COI to continue with the carrying on of such business. This is a welcomed increase from the present period of only four weeks allowed under the Existing Act.
Termination of Winding Up
Under the Existing Act, the only way in which a winding up order can be brought to an end is through an order for a stay of winding up under section 243. In considering whether to grant a stay, the Court would take into account factors such as the interests of the creditors and liquidator and whether it is conducive or detrimental to commercial morality.
In addition to the power to stay a winding up under section 492, the Act introduces a new section 493 which allows the Court to terminate the winding up of a company. In determining whether to terminate a winding up, the Court may consider various factors, such as the satisfaction of the debts, the agreement by both parties, or other facts as it deems appropriate. This allows for an easier and more definitive route to bring to an end the winding up where the debtor company has satisfied the debts owing to the petitioning creditor.
The scheme of arrangement provisions remain largely the same except for three of the more significant changes reflected in the Act.
Additional Safeguard of Independent Assessment
Section 367 introduces an additional safeguard to the scheme of arrangement framework by allowing the Court, upon application, to appoint an approved liquidator to assess the viability of a proposed scheme. This would enable an independent professional in the field of insolvency to determine the viability of the scheme and take into account the interests of all stakeholders.
Extension of the Restraining Order
For the extension of a restraining order, section 368(2) provides that the Court may grant a restraining order for a period of not more than three months and may extend this period for not more than nine months if the prescribed requirements are met. This would give effect to the CLRC’s recommendation that the maximum period of a restraining order should be a year.
Restraining Order Will Not Extend to Regulators
Section 368(6) makes it clear that a restraining order which restrains further proceedings against the company except by leave of the Court will not apply to any proceeding taken by the Registrar of Companies or the Securities Commission Malaysia. It is not clear if this would extend to restraining delisting proceedings taken by Bursa Malaysia against a public listed company.
The judicial management mechanism, modeled after the Singapore model, is a new component under the Act to provide a further option to rehabilitate a financially distressed company. It allows a company or its creditors to apply for an order to place the management of a company in the hands of a qualified insolvency practitioner. A moratorium would give the company temporary respite from legal proceedings by its creditors. The moratorium applies automatically from the filing until the disposal of the judicial management application and also while the judicial management order is in force.
Excluded Companies
Section 403 of the Act provides that the judicial management scheme cannot apply to a company which is a licensed institution or an operator of a designated payment system regulated under the laws enforced by Bank Negara Malaysia or a company which is subject to the Capital Markets and Services Act 2007.
Requirements for the Grant of a Judicial Management Order
The Court is empowered under section 405 of the Act to grant a judicial management order if and only if -
  1. it is satisfied that the company is or will be unable to pay its debts; and
  2. it considers that the making of the order is likely to achieve one or more of the following purposes -
    1. the survival of the company or the whole or part of its undertaking as a going concern;
    2. the approval of a compromise or arrangement between the company and its creditors;
    3. a more advantageous realisation of the company’s assets would be effected than on a winding up.
The judicial management order shall, unless discharged, remain in force for 6 months and may be extended on the application of the judicial manager for another 6 months.
Right of Veto
Section 408(1)(b)(ii) of the Act requires the notice of a judicial management application to be provided to any person who has appointed, or may be entitled to appoint, a receiver or an R&M of the whole or a substantial part of the company’s property under the terms of any debentures of a company.
Section 409 of the Act requires the Court to dismiss a judicial management application where it is satisfied that a receiver or an R&M referred to in section 408(1)(b)(ii) has been or will be appointed, and where the making of the order is opposed by a secured creditor.
However, the Explanatory Statement of the Bill presented in Parliament explains that section 409 is intended to allow for the dismissal of the judicial management application if the receiver or R&M is or will be appointed or where the application is objected by a secured creditor.
With the present use of the word ‘and’ in section 409, the exercise of the right of veto requires the debenture holder to appoint a receiver or R&M. It is a mandatory element to trigger the veto. If the word ‘or’ was used instead, then it widens the right of veto which can be triggered either when the debenture holder has appointed the receiver or R&M, or where there is opposition by a secured creditor (e.g. a secured creditor who holds a fixed charge or mortgage).
Approval of Judicial Manager’s Proposal
Section 420 of the Act provides that a judicial manager has 60 days (or such longer period as the Court may allow) to send to the Registrar, members and creditors of the company a statement of his proposal for achieving the purposes for which the order was made and to lay a copy of this statement before a meeting of the company’s creditors.
As a meeting of the creditors must be summoned on not less than 14 days’ notice, the judicial manager effectively only has a short period of 46 days to come up with the proposal to rehabilitate the company unless he applies to the Court for an extension of that time.
Section 421(2) of the Act requires a judicial manager’s proposal to be approved by creditors present and voting who hold 75% in value of the claims which have been accepted by the judicial manager. Once approved by the required majority, the proposal binds all creditors of the company, whether or not they had voted in favour of the proposal.
The corporate voluntary arrangement (“CVA”) is modeled after the corresponding provisions of the UK Insolvency Act. The CVA is a procedure which allows a company to put up a proposal to its creditors for a voluntary arrangement. The implementation of the proposal is supervised by an independent insolvency practitioner who would report to the Court on the viability of the proposal. There is minimal Court intervention in the process.
Excluded Companies
In the same vein as section 403 of the Act, section 395 provides that the CVA cannot be carried out in a company which is a licensed institution or an operator of a designated payment system regulated under the laws enforced by Bank Negara Malaysia, and a company which is subject to the Capital Markets and Services Act 2007.
In addition, the CVA cannot be carried out by a public company or a company which creates a charge over its property or any of its undertaking. The exclusion of the last group of companies may significantly reduce the efficacy of the CVA as a restructuring option as it is likely that many financially distressed companies would have charged some or all of their assets as security for borrowings.
Initiation of CVA
To initiate a CVA, the directors would have to submit to the nominee, being a person who is qualified to be appointed as an approved liquidator, a document setting out the terms of the proposed voluntary arrangement and a statement of the company’s affairs.
Under section 397(2) of the Act, the nominee is then required to submit to the directors a statement indicating whether or not in his opinion -
  1. the proposed CVA has a reasonable prospect of being approved and implemented;
  2. the company is likely to have sufficient funds available for it during the proposed moratorium to enable the company to carry on its business; and
  3. the company should convene meetings of its members and creditors to consider the proposed CVA.
Under section 398 of the Act, once the directors have received a positive statement from the nominee, they can then file this statement with the Court together with the other necessary documents, such as the nominee’s consent to act and the document setting out the terms of the proposed CVA.
Moratorium and Required Majority to Approve the Proposal
Upon the filing of the relevant documents pursuant to section 398, the Eighth Schedule of the Act provides that a moratorium commences automatically and remains in force for 28 days during which no legal proceedings can be taken against the company. It is meant to give some breathing room for the company from creditors’ legal proceedings.
Upon the moratorium coming into force, section 399 of the Act requires the nominee to summon a meeting of the company and its creditors within 28 days of the date of the filing of the documents in Court, as specified in the Eighth Schedule.
At the company’s meeting, a simple majority is required to approve the proposed CVA while at the creditors’ meeting, the required majority is 75% of the total value of the creditors present and voting. With such approval, the CVA takes effect and binds all creditors. The aim of the CVA is that it should apply only to the restructuring of unsecured debts of a company and cannot affect the right of a secured creditor to enforce its security.
If more time is required for the stakeholders to decide on a proposal, the moratorium period can be extended for a further period not exceeding 60 days with the approval of 75% majority in value of the creditors at a meeting and with the consent of the nominee and the members of the company.
The Act will bring many welcomed changes in revamping the corporate insolvency and rehabilitation framework in Malaysia when it comes into force. Companies will have more options in this area that have long been available to companies in foreign jurisdictions such as the United Kingdom and Singapore. It remains to be seen how some areas of the Act will be clarified through case law.