Covid-19 crisis: Restructuring and rescue options for businesses

Corporate Restructuring Services in Malaysia

(April 1): The coronavirus pandemic gives rise to the major risk of companies and small businesses going insolvent. In this article, I set out the restructuring and rescue options for businesses in Malaysia. They range from the new corporate rescue mechanisms in the Companies Act 2016 (CA 2016) for companies and the voluntary arrangement under the Insolvency Act 1967 (IA 1967) for sole proprietors.

Corporate voluntary arrangement — only for private companies with no secured debt

The CA 2016 introduced the corporate voluntary arrangement (CVA). The CVA is a relatively quick out-of-court process. The board of directors remain in management control of the company, but will work with an insolvency practitioner to draw up the CVA proposal.

First, the CVA can only be utilised by private companies and, in particular, where the company has no secured debt. This latter aspect has led to the criticism of CVA as a rescue tool and where we see the low usage of CVA. Distressed companies are likely to have obtained some form of financing and with some security having been created. Since its introduction in March 2018, only two companies have applied for CVA thus far.

Second, the debtor company will work with an insolvency practitioner to draw up the CVA proposal. Upon the filing of the necessary papers, an automatic moratorium applies to protect the debtor company. The moratorium prevents legal proceedings against the debtor company and also prevents a landlord from exercising any right of forfeiture and re-entering the premises.

Third, a meeting of the company’s creditors will have to be held within 28 days of the filing of the papers. At the meeting, the creditors will vote on the CVA proposal and 75% creditors’ approval will be required. Once passed, the proposal then becomes binding on all the creditors.

Judicial management — appears to be limited to unlisted companies

The CA 2016 introduced the second corporate rescue mechanism of judicial management. Judicial management would essentially place the management of a company into the hands of the court-appointed restructuring specialist.

Public-listed companies appear to be excluded from applying for judicial management. This is due to a particular restriction that “a company which is subject to the Capital Markets and Services Act 2007” cannot apply for judicial management (see section 403(b) of the CA 2016).

This has not been tested in the courts yet but it has largely been understood that public-listed companies fall within this restriction. With this restriction, ailing listed companies lose out on this corporate rescue option.

I set out some of the key features of judicial management.

 First, the filing of the court application for judicial management triggers an automatic moratorium. The moratorium will continue while the court application is still pending hearing and decision. This is an automatic feature of filing for judicial management as this gives the debtor company a few months of valuable breathing space.

Second, the application must demonstrate to the court that the company is insolvent or is near insolvency. Next, the court must be satisfied that the making of the judicial management order will essentially help to achieve the survival of the company or the restructuring of the company.

Third, any secured creditor can veto the judicial management application. This can be a disadvantage of judicial management as a rescue option.

Fourth, if the judicial management order is granted, the judicial manager has an initial term of six months to try to put forward a restructuring proposal to the company’s creditors. The moratorium protection continues on during the judicial management order.

Fifth, the judicial manager will seek to achieve 75% in value of the creditors’ approval for the proposal. Once approved, the proposal becomes binding on all the creditors.

Scheme of arrangement — for all companies

All companies can apply for a scheme of arrangement. Similar to the CVA, the board of directors remain in control of the company throughout the process.

There are three stages in a scheme of arrangement.

 At the first stage, the company applies to court for an order to hold meetings of the company’s creditors. The creditors must be classified into different classes based on their different legal rights. For instance, secured creditors into Class A and unsecured creditors into Class B.

At this stage, the company may also apply for a court order for an urgent moratorium known as a restraining order. However, unlike in CVA and judicial management, there is no automatic moratorium. It is difficult for the company to meet the four requirements for a restraining order and it would be very unlikely that any urgent moratorium can be obtained.

At the second stage, the company will hold the different meetings based on the creditor classes. The aim is to achieve 75% in value of creditors’ approval for each class.

At the third stage, the company applies to the court to sanction the scheme. The court will approve the scheme once it is satisfied that all the statutory requirements have been met. The scheme will then become binding on all the creditors listed in the scheme.

Credit Debt Restructuring Committee — in relation to bank creditors

Bank Negara Malaysia established the Credit Debt Restructuring Committee (CDRC) to act as a platform to allow for debtor companies and the financial institution creditors to work out a debt restructuring plan. This avoided the need to resort to formal court proceedings.

 The eligibility criteria are essentially:
1. The company having an aggregate debt of at least RM10 million and involving at least two financial institutions; and
2. The company is not dissolved, not in liquidation and not in receivership. There is an exception if receivers are appointed only over certain assets and the directors remain in control of the company’s operations.

Once CDRC has accepted the eligible company’s application, the banks shall observe a standstill. This is in effect a moratorium by the banks and applies until CDRC further advises.

As the CDRC platform only attempts to resolve bank debts, the company will still face claims from its other creditors. Therefore, the company would still have to consider other restructuring and rescue options.

Winding-up and interim liquidator

It may be that the company has failed in its restructuring options.

Alternatively, there are simply too many mounting creditor claims. The winding up of a company may be one option to preserve the remaining assets of the company and to allow a controlled sale of the company.

To assist in the preservation of assets, there can be the appointment of an interim liquidator. The appointment of an interim liquidator triggers a moratorium. This would help the company preserve its assets from piecemeal execution or other legal proceedings.

Where the company is wound up, there can still be continuation of the business of the company for a limited time. For example, in a court winding up, the liquidator can decide to continue with the running of the business of the company for six months. After that six months, the liquidator will need approval from the creditors (through the committee of inspection) or from the court.

If the company can be continued as an operating company, the liquidator would likely be able to carry out a sale at a better price.

Bankruptcy and voluntary arrangement

Many small businesses are sole proprietors. That means that the individual owner will be exposed to the risk of legal proceedings and eventually bankruptcy.

The IA 1967 contains a pre-bankruptcy rescue mechanism called the voluntary arrangement.

In applying for a voluntary arrangement, the individual debtor will appoint a nominee. The nominee is meant to act as independent professional to oversee and supervise the voluntary arrangement. The nominee can be a chartered accountant, an advocate and solicitor, or such other person to be determined by the Minister.

Next, the debtor files a court application for an interim order for voluntary arrangement. The interim order will only last for 90 days and cannot be extended. This interim order will act as a moratorium against bankruptcy petitions and other legal proceedings.

Within the 90-day interim order period, the nominee will hold a meeting of the creditors to try to secure their approval for the voluntary arrangement. The nominee needs to secure more than 50% in number and at least 75% in value of the creditors’ agreement.

However, the secured creditors’ rights cannot be affected without their consent. Once approved, the arrangement will be binding on all the creditors.

Possible Law Reform

As highlighted above, there are drawbacks or possible weaknesses in some of the above restructuring options. Some of the provisions may be too restrictive in a time where companies will now be fighting for survival.

One option would be to return to Parliament and to amend the CA 2016. But I would suggest that another option is a mechanism already built in the CA 2016.

 Section 615 of the CA 2016 allows the Minister, upon the recommendation of the Companies Commission of Malaysia, to exempt any person, corporation or class of corporations from all or any of the provisions of the CA 2016. Further, section 617 of the CA 2016 also allows the Minister to essentially vary or amend the Schedules to the CA 2016.

This opens the possibility of a temporary exemption period for companies to fully utilise all the corporate rescue options.

As one example, allow CVA to be utilised by all private companies regardless of whether the company has a charge over its property or not. Another example is to specifically exempt or to clarify that listed companies can apply for judicial management.

In balancing the distressed company’s survival with that of the creditors’ rights, the Court can be the guardian against any abuse of the provisions. There are already existing provisions for remedies against any abuse or prejudicial conduct against creditors’ rights.