A. SCHEME OF ARRANGEMENT (“SOA”)
- Application of SOA
Schemes of Arrangement is a compromise proposed between a company and its creditors or any class of them governed under Section 366 of the CA 2016. It is not exclusively intended for insolvent companies as it is also widely utilised by solvent companies for purposes of restructuring, while receiving the benefit of court-supervised restraining orders restricting various forms of recovery and enforcement actions against the company. The uses of SOA are not confined to debt restructuring of companies in financial distress, but, generally, are available to adjust the rights of members and creditors, reorganize the share capital of the company or perform a reconstruction or merger in the case of a group of companies.
- Procedure of SOA
(i) Firstly, a Court order on an application by either the company, any creditor or member of the company, liquidator or judicial manager (if the company is under judicial management), to summons for a meeting is to be obtained under Section 366 of CA 2016.
(ii) The scheme shall be put forth at the meeting of creditors to be agreed upon by a majority of 75% of total value of creditor or class of creditors present and voting, either in person or by proxy or at the meeting in accordance with Section 366(3) of CA 2016.
(iii) The company may then report this result to the Court in a subsequent application to the Court for approval of the scheme. Once approved by the Court, it becomes binding on all scheme creditors, including dissenting creditors as provided under Section 366(3) of the CA 2016.
- Power of the Court to appoint liquidator to assess viability of scheme of arrangement
In order to prevent the abuse of the moratorium provisions and to assess the viability of SOA, the Court has the power to appoint an approved liquidator under Section 367 of the CA 2016 to assess the viability of the scheme proposed for the compromise or arrangement and the liquidator is to prepare a report, of which is to be tabled in the court convened creditor’s or member’s meeting held to approve the scheme under Section 366 of CA 2016.
- Court Approval for SOA
Any scheme that has achieved the requisite statutory voting majorities still needs to be approved by the High Court, as the scheme derives its binding effect from the court order. In considering whether to approve the scheme, a Malaysian court will normally consider the following factors whether:
(i) all procedural requirements have been fulfilled;
(ii) the approved liquidator’s report had indicated that the scheme is viable;
(iii) the members or creditors had all the relevant and necessary information they would require to make an informed decision (for instance, information on effect of compromise or arrangement as required to be sent to or assessible by creditor or members under Section 369 of CA 2016); and
(iv) the scheme is sufficiently fair and reasonable that an honest and intelligent member or creditor, as the case may be, would approve it.
- Restraining Orders (“RO”)
A key feature of the SOA process is the availability of a court-granted restraining order that restrained all forms of legal action by creditors and other parties against the subject company, which granted the debtor company ample time to reach a compromise with its creditors.
- Requirements of RO
The grant of RO by Court to a company shall not exceed the period of three months but the period can be extended for not more than nine months by Court upon application by the company. In granting and/or extension of the RO, the company needs to strictly adhere to 4 requirements under Section 368(2) of CA 2016, namely,
(i) the proposal for scheme of arrangement must represent at least one half in value of all creditors;
(ii) that the RO is necessary to enable the SOA to be formalized for approval of creditors or members;
(iii) that a statement of affairs of the company be prepared up to 3 days before lodging of such application in court; and
(iv) approval of court of the person nominated by a majority of creditors to be a director of the company.
This was further confirmed in Barakah Offshore Petroleum Berhad & Anor v Mersing Construction & Engineering Sdn Bhd & Ors , in which the High Court held that the statutory conditions laid down in Section 368 (2) (a) to (d) of CA 2016 have to be complied with when applying for a restraining order.
- Effect of a RO
The benefit of RO is to restrain further proceedings by creditors and other parties in any action or proceeding against the company except by leave of the Court and subject to any terms as the Court may impose. While a restraining order is in force, the company is not permitted to dispose of any property or to acquire any new property other than in the ordinary course of its business, and if it does, the disposition or acquisition will be void as provided under Section 368(4) of CA 2016. Nevertheless, under Section 368(6) of CA 2016, the obtaining of a RO shall not affect any further proceedings in an action or proceedings that should be taken by the Registrar or Securities Commission or further proceedings in any action or proceeding against any person including the guarantor of the company.
- Procedures after obtaining RO
In accordance with Section 368(5) of the CA 2016, the Company shall within 7 days from the order lodge an office copy with the Registrar and publish a notice of the order in 2 local newspapers, namely, one in national language and another in English language.
B. CORPORATE VOLUNTARY ARRANGEMENT (“CVA”)
- Meaning and Purpose of CVA
CVA is a rescue or rehabilitation scheme initiated by a company which is in financial difficulties by proposing through a nominee, a scheme to its creditors. CVA allows cash-strapped private companies, who have not created a charge over their properties or undertakings, an opportunity to work out an amicable arrangement with their creditors, including the rescheduling of debts, with minimal court intervention. CVA is probably the simplest form of corporate rescue as unlike judicial management, there is no Court involvement for a CVA except for the filing of certain statutory forms and documents in Court. Neither is the board of directors displaced and the company business can be on-going as usual. CVA is useful to companies where time is needed to negotiate with its creditors or to find a white knight to save the company from being wound up.
- Non-application of CVA
In accordance with Section 395 of CA 2016, it must be noted that the CVA mechanism is not available to:
(i) public companies;
(ii) companies regulated by laws enforced by the Central Bank of Malaysia;
(iii) companies subject to the Capital Markets and Services Act 2007; and
(iv) companies which have created charges over its property or part of its undertaking
Thus, the CVA mechanism is not feasible as it has limited application only towards private companies which have not created charges over its property (i.e. with no secured debt).
- Proposal of CVA
In accordance with Section 396 of CA 2016, the CVA can be proposed by the directors of a company (which is not being wound up or under judicial management). A CVA can also be proposed by a liquidator or a judicial manager in cases where the company is being wound up or has been placed under judicial management.
- General Procedures of CVA
(i) The directors of the company will need to prepare and put forward the terms of the proposed arrangement (“the Proposal”) and appoint a Nominee to work with. To ensure the proposal is genuine and viable, Section 397 of CA 2016 requires the directors to appoint a licensed liquidator as a Nominee. The Nominee’s function is to assess the viability of the proposal and, if it is subsequently approved by the creditors, to act as a supervisor who oversees its implementation.
(ii) Once the Nominee is appointed, the Proposal together with the statement of company affairs are submitted to the Nominee for review and approval. If the Nominee is of the opinion that the Proposal is viable, then the documents setting out the terms of the CVA can be filed in Court.
(iii) Upon the filing of the documents in Court, an automatic moratorium applies and remains in force for 28 days in accordance with Eight Schedule of CA 2016. This moratorium is intended to protect the company from legal actions taken against it by its creditors while the Proposal is being considered. The effect of moratorium is as provided under Eight Schedule of CA 2016. The moratorium can be extended for not more than 60 days (with the approval of nominee and members of the company and obtaining 75% majority in value of creditors who are present and voting).
(iv) In accordance with Section 399 of CA 2016, while the moratorium is in force (within 28 days from filing in court), the Nominee shall summon a meeting of shareholders and a meeting of creditors to consider and approve the Proposal.
(v) In accordance with Section 400 of CA 2016, the Proposal must garner the approval of a simple majority of shareholders in a meeting of members and 75% of total value of the creditors present and voting in the creditors meeting. Once it is approved, the Proposal takes effect and is binding on all creditors of the company (including dissenting creditors).
Section 398 of CA 2016 provides that the moratorium in a voluntary arrangement commences automatically from the time of filing of certain documents by the company to the court and ends on the date the creditors’ meeting to approve the proposed voluntary arrangement called by the nominee unless further extended.
- Key Features and Advantages of CVA
(i) Appointment of a Nominee
The CVA scheme requires the Company to appoint a Nominee who shall be an insolvency practitioner to supervise the Proposal’s implementation and to opine on the viability of the Proposal put forward by the directors whether it has a reasonable prospect of being approved and implemented, whether the company is likely to have sufficient funds available during the proposed moratorium to enable the company to carry on its business and subsequently whether that the meetings of the company and its creditors should be summoned to consider the Proposal.
(ii) Directors Retain Executive Powers
The directors of the company retain their executive powers of the day-to-day management of the company. During the period of the moratorium, the Nominee has a duty of monitoring the affairs of the company to ensure that the company can sustain its business before the Proposal is approved. After the Proposal is approved, the Nominee’s main function is one of oversight and supervision. The Nominee is required to make the necessary distribution or payments to the company’s creditors in accordance with the terms of the Proposal.
(iii) No involvement of Court
The CVA mechanism the simplest of the 3 corporate rescue mechanisms available under the Companies Act 2016 as it does not require the Proposal to be approved by Court as it only requires the approval of 75% in value of the company’s creditors and a simple majority of the company’s shareholders. Aside from the requirements to file the documents outlining the terms of the Proposal to Court (for the moratorium to take effect), no further Court order is required for the Proposal to be implemented. Hence, it is a cost-effective mechanism for companies to restructure its debts with its creditors as the legal costs involved would be significantly lower.
(iv) Availability of a Moratorium
An automatic moratorium commences upon filing of Proposal in Court to protect the company from legal actions including winding-up proceedings, execution and enforcement of security. This moratorium or freezing of legal proceedings against the company would allow the company to be protected from having to defend multiple legal proceedings initiated by disgruntled creditors seeking to recover their debts from the company. Hence, it is cost-effective and the company be able to channel these resources into sustaining the business of the company while the Proposal is being approved.
The CVA scheme has limited application as it is restricted only to a private limited company (i.e. Sdn Bhd) which has not created any charge over its property or undertaking. A CVA moratorium generally provides additional time for smaller private companies to defer repayment and to carry on its business to facilitate the recovery from debts owed, rather than to go into liquidation directly.
C. JUDICIAL MANAGEMENT (“JM”)
- Definition and Purpose of JM
Judicial management is a court-supervised rescue procedure whereby a Court appointed judicial manager i.e. a licensed liquidator is tasked to come up with a rescue proposal for the company. Similar to the CVA, judicial management is aimed at giving viable companies in financial distress a chance to be rehabilitated and restored to profitability, maximising returns to creditors so that the number of cases in which companies are wound up are reduced.
- Non-Application of JM
In accordance with Section 403 of CA 2016, there are two categories of companies that are excluded from being placed under JM, ie:-
(i) Companies that are licenced and regulated by BNM; or
(ii) Companies that are subject to the CMSA.
- Proposal and Pre-conditions of JM
Section 404 of CA 2016 provides that either the board of directors or members or creditors of the company can apply to Court to place the company under judicial management if they consider that:-
(i) the company is or will be unable to pay its debts; and
(ii) there is a reasonable probability of rehabilitating the company or of preserving all or part of its business as a going concern or that otherwise the interests of creditors would be better served than by resorting to a winding up.
The above pre-conditions must be fulfilled by the applicant seeking for JM.
- The Substantial Test for Grant of JM Order by Court
The substantive test for judicial management is laid out in Section 405(1) of the CA 2016. Section 405(1) of CA 2016 inter alia provides that where a company or its directors, or a creditor, makes an application under Section 404, the court may make a judicial management order in relation to the company if:
(i) the Court is satisfied that the company is or will be unable to pay its debts; and
(ii) the Court considers that the making of the order would be likely to achieve one of more of the following purpose:
(a) the survival of the company, or the whole or part of its undertaking as a going concern;
(b) the approval under section 366 of a compromise or arrangement between the company and any such persons as are mentioned in that section;
(c) more advantageous realization of the company’s assets would be effected than on a winding up.
The aforementioned test is two-pronged. Firstly, the courts would have to be satisfied that the company is or will be unable to pay its debts. Reference should be made to Section 466 of the CA 2016 with regard to the definition of “inability to pay debts” of a company. Secondly, the applicant would have to prove to the Court that it meets one or more of the criteria stipulated in Section 405(1)(b) of the CA 2016. Consequently, as per Wong Chee Lin JC, the court merely needs to “consider” that there is a “real prospect” that one of those outcomes is achievable. Section 405(1)(b)(i) refers to the “the survival of the company … as a going concern.” The court in Leadmont held that the phrase “going concern” is interchangeable with the phrase “will continue its operations for the foreseeable future”. Therefore, the court will consider whether the making of the order would allow the company to continue its operations for the foreseeable future.
However, should an applicant not fall within Section 405 CA 2016, the court would still have the overriding power to make a JM order if it considers the public interest so requires as provided in Section 405(5)(a) of the CA 2016. As to what constitutes “public interest” is not defined in the Companies Act 2016, the court in Leadmont decided that “public interest” is to be determined on a case by case basis.
- Dismissal of Application of JM Order
After the application is filed, a 60-day interim moratorium will automatically be enforced. This interim moratorium allows for dissenting lenders and creditors to contest the judicial management application in court through their own solicitors.
Section 409 of CA 2016 provides that the Court shall dismiss an application for JM Order if it is satisfied that—
(a) a receiver or receiver and manager referred to in subparagraph 408(1)(b)(ii) has been or will be appointed; or
(b) the making of the order is opposed by a secured creditor.
Previously, only a debenture holder who can appoint a receiver or receiver and manager over the whole or substantially the whole of the company’s property may veto the appointment of a judicial manager. Pursuant to the Companies (Amendment) Act 2019, a secured creditor may veto the application for a judicial management order.
- General Procedure of JM
During the period between the application being made and either a judicial management order or dismissal of the application being made, there is a limited stay on certain types of creditor action. Section 410 of CA 2016 provides that
(a) no resolution shall be passed or order made for the winding up of the company;
(b) no steps shall be taken to enforce any charge on or security over the company’s property or to repossess any goods in the company’s possession under any hire purchase agreement, chattels leasing agreement or retention of title agreement, except with leave of the Court and subject to such terms as the Court may impose; and
(c) no other proceedings and no execution or other legal process shall be commenced or continued and no distress may be levied against the company or its property except with leave of the Court and subject to such terms as the Court may impose.
Following the judicial management order, a wider range of creditor action is restrained in addition to the restrictions of creditors’ actions as provided in Section 410 of CA 2016, for instance there shall be no appointment of receiver and manager, restriction of transfer of share of company and alteration of status of members. There is a good balance between protecting creditors and encouraging prospects of a rescue. In accordance with Section 406 of CA 2016, a JM order initially lasts for six months but can be extended for a further six months by the Court upon application by the judicial manager. Hence, a company can only be placed under JM for a maximum period of 12 months.
The appointment of a judicial manager displaces the directors. Pursuant to Section 420 of CA 2016, the judicial manager must within 60 days (which can be extended by the court) present a proposal to the creditors of the company and to summon a meeting of creditors to consider and vote on the proposal. Section 421 of CA 2016 provides that the voting threshold is 75 per cent in value of creditors whose claims have been accepted by the judicial manager, present in person or by proxy. Any proposal that is approved is binding on all creditors, regardless of how they voted. The judicial manager shall oversee the implementation of the proposal and have a duty to manage the affairs, business and property of the company in accordance with the proposal as stated under Section 423 of CA 2016. Section 414 of the CA 2016 provides that the general powers and duties of judicial manager includes all powers conferred and duties imposed on directors by CA 2016 or constitution of the company and power as specified in Ninth Schedule. Once the purpose of judicial management has been achieved, he or she may apply to discharge the order. If a proposal is not approved at the creditor meeting, the court would normally discharge the judicial management order, and either receivership or liquidation beckons.
JM which is helmed by a licensed liquidator i.e. an independent third party is an attractive option for creditors who lost the confidence or trust in the directors’ ability or willingness to do so. After all, a company’s financial predicament is often caused by the directors’ poor management of the company’s business.
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