COVID-19 crisis: Corporate Rescue Mechanisms
As the COVID-19 crisis continues to take its toll on the economy, many companies that are facing financial difficulties have been exposed to the risk of insolvency. In the current climate, there is no doubt that struggling companies would have to resort to some form of corporate restructuring in order to avoid being liquidated. The Companies Act 2016 (“CA 2016”) provides two option of corporate rescue mechanism to rehabilitate the businesses of distressed companies.
1) Corporate Voluntary Arrangement (CVA)
The CVA mechanism enables a company facing financial difficulties to enter into a plan or a debt restructuring agreement with its creditors with minimal Court intervention. The application of a CVA imposes an automatic moratorium on any legal action by creditors which would remain in force for 28 days (and may be extended up to a maximum period of 60 days from the commencement of the moratorium).
Section 395 of the CA 2016 provides that CVA shall not be applicable to:-
- a public company;
- 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;
- a company which is subject to the Capital Markets and Services Act 2007; and
- a company which creates a charge over its property or any of its undertaking.
By such design, this mechanism can only be utilised by private limited companies which do not have their properties or undertakings charged to another entity.
Initiating a CVA
The proposal for CVA may be prepared by the company directors, judicial manager or liquidator (as the case may be). This proposal would include an appointment of a nominee, who is a qualified insolvency practitioner to assess the prospect of the proposal being implemented and whether the company is likely to have sufficient funds available during the proposed moratorium to carry on its business.
Once the nominee lodges the proposal in Court, the moratorium on legal actions by creditors is automatically imposed. This moratorium essentially suspends the power of creditors to take legal action against a company, including but not limited to the initiation of winding up proceedings. Further, no steps may be taken to impose any security over the company’s property or to repossess goods in the company’s possession under any hire-purchase agreement, except with the leave of the Court.
When a moratorium is in force, a meeting for creditors and shareholders shall then be held to discuss the proposal. In the case of a creditor’s meeting, a 75% majority vote is required for approval of the proposal while for a meeting of shareholders, a simple majority will suffice. Once approved, the proposal becomes binding on all creditors and members. The nominee also functions as a supervisor of the agreement to monitor its implementation.
2) Judicial Management (JM)
The JM mechanism allows the company director(s) or a creditor to apply for a Court order that places the management of a company in the hands of a judicial manager appointed by the Court.
The judicial manager must then prepare a workable restructuring plan which has to be acceptable to the majority of the creditors. Once the plan is approved by 75% of the total value of the creditors, the restructuring plan will be implemented and binding on all creditors.
Most companies are eligible under the JM mechanism, with the following exceptions as provided under Section 403 of the CA 2016:-
- 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.
Commencing a JM
Once the JM application is filed in Court, an automatic moratorium takes place to prevent the initiation of any legal proceedings by creditors against the company. The Court shall hear the application within 60 days from the date the application is filed. Struggling companies will therefore enjoy the moratorium from the filing of the JM application until the application is dismissed or granted by the Court.
The Court is empowered under Section 405(1) of the CA 2016 to grant a JM order if: –
- it is satisfied that the company is or will be unable to pay its debts; and
- it considers that the making of the order is likely to achieve one or more of the following purposes:–
- the survival of the company, or the whole or part of its undertaking as a going concern;
- the approval of a compromise or arrangement between the company and its creditors;
- a more advantageous realisation of the company’s assets would be effected than on a winding up.
Further, Section 405(5)(a) of the CA 2016 vests the Court with an overriding power to make a JM order if it considers the public interest so requires. In the case of Leadmont Development Sdn Bhd v. Infra Segi Sdn Bhd  10 CLJ 412 , the High Court held that what constitutes a public interest would be determined on a case to case basis.
Once a JM order is granted by the Court, companies will continue to enjoy a second moratorium against winding up and legal actions which would last throughout the duration of the JM order. The judicial management order will remain in force for 6 months and may be extended for another period of not more than 6 months.
CVA or JM?
The CVA mechanism is encouraged for companies that prefer minimal Court intervention. The mechanism is also more cost efficient and time saving as compared to a JM, which requires the supervision of the Court. One of the key benefits of the CVA is that directors would remain in control of the company which allows the company to carry on its business as usual, since the appointment of the nominee does not discharge directors from their duties.
A key point as highlighted above is that the CVA is only limited to private limited companies which do not have any charge over their properties or undertakings. This exclusion would significantly limit the use of the CVA as many financially distressed companies would likely have existing loans which are paired with a charge. As such, the CVA may only benefit a number of small and medium enterprises which have not obtained loans from financial institutions or other entities.
Meanwhile, a JM would be useful for companies who may not have the experience in weathering such unprecedented times. The appointment of a judicial manager has the benefit of having the company temporarily managed by a qualified insolvency practitioner who has the necessary experience in rehabilitating and restructuring the company.
The appointment of a judicial manager may also provide some comfort to creditors in ensuring that struggling companies are being managed by professionals. Once the judicial manager steps in, the judicial manager takes over the directors’ duties and has the power to manage the affairs, business and property of the company. The company’s directors are legally required to cooperate with the judicial manager during the enforcement of the JM order.
A JM is far more costly and its entire process is rather cumbersome in comparison to a CVA. Companies applying for a JM order would need to satisfy the test laid out in Section 405(1) of the CA 2016. A JM application will also be dismissed if a receiver/receiver and manager has been (or will be) appointed and the application is opposed by any secured creditor.
Companies must bear in mind that both CVA and JM bears with it an element of publicity as they are legally required to among others, be announced to the public by way of newspapers advertisements.
While both corporate rescue mechanisms have their own drawbacks and advantages, the key feature for both options is the imposition of a moratorium on legal proceedings. This would enable financially struggling companies a much needed buffer to restructure and turn around their businesses to avoid the risk of going into liquidation. As the revenue of most companies have been impacted one way or another by the COVID-19 crisis and the MCO restrictions, it may be time for companies to consider exploring the above options of corporate rescue mechanism other than merely carrying out an internal corporate restructuring programme (which may be inadequate). It may seem rather extreme in the first instance, but in some cases, it may be a necessary step in ensuring the company stays afloat.
By: Jaclyn Chang
DISCLAIMER: This article is for general information only and should not be relied upon as legal advice and/or legal opinion. Messrs Yeoh & Joanne accepts no liability for any loss which may arise from reliance on the information contained in this article.
1) 公司自愿安排Corporate Voluntary Arrangement
2) 司法管理Judicial Management
- (i) 公司的存续，或其全部或部分承企业的经营；
- (ii) 批准公司与其债权人之间的妥协或安排；
- (iii) 公司资产的变现比清盘更有利。
此外，《2016年公司法令》第405(5)(a)条赋予法院压倒性的权力，如果它认为公共利益需要，可以发布JM法院令。在Leadmont Development Sdn Bhd v. Infra Segi Sdn Bhd  10 CLJ 412一案中，高等法院认为，将根据个别案件于决定什么将构成公共利益。
文章来自于：张美琪律师 (Jaclyn Chang Mei Qi)
文章翻译：李淑婷律师 (Lee Su Ting)
免责声明:本文仅供参考，不应作为法律建议和/或法律意见。Yeoh & Joanne律师事务所不会承担因依赖本文所含信息而产生的任何损失的责任。