It now goes without saying that the calamitous outbreak of the Covid-19 virus has roiled businesses around the world. Malaysia, too, is not spared. In many countries, while measures are put in place to contain the spread of the virus, relief measures are being introduced/implemented to assist individuals and help businesses stay afloat.
2. In Singapore, the introduction of a COVID-19 (Temporary Measures) Bill (“the COVID-19 Bill”) in the Parliament of Singapore is imminent. The COVID-19 Bill seeks to offer, amongst others, temporary relief to businesses and individuals who are unable to fulfil their contractual obligations because of COVID-19, temporary increases in the threshold for bankruptcy and corporate insolvency actions and even prohibition of such actions for a period of time, and appointment of assessors by the Minister of Law to resolve disputes (without lawyers) as to whether an inability to perform a contract was due to Covid-19. Directors of companies may also be temporarily relieved from their obligations to prevent their companies trading while insolvent if the debts are incurred in the company’s ordinary course of business but not when the debts are incurred fraudulently.
3. In the United Kingdom, the British Government has announced that it will amend legislation to provide temporary relief to businesses affected by the outbreak. Among the proposed amendments is the temporary suspension of the wrongful trading provisions retrospectively from 1 March 2020 for three months to allow companies undergoing a rescue or restructuring process to continue to trade.
Relief Measures introduced and implemented in Malaysia (as at the time of writing)
4. In Malaysia, the Government has already announced a raft of measures and financial reliefs and is working towards addressing the problems faced by SMEs/ businesses in Malaysia generally. Bank Negara Malaysia (the Central Bank of Malaysia) has taken immediate action to introduce relief measures which included the automatic deferment (but not waiver) of all financing payments by individuals and SMEs for 6 months commencing April 1, 2020 (applicable only to Ringgit Malaysia financing facilities which are not in arrears for more than 90 days) and announcing that banking institutions will facilitate requests for the restructuring of loans and Islamic financing facilities.
Corporate Rescue Mechanisms
5. For financially-troubled companies with viable businesses, the Malaysian Companies Act 2016 provides alternatives to a liquidation. These are referred to as the corporate rescue mechanisms. These corporate rescue mechanisms are, briefly, the Scheme of Arrangement, the Judicial Management regime and the Corporate Voluntary Arrangement. Whilst these are already known, we will nonetheless re-visit the same.
Scheme of Arrangement
6. A scheme of arrangement is a Court-approved debt restructuring agreement between the company, its shareholders and creditors.
6.1. An application may be filed to the Court to obtain an Order for the creditors and the members of the company to attend their respective meetings to consider a scheme of arrangement/restructuring and to vote on the same. Such application may be made by the company, its creditor, member, liquidator or judicial manager.
6.2. A restraining order (“the RO”) may be applied in conjunction with the aforesaid application, for the purpose of maintaining the status quo pending the meetings being convened and to ensure the assets of the company are kept intact. The RO, if given by the Court, would restrain all legal proceedings against the company for a period of not more than 3 months and on application of the company, the RO may be extended to not more than a further 9 months. The Court may choose not to grant the RO if it is not satisfied that the requirements to grant the same are not met, even if it does grant the Order convening the meetings.
6.3. If the Court grants the order for the meetings to be convened, notice of the time and venue of the meetings will then be issued to all creditors and the shareholders with a statement explaining the scheme and material interests of the directors. The proposed scheme is then put to the vote at the meetings and must be approved by each class of creditors (of similar interests) and of members holding a majority 75% of total value of creditors and 75% of members present and voting.
6.4. Once the requisite aforesaid statutory majority of creditors and members have approved the scheme, a further application has to be made for the Court to approve the scheme, with or without conditions.
6.5. Once the Court approval has been obtained, the Court approval order has to be lodged with the Companies Commission of Malaysia. Only upon such lodgment does the scheme then take effect. All creditors are thus bound by the scheme even if any of them had voted against it at the creditors’ meeting. The scheme is then implemented.
Judicial Management (“JM”)
7. A JM provides for a temporary court-supervised rescue plan where a judicial manager is appointed by the Court. The judicial manager takes control of all of the company’s property and exercises the powers instead of the directors of the company. This rescue mechanism is not available to companies under the supervision of the Central Bank (eg., insurance companies and financial institutions) and companies under the supervision of the Securities Commission (eg. public-listed companies), and is also not applicable to a company that has gone into liquidation.
7.1. An application for a JM Order may be made by the company or its members, directors and/or its creditors. Upon the filing of such application, the company acquires immediate protection from winding up and legal actions (except if the creditor subsequently obtains leave of Court to so proceed) until the determination of this application for a JM Order.
7.2. To obtain a JM Order (which includes the appointment of a judicial manager), it must be shown that the company is or will be unable to pay its debts and that the Order will allow for the survival of the company and/or for the restructuring of the company and/or for a more advantageous realization of the company’s assets as compared to the liquidation of the company. The applicant’s nomination of a judicial manager may be opposed by creditors holding more than 50% in value of debts and the Court may invite such creditors to nominate their own proposed judicial manager.
7.3. A JM Order will not be made if a receiver/receiver and manager has been or will be appointed over the assets of the company and the making of the order is opposed by a secured creditor (an unsecured creditor would not be able to oppose such application). In other words, only a secured creditor may oppose such application. Notwithstanding that, a JM Order may still be made on “public interest” considerations.
7.4. A JM Order made by the Court shall remain in force for 6 months for the judicial manager to put forward a proposal to the creditors of the company and may be extended for another 6 months on the application by the judicial manager. Upon the making of a JM Order, the moratorium against winding up and legal actions (except with the leave of the court or the consent of the judicial manager) shall continue as long as the JM Order remains in force. During this time, no steps can be taken to transfer any shares of the company or alter the status of any member except with the leave of Court.
7.6. The proposal requires the consent of 75% of the total value of creditors present and voting at the creditors’ meeting, and if approved, shall be binding on all creditors. If the proposal is rejected by the creditors, the Court may discharge the JM Order or make any order it thinks fit.
Corporate Voluntary Arrangement (CVA)
8. A CVA is a binding compromise or arrangement between a company and its creditors without the need for any Court approval or order.
8.1. Under the CVA mechanism, directors shall appoint a qualified insolvency practitioner to be a Nominee and submit their proposal to the Nominee together with the company’s statement of affairs for the Nominee’s assessment.
8.2. If the Nominee gives a positive opinion on the CVA, papers can then be filed with the Court and a 28-days automatic moratorium shall take effect upon such filing. The moratorium period may be extended for a period of not more than 60 days. During the moratorium period, no execution or legal proceedings can be filed against the company.
8.3. A meeting of members and creditors must be called within the 28-days moratorium period. The CVA requires more than 50% of the members’ approval and the approval of 75% in value of creditors present and voting. The CVA once approved, shall take effect and is binding on all creditors.
8.4. The CVA mechanism is only available to private companies with no security given (eg. start-ups or small businesses with few creditors). Such mechanism would exclude companies who have bank borrowings with security given to their financiers.
Corporate Debt Restructuring Committee (“CDRC”) and Small Debt Resolution Committee (“SDRC”)
9. Corporations and SMEs may also avail themselves of the mediation platform provided by Bank Negara Malaysia for them to work out a restructuring scheme with their financiers. These will come under the purview of the CDRC or the SDRC. The Committees will require the financiers to withhold legal actions against the company/SME pending negotiations for a restructuring. If the Committee concerned is of the view the proposed scheme is not viable, the borrower will be removed from its purview. If the proposed scheme is agreed upon, a restructuring agreement will be entered into between the borrower and its financial creditors without having to resort to legal proceedings.
Immediate relief needed
10. Whilst the aforesaid restructuring mechanisms are available, they may be time-consuming or are not adequate, nor do they afford immediate relief in the present circumstances, as solvency issues threaten to explode. Of immediate concern are the following:
a) liquidity issues – companies are now facing severe liquidity issues. The Court mechanisms may take too long and companies may not be able to afford the time to achieve a restructuring, or afford lawyers or consultants to assist them.
b) trade supply issues – accompanying the liquidity issue is that of obtaining further supplies/continuing to trade. The legal principle is that a director/officer of a company should not incur a debt by the company if he has no reasonable expectation, after taking into account other liabilities, that the company can pay such debt. This is the “wrongful trading” principle and raises the spectre of fear that officers of a company may be personally responsible if they continue to take on supplies and debt with the liquidity issues faced by the company.
c) obtaining immediate financing – financiers would be reluctant to lend an ailing company unless there are laws to afford them some protection or “super priority” for rescue financing, where priority is given to the debt arising from the rescue financing over all of the company’s unsecured and preferential debts. Such super priority given to rescue financing is recognized under the Singapore Companies Act in the restructuring of debts.
11. To say that these are difficult times is an understatement. However, no doubt new laws will be created to deal with these critical issues. Until then and our next update, we wish everyone please stay home and do keep safe.
If you have any questions or require any further assistance, please do not hesitate to contact us.
|Yoong Sin Min
|Ng Hooi Huang