Corporate Insolvency Act Malaysia

  • Bankruptcy
Corporate Insolvency Act Malaysia

Corporate insolvency in Malaysia is mainly governed by the Companies Act (CA) 2016 that came into effect on 31 January 2017, with some sections only coming into operation during 2018.

Previous insolvency and restructuring mechanisms remained whilst the new CA 2016 introduced two new corporate rescue processes; corporate voluntary arrangements and judicial management. In this article, we will have a brief look at each of the main insolvency procedures.

When is a corporation insolvent?

The Companies Act 2016 does not define insolvency, but it settled on the premise that a corporation is commercially insolvent when it cannot pay its current debts when they are due, regardless of whether the corporation has assets that, if realised, could cover the debts.

When must a corporation commence with insolvency procedures?

There are no mandatory obligations or specific time frames that compel a corporation to start with insolvency proceedings. Directors can, however, be held personally liable if a debt was contracted knowing that the corporation is insolvent.

What can a corporation do when it finds itself insolvent?

In global markets, we hear about companies filing Chapter 11 bankruptcy petitions; that only applies to companies that fall under the American Bankruptcy Code. Malaysian bankruptcy proceedings do not include a Chapter 11 process.

In Malaysia, there are five main corporate insolvency or restructuring mechanisms.

Corporate voluntary arrangements (CVA)

Corporate voluntary arrangements are a new rescue mechanism introduced under section 395-402 of the CA 2016 for private limited companies.

The aim is to provide a quick and economical debt restructuring option for private companies in financial distress.  The company enters into a voluntary agreement with its creditors, but under the supervision of an insolvency practitioner and before the company is unable to pay its debts. Court intervention is minimal.

It is not available to public companies, certain statutory licensed institutions, companies subject to the Capital Markets and Services Act 2007, or companies that have charges over its assets.

To start a CVA process, section 396 of the CA 2016 states that, the director of the company, or the liquidator (if the company is being wound up), or the judicial manager (if the company is under a judicial management order) may propose a CVA.

He or she needs to appoint a nominee (an insolvency practitioner) and submit the following to the nominee:

  • a document setting out the proposed terms of the CVA;
  • a statement of the company’s affairs; and
  • any other information required by the nominee.

When the proposal is lodged with the court, it must be accompanied by a statement from the nominee stating whether the proposal, in his or her opinion:

  • has a reasonable prospect of being approved and implemented;
  • whether the company is likely to have sufficient funds to carry on with its business during the moratorium; and
  • whether a meeting of the company and the creditors should be called to consider the proposal.

Once the application is filed, an automatic 28-day moratorium is imposed on all creditors under section 398 of CA 2016. No creditor may take legal action against the company during the moratorium. The moratorium remains in place until a meeting of the creditors is called.

The nominee must call for a creditors’ meeting. At the meeting, 75% in total value vote of the creditors must be present and voting at the meeting for the proposal to be approved. Once approved the CVA becomes binding on all creditors, regardless of whether they voted in favour of the proposal or not.

The moratorium can be extended for a maximum of 60 days if 75% in value of the creditors present at the meeting consents to an extension.

In terms of section 400(4) of the CA 2016, the meeting cannot approve a proposal that will affect the rights of a secured creditor to enforce his security, except if the secured creditor agrees.

Once approved, the nominee or another insolvency practitioner must now act as the supervisor to implement the voluntary arrangement. He or she must operate in accordance with the agreement.

Although the court’s approval is not needed, the nominee must file the result of the meeting with the court within 7 days.

Judicial management (JM)

Judicial management is the second new corporate rescue procedure introduced to Malaysian insolvency law under the CA 2016.  It allows a company to be placed in the hands of a qualified insolvency practitioner, called a judicial manager.

Some companies are not eligible for judicial management, for example, institutions regulated by the Central Bank of Malaysia or the Capital Markets and Services Act 2007.

Under section 404 of the CA 2016, a creditor or the company may apply for the company to be placed under judicial management.

For the application to be successful, the court must be satisfied that:

  • the company is, or will be unable to pay its debts; and
  • there is a reasonable probability that the company, or at least a part thereof, can be rehabilitated or kept as a going concern; or
  • that the interests of the creditors would be better served than with winding up the company.

Secured creditors may oppose the appointment of a JM. A debenture holder, for example, is entitled to object to the JM being granted and ask for the appointment of a receiver or a receiver and manager. The court must then consider if public interest overrides the secured creditor’s interest.

Once the application for JM is lodged, there is a limited moratorium under section 410 of the CA 2016 on what creditors can do until the JM is ordered or the application is dismissed.

Once ordered, the restrictions on creditors become wider:

  • any winding up application shall be dismissed; and
  • no security over the company’s property may be enforced; and
  • no shares of the company may be transferred.

Within 60 days of being appointed, the JM must call a meeting with all creditors and present a debt restructuring proposal to the creditors at this meeting. For the proposal to be accepted, 75% in value of creditors present and whose claims have been approved by the JM, must vote in favour of the proposal. The proposal may be modified at this meeting.

Once accepted the proposal is valid on all creditors, regardless of their vote.

If the proposal is rejected at the meeting, the JM may be discharged, and other insolvency options will be considered.

If accepted, the JM must oversee the implementation of the proposal. The judicial manager must take custody or control of all company affairs. He or she takes over the role of the directors and must do whatever is necessary to manage the affairs of the company in accordance with the proposal.

Under section 406 of the CA 2016, a JM order is granted for 6 months, but can be extended for a further 6 months.

Once the objective is achieved or seems to be incapable of being achieved, the JM can apply for the order to be discharged.

Throughout the JM process, the objective is to find a balance between creditor interests and encouraging a possible rescue of the company. Any creditor or member may approach the court during the process if they feel that the property is being managed in a way that is unfair or prejudicial to the creditors or the members.

Schemes of arrangements

In the context of insolvency, a scheme of arrangement can be described as a court-approved arrangement to restructure debts. The company can initiate it, or any creditor, or member of the company. It is a compromise between the company and its creditors.

If the company is under judicial management, the judicial manager may also initiate the scheme. If the company is being wound up, the liquidator can also initiate the proceedings.

Under section 336 of the CA 2016, the initiator can apply to the court to order a meeting of the creditors or members of the company. A company can enter into a scheme of arrangement if 75% in value of creditors or members present at the meeting vote in favour of the proposed arrangement.

If the court approves the proposed arrangement, it will be binding on all members and creditors.

The Court will only approve the proposed scheme if it is satisfied that:

  • all requirements were adhered to;
  • the scheme is viable;
  • all creditors or members had all the information necessary to make an informed decision; and
  • the scheme is fair and reasonable.

The Court may order some adjustments to the arrangements.

Since the new law came into effect, the court may also appoint a liquidator, if asked to do so, to assess the viability of the proposed arrangement.

Section 368(1) of the CA 2016 allows the court to issue a restraining order for a period of not more than 3 months to prevent any further proceedings against the company, once the proposed arrangement between the company and its creditors are in place. The Court may, on application of the company, extend this period for not more than 9 months, under certain circumstances.

In the past, repeated extensions could prevent creditors from enforcing their rights. The new CA introduced the time limit on extensions as a safeguard to creditors against companies who abused the extensions.

Receivership

Receivership is mainly a contract-based enforcement remedy. It can be used against insolvent corporations to protect an instrument holder’s rights relating to certain secured assets.

A receiver or a receiver and manager (R&M) can be appointed under the instrument (privately) or by the court.

In private appointments, a receiver will be appointed by a debenture holder or a charge holder.

The debenture agreement or the instrument (contract) that creates the charge will give the holder of the instrument the power to appoint a receiver or an R&M and set out the terms of appointment.

Section 376 of the CA 2016 gives the court the power to appoint a receiver or an R&M, after receiving an application from a debenture holder or any other interested party.

The court will appoint a receiver or R&M if the court is satisfied that the company:

  • failed to pay a debt due to the debenture holder or has failed to meet any other obligation to the debenture holder, or that the company is in arrears on any additional money borrowed or interest;
  • the company proposes to sell or dispose of secured property in breach of the terms of any instrument creating the security or charge; or
  • it is necessary to appoint a receiver or an R&M to ensure the preservation of the secured property for the benefit of the debenture holder.

Once appointed, the receiver or R&M shall have all the powers conferred to him or her by the relevant instrument or by the court order.

The receiver may do whatever is necessary to achieve the objective for which he or she was appointed, including taking possession of the instrument property. A receiver’s primary duty is to the instrument holder. However, there is a duty to the company to obtain the best possible price for the property.

Winding-up/Liquidation

There are 2 types of winding-up processes in Malaysia – voluntary and compulsory (by the court) winding up.

Voluntary winding-up may be affected by a special resolution of the members of the company (if the company is solvent), or the creditors of the company (if the company is insolvent).

Members voluntary winding-up

A resolution by the members can only be passed if the company is solvent and creditors will be paid in full if the assets are sold to meet liabilities.

Before a resolution can be passed, the directors must make a solvency declaration. Under section 443 of the CA 2016, the declaration must state that the directors are of the opinion that all debts will be paid in full within 12 months after the start of the winding-up.

Once winding-up is commenced, and a liquidator is appointed, the directors won’t have any more powers unless authorised by the liquidator. Business activities must stop. Any transfer of shares, or alterations in the status of the members, without authorisation by the liquidator, shall be void.

If the directors cannot make a solvency declaration, or the liquidator discovers that the company is insolvent, the creditors can proceed with a creditor’s voluntary winding-up. They may decide to appoint a different liquidator under section 450(2).

Creditors voluntary winding-up

A creditor’s voluntary winding-up can also be initiated after the directors make a statutory declaration that the company is unable to carry on with its business.

Once a liquidator is appointed under a creditor’s winding-up, section 451 of the CA 2016 states that no further action or proceedings may be initiated against the company, except with leave from the court.

A creditors’ winding-up is less costly and less complicated than a compulsory winding-up.

Court based winding-up procedures

There are 12 circumstances under which the court may order winding up of a company under section 465 of the Companies Act 2016.

We will focus on section 465(e) when the company is unable to pay its debts, and the process is initiated by a creditor.

A company is deemed to be unable to pay its debts under section 466 if:

  • the debt exceeds the amount prescribed by the Minister (currently RM10,000), and the company has failed to pay the debt for 21 days after the creditor served a notice of demand; or
  • the company was unable to adhere to a judgment or order in favour of a creditor; or
  • it is proved to the court that the company is unable to pay its debts.

TAKE NOTE: On 20 April 2020 the Companies Commission of Malaysia temporarily raised the amount to RM50,000 and extended the 21 days period to 6 months to provide temporary respite during the Covid-19 pandemic.

A petition to wind-up must be filed with the court within 6 months from when the above-mentioned notice of demand was served by the creditor.

Once the petition for winding-up is filed and before the order is made, the court may, on application, order a stay or a restraint against any further proceedings against the company.

Once the winding-up order is made, no further proceedings against the company are allowed, except if it is in accordance with the order and with the court’s leave. Any disposition of company assets shall be void unless made by the liquidator or under a court order.

The company’s property will now be controlled by the appointed liquidator.

The liquidator has the power to sell the company’s property and must be mindful of section 528 of the CA 2016, which states that creditors may not be given unfair preference over each other.

The power of the liquidator is set out in the Twelfth Schedule of the CA 2016.

Special legislative restructuring schemes

In addition to the above, certain corporate debtors are subject to specially enacted legislation for restructuring or rehabilitation. If a company is subject to any of the following Acts, specific rules apply:

  • Malaysia Deposit Insurance Corporation Act 2011; and
  • Pengurusan Danaharta Nasional Berhad Act 1998.

Directors duties during of insolvency

When a company is solvent, directors must act in good faith and in the best interest of the company. Their duty is directed towards the company.

When a company is insolvent, the court held that the interest of the creditors becomes dominant in deciding what constitutes the best interest of the company. Directors must ensure that they don’t prejudice the creditors or increase the company’s debts.

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