New corporate rescue mechanism in force from 1 March 2018 introduces judicial management schemes and corporate voluntary arrangements
28 March 2018
The corporate rescue mechanism under Division 8 of Part III of the Companies Act 2016 came into force on 1 March 2018, together with the Companies (Corporate Rescue Mechanism) Rules 2018. The new regime introduces two new corporate rehabilitation mechanisms for financially distressed companies, i.e. judicial management schemes and corporate voluntary arrangements.
Judicial management scheme
The new judicial management procedure will allow a distressed company or its creditors to apply for an order to place the company under the management of a qualified insolvency practitioner.
An application for a judicial management order may be filed if the company or its creditor considers that:
- the company is or will not be able to pay its debts; and
- there is a reasonable chance to rehabilitate the company or to preserve 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 court will grant a judicial management order if it is satisfied that:
- the company is or will not be able to pay its debts; and
- the making of the judicial management order would likely result in:
- the survival of the company, or the whole or part of its undertaking as a going concern;
- the company obtaining approval from the court of a compromise or arrangement with its creditors or members; or
- a more advantageous realisation of the company's assets compared to a winding up.
The essential features of a judicial management scheme are as follows:
- Upon an application for a judicial management order, a moratorium on legal proceedings against the company by its creditors automatically applies, until the application is dismissed or an order is granted.
- A second moratorium will automatically apply for the period during which a judicial management order is in force. Such an order will remain in force for six months, unless earlier discharged, although the judicial manager may apply for an extension of time.
- An appointed judicial manager is required, within 60 days (or such longer period as the court may allow), to send the creditors of the company a statement of his proposals for achieving the purposes for which the order was made, and to present a copy of this statement before a meeting of the company’s creditors.
- If the proposals are approved by a majority of 75% in value of the creditors present and voting either in person or in proxy, the proposals will be binding on all creditors of the company.
Corporate voluntary arrangement
In comparison with a judicial management scheme, a corporate voluntary arrangement (“CVA”) allows a company to present a proposal to its unsecured creditors for a voluntary arrangement with minimal intervention from the court.
A CVA cannot be proposed by the following types of company:
- a public company;
- 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 Acts 2007; or
- a company which has created a charge over its property or any of its undertaking.
The essential features of a CVA regime are as follows:
- The directors of a company may initiate a CVA by submitting a proposal for voluntary arrangement to the company’s creditors.
- A nominee appointed by the directors as a trustee or supervisor is then required to submit to the directors a statement indicating whether or not in his opinion the proposed CVA has a reasonable prospect of being approved and implemented; and whether the company is likely to have sufficient funds available for it during the proposed moratorium to enable the company to carry on its business.
- Upon the filing of such statement and other relevant documents with the courts, a moratorium will automatically commence and remain in force for a period of 28 days, during which period the nominee is required to summon separate meetings of the company and its creditors.
- A resolution approving the CVA at the meeting of the company may be passed by a simple majority, whereas the required majority to approve the CVA at the meeting of creditors is 75% of the total value of the creditors present and voting in person or by proxy.
- Once approved by the requisite majorities, the CVA will be binding on all creditors of the company.
- The initial moratorium period may be extended beyond the initial 28-day period, to not more than 60 days, if approved by a 75% majority in value of creditors and consented to by the nominee and members of the company.