Jeeva Partnership | Resuscitating distressed companies

06 Jul Resuscitating distressed companies

Posted at 11:25h in Covid19, Help with Assignment by admin

Economic instability due to the current pandemic has caused many companies to cease operations. Captains of Industries must be aware of legal provisions that permits them to rehabilitate financially distressed companies so as to avoid permanent closure of their companies.

The implementation of Division 8 of Part III of the Companies Act 2016, facilitated by the Companies (Corporate Rescue Mechanisms) Rules 2018 provides for further corporate rescue mechanisms, namely, “Judicial Management’ and ‘Corporate Voluntary Arrangement’.

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There is an automatic moratorium upon the filing of the judicial management application to halt any winding up, enforcement of any charge or security over the company’s property or other legal or quasi-legal proceedings against the company. This automatic moratorium will exist until the making of the judicial management order or the dismissal of the application to give the judicial manager the breathing space to assist in the rehabilitation of the financially distressed company without intervention from the creditors of the company and to ensure that the company will be able to shift its focus to the sole purpose of rehabilitating the company.

In the event the court grants the judicial management order, that order shall direct that the affairs, business and property of the company shall be managed by the judicial manager during the period in which the order is in force. The definition of ‘property’ of the company is wide and includes money, goods, things in action and every description of property, whether real property or personal property, and whether in Malaysia or elsewhere, and also obligations and every description of interest whether present or future or vested or contingent arising out of, or incidental to property.

JUDICIAL MANAGEMENT SCHEME

Judicial Management is a temporary court-supervised rehabilitation plan introduced through the Companies Act 2016 whereby the court appoints a judicial manager who must be a licensed practitioner, i.e., licensed liquidator to assist financially distraught companies by affording an opportunity to the company to rehabilitate and restore itself back to profitability.

The company, directors or its creditors may apply to court for a judicial management order to place the management of the company in the hands of a judicial manager on one of the following grounds (Section 405 Companies Act 2016):

1. 1. Inability of the company to pay debts;
  2. To ensure survival of the company, wholly or partly of its undertaking as aconcern;
  3. A better way to realize the assets as compare to winding up; and
  4. Creditors will be in a better position than if the company was wound up.

Duration of the judicial management order

A company can only be placed under judicial management for a maximum period of 12 months (Re Gold Coast Morib International Resort Sdn Bhd and Another Case [2021] MLJU 126). From the date the company is placed under judicial management, the judicial manager has 60 days to draw up a rescue proposal and table it at a creditors’ meeting and it is considered approved once consent of 75% of the total creditors is obtained. On approval, the proposal will be binding on all creditors including those who voted against the proposal and those who did not attend the creditors’ meeting.

See: Leadmont Development Sdn Bhd v Infra Segi Sdn Bhd and Another Appeal [2018] MLJU 1320

CORPORATE VOLUNTARY ARRANGEMENT (“CVA”)

In essence, a CVA is a compromise or scheme of arrangement of a company’s affairs with is creditors aimed at the satisfaction of its debts. The option of a CVA is open only to private limited companies which have not created a charge over its properties or undertakings (this is a common practice among most companies which unfortunately, precludes such companies from being eligible for CVAs).

Distinguishable from Judicial Management, a CVA does not require a court order but only the filing of certain relevant documents and court papers. In most cases, this allows for a cheaper, more expedient process. Under a CVA, the directors of the company, judicial manager (if the company is under a judicial management order) or a liquidator (in a winding up situation) may make a proposal for voluntary arrangement to the Company’s creditors.

This proposal includes the appointment of a nominee who is a qualified insolvency practitioner whose function is to submit a statement to the directors indicating whether the proposal has a reasonable prospect of being approved and implemented and whether the company is likely to have sufficient funds to carry on its business during the proposed moratorium. Upon approval by the directors, the nominee will then supervise the implementation of the voluntary arrangement.

Once the relevant documents are filed, a moratorium will automatically commence and will stay in place until approval of the proposal by the creditors and members of the company. This further sets it apart from the scheme of compromise and arrangement under S.366 of the Companies Act which does not afford an automatic moratorium.

The moratorium serves a major advantage of the CVA rescue mechanism as It temporarily shields the company from the institution or continuation of legal proceedings against the company for debt recovery. The moratorium period may be extended for not more than 60 days subject to the approval of the members of the company members, nominee and 75% of the creditors.

Approval of the proposal for voluntary arrangements requires a simple majority of 75% of the total number of creditors present and voting at the meeting. Upon approval, the proposal becomes binding on all the company’s creditors, including those who voted against the proposal.

CONCLUSION

It is evident from the above that both corporate rescue mechanisms provide options and safeguards to Companies as to avoid permanent closures , in addition to the scheme of compromise and arrangement under the Companies Act 2006.

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