The global pandemic has left the economy in a dire situation. According to the statistic from the Entrepreneurship Development and Cooperatives Ministry, there were 32,469 small-medium enterprises (SMEs) have been wound up from March to November 2020. Besides, a survey conducted in November 2020 by the SME Association of Malaysia revealed that 19% or 329 SMEs are considering shutting down permanently in the next six months.1
Closing down a business is always detrimental to the stakeholders, be it the shareholders, creditors, employees, or clients. The domino effect would in turn affect the country’s economy. Hence, winding up should only be used as the last resort. Instead, cash-strapped companies should first explore ways to preserve and rehabilitate the company via various mechanisms under the law.
Corporate Rescue Mechanisms Under Companies Act 2016
A key to rehabilitating a company is the ability to defer payment to its creditors when the company is making the effort to regularise its cash flows. A moratorium. To this end, the statutory moratorium provided under the Companies Act 2016 is a helpful solution. There are two (2) corporate rescue mechanisms in the Companies Act 2016 which provide an automatic statutory moratorium. The mechanisms and how it works are discussed in brief below.
i) Corporate Voluntary Arrangement (CVA)
In essence, CVA is an arrangement agreed between the company with its creditors pertaining to the restructuring of the company’s debts. It is a relatively simpler mode of restructuring with minimal Court intervention. Therefore, CVA suitable to be used for SMEs. However, the major drawback of this mechanism is that it does not apply to a company that has secured creditors and the categories of companies under Section 395 of the Act.
The process starts with the company’s directors appointing an insolvency practitioner as the nominee 2 who will form the opinion on whether the proposed voluntary arrangement submitted by the company has a reasonable prospect of being approved and implemented, the sufficiency of the cash flow of the company during the proposed moratorium period, and whether the meetings of the company and its creditors should be called to consider the proposed arrangement.3
The moratorium period under CVA commences automatically from the time of the filing of the proposed voluntary arrangement, and other documents set out in Section 398 of the Companies Act 2016 into Court. It lasts for 28 days and can be extended to a period of not more than 60 days with the consent of the nominee, the member of the company, and 75% majority in value of creditors who are present and voting.4
During the moratorium period, the nominee shall summons the meeting of the members and its creditors to consider the proposed voluntary arrangement. At the company level, a simple majority is required to pass a resolution to approve the proposal for voluntary arrangement in a meeting of members.5
On the other hand, a proposal for voluntary arrangement must be approved by 75% of the total value of creditors present and voting at the meeting, be it in person or by proxy.6 Once the proposed voluntary arrangement is approved by the members and its creditors, it will be binding on all creditors of the company.
The benefit of Corporate Voluntary Arrangement is the management of the companies remains with the directors, judicial manager, or the liquidator. On the other hand, the downside is that the scheme is not available to companies that have secured creditor, and the moratorium period is relatively short compared to other mechanisms.
ii) Judicial Management (JM)
Judicial Management is more widely available to all companies except a licensed institution under the purview of the Central Bank of Malaysia, and a company that is subject to the Capital Markets and Services Act 2007.7 The application for a company to be placed under judicial management may be made by the company or its creditors8.
The moratorium period under Judicial Management starts automatically upon filing the application in Court. During the period when the moratorium is in force, no resolution or order can be made for the winding up of the company, no steps can be taken to enforce any charge or to repossess any goods in the company’s possession except with the leave of the Court, and no proceeding, execution or other legal processes can be commenced or continued against the company without the leave of Court.9
Under the Companies (Corporate Rescue Mechanism) Rules 2018, the Court shall fix a hearing date for the application on a date not later than 60 days from the date when the application is filed. For the Court to grant an Order for Judicial Management, the company concerned must satisfied or convince the Court the following10: –
a) The company is unable to pay its debts.
b) That there is a reasonable probability of: –
- rehabilitating the company or of preserving all or part of its business a going concern; or
- the approval of a scheme of arrangement between the company and the person mentioned in Section 366 Companies Act 2016; or
- a more advantageous realisation of the company’s assets would be effected than on a winding-up; or
- if the Court thinks it is in the public interest to do so.
The Order for Judicial Management, if granted by the Court, will last for 6 months from the date of making the Order, and the Court may on the application for a judicial manager, extend this period for another 6 months subject to the terms and compliance in Section 406 Companies Act 2016.
Looking at the process holistically, a company has up to 14 months from the date when an application for judicial management is filed to restructure the company’s business. Hence, the judicial management mechanism is a powerful tool for cash-strapped companies to obtain temporary relief from creditors’ actions while trying to revive the company’s business.
Closing Remarks
In this challenging business environment, there may be a situation where companies require a bit of time to regularise their cash flow position. In such a case, Corporate Voluntary Arrangement and Judicial Management are viable options to be explored by companies and should be considered by the creditors to achieve a win-win situation.
1 More Businesses Risk Liquidation. Retrieved from https://themalaysianreserve.com/2020/11/02/more-businesses-risk-liquidation/
2 Section 396 Companies Act 2016 provides that proposal for voluntary arrangement may also be made by a judicial manager or liquidator if a company is under judicial management or is being wound up, as the case may be.
3 Section 397(2) Companies Act 2016. The Documents that requires to be submitted by the directors, judicial manager or liquidator to the Nominee is provided in Section 397(1) Companies Act 2016.
4 Eighth Schedule Companies Act 2016
5 Section 400(3) Companies Act 2016
6 Section 400(2) Companies Act 2016.
7 Section 403 Companies Act 2016
8 Section 404 Companies Act 2016. This contrasts with the Corporate Voluntary Arrangement where the creditor has no right to propose.
9 Section 410 Companies Act 2016.
10 Section 405 Companies Act 2016.
