Managing Insolvency in Malaysia

Corporate Rescue Schemes, Liquidation and Receiverships

Wong Fe Mei

Introduction

Adapting to an ever-changing business environment is a process every successful business has to go through. This is more so during challenging times when there are significant headwinds in the economy, for example the unprecedented impact of Covid-19 on businesses, people and governments.

Failure to do adapt and respond effectively to the challenges can result in sometimes fatal consequences to the business. A business may then go into a downward spin, and find it difficult to get out of the slippery slope. By that time, rescue may be difficult and painful for all concerned. In the worst case scenario, liquidation may be the only option.

Agile management should therefore think forward, plan ahead and execute well. Success belongs to the brave and tenacious, but failure comes due to lack of attention or sometimes, misfortune. In the event of business distress due to short term issues such as cash flows constraints, lack of demand, supply shortage and etc., a rescue and resuscitation of the business to good health is still possible. Much then depends on the support of every stakeholder, including creditors, bankers, shareholders and sometimes even employees. Their cooperation will then be necessary to work out a solution that is acceptable to all.

In this publication, we are honored to share our knowledge on strategic restructuring and insolvency in Malaysia and how businesses in distress can extract maximum value for creditors and stakeholders alike.

If you are contemplating a restructuring exercise or liquidation scheme, please feel free to contact us for a chat. We will be glad to take you through this challenging journey and ultimately create the opportunity for new beginnings.

Like the quote says “When one door closes, another one opens.” Let us help you open the door to a fresh new start!

Reasons why businesses face insolvency situations

Businesses can end up with financial distress due to many reasons. Some are business related whilst others are not. Some are self-inflicted whilst others are due to changes in technology, business environment or regulations. Some of the common reasons are as follows:-

Borrowing heavily and inability to repay i.e. high gearing
Loss of major client
Serious business downturn and inability to adapt (e.g. COVID-19)
Business owner has health issue or has passed away
Fraud within the company
Reputational damage due to internal control failure
Withdrawal of financial support by banks
Strong market competition and inability to adapt

Informal Rescue Measures

Companies that are looking to resolve their financial health issues will usually resort to informal measures as the preferred alternative. Only in circumstances beyond their control will they turn to formal business rescue schemes which are expensive and can involve long and complicated legal procedures.

In fact, informal restructuring options can be significantly advantageous in helping businesses recover if conducted at an early stage and before the financial distress becomes too severe. One such advantage is that it allows the company to retain its reputation and preserve its market value since informal restructuring methods are often conducted confidentially.

Common informal measures for distressed companies include:-

Negotiating with creditors i.e. landlords, suppliers, etc.
Cutting costs e.g. reduce headcount, cutback in overheads, etc.
Focusing on profitable operations
Disposal of loss making operations
Sale of surplus or unused assets
Change of key management personnel

Formal Rescue Measures

With strategic implementation, a good corporate rescue plan can greatly maximize a business’ chances of continuity on a solvent basis. In fact, a solid corporate rescue plan should yield better returns for the company’s creditors or shareholders, as compared to an immediate liquidation of the business. The following is a summary of formal measures laid out in various pieces of legislation by the government.

Corporate Debt Restructuring Committee (CDRC)

The Corporate Debt Restructuring Committee (CDRC) set up by Government acts as the mediator for creditors which have borrowings from banks. The CDRC carries with it the authority of the government as well as the Bank Negara to assist borrowers and bankers in finding an amicable settlement between all parties concerned.

WHO

Aggregate indebtedness of RM10 million or more;
Owes at least 2 financial
institutions
Not in receivership or liquidation
Experiencing difficulties in
servicing their debt obligations
PN17 or GN3 company listed on
Main and Ace Market respectively

HOW

Appointment of Financial Advisor and/or Legal Advisor
Submit application together with
the preliminary proposed debt restructuring scheme to CDRC

WHAT

Must have viable business post-restructuring
Able to negotiate with financial institutions and unsecured
creditors
Subject to CDRC accepting the application

Corporate Rescue Schemes

A summary of the various Corporate Rescue Schemes available under the Companies Act 2016 and their major differences is set out below.

Questions	Scheme of Arrangement	Corporate Voluntary Arrangement	Judical Management
Scheme initiated by?	Company * / Creditors	Company *	Company * / Creditors
Scheme in charge by?	Directors	Directors	Judicial Manager
Court involvement?	Court Convenes Meeting	Minimal Court Involvement	Judicial Manager appointed by Court
Approval From?	75% in value of Creditors /Members OR class of Creditors/Class of Members	75% in value of Creditors and 50% of Members	75% in value of Creditors without classes unless at a Scheme of Arrangement

* Company includes a Liquidator if the company is under liquidation, and a Judicial Manager if the company is under Judicial Management

Questions	Scheme of Arrangement	Corporate Voluntary Arrangement	Judical Management
Restrictions?	Any Company can apply	❌ Public Company ❌ Co. regulated by BNM ❌ Co. subject to CMSA ❌ Co, with secured creditors	❌ Co. regulated by BNM ❌ Co. subject to CMSA
Moratorium?	Applicable under restraining order for 3 months Extendable to a maximum of 9 months	Immediate moratorium of 28 days Extendable to a maximum of 60 days	Moratorium of 6 months Extendable by another 6 months
Under what circumstances?	Able to negotiate with creditors and able to obtain approval from classes of creditors	Able to negotiate with creditors and with restructuring plan ready	When creditors do not have trust in Management but company has viable business
Costs and Timing?	Moderate	Low	High

General Road Map for a Corporate Rescue Scheme

Below are the possible steps necessary in the implementation of a corporate rescue scheme. It will start with the appointment of advisers and end with the successful implementation of the scheme by all concerned.

Step 1 Appoint: Financial Advisor Legal Advisor
Step 2 Prepare: Scheme / Proposals Court paper
Step 3 Finalise the Scheme / Proposals for Meeting of Creditors
Step 4 Creditors’ Meeting
Step 5 Formalise Results of Meeting either by an Agreement / Filing with Court and Companies Commission of Malaysia (SSM)