Ship Wheel

Managing Insolvency in Malaysia

Corporate Rescue Schemes, Liquidation and Receiverships

Wong Fe Mei
10/04/2020
Ship Wheel
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:-

  1. Borrowing heavily and inability  to repay i.e. high gearing
  2. Loss of major client

  3. Serious business downturn and inability to adapt (e.g. COVID-19)

  4. Business owner has health issue or has passed away

  5. Fraud within the company

  6. Reputational damage due to internal control failure

  7. Withdrawal of financial support by banks

  8. 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:-

  1. Negotiating with creditors  i.e. landlords, suppliers, etc.

  2. Cutting costs e.g. reduce headcount, cutback in overheads, etc.

  3. Focusing on profitable operations

  4. Disposal of loss making operations

  5. Sale of surplus or unused assets

  6. 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.

Formal Rescue Measures

 

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.

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

 

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