PN17 is a term that often strikes fear into the hearts of those unfamiliar with it. While it does indicate financial distress and a failure to meet Bursa Malaysia's listing rules, it doesn't necessarily mean that the company is on its deathbed. In fact, some cases may be much ado about nothing, while others may be a precursor to corporate failure. It's worth noting that auditors' qualifications of financial statements can also trigger PN17, which can have severe consequences.
To avoid falling into PN17, it's crucial to pay attention to the details. Any company listed on the Main Market of Bursa Malaysia can trigger one or more of the criteria that lead to PN17. Similarly, companies listed on the ACE Market of Bursa Malaysia have the equivalent status of GN3.
The criteria for triggering PN17 or GN3 are as follows:
(a) The shareholders’ equity of the listed company on a consolidated basis is 25% or less of the share capital (excluding treasury shares) of the listed company and such shareholders’ equity is less than RM40 million.
Companies like these would have eroded their capital and reserves substantially due to previous losses and hence, need financial assistance to survive. Financial assistance can come from existing shareholders or a white knight in the form of new funds, new businesses or new business assets. The company may also consider debt restructuring, cost optimisation measures and business diversification. A company in this situation is comparable to a person on the operating theatre for a major operation or blood transfusion. An example is Petra Energy Berhad, a Malaysian integrated brownfield services provider for the oil and gas industry. It was classified as a PN17 company in 2020 due to its shareholders' funds being less than 25% of its share capital as a result of operational issues. Petra Energy has since regularised its financial condition and was subsequently removed from PN17 status in August 2020.
(c) There is a winding up of a listed company’s subsidiary or associated company which accounts for at least 50% of the total assets employed of the listed company on a consolidated basis.
A winding up of a company may or may not be due to financial difficulties. In Malaysia, a company may be wound up voluntarily or by the court. A members’ voluntary winding up may occur when the company passes a resolution to wind up the company and appoints a liquidator to manage and distribute the company's assets to its creditors and shareholders. This process may take place when the company is solvent and able to pay off its debts, or when the shareholders decide that the company can no longer continue its operations. In contrast, a creditors' voluntary winding up is a type of voluntary winding up where the company is insolvent and unable to pay its debts, and the decision to wind up the company is initiated by the creditors of the company rather than the shareholders.
A court-ordered winding up may occur when the company is insolvent, meaning it is unable to pay its debts, or if the court finds that it is just and equitable to wind up the company. This may happen if, for example, the company has committed serious misconduct or if the shareholders are deadlocked and unable to make decisions.
In all the cases, a liquidator will be appointed to manage the winding-up process, which involves selling the company's assets, paying off its creditors, and distributing any remaining assets to the shareholders. The winding-up process is governed by the Companies Act 2016 and the Insolvency Act 1967.
Since winding up a company may not be due to financial difficulties, every case has to be judged on its merits. Members’ voluntary winding up exercises are rather mild but creditors’ voluntary winding up and court-ordered winding up are red flags that point to financial distress. Companies in this position may be similar to persons needing an operation or a trip to the ICU.
One example of a Malaysian listed company that was under PN17 status due to the winding up of its subsidiary is Eurospan Holdings Berhad. In June 2020, Eurospan Holdings Berhad announced that its subsidiary, Tamadam Industries Sdn Bhd, had been wound up by order of the High Court of Malaya. As Tamadam Industries accounted for more than 50% of Eurospan's total assets employed on a consolidated basis, Eurospan was then classified as a PN17 company.
Eurospan Holdings Berhad has since made efforts to regularize its financial condition and was subsequently removed from PN17 status in October 2021.
(d) The auditors have expressed an adverse or disclaimer opinion in the listed company’s latest audited financial statements.
In Malaysia, an adverse audit opinion is issued by an external auditor when they conclude that the financial statements of a company DO NOT fairly present the financial position, performance, and cash flows of the company in accordance with the applicable financial reporting framework. Some common reasons for adverse audit opinions in Malaysia include:
An adverse audit opinion is a serious matter and may affect the reputation of the company.
A disclaimer of audit opinion can be equally serious. It is issued when the external auditor is unable to express an opinion on the financial statements of a company. A disclaimer of opinion indicates that the auditor was not able to obtain sufficient appropriate audit evidence to support his audit opinion or was not able to complete the audit for some other reason.
Some of the reasons for a disclaimer of opinion may include limitation in scope of the audit, inadequate financial records, going concern issues or material misstatements in the financial statements.
From experience, a company with adverse or disclaimer audit opinions may not necessarily be in financial difficulties. Instead, it may indicate that the auditors have reservations over the accuracy of the financial statements, or the auditors may have serious disagreements with the company’s management on accounting or audit issues. Nevertheless, these opinions warrant closer attention as many of the significant fraud cases in Malaysia arose from such opinions.
Serba Dinamik Holdings Berhad's went into PN17 when its external auditors issued an adverse audit opinion on the company's financial statements for the financial year ended December 31, 2020. The adverse opinion was due to the auditors’ inability to obtain sufficient audit evidence to support the company's revenue and trade receivables balances.
Another company which went into PN17 but due to a disclaimer of audit opinion was Transmile in 2006. Subsequently, fraud involving the overstatement of the company's revenue and profits for several years, was discovered.
(e) The auditors have highlighted a material uncertainty related to going concern (MUGC) or expressed a qualification on the listed issuer’s ability to continue as a going concern in the listed issuer’s latest audited financial statements and the shareholders’ equity of the listed issuer on a consolidated basis is 50% or less of share capital (excluding treasury shares) of the listed issuer.
Auditors usually highlight these MUGC or qualifications if the company shows tight cashflow, financial distress or current liabilities exceeding current assets. Some may not be in immediate danger but others may be facing serious financial difficulties. Depending on the seriousness of the financial position, profitability and cashflow of the company, these companies are similar to humans who need a medical checkup, an operation or even the ICU.
One example of a company which went into PN17 due to going concern was Khee San Berhad. In their audited financial statements for the financial year ended June 30, 2020, the company's external auditors issued an adverse opinion, stating that the company had incurred losses and negative cash flows from operations, and had a net current liability position as of the financial year-end. The company remains in PN17 status at the date of this article.
(f) There is a default in payment by a listed company, its major subsidiary or major associated company, as the case may be, as announced by a listed company and the listed company is unable to provide a solvency declaration to the Bursa Malaysia.
A default in payment in this instance is when a listed company fails to pay its debts as they become due and payable, and the default amounts to a material breach of the terms and conditions of the loan or financing agreement.
Under Bursa Malaysia's Listing Requirements, a listed company is required to announce any default in payment immediately after the default occurs or as soon as practicable. The announcement must include details of the default, the amount outstanding, and any action taken or proposed to be taken to rectify the default. If a listed company fails to rectify the default within the stipulated timeframe, Bursa Malaysia may take action to classify the company as a PN17 company.
Companies that make such announcements and who are unable to provide a solvency statement to the Bursa, are making an open declaration that they are in financial difficulties. They will therefore need to undergo major restructuring before it can be uplifted from PN17 or GN3. Companies like these are similar to persons who need a major operation or the ICU.
One example was Bintai Kinden Corp Bhd which was classified in March 2023 as a PN17 issuer after its subsidiary defaulted on RM109 million worth of financing facilities and the company was unable to provide a solvency declaration to the Bursa.
(g) In addition to the criteria above, companies listed on the ACE Market may fall into the GN3 status if it triggers any of the following criteria:
(i) The company incurred one full financial year’s loss which equalises or exceeds shareholders’ equity; and its shareholders’ equity does not exceed 50% of its share capital.
(ii) The company incurred aggregated losses in two consecutive financial years which exceed shareholders’ equity and shareholders’ equity does not exceed 50% of share capital at the end of the period; and where the loss incurred in the second financial year exceeds the loss incurred in the first financial year of the two-year period.
Generally, the factors triggering the PN17 or GN3 criteria include:
A company under PN17 or GN3 needs a regularisation plan for it to be uplifted from the PN17 status and have its listing status reinstated.
In summary, if we were to use medical health of a person as an analogy for PN17 and GN3, then the varying degrees financial distress and PN17/GN3 can be akin to the following medical status :-
Healthy person with no adverse or apparent medical symptoms
Financially healthy companies
Have apparent medical symptoms requiring further check-up and/or investigation
Company with MUGC, with continued operational losses and but not triggering PN17/GN3 status
Have heart blockage, cancer stage 1 and 2, and etc requiring medical intervention
Company triggering PN17/GN3 status but operation is still viable, requires restructuring to restore financial health
Have serious medical issue, require medical intervention such as operation/blood transfusion and ICU
Company triggering PN17/GN3 status with serious financial difficulties, unable to continue operations unless major restructuring involving injection of new funds, new business is undertaken.
In Part 2, we will go behind the scene and unravel the factors for success or failure of regularisation plans undertaken by PN17 or GN3 companies.