This article first appeared in Forum, The Edge Malaysia Weekly on April 8, 2024 - April 14, 2024

The Companies (Amendment) Act 2024 (Amendment Act), save for a few sections, came into force on April 1. A significant portion of the Amendment Act focuses on strengthening the restructuring and corporate rescue provisions of the Companies Act 2016. This article sets out eight key practical themes as we navigate this new restructuring landscape.

The Companies Act 2016 contains three key corporate rescue tools to assist financially distressed companies. A scheme of arrangement is a debtor-in-possession (that is the management remains in control of the company while it restructures its debts) court process. The corporate voluntary arrangement (CVA) is an out-of-court debtor-in-possession process specific to restructuring unsecured debts. Finally, judicial management allows the court to appoint an insolvency practitioner to take over the management of the company in order to drive the restructuring process.

The Amendment Act strengthens the above three corporate rescue tools.

For instance, there is a clearer codification of the scheme of arrangement process and procedure. This gives added certainty to both the debtor company and the creditors.

For corporate voluntary arrangement, a wider range of companies will be able to apply for a CVA. The Amendment Act removes the restriction where a company that created a charge over its property or any of their undertakings could not apply for a CVA. However, this particular provision removing the restriction has not come into force yet.

For judicial management, public listed companies can now apply for judicial management. Previously, the Companies Act 2016 had a restriction where companies subject to the Capital Markets and Services Act 2007 could not apply for judicial management. This is interpreted to include public-listed companies. Hence, we saw the example of the court dismissing Scomi Group Bhd’s application for judicial management. This restriction will now be removed and listed entities will have more restructuring options.

Moratorium protection is often an essential feature in a corporate rescue process. This gives the debtor company breathing space from legal proceedings while it focuses on the restructuring.

Schemes of arrangement will now see changes to its moratorium order known as the restraining order. First, an automatic two-month moratorium is triggered upon the filing of court papers for a scheme of arrangement. Within this period, the court will then decide on whether to grant the restraining order for up to a maximum period of 12 months. The automatic moratorium will help in giving immediate relief to a distressed company facing the risk of lawsuits.

Second, the introduction of a cooling-off period to prevent repetitive restraining orders. The court cannot grant a further restraining order if there had been an earlier restraining order in the last 12 months.

This cooling-off period may unduly restrict the stability afforded to the debtor company and to the creditors as the company undertakes a complex scheme of arrangement. A scheme of arrangement may not complete within a period of 12 months. For example, Sapura Energy Bhd’s ongoing scheme of arrangement has had the court grant more than 24 months of restraining order protection.

For judicial management, the court order appointing the judicial manager used to have a maximum duration of 12 months. While the judicial manager remained in place, there would also be moratorium protection for the company. The new law gives the court the discretion to continue to extend the judicial manager’s term with no upper limit and subject to such terms as the court may impose. This gives a longer runway for the judicial manager to implement a successful restructuring and with the stability of the moratorium.

In normal circumstances, a financially distressed company will find it difficult to obtain further financing and may struggle to raise new working capital. Super priority rescue financing allows the court to order the creation of priority or better security for the rescue financier who is willing to extend credit to the distressed company. Super priority rescue financing will be available to companies that apply for a scheme of arrangement or in judicial management.

Rescue financiers may come from: the shareholders, a white knight entity, or even the financial institutions who wish to have their debt move up the security ranking. As an example, in one of Singapore’s first rescue finance cases, it was the bank that obtained super priority status for the rescue financing of the DSG Group’s scheme of arrangement. The financing was also unique in that it was a roll-up of the pre-existing debt, that is upgrading some of the pre-existing debt into super priority debt.

With the potential of higher risks but higher rewards for the rescue financier, it will also be interesting to see how this field of rescue financing will be regulated by the Central Bank of Malaysia.

Schemes of arrangement require the splitting or classification of the creditors into different classes based on their different legal rights. Schemes of arrangement would almost inevitably require the approval of each of its classes of creditors.

Cross-class cramdown is the ability to utilise the votes and approval of one or more of the other approving class of creditors to cramdown or override the dissenting class. This feature is meant to allow for a successful scheme already approved by an overwhelming value of the overall creditors and with safeguards for the dissenting class of creditors.

The new law will now offer quicker and potentially more cost-efficient options for restructurings.

First, we see the introduction of the pre-packaged scheme of arrangement, otherwise known as the pre-pack. The pre-pack allows for a more compressed timeline, an approval through a paper voting process, and with less involvement of the court process.

Second, once we see the full relaxation of the restrictions on companies pursuing CVAs, I expect to see a far wider use of CVAs. These quicker tools of the pre-pack and the CVAs may be a stand-alone restructuring, or used in combination with other bilateral negotiations and court processes.

With all these new tools and features, the new law and court practices will lead to greater involvement of insolvency practitioners in these restructurings.

For instance, the use of super priority rescue financing or the cross-class cramdown requires the court to appoint an insolvency practitioner to oversee that process. We will then increasingly see the court relying on the expert views of different insolvency practitioners as they put forward their contrasting views and analysis to the court.

In the recent scheme of arrangement of court proceedings involving KNM Group Bhd, the court appointed an insolvency practitioner to issue a report on the viability of the scheme. Another insolvency practitioner then submitted to the court an alternative report with a different analysis of the scheme. We will likely see an increase in a contest of opinions of insolvency practitioners.

All these new features and practices allow Malaysia to keep pace with international restructuring developments. For example, our super priority rescue financing provision follows the wording of Chapter 11 of the US Bankruptcy Code. We will therefore soon see our courts having to cite US bankruptcy cases. Cross-class cramdown is a feature in Singapore and the UK. The different countries can learn from each other’s development of the law and procedure.

Finally, with this new law, we will have more court involvement and court oversight over the processes.

Restructuring and insolvency law is unlike the usual adversarial process that goes through the court. It is not a case of one litigant striving to vanquish the other. A restructuring involves a collective process designed to achieve an equitable treatment for all stakeholders. The process will have to balance the different legal rights and commercial aims of the distressed company, its directors, financial institution creditors, unsecured creditors, preferential creditors such as employees, and any appointed insolvency practitioners.

With the likely growth in the number of restructuring cases, I am glad that Malaysia already has specialist insolvency courts in Kuala Lumpur and Shah Alam. These courts currently focus on cases involving post-winding up, judicial management and CVA. There may then be a need for more insolvency courts to be set up, perhaps to cater for the northern and southern areas. Further, for a court code to be tagged for scheme of arrangement cases like how it is currently done for judicial management and CVA. This allows for easier classification to the appropriate court.

The specialisation and strengthening of the restructuring and insolvency judges must also go hand in hand with the upskilling of the restructuring lawyers in Malaysia. This is for us as lawyers to continue to be plugged in to the international legal developments of these new restructuring tools.

Lee Shih is the managing partner of the boutique law firm, Lim Chee Wee Partnership. He is active in the area of restructuring and insolvency law.

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