THERE are currently three corporate rescue mechanisms (CRMs) under The Companies Act 2016 (CA 2016), intended to help struggling businesses in Malaysia restructure and recover:
- Scheme of Arrangement (SOA)
A Court-supervised compromise or arrangement between a company and its creditors or members, mainly used by insolvent entities. A scheme that is approved by at least 75% in value of creditors and sanctioned by the Court is binding on all the scheme creditors. Where required, companies may seek relief from legal actions via a moratorium and a restraining order.
- Judicial Management
A Court-driven rescue procedure for companies unable or likely to become unable to pay their debts. Typically initiated upon application by companies, the Court appoints an independent Judicial Manager (JM) who assumes control over the management of the company's affairs, business, and property. There is an automatic moratorium upon an application being made, and a formal moratorium once a JM is appointed. The JM formulates a proposal which is binding on all creditors, upon being approved by at least 75% in value of creditors.
- Corporate Voluntary Arrangement (CVA)
This procedure is envisaged for less complex restructurings with minimal Court involvement. The terms of restructuring are usually discussed with key creditors. An independent insolvency practitioner is appointed to act as a "nominee" who provides an opinion on whether the proposal has reasonable prospect of being approved. An automatic moratorium of 28 days (extendable by another 32 days) kicks in upon filing of the proposal. The proposal is binding on all creditors once approved by at least 50% of members and 75% in value of creditors.
Rethinking liquidation as a rescue opportunity
Although the CRMs under CA 2016 remain useful for distressed companies, liquidations may sometimes be inevitable for some companies because, among others, the necessary stakeholder consensus cannot be achieved or cash has run out.
In the past, once a company is placed in liquidation, the company’s business ceases, its assets are sold, and the company is eventually dissolved, regardless of whether the company had a viable business. This was because the now-repealed Companies Act 1965 only allowed for a stay of winding up proceedings, but not their termination.
What is less widely known, however, is that Section 493 of CA 2016 provides an additional option in the context of liquidations. Under Section 493, the Court may, on the application by a liquidator, creditor or contributory, order the winding up to be terminated. As a result, if an insolvent company is placed into liquidation, the company no longer faces a certain death knell. Under appropriate circumstances, a liquidator may now apply to the Court and use either a SOA or CVA to deal with the company’s liabilities.
Combining liquidations and corporate rescue mechanisms
- When an insolvent company with a viable business goes into liquidation (whether voluntarily or ordered by the Court), the liquidator (an independent insolvency practitioner) will assume control of the assets and/or business of the company.
- As legal proceedings generally cannot be continued or commenced against the company without leave of Court, the liquidator can assess the viability of the business, a potential restructuring, and/or other options without being threatened by legal actions or proceedings.
- For viable businesses, a SOA or CVA can be formulated and proposed by the liquidator to allow a compromise of the debts owed to creditors. This enables the business to continue and/or some assets to be sold as part of the restructuring, and liquidation to be terminated.
- The recovery/return to stakeholders of a company from a restructuring should be higher than if the business and/or assets are sold on a break-up basis by liquidators — generally at a discounted value.
Vital elements required
Restructuring and/or transitioning back to a going concern via CRMs require at least these vital elements:
- A viable underlying business model
The underlying business must be commercially viable, with clear future earning capacity.
- Strong creditor buy-in and consensus
To secure the required majority, creditors must be convinced that the business is viable. Equally, they need to be provided a reasonable repayment amount (compared to a liquidation scenario where the assets are sold) and a realistic recovery of these amounts.
- Fresh working capital or rescue financing
Fresh funds would be required to revive the business and to support operations.
- Experienced Insolvency Practitioners (IP)
Many IPs undertake liquidations of companies with operations and assist in SOA or CVA applications. Managing both activities concurrently requires a trusted and experienced IP familiar with corporate restructurings to work with all stakeholders for the best outcome.
Liquidation no longer has to mean the end of a business. With a viable business (or part thereof), creditors’ buy-in, and fresh capital, a company placed into liquidation can still find its way back to a going concern.
For businesses and creditors weighing their options, understanding the issues and options early can make the difference between a second chance and a dissolution.
Bernard Tan is executive director of advisory at BDO Malaysia.