Corporate Restructuring in Malaysia
By KC Chia, KC Chia & Noor
“Corporate restructuring is an effective tool to resurrect distressed companies with a view of giving them a new lease of life, therefore enabling them to positively contribute to the nation’s future social and economic development…” Many companies in an economic downturn are making losses and may find themselves in a position of insolvency, meaning that they are unable to pay their debts as and when they fall due. Being trapped in such position is precarious, as there is a risk of the company being wound up, causing undue hardship to employees, creditors and shareholders alike. In addition, creditors will rush to enforce their debts, which is usually disastrous state of affairs. This may eventually lead to the end of a company following a harsh liquidation process, which is costly, less efficient and time consuming. However, there are revival mechanisms in place to address such issues, depending on the root cause.
A state of insolvency can generally be categorised as one of two types: (i) there are insufficient assets to settle all debts, or (ii) there are sufficient assets to settle all debts with surplus available for distribution, but it may take time to realise such assets into cash. In the first scenario, the question is whether the company is realistically able to strike a compromise with its creditors and turn the situation around. Such companies will usually require an injection of fresh capital and/or new viable businesses from “white knights”. In the second scenario, it is likely that a compromise regarding the company debt could be agreed upon without the need for any further form of aid. The decision-makers of the distressed company would therefore have to carefully consider whether winding up the company or a form of corporate resuscitation would be in the best interests of the company.
Although there is no voluntary administration procedure in Malaysia for the restructuring of a company enduring a period of financial distress, the compromise and scheme of arrangement mechanism as provided in Section 176 of the Companies Act, 1965 (the Act) (similar to Sections 411 to 413 of the Australian Corporations Act, 2001; Para. 26 of the UK Companies Act, 2006), is still operational and provides a solution to companies for which a financial revival is a viable option. Among other things, this mechanism allows a company to propose a compromise with its creditors in an orderly manner. The compromise may entail a combination of seeking a haircut to total debt, freezing of further interest charges and deferment of the repayment schedule.
The advantage of this procedure is that as an integral part of the scheme of arrangement, the company can propose a compromise to its creditors as a group or on a global basis, instead of having to deal with each creditor individually. It would be almost impossible to seek a compromise with each creditor as the terms of compromise will not be same with some variations for each creditor class. Additionally, it is even doubtful that there would be sufficient time to negotiate with each creditor individually. The acceptance or rejection of the compromise proposal is determined by the creditors at their respective meetings.
Before a proposal for compromise and scheme of arrangement can be brought to creditors for their consideration, the company must first make an application to the high court for an order to convene a meeting of creditors. Creditors must be grouped into their respective classes, as there are different types of creditors for the respective amount of debts. This would enable them to vote at their respective meetings, whereas the rights, benefits and obligations of all creditors in that particular class have to be just and equitable. All information required by the creditors to make decisions regarding the proposed compromise together with the scheme of arrangement which may involve the interests of equity and preference shareholders as well as the white knights must be furnished to them in the form of an explanatory statement.
A meeting convened pursuant to the high court order under Section 176 has the advantage that if a sufficient majority of creditors are in favour of the proposal for the compromise and scheme of arrangement, despite the presence of some dissenting creditors, the scheme can still be considered approved and endorsed by creditors. For the majority to be regarded as sufficient, it must equate to at least 75% of the value of the creditors’ debts and a simple majority in number for those creditors attending and having voted in the respective meetings. Where there are few classesof creditors, separate meetings for each class are required. Whether the proposal for a scheme will succeed or not depends on how the proposal is structured and the relative appeal of the compromise. Some proposals are structured in such a way that in order for the scheme to be approved and implemented, the approval of all classes of creditors is a prerequisite condition and that any one class rejecting the proposal may spell the end of the entire restructuring effort.
It is common to submit an application requesting a moratorium period of two to three years which aims to restrict legal proceedings against the company at the same time as making an application for an order to convene the creditors’ meetings. Protection for legal proceedings against the company is required as this will give the time required for the company to table the proposal for compromise and to obtain the necessary approval for the scheme from its creditors.
If the creditors vote in favour of the proposal in the court-convened meetings, the company will then have to make another application to get the high court to sanction the scheme as approved by the creditors. At this stage, creditors can still object, but in order for the proposed scheme to be rejected, they must be able to unequivocally justify why it should not be sanctioned, despite having received prior approval from the requisite majority in terms of value and number of respective creditors.
In short, as highlighted by Ramanujam (2000): “Corporate restructuring is designed with a view that a productive unit is to be saved and brought back to life. The anxiety underlining this objective is that if a productive unit dies, it will cause incalculable harm to the society, to the economy, to the shareholders and stakeholders including creditors, suppliers, employees and bankers alike who are serving the public by extending credits to the industry. If the industry thrives, the customers would get more supplies, the employees would get employment and the government would get more revenue and the augmented funds could be used for national building purposes.”
Given the current unfavourable economic condition in Malaysia and the ASEAN region as a whole, it is anticipated that more distressed companies are expected to resort to the compromise and scheme of arrangement mechanism as provided in Section 176 of the Act in the near future. This is intended to provide a rehabilitation scheme to distressed companies with a view to giving them a new lease of life. If these companies can be revived, they will contribute positively to the nation’s future social and economic development.
KC Chia & Noor, Kuala Lumpur, Melaka, Kluang, Johor Darul, Takzim, Malaysia
published: May 2015