In the table below, we have summarised the key differences between the remedies available to distress company which is unable to pay monies to its creditors.

 

Scheme of Arrangement

Corporate Voluntary Arrangement (“CVA”)

Judicial Management (“JM”)

Purpose

 

Schemes of arrangement are not exclusively intended for insolvent companies and are widely utilised by solvent entities. Nevertheless, the scheme of arrangement process is commonly used by insolvent companies for purposes of restructuring, while receiving the benefit of court-supervised restraining orders restricting various forms of recovery and enforcement actions against the company. A scheme of arrangement allows for the court-approved scheme to be imposed on dissenting creditors and members, provided the statutory voting majorities have been obtained.

 

CVA is a newly introduced corporate rescue mechanism under the Companies Act 2016 (“CA 2016”). It provides a consensual statutory restructuring tool that is available to private companies only. The CVA process enables company experiencing financial difficulties to enter into a plan or an arrangement with the creditors without the need to have the plan or arrangement being approved by Court.

Judicial management is another of the new corporate rescue mechanisms under the CA 2016 that allows for the appointment by the Malaysian High Court of a judicial manager over an insolvent corporate debtor, in circumstances where it can be shown that there is a reasonable prospect of, inter alia, preserving all or part of the company as a going concern and where interests of creditors would be better served than on a winding up.

Application

For all companies

Section 395 of CA 2016

CVA shall not be applicable to:

 

(a)      a public company;

(b)      a company which is a licensed institution or an operator of a designated payment system regulated under the laws enforced by the Central Bank of Malaysia;

(c)      a company which is subject to the Capital Markets and Services Act 2007; and

(d)      a company which creates a charge over its property or any of its undertaking.

 

 

Section 403 of CA 2016

JM shall not be applicable to:

 

(a)    a company which is a licensed institution or an operator of a designated payment system regulated under the laws enforced by the Central Bank of Malaysia; and

(b)    a company which is subject to the Capital Markets and Services Act 2007.

Pre-conditions

 

Paragraph 9 of the Guidelines for Corporate Rescue Mechanism Under Division 8 Part III of the Companies Act 2016 issued by Companies Commission of Malaysia (“Guidelines”)

To ensure other due processes are in compliance with the relevant provisions in the CA 2016, an applicant must ensure that a company in the striking off process shall not initiate a CVA.

 

Paragraph 10 of the Guidelines

Before a proposal for a CVA can be made, the applicant must ensure that:

(a)      there is no pending query with SSM (query status is available at (https://www.ssm.com.my/Pages/Quick_Link/e-Query.aspx); and

(b)      all of the company’s information with SSM are up-to-date.

 

Paragraph 9 of the Guidelines

To ensure other due processes are in compliance with the relevant provisions in the CA 2016, an applicant must ensure that a company in the striking off process shall not initiate a JM process

 

Paragraph 10 of the Guidelines

Before making an application for JM order, the applicant must ensure that:

(a)    there is no pending query with SSM (query status is available at (https://www.ssm.com.my/Pages/Quick_Link/e-Query.aspx); and

(b)    all of the company’s information with SSM are up-to-date.

 

Section 405(6) of CA 2019

A JM order shall not be made in relation to a company after the company has gone into liquidation.

 

Section 404 of the CA 2016

An application for an order that a company should be placed under a judicial management and for an appointment of a judicial manager may be made to the Court by the company or its creditor if the company or its creditor considers that-

 

(a)    the company is or will be unable to pay its debts; and

(b)    there is a reasonable probability of rehabilitating the company or of preserving all or part of its business as a going concern or that otherwise the interests of creditors would be better served than by resorting to a winding up.

 

Who can propose/ apply

Section 366 of CA 2016

Application for SA may be made to court by:

 

(a)      the company;

(b)      any creditor or member of the company;

(c)      the liquidator, if the company is being wound up; or

(d)      the judicial manager, if the company is under judicial management.

 

Section 396 of CA 2016

The application for voluntary arrangement may be proposed by:

 

(a)      the directors of a company other than a company which is under a JM order or is being wound up;

(b)      in the case of company under judicial management order, the judicial manager; and

(c)      in the case of company being wound-up, the liquidator or Official Receiver.

 

Section 404 read together with section 405 of CA 2016

the application for a JM order may be made to the court by

 

(a)    a company or its directors, under a resolution of its members or the board of directors, or

(b)    a creditor, including any contingent or prospective creditor,

 

or all or any of those parties.

 

Management of Company

Section 367 of CA 2016

The Court may, on an application, appoint an approved liquidator to assess the viability of the scheme proposed for the compromise or arrangement and the approved liquidator appointed shall prepare a report for submission to the applicant to be tabled at the meeting of creditors or members

Section 396(2) of CA 2016

Nominee will be appointed as a trustee or supervisor for the purpose of supervising the implementation of the CVA

 

Section 396(3) of CA 2016

A judicial manager if a company is under a judicial management order or a liquidator if a company is being wound up may be the nominee.

 

Section 396(4) of CA 2016

In the case where the liquidator is the Official Receiver, the nominee shall be an insolvency practitioner.

 

 

Section 405 (3) of CA 2016

Court shall direct the affairs, business and property of the company shall be managed by a judicial manager appointed by the court.

 

Section 407(1) of CA 2016

In any application for a JM order, the applicant shall nominate a person who is an insolvency practitioner, who is not the auditor of the company, to act as a judicial manager.

 

Section 407(2) of CA 2016

The Court may refuse the nomination of the applicant and may appoint another person who is an insolvency practitioner as the judicial manager.

 

Court order for the process

Section 366(1) of CA 2016

Court may on application order a meeting

 

Section 367(1) of CA 2016

The Court may, on an application under this Subdivision, appoint an approved liquidator to assess the viability of the scheme proposed for the compromise or arrangement

Section 401(1) of CA 2016

The nominee or insolvency practitioner who shall be known as the supervisor would be responsible for the implementation of the proposal

 

Section 401 (4) of CA 2016

If creditors or any person dissatisfied by any act, omission or decision of the supervisor may appeal to court

 

Section 581 of CA 2016

Power of court to grant relief

 

Section 405 of CA 2016

Court may make a judicial management order upon application and appoint a judicial manager.

 

Section 581 of CA 2016

Power of court to grant relief

 

Moratorium

Section 368 of CA 2016

On the application in a summary way of the company or any member or creditor of the company, the court may grant restraining order.

 

Unlike in CVA and JM, there is no automatic moratorium. When there is no restraining order in place, the company may sell its assets in the ordinary course of business.

 

If no order has been made or resolution passed for the winding up of a company and a compromise or arrangement has been proposed between the company and its creditors or any class of those creditors, the court may grant restraining order to restrain proceeding against the company on the application of the company if-

 

(a)      the Court is satisfied that there is a proposal for a scheme of compromise or arrangement between the company and its creditors or any class of creditors representing at least one-half in value of all the creditors;

(b)      the Court is satisfied that the restraining order is necessary to enable the company and its creditors to formalise the scheme of compromise or arrangement for the approval of the creditors or members under section 366;

(c)      a statement of particulars as to the affairs of the company made up to a date not more than three days before the application is lodged together with the application; and

(d)      the Court approves the person nominated by a majority of the creditors in the application by the company under to act as a director or if that person is not already a director, appoints that person to act as a director notwithstanding the provisions of this CA 2016 or the constitution of the company

 

Section 398(1) of CA 2016

Moratorium commences automatically upon filing to the court the documents set out in section 398(1) without the court’s order.

 

Section 411 read together with section 410 of CA 2016

The moratorium applies automatically from the filing until the disposal of the judicial management application and also while the judicial management order is in force.

 

Duration of any moratorium

Section 368(2) of CA 2016

The Court may grant a restraining order to a company for a period of not more than three months and the Court may on the application of the company, extend this period for not more than nine months

Paragraph 3 of 8th Schedule of CA 2016

The moratorium shall remain in force for twenty-eight days. The period may be extended for up to a maximum of sixty days counted from the commencement of the moratorium subject to consent given by the nominee and members of the company, and obtaining 75% majority in value of creditors who are present and voting either in person or by proxy at the meeting.

 

Section 406(1) of CA 2016

A JM order shall remain in force for a period of six months from the date of the making of the order, unless the judicial management is otherwise discharged, but the court may, on the application of a judicial manager, extend this period for another six months subject to such terms as the court may impose.

 

Operation of business by director

There are no provisions prohibiting the directors from continuing the operation of business and create further indebtedness.

There are no provisions prohibiting the directors from continuing the operation of business and create further indebtedness.

Section 411(1) of the CA 2016

Upon the appointment of a judicial manager, any receiver or receiver and manager shall vacate the office and any winding-up application shall be dismissed.

 

Section 405(3) of CA 2016

The powers conferred and duties imposed on the board of the directors shall be exercised by the judicial manager upon his or her appointment.

 

9th Schedule of the CA 2016

Lists the powers of a judicial manager that include the power to borrow money and the power to carry on the business of the company.

 

Disposal of secured assets

Section 368(4) of CA 2016

Unless the court orders otherwise, any disposition of the property of the company made after that grant of the restraining order by the court shall be void

 

Paragraph 17 of the Eighth Schedule of the CA 2016

No legal proceedings and no execution or other legal process may be commenced or continued, and no distress may be levied against the company or its property except with leave of court

Section 426(2) of CA 2016

Transfer or assignment of the company’s property to trustee for the benefit of all its creditors should be void.

 

Section 410 of CA 2016

During the period beginning with the making of an application for a judicial management order and ending with the making of such an order or the dismissal of the application, no other proceedings and no execution or other legal process shall be commenced or continued and no distress may be levied against the company or its property except with leave of the Court and subject to such terms as the Court may impose.

 

Section 411(4) of the CA 2016

Upon the making of a judicial management order, no other proceedings and no execution or other legal process shall be commenced or continued and no distress may be levied against the company or its property except with the consent of the judicial manager or with the leave of the Court and, if the Court grants leave, subject to such terms as the Court may impose.

 

Approval from creditors and members

Section 366(3) of CA 2016

The compromise or arrangement shall be binding if it is agreed by a majority of seventy-five per centum of the total value of the creditors or class of creditors or members or class of members present and voting either in person or by proxy at the meeting or the adjourned meeting and has been approved by order of the Court.

Section 400(2) of CA 2016

Requires 75% of the total value of the creditors present and voting at the meeting either in person or by proxy to approve a proposal for CVA

 

Section 400 (4) of CA 2016

A meeting summoned under section 399 shall not approve any proposal which affects the right of a secured creditor of the company to enforce his security, except with the concurrence of the secured creditor concerned.

 

Section 400 (3) of CA 2016

Requires a simple majority to pass a resolution to approve the proposal for CVA in a meeting of members

 

Section 421(2) of CA 2016

The proposal shall be approved by 75% of the total value of creditors whose claims have been accepted by the judicial manager, present and voting at the meeting either in person or by proxy

Modification in respect of the Proposal

Section 366(4) of CA 2016

The court may make alterations or conditions to a compromise or arrangement as the Court thinks just.

 

Section 400 (6) of CA 2016

A modification in respect of the proposal shall not be allowed to be made in any of the meeting under section 399.

 

Section 421(2) of CA 2016

The proposal may be approved with modifications subject to the consent of the judicial manager to each modification.

Binding effect of the proposal

Section 366(3) of CA 2016

The compromise or arrangement shall be binding on-

 

(a)      all the creditors or class of creditors;

(b)      the members or class of members;

(c)      the company; or

(d)      the liquidator and contributories, if the company is being wound up.

 

Section 400(5) of CA 2016

The proposed voluntary arrangement shall take effect and be binding on all creditors of the company whether or not the creditors have voted in favour of the proposal.

Section 421(3) of CA 2016

The proposal, with or without modifications, shall be binding on all creditors of the company whether or not the creditors have voted in favour of the proposal.

Requirement of fairness by court

In relation to schemes of arrangement, although the CA 2016 does not contain any provision in relation to the fairness of a scheme or arrangement, case law Sham Chin Yen & Ors V. Mansion Properties Sdn Bhd illustrates that:

 

“the court is not a mere rubber stamp and it will look at the arrangement to ensure that it is a reasonable one. If the court concludes that there is an objection to the arrangement, such that a reasonable person might not approve it. Then the court may refuse to approve the arrangement. The court must be satisfied that the proposal is at least so fair and reasonable that an intelligent and honest person who is a member of the class of the security holders bound by the arrangement acting alone in respect of his or the interest, as such security holder might approve it. "

There are no provisions in the CA 2016 that subject a CVA to the requirement of fairness.

 

Section 425 of CA 2016

Allows creditors to apply to the court for an order if the company’s affairs, business and property are being managed in a manner that is unfairly prejudicial to the interest of the creditors.