When a company faces financial distress, several legal mechanisms may be employed to either rescue the company or bring its existence to a formal close. In Malaysia, three principal pathways exist: receivership, winding up, and schemes of arrangement (including under a restraining order, or RO). Each process has distinct objectives, procedures, and consequences for creditors, shareholders, and directors. Understanding these differences is critical for stakeholders navigating corporate insolvency.

1. Receivership: A Creditor-Driven Recovery Process

Receivership is a process whereby a secured creditor—typically a financial institution—appoints a receiver to take control of specific assets of the company, usually under a debenture or other security agreement. The goal is to realize the secured assets and recover debts owed to the secured party.

Key Features:

Company:

• Retains legal ownership of assets not subject to the receiver’s control.

• Directors remain in office but only retain authority over non-receiver-managed assets.

• May continue operating unaffected parts of the business.

Receiver:

• Takes control only of assets specified in the security document.

• May sell assets to repay the secured creditor.

• Owes a duty to act in the secured creditor’s interest, not the company or unsecured creditors.

• Can decide to continue or cease business operations, depending on the creditor’s instructions.

Receivership is limited in scope to the enforcement of a creditor’s security, and does not necessarily lead to the winding up of the company unless further action is taken.

2. Winding Up: The End of the Road

Winding up (also known as liquidation) is the legal process of dissolving a company, in which its assets are collected and distributed to creditors. It is typically used when a company is insolvent and there is no viable path to recovery.

Key Features:

Company:

• Directors lose all powers and authority.

• Business operations cease (except as needed for winding up).

• Cannot enter new contracts or business arrangements.

Liquidator:

• Appointed by the court or creditors to take over the company’s affairs.

• Responsible for selling company assets, paying creditors, and distributing any surplus to shareholders.

• Ultimately dissolves the company once all matters are settled.

Winding up represents a terminal process, focused on orderly dismantling and distribution rather than recovery.

3. Scheme of Arrangement / Restraining Order (RO): A Structured Path to Recovery

A Scheme of Arrangement is a court-approved compromise between a company and its creditors or members, aimed at restructuring debts or reorganizing operations. It is a debtor-in-possession rescue tool, allowing the company to continue operations while a restructuring plan is negotiated and implemented.

Where necessary, the company may apply for a Restraining Order (RO) under Section 368 of the Companies Act 2016 to protect itself from legal actions while the scheme is proposed and executed.

Phases of Restraining Order (effective 1 April 2024):

Phase 1: Automatic Moratorium (2 months)

• No supporting materials required.

• Offers urgent, temporary protection.

Phase 2: Initial RO (3 months)

• Court may extend RO if satisfied the application is bona fide (e.g. MOU with white knight, appointed advisers).

Phase 3: RO Extension (up to 9 months)
Requires satisfaction of all four conditions:

1. Scheme must involve at least 50% in value of creditors.

2. RO is necessary for implementation of the scheme.

3. Statement of Affairs filed within 3 days of application.

4. Creditor-nominated director appointed.

Cooling-Off Period (Section 368(3B)):

• No second RO allowed within 12 months from the Initial RO, preventing abuse through repeated filings.

Effects of RO:

• Legal actions, winding-up petitions, and receiver appointments are prohibited without Court approval.

• Disposals or acquisitions of property outside the ordinary course of business post-RO are void unless the Court orders otherwise.

Rescue Financing (Section 368B):

• Companies may raise super-priority financing, with Court approval, even if assets are already secured.

• Funds must be necessary for survival or to achieve better realisation of assets compared to liquidation.

• Facilitates continued operation and supports success of the restructuring.

Power to Bind Dissenting Creditors (Section 368D):

• The Court can approve a scheme even if some creditor classes oppose it (cram down), provided: a) Dissenting creditors receive no less than they would in a winding up. b) At least one class of creditors (75% in value) supports it.

Creditor Classification:

(a) Broad Definition of “Creditor”:

• Includes contingent, unproven, and unliquidated claims (Asiabio Capital v Seacera Group [2021]).

(b) Two-Stage Class Test:

• Follow test from Sovereign Life Assurance v Dodd (1892): Creditors must have similar enough rights to consult together.

• Reinforced by Re Hawk: Similar creditors must consult together; overly rigid class separation can give veto power to minorities.

• Class classification is a judgment-based exercise, depending on how the scheme affects different creditors relative to a comparator (e.g., liquidation).

(c) Exclusion of Certain Creditors:

• It is not mandatory to include all creditors.

• So long as exclusion is based on legitimate commercial justification and not arbitrary, it is permitted.

• Statutory safeguards under Section 368 protect against abuse.

Conclusion: Choosing the Right Path

Each process serves a different objective. Receivership favors secured creditors. Winding up prioritizes orderly closure. A Scheme of Arrangement, supported by ROs and rescue financing, offers a second chance. The choice depends on commercial context, the company’s financial state, creditor dynamics, and whether genuine rescue is possible