By Majella Gomes
It is important that insolvency professionals understand the three different modes of restructuring – Schemes of Arrangement (SoA), Judicial Management (JM) and Company Voluntary Arrangement (CVA) and their implications under the Companies Act 2016 (CA 2016) – to determine which of these would be most suited to an insolvent organisation’s restructuring requirements.
Several parties within the business ecosystem can apply for restructuring of an insolvent organisation e.g. companies, directors acting on behalf of the companies, liquidators and creditors. The timeframe within which the initial proposal for any of these actions must be made is usually quite short but extensions may be requested from the Courts.
Restraining Orders under Schemes of Arrangement
Provisions in the new law, such as a restraining order, will also take effect, to the benefit of creditors – although a restraining order requires the support of at least 50% of the company’s creditors. Section 366 of the Companies Act 2016 is expected to make things a little easier for creditors to recover their funds if a company undergoes restructuring. When this is the route decided upon, the firm’s EBITDA will be assessed; cash flow, different projects, debt levels etc. will be scrutinised to ascertain sustainability, noted Aaron Lok, Executive Director, KPMG Advisory at the MIA Insolvency Conference 2018. Restraining orders used to be made to last as long as possible but now the maximum period was a year, he said, adding that this tended to give investors more comfort.
Bernard Tan, Executive Director, BDO Malaysia, noted that as JM requires the handing over of control of a company’s operations to the Judicial Manager, there is a question as to how many business owners (especially family owned ones) would be willing to do so. From the creditors’ perspective, there is a fear that JM could be used as a means to frustrate lenders as, upon submitting an application to the Court for a JM order, lenders are unable to continue enforcement of their security, commence/continue legal proceedings, etc. except with leave of Court.
However, despite what many businesses see as strained financial circumstances, there have not been many cases of companies opting to restructure via JM, he said. Up to November 2018 and although the CVA and JM sections of the Companies Act 2016 had come into force on 1 March 2018, there appears to have been only one CVA and three JM cases. Tan shared his view that JM provides an additional option for companies and under the right circumstances (e.g. borrower with a viable business and genuine intention to restructure its debts), JM is a viable restructuring option. However, based on his experience involving a particular group of companies which made JM applications, Tan cautioned that there are still possibilities for the JM provisions to be abused.
With the advent of data, it is now also permitted to sell information of the restructuring company’s customers as part of the company’s assets as long as proper protocols are observed.
Conflict of interest could be an issue as well under the CA 2016; for example, the auditor cannot be the liquidator as well.
Generally, Malaysia follows Singapore’s methods; Singapore’s Insolvency Act addresses companies filing for insolvency according to the amounts that they owe.
In conclusion, even with new regulations under the CA 2016, the traditional, formal methods of insolvency do not differ greatly from most corporate rescue mechanisms.