Contributed By Adnan, Sundra & Low
From 2009 to December 2018, there were 24,320 compulsory windings-up by the court and 15,010 voluntary windings-up.
In Malaysia, the development of financial restructuring and insolvency are dependent on the development of the legal framework as financial restructuring procedures and insolvency proceedings are governed by statutes (mainly under the Companies Act 2016 (CA 2016)).
At this juncture, the effect of the changes to the CA 2016 and the Insolvency Act 1967 (IA 1967), has not really made an impact on the market, given its infancy. For instance, under the Insolvency Act, bankruptcy proceedings may only be commenced against personal guarantors after exhaustion of all other remedies and securities against the principal borrower. Even with these new provisions, financial institutions still insist upon guarantees being given by the individual directors of companies.
The corporate insolvency regime in Malaysia is mainly governed by the CA 2016, which came into force in stages from 31 January 2017, replacing the previous Companies Act 1965 after 51 years. Division 8 of Part III of the CA 2016, which introduces a corporate rescue mechanism in Malaysia for the first time, only came into force recently on 1 March 2018. As a result of this, there are only very limited cases involving corporate restructuring.
The insolvency of business entities and partnerships are governed by the IA 1967 via the Bankruptcy (Amendment) Act 2017 (BAA 2017) that renamed the previous Bankruptcy Act 1967 as IA 1967. The BAA 2017 has also introduced a pre-bankruptcy mechanism called the voluntary arrangement (Part 1 of the IA 1967) where the debtor will appoint a nominee to act as an independent professional to oversee and supervise the voluntary arrangement.
The five main corporate insolvency processes or restructuring processes in Malaysia are as follow:
(a) a company under a resolution of its members of the board of directors; or
(b) a creditor, including any contingent or prospective creditor.
(a) a voluntary winding-up; and
(b) a winding-up by a court.
A voluntary winding-up may be effected by a resolution, either:
(a) by a member’s voluntary winding-up. This is where the company is solvent and the liquidator is appointed by the members at a member’s meeting; or
(b) by a creditor’s voluntary winding-up. This is where the company is insolvent.
A winding-up by a court is also known as a mandatory winding-up where a petition is being presented to the court by one or more petitioners. The petitioners include creditors, liquidator and the Registrar.
There are no mandatory obligations under the CA 2016 that compel companies to commence formal insolvency proceedings within a specific timeframe.
Although companies are not obliged under the CA 2016 to commence insolvency proceedings, directors risk personal liability for trading while insolvent or fraudulent trading. Section 539(3) of the CA 2016 provides that, in the course of winding-up proceedings of a company, any officer of the company who was knowingly a party to contracting a debt had, at the time the debt was contracted, no expectation that the company would be able to pay the debt, commits an offence of insolvent trading and shall upon conviction be liable to imprisonment or to a fine or to both. Upon conviction under this section, the court may also upon application declare the officer to be personally liable for the repayment of the whole or any part of the debt.
Further, when an officer of a company was knowingly a party to the carrying-on of the business of the company with intent to defraud the creditors of the company or creditors of any other person or for any fraudulent purpose, the court may declare the officer to be personally liable, without any limitation of liability for all or any of the debts or other liabilities of the company, as the court directs.
There are no provisions under the CA 2016 that oblige the company to commence proceedings. However, see 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership for the procedural options that are available to a company.
Subdivision 7 of Part IV of the CA 2016 provides for the provisions in relation to involuntary proceedings (ie, winding up by a court). An order to wind up by a court may be made on the petition by any one or more parties, as prescribed in s 464 of the CA 2016, among others, including the following:
The circumstances in which a company may be wound up by a court include:
“Insolvency” is not defined under the CA 2016 but has received judicial appreciation. In this regard, it is settled law that insolvency is determined in a commercial context, which is the failure to pay current demands regardless of whether the debtor is in possession of assets which, if realised would permit it to discharge its liabilities. The test of commercial insolvency simply means that the respondent company is not able to meet current debts when they fall due.
A voluntary winding-up may be affected by way of a resolution of the members of the company. However, when such a resolution is proposed, the directors of a company are required to prepare a declaration of solvency (ie, the company is able to pay its debts in full within a period not exceeding twelve months after the commencement of the winding-up). In the event that the declaration is made, the voluntary winding-up shall continue as a members’ voluntary winding-up; alternatively, if the declaration is not made (ie, the directors deem that the company is unable to pay its debts), the voluntary winding-up will proceed as a creditors’ voluntary winding-up.
As explained in 2.5 Commencing Involuntary Proceedings, an involuntary winding-up, ie, a winding-up by the court, a company may be wound up on the petition of, inter alia, the following entities:
Insolvency is not a requirement to commence a compulsory winding-up (as there may be other reasons, such as it is just and equitable or the directors of the company have acted in the affairs of the company in a manner unfair or unjust to its members), but rather is a test applied by the court upon being presented with a winding-up petition to determine if the company is able to pay its debts (supra). However, the most common form of compulsory winding-up is commenced by creditors, due to what is described as an inability to pay its debts (a technical description of what is basically a failure on the part of a company to pay a debt to a creditor above a certain monetary threshold within a fixed period of time).
In this regard, s 466 of the CA 2016 provides for the definition of “inability to pay debts”. A company is deemed to be unable to pay its debts if:
The CA 2016 is not the only legislation in Malaysia that provides for corporate insolvency legislation; there are provisions in industry-specific legislations imposed on insolvency of certain entities.
The Financial Services Act 2013 contains provisions in relation to the insolvency of licensed financial institutions. Section 23 of Trust Companies Act 1949 provides for the winding-up of a trust company. The winding-up of a business trust is provided for under s 256ZG of Capital Markets and Services Act 2007.
The Corporate Debt Restructuring Committee (CDRC) was formed by Bank Negara Malaysia to provide a platform for both debtor and creditors to work out a feasible debt-restructuring scheme without having to resort to legal proceedings. Nonetheless, the code is not intended to be legally binding on the parties.
Under the New Companies Act regime of 2016, the Act introduced a new provision under division 8, which is a CVA, that is applicable only to private limited companies. The CVA was modelled after the similar provisions of the UK Insolvency Act 1986, known as the company voluntary arrangement.
Given that this is a rather new provision and only applicable to private limited companies, there is very little data as to how the market views the applicability of a CVA. Financial Institutions generally in Malaysia are more inclined to follow the statutory regime of a court-approved scheme of arrangement, given the involvement of the court in its regulation. See 4.2 Rights and Remedies for further illustration on CVAs.
Generally speaking, consensual standstills are usually either procured by an agreement in writing and/or orally pursuant to discussions between a creditor and a debtor. However, in most circumstances there is a requirement of an upfront payment as consideration for forbearance on part of the creditor and a time-period by which, if a settlement is not reached, the forbearance will lapse and the creditor will proceed with whatever legal rights it may have.
Generally, the new money is injected by a white knight to allow for a rescue of a commercially insolvent company. Whether there would be superior rights afforded to the white knight depends on the negotiations between the insolvent company, its creditors and the white knight.
At this juncture, there are no statutory provisions which would allow for a party who injects new money to be given super-priority liens or rights.
There appear to be no provisions in statute which would prohibit the creditors from voting oppressively.
Within Malaysia, a consensual and out-of-court financial restructuring or workout maybe perfected by obtained an order of the court (Consent Order). Any dissenting creditors or owner (whose rights or interest would be directly affected by the order) may make an application to intervene before the order has been made, sealed and perfected. However, once the order has been made, the only recourse the dissenting creditors or owners have is to bring a separate action and seek appropriate relief from the court.
The types of security that may be taken by secured creditors in Malaysia are as follows:
Rights of secured creditors are provided for under s 524 of the CA 2016. The secured creditors may:
Generally, secured creditors will enforce their security via the security instrument. However, in the following situations, a secured creditor may only enforce their rights with leave from the court:
Although the rights of a secured creditor are subject to a moratorium, if the security instrument contains a valid and irrevocable power of attorney and the power to exercise this power has materialised, the secured creditor or the appointed R&M will be the attorney of the debtor. Any sale of property secured by the instrument will be valid and not considered to be a disposition of property. A power of attorney will only be revoked when the company is dissolved.
A secured creditor does not have to wait until formal restructuring or liquidation proceedings have been initiated to enforce their claim. They may enforce their security, as long as the event specified in the security instrument allowing enforcement has materialised.
All secured creditors are subject to similar rights and duties.
The CA 2016 does not contain any specific provisions that award special protections and rights to secured creditors. However, in relation to restructuring proceedings:
Generally speaking, the assets which have been charged to a secured creditor do not form part of the pool of assets to be distributed to the insolvent company’s unsecured creditors (and also the statutory creditors). As such, those assets do not vest in the liquidator. A secured creditor is fully entitled to deal with its charged asset pursuant to s 524(1) of the CA 2016; a secured creditor may:
However, as part of the general pool of assets available for distribution, the following have priority over all unsecured creditors. See 5.8 Statutory Waterfall of Claims for priority of claims. Further, when a secured creditor chooses to exercise his or her right as provided by the security instrument, the proceeds of the sale or any money so attached will be subject to the payment of any outstanding wages of employees who were employed or worked on the charged land.
An unsecured creditor, however, has to prove his or her debt immediately after the making of a winding-up order. An unsecured creditor will only be paid after the secured creditors and preferential creditors’ debts have been fully settled.
There are no specific provisions in the CA 2016 providing for unsecured trade creditors and for whether or not an unsecured trade creditor will be kept whole during restructuring process. However, when entering into any restructuring procedure, it is unlikely that the unsecured creditors will be kept whole.
The CA 2016 does not provide specific rights and remedies for unsecured creditors. However, unsecured creditors who have the right to vote might be able to disrupt the restructuring process, as any proposal made will only be binding on all creditors after obtaining a majority of 75% in value of the creditors. See 6.1 Statutory Process for a Financial Restructuring/Reorganisation.
Pursuant to s 19 of the Debtors Act 1957, a creditor may apply for the seizure of a judgment debtor’s property before upon fulfilment of the conditions stated in s 19 of the Act, provided that the requirements contained in s 19 (1) of the same Act are met.
The time-limit to commence a legal action against a debtor in any matters relating to any forms of contract is generally six years from the date on which the cause of action accrued, ie, the date on which the money is due for payment.
When a judgment has been obtained, the judgment creditor has 12 years from the date that the judgment became enforceable to enforce the judgment.
However, subject to Order 46 Rule 2 of the Rules of High Court 2012, when six years since the date of judgment have elapsed, a judgment creditor may only enforce the judgment with leave from the court.
In Malaysia, a landlord-tenant relationship is a contractual one pursuant to the tenancy agreement. As such, any claim for damages that a landlord would have against a tenant would be for breach of that contract and as a result would render the landlord an unsecured creditor, thus they would rank pari passu with all other unsecured creditors.
There are no special procedures or requirements that have to be satisfied by foreign creditors. All creditors are to be treated the same way, depending on their classification.
Claims of creditors are to be paid from the assets available for distribution (which excludes charged assets) in the following order:
See 5.8 Statutory Waterfall of Claims. Claims for administration expenses, employee and pension claims, tax claims and office-holder fees are categorised as preferential debts. If the assets of the company for payment of unsecured creditors are insufficient to meet any preferential debts in s 527(1)(b), (d), and (e) and any amount payable in (3), these debts will have priority over claims under a floating charge.
Schemes of Arrangement
A scheme of arrangement is a court-approved compromise or arrangement that may be initiated by the company, any creditor or member of the company, liquidator (if the company is being wound up) or the judicial manager (if the company is under judicial management).
The initiator will apply to the court for an order for meeting of the creditors or members to be held. Only a proposed compromise or arrangement that has been agreed by 75% 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 and approved by the court will be binding on all the creditors, members of the company, the company or the liquidator and contributories (if the company is being wound up). This order will only have effect upon lodgment of an office copy of the order with the Registrar (the Chief Executive Officer of the Companies Commission of Malaysia).
A proposed compromise or arrangement may be subject to alterations or conditions as the court thinks just. The court may also, on application, appoint an approved liquidator to assess the viability of the proposed arrangement or compromise. The appointed liquidator will prepare a report for submission to the applicant.
Further, when a compromise or arrangement has been proposed between the company and its creditors or any class of those creditors, the court may, on application, restrain further proceedings in any action or proceedings against the company except by leave of the court. The restraining order granted under s 368(1) of the CA 2016 may be extended for a period of not more than nine months if the conditions in s 368(2) of the CA 2016 are fulfilled.
The CVA is a mechanism that involves minimal court intervention and is only applicable to a private company that does not have charges created over its property or any of its undertakings. Persons who may propose a voluntary arrangement are the directors of a company, the judicial manager (if the company is under a judicial management order) or liquidator (if the company is being wound up).
To initiate a CVA, the directors will need to appoint a nominee and must submit a document setting out the terms of the proposed CVA and a statement of the company’s affairs. The nominee will then submit to the directors a statement indicating in his or her opinion in the following matters:
Under the proposed CVA, the nominee appointed will also be appointed as a trustee or supervisor supervising the implementation of the CVA.
Upon filing of the documents as listed in s 398(1) of the CA 2016, a moratorium will commence automatically and remains in force for 28 days. The effect of a moratorium amongst others includes that no petition may be presented for winding up the company and no legal proceedings may be taken against the company. Whilst a moratorium is in force, the nominee is to summon a meeting of the company and a meeting of its creditors.
A simple majority is required in a meeting of members and a majority of 75% of the total value of creditors present and voting in a creditor’s meeting is required to approve the proposed CVA. Once approved, the proposed CVA will take effect and be binding on all creditors of the company whether or not the creditors voted in favour of the proposal. Although the court’s approval is not required, the nominee will have to file the result of either meeting to the court in Form 2 within seven days from the date of the meeting. The nominee will also need to notify the Registrar the result of either meetings on the date of filing Form 2. Section 400(6) of the CA 2016 prohibits the modification of the proposal.
The supervisor, who normally is also the nominee, but not necessarily the nominee, is under a duty to implement the agreed arrangement or compromise. The supervisor will need to act in accordance with the terms of the arrangement or compromise. There is no statutory protection awarded to the supervisor in the process of carrying out his or her duties. A nominee, however, may, on application to the court, absolve himself or herself from liability for negligence, breach of duty, default or breach of trust if he or she had acted honestly and reasonably under the circumstances.
The CA 2016 does not provide any mechanism that allows aggrieved parties to challenge the CVA. There is, however, a provision that allows aggrieved parties to challenge the conduct of the supervisor by an appeal to the court. The appeal must be made by way of notice of application in Form 23 of the First Schedule to the CA 2016 and served on the relevant parties by the applicant not less than three clear days before the hearing. The court may confirm, reverse or modify any act or decision of the supervisor, give directions to the supervisor or make any such orders as the court thinks fit.
The aim of CVA is to provide an economical, speedy and minimal court-intervention process for companies with financial difficulties to come to an arrangement with their creditors at an earlier stage before the companies are unable to pay their debts.
The JM is a new corporate rescue mechanism that only came into force on 1 March 2018. An application for the appointment of a judicial manager may be made jointly or separately by (i) a company under a resolution of its members of the board of directors; or (ii) a creditor, including any contingent or prospective creditor. An applicant must nominate an insolvency practitioner, who is not the auditor of the company, to act as the judicial manager.
An application will be made by way of an originating summons. The applicant will need to serve the application together with a supporting affidavit (i) on the company (if the applicant is a creditor) within five days from the filing of the application; and (ii) on the holder of debenture who has appointed or may be entitled to appoint a receiver or receiver and manager of the whole or substantially the whole of the company’s property. The applicant shall also cause the notice of application to be advertised not less than 14 days before the hearing date of the application on a widely circulated Malaysian national language newspaper and English-language newspaper. The applicant is also obliged to lodge a copy of the notice with the Registrar on the date of advertisement.
The court will only make a JMO in relation to a company that has not gone into liquidation and if the court is satisfied that the company is or will be unable to pay its debts and the JMO will be likely to achieve one or more of the purposes as listed in s 405(1)(b) of the CA 2016, namely: (i) the survival of the company, or the whole or part of its undertaking as a going concern; (ii) the approval of a compromise or arrangement under s 366 of the CA 2016 between the company and any such persons mentioned in the section; or (iii) a more advantageous realisation of the company assets than would be effected by a winding-up.
The filing of an application for a JMO has the following effect:
Where a JMO has been made, the judicial manager shall, within 60 days or a period as the court may allow, after the making of the order, devise a statement of proposal achieving one or more of the purposes mentioned in s 405(1)(b) of the CA 2016. A proposal by the judicial manager will be binding on all creditors once it has been approved by 75% of the total value of creditors.
Section 411 of the CA 2016 lists the effect of the JMO, which includes:
Section 425 of the 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. The court has, among others, the power to regulate future management of the judicial manager.
Schemes of Arrangement
There is no automatic moratorium in a scheme of arrangement. See 6.1Statutory Process for a Financial Restructuring/Reorganisation for more details on the restraining order which may be issued pursuant to s 368 of the CA 2016, which is commonly resorted to by companies considering a scheme of arrangement.
In a scheme of arrangement, the directors and officers of the company will continue to manage the company. However, s 368(4) of the CA 2016 provides that any disposition or acquisition of property other than in the ordinary course of business of the company, without leave of the court, shall be void and the company and every officer that contravenes this section shall be guilty of an offence.
In a CVA, the directors and officers of the company will continue to manage the company subject to the moratorium that commences automatically upon filing the requisite documents (see 6.1Statutory Process for a Financial Restructuring/Reorganisation).
For both schemes of arrangement and CVAs, there are no provisions prohibiting the directors from continuing the operation of business and create further indebtedness. However, the directors must be mindful that, in the event that the company goes into liquidation, the directors will be liable if they contracted to a debt without reasonable expectation that the company will be able to pay the debt.
See 6.1Statutory Process for a Financial Restructuring/Reorganisation for the position of the company during a JMO application. 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. The powers conferred and duties imposed on the board of the directors shall be exercised by the judicial manager upon his or her appointment. The Ninth 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.
Schemes of Arrangement
It is the responsibility of the applicant for the organisation of the composition of the classes because there must be different meetings for different classes of creditors to consult on the proposed arrangement or compromise. The rationale behind this is that it is impossible to consult persons whose rights are not similar.
If a meeting is summoned, every notice summoning the meeting that is sent to a creditor or member shall contain a statement explaining the effect of the compromise or arrangement, and in particular, stating any material interest of the directors, whether as directors or as members or as creditors of the company or otherwise, and the effect of the compromise or arrangement in so far as it is different from the effect on the similar interest of other persons. The notice must contain all matters relating to the assets and receivables to allow the creditors to make an informed decision.
Notice of the meeting must be given to every creditor of whose claim and address the nominee is aware. The notice of the meeting must be given in accordance with Division 5 of Part III of the CA 2016. The notice given shall be at least 14 days before the meeting or any such longer period that may be prescribed by the constitution of the company. Any proposal under the CVA shall not affect the right of a secured creditor (without his or her concurrence). A moratorium may be extended pursuant to the provisions of paragraph 13 of the Eighth Schedule of the CA 2016 via the establishment of a moratorium committee.
As discussed in 6.1Statutory Process for a Financial Restructuring/Reorganisation, after devising a proposal the judicial manager will summon a creditor’s meeting. Creditors are only entitled to vote at the meeting upon submission of proof of debt to the judicial manager.
A creditor’s committee may be established by the meeting approving the judicial manager’s proposal held under s 421 of the CA 2016. The committee of creditors shall consist of five to seven persons. The duty of the committee is to assist the judicial manager and to scrutinise the conduct of the judicial manager. The committee may also require the judicial manager to attend before the meeting to furnish the meeting with any such information relating to the carrying-out by the judicial manager of his or her function as the meeting may reasonably require.
See 6.1Statutory Process for a Financial Restructuring/Reorganisation for claims of dissenting creditors under schemes of arrangement, a CVA and a JM.
There are no provisions in the CA 2016 in relation to the trading of claims made against a company undergoing restructuring.
Under a scheme of arrangement, an application may be made to the court for approval of a scheme for reconstruction of any company or the amalgamation of any two or more companies.
Under a scheme of arrangement, when there is no restraining order in place, the company may sell its assets in the ordinary course of business. When a restraining order is in place, any disposition of the property of the company made out of the ordinary course of business, except with leave of the court, shall be void.
For a JM, a judicial manager has a wide range of powers as provided for under the Ninth Schedule of the CA 2016. The powers include the power to sell or otherwise dispose of the property of the company. As such, the company itself may not dispose of such assets without the consent of the judicial manager.
For a CVA, there are no provisions in the CA 2016 in relation to the company’s use of or sale of the assets of the company. However, when the moratorium is in force, no steps may be taken to impose any security over the company’s property.
See 6.7 Restrictions on a Company’s Use of or Sale of its Assets.
A secured creditor may surrender the charge to the liquidator for the general benefit of creditors and claim as an unsecured creditor. However, in a CVA, a proposal that will affect the right of a secured creditor may not be approved except with the consent of the secured creditor concerned.
There are no provisions in the CA 2016 in relation to priority new money.
There are no provisions in the CA 2016 that allow parties to utilise the statutory restructuring procedures to determine the value of claims. In fact, for the purposes of involuntary winding-up proceedings, if the company disputes the debt successfully, those proceedings are likely to be dismissed.
In a JM, s 425 of the 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.
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 illustrates that, when considering whether to order for a meeting pursuant to s 366 of the CA 2016, the court will evaluate the reasonability and fairness of the proposed arrangement based on the information disclosed by the applicant. Further, when considering an application for a restraining order, the court will also consider whether the proposed arrangement can reasonably be supposed by sensible businesspeople to be for the financial benefit of both the company and the creditors.
There are, however, no provisions in the CA 2016 that subject a CVA to the requirement of fairness.
There are no statutory provisions in Malaysia in relation to releasing non-debtor parties from liabilities.
The CA 2016 only provides for the right to set off in winding-up procedures.
When it is no longer possible to implement the agreed CVA, the supervisor is usually required to report the fact to the creditors and distribute any funds in possession of the supervisor in accordance with the terms of the agreement. Pursuant to s 402 of the CA 2016, when there is a failure to implement the agreed CVA, it will result in the premature end of the CVA and the CVA will cease to have effect.
For a JMO, the judicial manager of a company shall apply to the court for the JMO to be discharged if it appears to the JM that the purpose specified in the JMO is incapable of being achieved.
There are no statutory provisions in Malaysia in relation to existing equity owners.
Part IV of the CA 2016 governs statutory insolvency proceedings in Malaysia. There are two types of winding-up processes in Malaysia, namely voluntary winding-up and compulsory winding-up.
A company may be wound up voluntarily by passing a resolution. A voluntary winding-up may either be initiated by a company’s members or by its creditors.
A member’s voluntary winding-up is initiated when the directors of a solvent company have passed a resolution for the assets of the company to be sold, for liabilities to be satisfied and to distribute the remaining assets of the company to the shareholders. Before passing the resolution, the directors of the company are obliged under s 443 of the CA 2016 to make a written declaration that the directors are of the opinion that the company will be able to pay its debts in full within twelve months after the commencement of winding up. At the meeting, the members will also appoint a liquidator for the purpose of winding up the company’s affairs and distribution of assets.
After the passing of a resolution for a voluntary winding-up, the company must lodge a copy of the resolution with the Registrar within seven days after the meeting and circulate the notice in one widely circulated national-language newspaper and one widely circulated English-language newspaper within the ten days following the meeting.
Upon the appointment of the liquidator, all powers of the directors cease, except in so far as the company in general meets with the consent of the liquidator, or the liquidator sanctions the continuance of all the powers of the directors. The liquidator has the power to summon a meeting of the creditors if the liquidator is of the opinion that the company will not be able to pay its debts. Once a meeting is held after being summoned by the liquidator, the winding-up will proceed as if the winding-up were a creditor’s voluntary winding-up.
A creditor’s voluntary winding-up may be initiated when the directors of a company make a statutory declaration that the company is unable to continue its business and the meetings of the company and of its creditors have been summoned or through the conversion from a member’s voluntary winding-up. An interim liquidator, who has the same power as a liquidator, will be appointed in the initiation.
Section 451 of the CA 2016 provides that, after the commencement of a creditor’s voluntary winding-up, no action or proceedings shall be initiated or will proceed against the company except with leave from the court.
The effect of a winding-up are as follow:
When the affairs of the company are fully wound up, the liquidator shall prepare an account in relation to the winding-up process and the disposition of company’s properties are to be presented at a meeting of the company and, in creditors’ voluntary winding-up, at a meeting of members and creditors. The company will be dissolved three months after the lodging of the return of the holding of the meeting with a copy of the account with the Registrar and Official Receiver.
Compulsory Winding-up (Subdivision 7)
Following on from 2.5 Commencing Involuntary Proceedings, the petition of winding up a company is governed by the Companies (Winding-Up) Rules 1972. The commencement of winding up shall be at the date of the winding-up order.
After the presentation of the petition and before a winding-up order has been made, the court may, upon an application, order a stay of proceedings or restrain further proceedings against the company. During this period of time, the court may also appoint an interim liquidator. When a winding-up order has been made, no action or proceedings shall proceedings without the court’s leave. After the presentation of a winding-up petition, any disposition of property of the company, save for those by liquidator and unless the court otherwise orders, shall be void.
After an interim liquidator has been appointed or a winding-up order has been made, the company’s property will be taken into the control of the interim liquidator or the liquidator. The powers of the liquidator are specified in the Twelfth Schedule of the CA 2016, subject to control of the court and any creditors or contributories.
The company will be dissolved upon the liquidator’s application to the court.
Upon the making of the winding-up order, all assets belonging to the company will be vested under the control of the liquidator. As mentioned in 7.1 Types of Voluntary/Involuntary Proceedings, in a compulsory winding-up, after the presentation of the petition, any disposition of property save those that are disposed by the liquidator will be void. Section 472(1) of the CA 2016 does not exclude a bona fide transaction, but the onus will be on the applicant.
In compulsory winding-up procedures, the liquidator has the power to sell the immovable and movable property and other items of the company by public auction, public tender or private contract; the liquidator in a voluntary winding-up may only execute a sale of assets by obtaining approval by a special resolution in a member’s voluntary winding-up and in a creditor’s voluntary winding-up, by approval of the court of the committee.
Generally, the purchaser will acquire a good title in a sale of assets. Winding up itself will not affect the contracts the company has entered into before winding up. However, one must be mindful of the principle of undue preference, so any contract which favours certain creditors may be challenged by the liquidator. Section 528 (1) of the CA 2016 also prevents transactions that give unfair preference to certain creditors.
There are no provisions in the CA 2016 in relation to the failure of a company or creditor to observe the statutory plan.
There are no provisions in the CA 2016 in relation to the investment of priority new money during insolvency proceedings.
There are no provisions in the CA 2016 that provide for the liquidation of a corporate group on a combined basis, as each company in Malaysia is treated as a separate legal entity.
In a creditor’s voluntary winding-up, the liquidator may at the request of the creditors summon a separate meeting to determine whether or not to appoint a committee of inspection to act with the liquidator and, if so, to elect the members of the committee. The committee shall consist of not more than five persons (whether creditors or not) to represent the interest of the creditors. A committee of inspection, however, is less common in a compulsory winding-up.
The CA 2016 does not contain provisions in relation to the responsibilities and powers of the committee but, generally, the duty of the committee is to guide and give direction to the liquidator. Members of the committee will not be remunerated but expenses incurred by the committee will be reimbursed by the liquidator from the assets of the company.
See 7.2 Distressed Disposals.
Malaysia does not recognise foreign insolvency restructuring and proceedings except where a foreign company carrying out business in Malaysia has gone into liquidation or dissolved in its place of incorporation or origin. In this event, the foreign liquidator will have the powers and functions of a liquidator until a liquidator for Malaysia is appointed by the Malaysian Court.
In addition, the Reciprocal Enforcement of Judgments Act 1958 allows a judgment creditor, upon application to the High Court of Malaysia, to enforce a foreign judgment of certain jurisdictions’ superior courts in Malaysia.
The UNCITRAL Model Law on Cross-Border Insolvency provides for effective mechanisms to deal with cases of cross-border insolvency proceedings. However, Malaysia has not incorporated this Model Law into domestic legislation.
No such rules apply in Malaysia.
Foreign creditors are not dealt with in a different way in proceedings in Malaysia.
Under receivership, a court may appoint an R&M upon application if the court is satisfied that one of the circumstances in s 376(1) of the CA 2016 has materialised.
If a winding-up order is made under a compulsory winding-up, the court will appoint a liquidator.
A liquidator in a voluntary winding-up procedure is an agent of the company and will be remunerated out of the assets of the company in priority to all other claims.
Subject to an order of court, an R&M will have the powers set out in the Sixth Schedule of the CA 2016, among which is the power to borrow money on the security of the property of the company, to take possession and control of the property of the company and to carry on any business of the company. A court-appointed R&M is an officer of the court. As such, no action may be brought against a court-appointed R&M without obtaining the court’s leave.
An R&M is also obliged to lodge a detailed account setting out particulars as provided for in s 392(1) of the CA 2016.
Due to his or her appointment by the court, a liquidator is an officer of the court, and is therefore subject to the control of the court. Upon the appointment of a liquidator, the directors cease to be in power. The role of the liquidator is to administer the assets of the company and distribute the assets among its creditors (see Twelfth Schedule of the CA 2016 for powers of liquidator in a compulsory winding-up). A liquidator appointed in a voluntary winding-up, however, may also exercise powers given to a court-appointed liquidator (see Eleventh Schedule of the CA 2016 for powers of a liquidator in a voluntary winding-up).
Qualifications of liquidators are provided for in s 433 of the CA 2016. The CA 2016 only permits an “approved liquidator” ie, persons recognised by a professional body with experience and capacity. Below are, among others, persons who are not qualified to be appointed as a liquidator:
In relation to an R&M, s 372 of the CA 2016 provides that any person who is an approved liquidator shall be qualified to be appointed as an R&M.
Generally, the directors of the company will seek advice from accountants, legal advisers and financial advisers.
All professionals employed will be remunerated based on the terms of the service agreement that they entered into with the company.
The CA 2016 does not contain any provisions that require a company to obtain authorisation or judicial approval if that company wishes to appoint advisers in relation to restructuring procedures or insolvency processes.
A professional adviser owes a duty towards the company by virtue of the agreement entered into between them and the company.
Generally, an accountant will be responsible for the preparation of financial statements of a company and in certain situations, evaluates the assets of the company. Legal advisers will ensure that the company has complied with all statutory requirements. Financial advisers, however, play a vital role in evaluating the capital structure of the company.
In Malaysia, parties do not usually arbitrate or mediate when their dispute involves restructuring and insolvency matters.
Courts do not order mandatory arbitration or mediation in a judicially supervised insolvency or restructuring proceeding.
As arbitration agreements are in essence a form of proceeding, these proceedings, while enforceable, would still be subject to any order restraining and/or staying such proceedings.
The relevant statute governing arbitrations is the Arbitration Act 2005. There are no statutes which govern mediations.
Arbitrators and mediators are appointed by agreement of the parties or by reference to the relevant governing bodies/organisations of arbitrators/mediators. The governing bodies/organisations include the Asian International Arbitration Centre and the Malaysian Mediation Centre.
When a company is solvent, directors owe both statutory and common law duties towards the company. Pursuant to s 213 of the CA 2016, a director is required to exercise his or her powers in good faith and in the best interest of the company. A director shall exercise reasonable care, skill and diligence with the knowledge, skill and experience which may reasonably be expected of a director having the same responsibilities and any additional knowledge, skill and experience that the director in fact has. The directors do not owe a separate statutory duty to the shareholders and creditors; the duty of the directors is towards the company.
Although the CA 2016 does not contain any provisions in relation to a director’s duty to creditors during insolvent, there are provisions in the CA 2016 that will affect the directors when discharging their duty. The undue preference provision in Subdivision 3 of Division 2 of Part IV of the CA 2016 prevents the directors from disposing the company’s assets in ways that may prejudice the company’s creditors.
Section 540 of the CA 2016 further provides that it is an offence if, in the course of the winding-up of a company, it appears that any business of the company has been carried out with the intention to defraud the creditors of the company or creditors of any person. Directors who are found guilty of this offence shall be personally liable, without any limitation, for all or any of the debts or other liabilities of the company, as the court directs.
Generally, creditors do not have locus standi to bring an action against the directors; all actions are brought by liquidators. Nonetheless, creditors (any other person with an interest in the winding-up) are empowered by s 542 of the CA 2016 to apply to court to have the conduct of directors examined.
Under the CA 2016, in a court scheme of arrangement and where the debtor company is applying for a restraining order, s 368(20(d) of the CA 2016 requires for a nominee director appointed by a majority of the creditors to be appointed to the board of the debtor company before a restraining order is granted. The Act does not state to whom this nominee reports, but it is generally accepted that the nominee is an independent director placed by majority creditors and whose appointment is sanctioned by the court.
Section 217 of the CA 2016 provides for the appointment of a nominee director. A nominee director is a director appointed by, or is a representative of, a member, employer or debenture-holder. In the event that there is any conflict between his or her duty to the company and his or her duty to the nominator, the CA 2016 prohibits him or her from subordinating his or her duty to act in the best interest of the company to his or her duty to his or her nominator. A nominee director is like any other person occupying the position of director of a company, and is therefore subject to the same directors’ duties (see 12.1 Duties of Directors for directors’ duties).
A fundamental principle in company law is that a company is an entity distinct from its members and officers. The liability of a member is as follows:
When there is an acquisition or sale made by the company and a director or company is connected to a director within a period of two years before the commencement of the winding-up, the liquidator can recover from that person or company an amount that corresponds to the difference in value between the value of the asset sold or acquired and the actual consideration paid or received.
In addition, if there is any preference given to a creditor over other creditors in any transaction relating to property made or done by or against a company where the company is insolvent at the time of the transaction, that act shall be deemed fraudulent and void if such acts are done within six months from the presentation of the winding-up petition. However, the transaction will not be void if the counterparty dealt with the company for valuable consideration and without any actual notice of the contravention.
Further, with leave of the court or the committee of inspection, the liquidator may disclaim onerous contracts, such as any estate or interest in land that is burdened with onerous covenants, shares in corporations, and unprofitable contracts.
See 13.1 Historical Transactions.
The provisions of the CA 2016 will only void transactions against the liquidator in the event of a winding-up. Any such annulment of transactions will be asserted by the liquidators.
The debtor company will at the request of the creditors prepare a valuation of the company. This is normally done by its auditors and/or an independent third-party auditor. The report would then serve as a basis on which the creditors in general will decide whether they would agree or consent to any form of arrangement or scheme.
Usually, the creditors will initiate a valuation.
Generally, the creditors will rely on the auditors to ensure that the valuation is carried out in accordance with accepted practices, guidelines and professional standards.