Corporate rescue reforms in the proposed Companies (Amendment) Bill 2020

Corporate rescue reforms in the proposed Companies (Amendment) Bill 2020
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This Bill will introduce significant amendments and will be a real shot in the arm to strengthen Malaysia’s corporate rescue tools.

KUALA LUMPUR (Aug 24): The Companies Commission of Malaysia (SSM) has issued its consultative document on the proposed Companies (Amendment) Bill 2020. This Bill will introduce significant amendments and will be a real shot in the arm to strengthen Malaysia’s corporate rescue tools. The proposed amendments follow similar moves in the United Kingdom and Singapore in helping distressed companies and ensuring safeguards for creditors’ interests.

I highlight the Bill’s ten most significant restructuring amendments. I welcome these much-needed restructuring and relief tools to help distressed businesses in the Covid-19 environment. Deadline for comments on the consultative document is on Aug 26, 2020. It would then appear that the proposed Companies (Amendment) Bill 2020 may be tabled at the November 2020 Parliamentary sitting.

#1: Super-charged restraining order moratorium in a scheme of arrangement

The restraining order in a scheme of arrangement requires a court order to give moratorium protection against legal proceedings. However, there are difficult pre-conditions to meet for securing a restraining order.

The super-charged restraining order intends to have these features:

  • A form of an automatic moratorium from legal proceedings for an initial period of 60 days. This is to give the distressed company breathing space and time to canvass creditor support.
  • Subsequently, the four conditions must be met for an extension of the restraining order for a further 10 months.
  • The restraining order can extend to restraining proceedings against the subsidiary or holding company in the proposed scheme of arrangement. This allows for the entire group of companies to be protected while coming up with the restructuring plan.

#2: Additional safeguard of restraining disposition of property

Ordinarily, with the grant of a restraining order, there is a general prohibition against disposition of the company’s property which is not in the ordinary course of business.

There is now an additional safeguard for creditors. Creditors can apply to obtain a specific order to further restrain the company from disposing of its assets or transferring any shares except in good faith and in the ordinary course of business.

#3: Cross-class cramdown in a scheme of arrangement

The existing scheme of arrangement provisions envisages having classes of creditors based on their different legal rights. Each class will need to give 75% in value of approval of the proposed scheme. If one class of creditors votes down the scheme, the entire scheme would be jeopardised.

The proposed amendments envisage a wider cramdown provision extending to cross-class cramdown. The court can approve the scheme and allow certain classes of creditors also cramdown the dissenting class. This is subject to a fair and equitable principle and that there is no unfair discrimination.

This promotes a greater chance of a successful restructuring and where the court can safeguard the fairness of this cross-class cramdown.

#4: Other safeguards and improvements to the scheme of arrangement process

There are other general safeguards and codification of procedure into the scheme of arrangement process.

First, the court can order a meeting to revote on the proposed scheme of arrangement if objections are raised on the terms of the scheme. This can save valuable time and gives the debtor company a chance to re-table a revised scheme rather than restarting the whole process.

Second, the court can even approve a scheme of arrangement without having the meeting of creditors. This allows a faster process and the ability to go for pre-packaged schemes of arrangement.
Third, a codification of the inspection and adjudication of proofs of debt in relation to a scheme of arrangement.

#5: Review of decisions after approval of the scheme

This is a new safeguard afforded to creditors. After the sanction of the scheme of arrangement, the court can grant certain relief if there has been an act or omission that results in a breach of the term of the scheme of arrangement. The court may also clarify any term of the scheme of arrangement.

#6: Super priority rescue financing in schemes and judicial management

In my mind, this will be a game changer and a necessary facet of promoting corporate rescue. The amendments propose to introduce super priority rescue financing for schemes of arrangement and judicial management.

Rescue financing will complete the triumvirate of essential features to promote restructuring and rescue. Breathing space through the super-charged restraining order, facilitation of the compromise in the new scheme of arrangement features, and access to essential working capital funding through rescue financing.

Where there is new funding secured, the court can make an order to accord super priority to this funding. The different types of priority may be where the rescue funding is treated at the top of the priority as if it were part of the costs and expenses of winding up, priority over other preferential debts and other unsecured debts, or to even be provided with security or secured or unsecured assets.

This brings to Malaysian shores similar US Chapter 11 rescue financing provisions and Singapore’s super priority rescue financing features.

#7: CVA has a wider access

Corporate voluntary arrangement (CVA) will have wider access. The entire existing Section 395 of the CA 2016 will be substituted with narrower restrictions. In particular, there is the removal of the restriction against a company having created a charge. That will allow more distressed companies to consider the CVA.

#8: Public listed companies can apply for judicial management

The judicial management restrictions under existing law left a lot of uncertainty on whether public listed companies could apply for judicial management. The proposed amendments will make it clear that generally, public listed companies can apply for judicial management. This is because the restrictions are now only confined to certain types of companies as registered, licensed or recognised under certain parts of the Capital Markets and Services Act 2007, or under the Securities Industry (Central Depositories) Act 1991.

#9: Secured creditor recovery of property in JM and CVA

There are proposed new provisions to allow secured creditors to take possession or exercise its secured rights over the secured property during a moratorium in CVA and JM. This is generally where the property is not required by the company during the CVA or JM, there is a high risk to the existence of the property or the value of the property decreases in value due to the moratorium.

#10: Continuation of essential goods and services/ipso facto clauses

Finally, it is intended that when there is a proposed scheme of arrangement, CVA or JM, essential supplies under existing contracts must continue to be provided. Ipso facto clauses or termination clauses due to insolvency-related events will cease to have effect. Suppliers will have to continue to fulfill their commitments under their contracts with the debtor company. As protection to the suppliers, the suppliers do have an avenue to apply for consent to have the contract or supply terminated on certain grounds.

Conclusion: Flattening the insolvency curve

The above is a high-level summary of the major restructuring and corporate rescue amendments being proposed. Overall, the proposed Companies (Amendment) Bill 2020 will introduce significant and useful restructuring tools to better assist distressed companies. These changes are urgently needed by companies in battling the challenging Covid-19 business environment and will help to flatten the insolvency curve threatening companies.

 

Lee Shih is a restructuring and insolvency lawyer and the managing partner of the boutique law firm, Lim Chee Wee Partnership. He also writes at themalaysianlawyer.com.