The New Law of Corporate Restructuring in Malaysia: Analysis of the Concept of Scheme of Creditors' Arrangements in Corporate Insolvency Proceeding

The New Law of Corporate Restructuring in Malaysia: Analysis of the Concept of Scheme of Creditors' Arrangements in Corporate Insolvency Proceeding

Aishah Bidin (National University of Malaysia, Malaysia) and Nordin Hussin (National University of Malaysia, Malaysia)
DOI: 10.4018/978-1-5225-5541-4.ch008

Abstract

The passing of the Malaysian Companies Bill 2015, which replaced the Companies Act 1965, marks the most comprehensive legislative change in Malaysia's corporate law in 50 years. The Companies Act 2016 makes some significant changes to Malaysia's corporate insolvency regime, as it introduces two new insolvency processes: judicial management and corporate voluntary administration. It also modifies the existing law relating to schemes of arrangement. The objective of this chapter is to study and evaluate the legislative position in United Kingdom, Australia, and Malaysia with regard to the scheme of creditors' arrangement. The introduction of the judicial management mechanisms is a move towards bringing Malaysia's insolvency laws up to the same international standards as many other countries in the region. It also discusses on the strength and limitation of the mechanism as opposed to the concept of judicial management.
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Introduction

An Overview of the Corporate Restructuring in Malaysia

The underlying philosophy of Malaysian insolvency law has been described as combining the elements of distributive, rehabilitative and penal philosophies (Rabindra, n.d.). The main objectives of corporate insolvency law of Malaysia are as follows: (1) to provide for rehabilitation where possible; (2) to ensure the preservation and ranking of secured creditors’ rights and equal treatment of all other creditors where a company cannot be saved; and (3) to punish delinquent officers who have contributed to the insolvency. In the case of personal bankruptcy, on their discharge, the bankrupt is freed from all debts provable in bankruptcy and is also released from many civil liabilities attached to him or her as a bankrupt.

In practice, however, insolvency law has been described as having a bias towards the interests of creditors. Insolvency law in Malaysia is designed to help creditors enforce their rights, recover their debts and protect their interests. Malaysia primarily has a creditor focused system. There are, however, indications of growing dissatisfaction with Malaysia’s pro-creditor laws. In particular, there have been repeated calls for the introduction of an equivalent to the US Chapter 11 rescue procedures. Bankruptcy and Insolvency law in Malaysia has been developed through the interaction and interdependence of case law that originated in England and Australia. Legislation dealing with personal bankruptcy consists of the Malaysian Bankruptcy Act 1967 and the Bankruptcy Rules 1969. They are modelled on English bankruptcy law. Similarly, the core company legislation in Malaysia, that is, the Companies Act 1965, is modelled on the English Companies Act 1948 and the Australian Uniform Companies Act 1961. Principles of common law that comprise English and Australian insolvency law are reflected in the Malaysian insolvency regime. In view of this historical relationship, English and Australian judicial pronouncements on the interpretation of company legislation are still highly persuasive in interpreting Malaysia company law, even though there is increasing divergence in Australian and English judicial attitudes to corporate governance (Arjunan, 1995).

The broad aims of Malaysian corporate insolvency law are similar to the Australian and English equivalents. The purposes and principles of insolvency law in many different Western legal systems have been described in terms of such criteria as fairness, efficiency and impartiality (Tomasic & Whitford, 1997). The aims of Malaysian insolvency law are similar. They include the rehabilitation of debtors, fair and efficient distribution of debtors’ assets to creditors, equality and impartiality of treatment of creditors, and the punishment of wrongdoers. The rehabilitative aim of the law manifests itself in section 176 of the Companies act, which deals with the schemes of arrangements and in the Pengurusan Danaharta Nasional Berhad Act 1998. The recital to the latter statute inter alia states that its declared aim is to ‘assist the business sector by dealing expeditiously with financially distressed enterprises.’ Evidence of a distributive philosophy can be found in Part X of the Companies act comprising sections 212 to 318 and in particular to Division 4 of Part X which deals with priorities. Provisions exist in the act to punish wrongful trading and fraudulent trading and to punish non-compliance with the insolvency provisions (Rabindra, n.d.).

There are two basic types of insolvency measures. Firstly, creditors have the facility of appointing a receiver and manager (Companies Act 1965, Part VIII, 1965). Secondly, an application may be made to court for winding up which has three different types namely members’ voluntary winding up, creditors’ voluntary winding up and winding up by the court (Companies Act 1965, Part X, 1965). In addition, there exists in Malaysia the possibility of using a scheme of arrangement for the restructuring of companies (Companies Act 1965, Part VII, 1965). The winding up of insolvent companies is not the best option for all parties concerned. The interest of the company, its creditor, shareholders and employees as well as the larger interests of the community itself and reorganise its business within the protection and control of corporate restructuring legislation. This is particularly true in the case of companies which are essentially healthy and which have honest competent management but which may be facing temporary cash flow problems caused largely by external factors (Bidin, n.d.).

The Malaysian insolvency and restructuring framework pre-1998 is contained in Companies Act 1965 and Companies (Winding Up) Rules 1972. Recognizing the severity of the crisis that started in mid-1997, the Malaysian Government swiftly implemented several new measures to address the challenges. In mid-1998 the government initiated the establishment of a new restructuring infrastructure comprising three agencies, namely Pengurusan Danaharta Nasional Berhad (“Danaharta”)1 (an asset management company), Danamodal Berhad (“Danamodal”)2 (a bank recapitalization agency) and the Corporate Debt Restructuring Committee (“CDRC”)3 to accelerate restructuring of the banking and corporate sectors. Danaharta was set up by way of legislation to remove non-performing loans (“NPL”) form the banking sector. However, Danaharta was officially dissolved on 31st December 20054 in which CDRC which also was officially closed on 20 August 20025. But it resumed the operation in 2009 and then again announced6 in May 2013 that it has ceased accepting the new applications effective 2nd May 2013. Danamodal on the other hand, a special purpose company, was set up to recapitalize the banks. The establishment of these agencies expanded the avenues for debt resolution for distressed companies since restructuring could be carried out with or without formal legal sanctions.

Formal restructuring is effected through the following namely the Scheme of Arrangement under the Companies Act 1965 (commonly referred to as Section 176), and Receivers and Managers under common law and Liquidators under Part Vii and/or Part X of the Companies Act 1965. Whereas the informal restructuring is effected through (i) the company voluntarily undertaking private negotiations, and (ii) the company voluntarily seeking the Corporate Debt Restructuring Committee (“CDRC”)’s assistance (Bidin, 2013).

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