In response to COVID-19, the UK has fast-tracked its Corporate Insolvency and Governance Bill (the PDF copy of the Bill is here and with helpful Explanatory Notes). The overarching objective of this Bill is to provide businesses with the breathing space they need to continue trading during this difficult time and to avoid insolvency. I set out seven of the key measures that UK is introducing and the possible reforms that Malaysia can adopt.
#1: Stand-alone Automatic Moratorium
The Bill introduces a unique stand-alone moratorium mechanism. Ordinarily, a moratorium to stay legal proceedings and creditor actions would be part of a restructuring or rescue process. So for example, in the UK, moratoriums can be obtained in the administration process or through the CVA.
Now, the debtor company can obtain a free-standing moratorium in order to secure breathing space. The debtor can use the time to engage with its creditors informally, or for the debtor to pursue formal court restructuring processes.
Briefly, where a UK company is not subject to a winding up petition, it can obtain a automatic moratorium through the filing of certain documents in court. If a company is subject to a winding up petition, a different procedure is required through obtaining a court order for the moratorium.
The initial automatic moratorium will last for 20 business days (essentially, just about a month). The moratorium can be extended by the directors without obtaining creditor consent, or by obtaining creditor consent, or by obtaining a court order for the extension.
This stand-alone moratorium will allow the directors to still be in control i.e. a debtor-in-possession moratorium process.
What does Malaysia have?
A debtor company in Malaysia can only obtain moratorium protection when the company undertakes one of the restructuring or rescue processes under the Companies Act 2016 (CA 2016).
First, a restraining order in a scheme of arrangment. This requires an application to the court and with difficult pre-conditions to be met. One of the conditions effectively already requires substantial creditor support for the creditor-nominated director to be appointed.
Second, Malaysia’s CVA triggers an automatic moratorium upon the filing of certain documents. Unlike the UK CVA, Malaysia’s CVA will have mandatory moratorium protection. There will be the initial period of 28 days for the CVA proposal to be tabled. Unlike in the UK, there is nothing to prevent a company from triggering a second or third or further CVA process.
Third, judicial management. This is a similar model to the UK’s administration. The filing of the judicial management application in court will trigger an automatic moratorium. Any secured creditor can veto the judicial management application. This veto is often triggered. This will bring the judicial management application to an end in several months. If the judicial management order is allowed, the company is placed under the control of the judicial manager for six months. The moratorium protection continues during the duration of the judicial management.
What could be the possible reform for moratorium protection?
To promote a debtor-in-possession model with moratorium protection. This can be via the restraining order in a scheme of arrangement. The scheme of arrangement offers flexibility of being used by SMEs and public-listed companies. Allow the debtor company to have a time-limited automatic moratorium upon the filing of the restraining order application. This can be similar to the Singapore’s section 211B moratorium. The application can made subject to appropriate disclosures and safeguards. As I explain next, the further safeguard is by adopting a monitor role.
#2: Safeguard for Moratorium – the Monitor
The UK moratorium has a safeguard to protect creditors’ interests. An insolvency practitioner must be appointed as a monitor. The monitor is required to assess throughout the moratorium whether the rescue of the company as a going concern is still likely. The monitor will also approve sales of assets outside the ordinary course of business, and to approve the grant of new security over the company’s assets.
But as stated above, the company’s directors continue to manage the business and the directors will still be in control.
What does Malaysia have?
I focus on the restraining order in the scheme of arrangement. As part of the grant of the restraining order, the court must approve a director-candidate who has been nominated by a majority in value of the creditors. This individual will be appointed as a director of the company which obtained the restraining order.
The CA 2016 is silent on the exact duties and responsibilities of this director. It is thought that this director will act as a watchdog of sorts to safeguard creditors’ interests. In practice, it is difficult to have an individual agree to take up this director role in a distressed and possibly insolvent company. The law is silent on this director’s obligation or responsibility to report to the court, or to report to the scheme creditors.
What could be possible reform?
To adopt this monitor role as part of the grant of a restraining order. An insolvency practitioner will be appointed as an officer of the court. The law can clearly spell out the responsibilities and reporting obligations of the monitor. But the monitor will not step in to displace the day-to-day running of the company.
#3: New Restructuring Plan Process – Cross-Class Cramdown
The Bill introduces a new rescue process. It is called the restructuring plan. The restructuring plan appears to follow the scheme of arrangement framework. The company can propose a compromise or arrangement with its creditors and members. Approval of 75% in value of each class is required.
There is a key improvement of this new restructuring plan process. The court can sanction a plan that binds dissenting classes of creditors and members as well. This is a cross-class cramdown procedure. Even if one class of creditors doesn’t meet the 75% in value threshold, the court can allow for that class to be crammed down. This is provided that this particular class of creditors are no worse off.
What does Malaysia have?
Malaysia does not have this ability to have a cross-class cramdown.
What could be possible reform?
For Malaysia to adopt a similar mechanism of a cross-class cramdown. This would also follow Singapore’s approach when Singapore improved its scheme of arrangement provisions.
#4: Halting Termination Clauses
The Bill will halt suppliers from stopping supplies simply by reason of the company’s insolvency. This is as long as the supplies continued to be paid. The Bill also prevents suppliers from amending payment terms as a result of the company’s insolvency.
What does Malaysia have?
Where a company is placed in receivership or in judicial management, there are provisions to allow the receiver or judicial manager to continue with supplies to the company by providing a personal guarantee. The continued giving of the supply cannot include a condition that there must be payment of the debts from pre-receivership or pre-judicial management.
What could be possible reform?
To have a wider application of suspending termination clauses or ipso facto clauses if the company undertakes a rescue or restructuring process.
#5: Temporarily Suspend Wrongful Trading Liability
The Bill will temporarily suspend the directors’ liability for wrongful trading. This will take place from 1 March to 30 June 2020, or one month after the coming into force of the Act (whichever is later).
What does Malaysia have?
Malaysia continues to have the criminal offence of insolvent trading under section 539(3) of the CA 2016.
What could be possible reform?
To consider a temporary suspension of insolvent trading in Malaysia. The Insolvency Practitioners Association of Malaysia (IPAM) has also called for such a temporary suspension.
#6: Temporary Restriction on Winding Up Petitions
The Bill temporarily restricts the presentation of a winding up petition based on an unsatisfied statutory demand. There are also further restrictions for presenting other types of winding up petitions. The period of suspension is generally between 1 March 2020 to 30 June 2020, or one month after the coming into force of the Act.
What does Malaysia have?
Malaysia has provided temporary winding up protection. The debt threshold for the statutory demand has been increased and with the debtor company having six months to respond to the statutory demand.