The Companies Commission of Malaysia (SSM) has issued its Consultative Document Companies (Amendment) Bill 2020. The proposed amendments cover a wide range of areas. I will write another time on some of the other areas like beneficial ownership and other amendments.
One key aspect of the Companies Amendment Bill 2020 is the very significant amendments and strengthening of the restructuring framework through the scheme of arrangement and corporate rescue mechanisms. The proposed amendments follow similar moves taken by the United Kingdom and Singapore in assisting and helping distressed companies and ensuring safeguards for creditors’ interests.
I highlight the 10 most significant restructuring and corporate rescue amendments which are in the proposed Companies Amendment Bill 2020. I did take part in the initial consultation process as a member of some of the professional bodies. I very much welcome these much-needed restructuring and relief tools to help distressed businesses in the Covid-19 environment.
#1: Super-charged restraining order moratorium in a scheme of arrangement
The restraining order in a scheme of arrangement currently requires a Court order to give moratorium protection against legal proceedings. There are difficult pre-conditions to meet.
The super-charged restraining order intends to have these features:
- A form of an automatic moratorium for an initial period of 60 days. This is to give the distressed company breathing space and time to canvass creditor support. So the strict four pre-conditions do not have to be met.
- Subsequently, the four conditions must then be met for an extension of 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 is subjected to certain conditions to prevent abuse.
The above features are quite similar to the Singapore provisions relating to moratorium protection in a scheme of arrangement.
#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 where creditors can apply to obtain a specific order to further restrain the company from disposing 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 classes of creditors based on their different legal rights. But each class will need to obtain the necessary 75% in value of approval. If one class fails, the entire scheme would be jeopardised.
The proposed amendments envisages an even wider cramdown provision extending to cross-class cramdown. The Court can approve the scheme of arrangement and allow certain classes to also cramdown the dissenting class based on 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. This follows closely the Singapore provision and also the procedural guidelines set out in the Singapore Court of Appeal decision of TT International.
#5: Review of decisions after approval of the scheme
There is a 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 necessary facet of promoting corporate rescue. The amendments propose to introduce super priority rescue financing for schemes of arrangement and judicial management.
This completes the triumvirate of essential features to promote restructuring and rescue. There is breathing space through the super-charged restraining order, there is facilitation of the compromise in the new scheme of arrangement features, and there is now access to essential working capital funding.
Where there is new funding secured, the Court can then make an order to provide 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 in very similar Chapter 11 rescue financing provisions and Singapore’s super priority rescue financing features as well.
#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 company having created a charge. That will allow many 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 as to 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 Part II, Part III and Part VIII of the Capital Markets and Services Act 2007, or which is approved under Part II of the Securities Industry (Central Depositories) Act 1991.
#9: Secured creditor recovery of property in JM and CVA
There are proposed new provisions to allow the 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.
My initial thoughts are that this secured creditor right does not seem to be subject to any leave of Court or Court determination. It may then increase the risk of litigation and piecemeal fragmentation of the assets of the distressed company.
#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 can 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.
The above is a high-level summary of the major restructuring and corporate rescue amendments being proposed. I have not had a chance to study all of the wording in great detail. I will provide more of my thoughts in the future. Overall, the proposed Companies Amendment Bill 2020 will introduce some very significant and useful restructuring tools to better assist distressed companies.