In EY Malaysia’s Transactions Insights (February 2021), it was pointed out that the prolonged impact of the COVID-19 pandemic continues to disrupt Corporate Malaysia, financially and operationally. Almost a year on, the magnitude of financial risks has increased. A vast majority of companies would require some form of recapitalization to improve their financial position.
I identify six much-needed reliefs to provide a shot in the arm for Corporate Malaysia. The reliefs will help to inoculate and strengthen businesses against further distress.
In the Companies Commission of Malaysia (CCM) Consultation Document issued in July 2020, CCM set out policies and a draft proposed Bill in support of such reliefs. I wrote about these changes in The Edge Malaysia as well.
Like the vaccine rollout in Malaysia, I am hoping for a smooth and quick rollout of these proposed laws. The commentary below is based on the proposed laws by the CCM.
#1: Moratorium Relief
Many of the moratorium and protective Covid-related reliefs have come to an end.
The banks’ blanket loan moratorium came to an end in September 2020. The statutory demand winding up moratorium expired on 31 December 2020. There was some relief when Malaysia introduced the Covid Act and with an extension of the contractual reliefs. However, the Covid Act came late in the day such that contracts had already been terminated and with businesses having moved on.
Recognising the need for additional relief measures, the Securities Commission Malaysia and Bursa Malaysia announced relief to listed issuers with unsatisfactory financial conditions and inadequate levels of operations.
But more is still required.
One of the top concerns of businesses is to still have enough breathing room to plan for an orderly restructuring.
It is heartening to see that the proposed laws will allow for a wider and more immediate moratorium relief for companies and their related companies pursuing a scheme of arrangement. The moratorium will hold back pending and future legal proceedings against the distressed debtor company.
#2: Wider Restructuring Options
The wider moratorium will be coupled with wider restructuring options.
The scheme of arrangement will be greatly enhanced, with safeguards and certainty for both the debtors and the creditors. A scheme of arrangement essentially involves three stages driven by a court process.
The first stage of a scheme is for permission from court to essentially hold creditors’ meetings. This first stage is normally coupled with the court application for the moratorium.
The second stage of a scheme is the holding of the creditors’ meetings. The proposed laws will enhance the voting process based on the assessment of the debts and with an independent chairperson. The aim is to get 75% in value of the creditors approving the proposal that particular meeting.
The third stage of a scheme is to return to Court to sanction the creditor-approved scheme.
The corporate voluntary arrangement (CVA) will be enhanced. It may very well be the rescue tool of choice in restructuring unsecured debts.
Under the proposed change in law, even if a company has a charge over its property, the company is able to still put forward a quick out-of-court proposal to restructure its unsecured debts. In a CVA, there is no need for the three stages like in a scheme. Under the proposed change, even public listed companies can then utilise CVA.
Judicial management (JM) will also similarly be extended to public listed companies. That seems appropriate since JM traces its origins in the Singapore Pan Electric Limited case where there was a catastrophic collapse of a public-listed company.
Distressed debtors will have a wider choice of rescue tools to suit particular circumstances.
#3: Rescue Funding
The proposed laws will give distressed companies access to essential working capital funding through rescue financing. This brings to Malaysian shores similar US Chapter 11 rescue financing provisions and Singapore’s super priority rescue financing features.
These changes will not only benefit debtor companies. These changes will incentivise white knight investors and existing financial institution creditors. In balancing risk and reward, the new capital and funds being injected into a distressed company can be rewarded with greater security.
#4: Continuation of Essential Supplies
The scheme of arrangement, CVA and JM mechanisms encourage and aim to facilitate a company to continue as a going concern. This is instead of slipping into liquidation. With the proposed changes in the law, the scheme, CVA and JM will automatically strengthen the distressed company by allowing for the continuation of essential supplies under existing contacts.
What is known as ipso facto clauses or termination clauses due to insolvency-related events will cease to have effect where the company undertakes the scheme, CVA or JM. 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.
#5: Debtor-In-Possession / Oversight if Necessary
With wider restructuring options, the new laws strike a balance. To allow management to stay in control since they are the businessmen and they understand the industry. Yet, there must be some oversight with the involvement of an insolvency practitioner, who would be well-versed in restructuring and insolvency aspects.
So, the scheme of arrangement and CVA would be very much management-driven. Yet, there will be in almost all cases now, mandatory insolvency practitioner involvement. The choice of the insolvency practitioner, the qualifications and some Court oversight will be important.
On the other hand, there may be cases where the company and its business are worth rescuing. But the creditors have lost faith in the company’s management. Then, the JM mechanism can also allow for a creditor-led appointment of the court-appointed judicial manager to stabilise and preserve the value of the distressed company. A judicial manager will take over all management powers of a company.
#6: Creditor Protection
Safeguards are present in the existing laws and in the proposed changes in the law to protect the interests of creditors.
For instance, we will see greater certainty for the creditors voting in the scheme of arrangement procedure. There will be heavier involvement of a court-appointed insolvency practitioner in the scheme process. The insolvency practitioner will have to perform a neutral role in tabling reports and generally assisting the Court.
Secured creditors’ rights over their security will also be further strengthened. For instance, a secured creditor continues to retain its veto right over a judicial management application.