Case Update: Bank Negara’s Small Debt Resolution Scheme Does Not Have Mandatory Moratorium

In the High Court decision of Bank Muamalat Malaysia Berhad v Prolink Marketing Sdn Bhd & 2 others [2019] 1 LNS 702, the Court held that Bank Negara’s Small Debt Resolution Scheme (SDRS) merely provided advice to a bank to observe a standstill in legal proceedings against distressed borrowers. It was not mandatory for the bank to halt legal proceedings.

Summary of the Decision

In August 2018, Bank Muamalat filed a suit against the borrower, Prolink Marketing Sdn Bhd, for more than RM1.1 million under certain Financing Facilities.

Bank Muamalat applied for summary judgment against the borrower.

On 28 August 2018, the borrower applied to Bank Negara Malaysia by way of the SDRS for the purpose of restructuring all of the borrower’s bank facilities. The SDRS committee held a meeting with the borrower and the other banks.

By way of an email dated 24 September 2018, the SDRS committee instructed that all banks halt legal proceedings pending completion of the restructuring process by the SDRS committee.

The SDRS Committee was set up by Bank Negara Malaysia as an effort to assist small and medium enterprises to resolve impaired financing with multiple financial institutions. Bank Muamalat pointed out that under the SDRS guidelines issued by Bank Negara Malaysia on 11 July 2014, paragraph 8.6 states:

8.6 All participating financial institutions are advised to halt legal proceedings, effective from the date the applications are received to the occurrence of either of the following events:

 

The Court agreed with Bank Muamalat’s position that the SDRS instruction is merely advice and not a mandatory instruction to be complied with by the participating financial institutions.

The SDRS guidelines are merely a policy document that sets out the objective, applicability and procedure to facilitate the SDRS objective to support viable SMEs facing financial difficulties and for financial institutions to play an effective role in facilitating the rehabilitation of viable SMEs.

The document serves as a guideline that is not intended to be legally binding.

Thus, the advice given by the SDRS Committee to halt proceedings against the borrower here was not mandatory in nature. The SDRS Committee could not stop Bank Muamalat from pursuing the legal action. The Court allowed summary judgment against the borrower.

Significance

This decision brings into question the efficacy of the informal out-of-court debt restructuring options for borrowers.

In relation to the SDRS, I do not know if the current guidelines and framework continue to contain language of mere advice on a moratorium or whether there is stronger mandatory language. A moratorium against legal proceedings would seem natural if Bank Negara Malaysia wants to encourage the restructuring and mediated platform of the SDRS.

Effective 14 August 2020, Bank Negara Malaysia transferred the SDRS to the Agensi Kaunseling dan Pengurusan Kredit (AKPK).  AKPK is an agency established by Bank Negara Malaysia to assist individuals in particular on financial education, financial management, and debt management.

It may be the SDRS framework under AKPK contains clearer language on the ability to have a moratorium while the SDRS attempts to facilitate the restructuring.

As stated in the Bank Negara Malaysia press release of 14 August 2020 on the SDRS being under the purview of AKPK:

The SDRS was established by Bank Negara Malaysia in 2003 to provide assistance to viable SMEs in all economic sectors that are facing difficulties in servicing their debt with multiple financial institutions, by facilitating the restructuring or rescheduling of loans. It is a platform for financial institutions and SMEs to work out debt rehabilitation solutions amicably and collectively without resorting to legal recourse, allowing SMEs to focus on plans to revive their businesses.

 

Beyond the SDRS, for larger debts of more than RM10 million, there is the Bank Negara Malaysia Corporate Debt Restructuring Committee (CDRC).

Under CDRC’s Code of Conduct, there is clearer language of the moratorium and standstill effect of entry into the CDRC. Each financial institution shall observe the standstill period:

Standstill

9.1   Each participating institution shall observe a standstill period commencing from the date of CDRC’s notification of the acceptance of an eligible debtor’s application up to a period of six (6) months. The standstill period may be extended for another six (6) months for creditors to obtain internal approval for the proposed restructuring scheme, and for the completion of legal documentation and operationalisation of an agreed scheme. Any such extensions shall be granted upon CDRC’s receipt of written confirmation of agreement from a simple majority of each class of creditor and CDRC’s affirmation thereto. The original standstill period will cease if no written confirmation on any extension request is received upon its expiry. Any further extension beyond the 12-month standstill period for the operationalisation of the scheme will require at least seventy-five percent (75%) approval from each class of creditor and CDRC’s affirmation thereto.

9.3 During the Standstill Period, participating institutions shall observe the following:

b) not take or commence or continue any recovery action or legal proceedings against the Eligible Debtor or any of its assets, whether held as security or not in respect of any of the Facilities or any other liability of the Eligible Debtor or permit any recovery action or proceedings to be taken on its behalf

 

Nonetheless, it remains to be seen if there is any strict legal effect of the standstill period. If a financial institution were to initiate or continue with legal proceedings against the CDRC standstill period, would the Court give effect to the standstill?

Ultimately, whether it is the SDRS or the CDRC, there are safeguards in those frameworks where the committees are to decide on whether to accept an eligible borrower into the respective debt restructuring regime. It should follow that there should then be a moratorium against the financial institution’s initiation or continuation of legal action against the borrower. This is to provide room for all parties to attempt to reach a restructuring agreement.

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