Changes in the corporate structure of a company or a group of companies as in a takeover, transfer of the whole or part of a company’s undertaking to a new company, the merger of two or more companies into a new company or a split of one company into two or more companies are termed as “arrangements”, “reconstructions” and “amalgamations”. The schemes of arrangement are proposed as a commercially desirable way out of a company’s financial problem.
An “arrangement” involves a reorganisation of the share capital of a company by consolidation or division of shares of different classes or both of these methods.
A “compromise” involves an adjustment of conflicting interests with each side accommodating modifications.
A “reconstruction” involves reviving a company by the transfer of assets from a company to a new company, or an alteration to the capital structure of a company or group of companies.
An “amalgamation” involves the welding together of two undertakings under common control.
Corporate Rescue Mechanism
Under the CA 1965, limited options are available to an insolvent company. Options available are receivership, winding up or entering into a scheme of arrangement with the creditors.
The new CA has introduced new Corporate Rescue Mechanisms to help financially distressed companies. The rescue mechanism aims at rehabilitating the financial and business viabilities rather than winding up the distressed company.
The corporate rescue mechanisms are:-
(a) corporate voluntary arrangement; and
(b) judicial management.
Corporate Voluntary Arrangement
This arrangement is not available to:
- a public company;
- a company which is a licensed institution or an operator of a designated payment system regulated under the law enforced by the Bank Negara Malaysia;
- a company which is subject to the Capital Markets and Services Act 2007; and
- a company which creates a charge over its property or any of its undertaking.
The proposal for a voluntary arrangement may be made by:
- a director of a company.
- a judicial manager if a company is under a judicial management order.
- a liquidator if a company is being wound up.
- a nominee is appointed to manage and implement the voluntary arrangement proposed by the management. A nominee may be a qualified insolvency practitioner, a judicial manager or a liquidator.
- moratorium remains in force for a period of twenty eight (28) days from the day the notification is presented to the court during which the company cannot be wound up.
- a meeting must be called within the moratorium period to approve the proposals by members and creditors.
- a secured creditor may appoint a receiver to deal with the charged property of a company during the moratorium.
- any restructuring scheme must be approved by a simple majority of shareholders at a member’s meeting and 75% of the total value of creditors present and voting at a creditor's meeting.
The judicial management procedure is court-based and involves a petition and a subsequent order. The court will appoint an independent and qualified judicial manager to manage the company’s affair in accordance with an approved creditors’ proposal until the company is rehabilitated.
An application to the court for a judicial management order may be where a company or a creditor or creditors consider that:
- the company is or will be unable to pay its debts
- there is a reasonable probability of rehabilitating the company.
An application may be made by:
- the company
- the directors of the company
- a creditor or creditors of the company
A court may refuse to grant a judicial management order for a company which is hopelessly insolvent. The court must:
- be satisfied that the company is, or is likely to become, unable to pay its debts; and
- consider that the order is likely to achieve one or more of the following purposes:
- the survival of the company, the whole or part of its undertaking as a going concern;
- the approval of a compromise or voluntary arrangement;
- a more advantageous realisation of the company's assets than on a winding up.
The judicial management procedure is not available:
- to a bank, a finance company or an insurance company.
- after the company has gone into liquidation.
Effect of Judicial Management Order
- any receiver or receiver & manager shall vacate office.
- any application for the winding up of the company shall be dismissed.
- no proceedings, execution or other legal process can be commenced or continued unless with the consent of the judicial manager or the court.
- no steps to be taken to enforce charge over security.
- no shares can be transferred in the company.
- moratorium period of 180 days takes effect.
- judicial manager to implement a workable restructuring plan once it is approved by 75% of the total value of creditors present and voting at a creditor’s meeting and sanctioned by the court.