The Companies Bill 2013 (Part 1): Changes to the Insolvency Regime

Lee Shih comments on the upcoming revamping of the Companies Act 1965. See, some LoyarBurokkers are real hot-shot lawyers okay?!

It has been a long wait for to see the reforms to the Companies Act 1965 (“Act”). The Companies Commission of Malaysia (“CCM”) had established the Corporate Law Reform Committee (“CLRC”) in 2003 to review the Act in order to reflect the current and future needs of the business environment. Having conducted such a review, the CLRC published its Final Report in 2008 with its recommendations.

The CLRC recommendations are significant as they form the foundation of the new Companies Bill 2013 (“Bill”) which would revamp the Act.

Having published a copy of the Bill for public consultation, the CCM is presently reviewing the feedback received.

This article will touch on some of the more significant provisions of the Bill in reforming the existing insolvency-related areas of receivership and winding up law.

In my follow-up article, I will write on the other insolvency areas of the scheme of arrangement and the new judicial management and corporate voluntary arrangement.

RECEIVERSHIP

Introduction

As an introduction, the  appointment  of  a  receiver  or receiver and manager (R&M”) usually  derives  from  a  debenture  which  generally allows a debenture holder (normally a bank or a financial institution) to appoint a receiver or R&M if the principal monies secured by the debenture becomes payable, or upon the occurrence of events of default as specified in the debenture.

The function of a receiver or R&M appointed by a debenture holder is to take possession of the assets covered under the debenture holder’s charge. Typically, the receiver or R&M will then realise those assets and pay off the debenture holder.

Appointment

The receivership provisions in the Bill substantially expand on the existing provisions in the Act. Clauses 372 and 373 of the Bill set out the manner of appointing a receiver or R&M under an instrument or by the Court.

Clause 372(2) of the Bill expressly sets out the agency status of a receiver appointed under a power conferred by an instrument (and presumably, the final version will also spell out the corresponding status of an R&M). The present legal position is that a receiver or R&M becomes an agent of the debtor company by virtue of the inclusion of provisions to that effect in the debenture under which he is appointed. The codification of the agency status of the receiver and R&M helps to remove some of the present ambiguities on the status of the receiver or R&M. It makes clear the ability of the receiver or R&M to contract on behalf of the company or do any act as an agent of the company to enable him to perform his functions.

In the case of a Court appointment, clause 373 of the Bill lists out three specific grounds upon which the Court may appoint a receiver or R&M, which are essentially where the company has failed to pay a debt due to a debenture holder, or the company proposes to sell the secured property in breach of the charge, or it is necessary to do so to preserve the secured property.

However these three categories appear to omit the common law right for such a Court appointment for instance where there is serious disputes among the shareholder (Federal Transport Service Co Ltd & Ors v Abdul Malik & Ors [1973] 1 MLJ 216) or serious mismanagement (Re Bondwood Development Ltd [1989] HKCFI 320). It is hoped that this omission will be clarified in the final version of the Bill whereby there is an express statement that the common law right of appointment is not abrogated.

Personal Liability of the Receiver and R&M

The original recommendation by the CLRC in its Final Report was for the receiver or R&M to be personally liable for debts incurred by him unless there is a specific agreement to the contrary between the contracting parties. However, clause 378 of the Bill does not make this clear and in fact imposes personal liability for such debts incurred by him in the course of receivership “notwithstanding any agreement to the contrary”, thereby not allowing the parties to contract out of this provision.

Further, the wordings which impose personal liability described above appear to conflict with clause 379(2) which purports to give effect to the CLRC’s recommendation that the “terms of a contract … may exclude or limit the personal liability of the receiver …

It is hoped that the final version of the Bill will resolve these conflicting provisions and carry into effect the CLRC’s recommendation.

Codified Powers of the Receiver and R&M

Clause 380 of the Bill introduces a welcomed codification of the express powers of a receiver or R&M which are set out in the Seventh Schedule of the Bill. Presently, a receiver or R&M would have to derive his powers solely from the provisions of the debenture under which he was appointed, and it is not uncommon to encounter situations where the powers listed in the debenture are inadequate or ambiguous.

This codification of a minimum list of default powers exercisable by a receiver or R&M is in line with the approach taken in the United Kingdom, Australia and New Zealand.

Receiver’s Powers Over the Charged Assets After Liquidation

The agency status of the receiver or R&M would terminate upon the winding up of the debtor company but it was generally accepted that the receiver or R&M would continue to have control over the charged assets under the debenture.

However, the Supreme Court decision in Kimlin Housing Development Sdn Bhd (appointed receiver and manager) v Bank Bumiputra (M) Bhd & Ors [1997] 2 MLJ 805 (“Kimlin”) had impaired the ability of a receiver or R&M appointed under a debenture to deal with or dispose property secured under the debenture. Kimlin effectively held that upon liquidation, all the powers of the receiver and R&M ceased over all the assets of the company, whether secured by a National Land Code (“NLC”) charge or not. All the assets had to be delivered to the liquidator.

Subsequently, the Federal Court in K Balasubramaniam, Liquidator for Kosmopolitan Credit & Leasing Sdn Bhd (In Liquidation) v MBf Finance Bhd & Anor [2005] 2 MLJ 201 (“Balasubramaniam”) clarified the Kimlin decision in that the receiver or R&M would continue to retain his possessory rights under the debenture to take custody and control of all the charged assets under the debenture (e.g. plant and machinery) except for assets under a NLC charge.

To get around the restrictive approach of Kimlin, the Final Report had recommended the adoption of provisions from Australia and New Zealand. The recommendations were three-fold:

  1. the receiver or R&M could continue to act as an agent of the debtor company for the purpose  of  carrying  on  the  business  of  the  company  even  though  the company is already in liquidation;
  2. that a receiver or R&M who has obtained consent from the court or the liquidator is deemed as an agent of the company; and
  3. the agency status of a receiver or R&M over the property or asset secured under the debenture upon which his appointment was made shall survive and continue after the appointment of the liquidator.

Under this approach, the receiver or R&M could then continue to carry on the business of the company and to sell off the charged assets. The ability to continue to act as an agent of the company would be subject to obtaining consent of the liquidator or if the liquidator withheld his consent, then consent from the Court. By allowing for the continuation in office of the receiver under the supervision of the liquidator or the Court, there would be a more orderly and unified administration of the company’s affairs.

It is therefore unfortunate that clause 383 of the Bill does not make clear the recommendation made by CLRC. Clause 383(1) presently sets out that the “receiver may continue to act as a receiver and exercise all the powers of a receiver in respect of property of a company that has been put into liquidation, provided that he obtains consent from the liquidator or if the liquidator withholds his consent, the consent of the Court.” This is arguably a further regression from the Balasubramaniam position and clause 383 would prevent the receiver or R&M to exercise any possessory rights over the non-NLC charged assets unless consent is obtained from the liquidator or Court.

WINDING UP

Introduction

Liquidation or winding up is a process whereby the assets of a company are collected and realised, and the resulting proceeds are used to pay its debts and liabilities. Winding up is a collective procedure where the unsecured creditors lose the individual right to take action to enforce their debt and it ensures an orderly distribution of proceeds. There are two principal forms of winding up: the voluntary winding up process and the winding up by the court, known as compulsory winding up.

Voluntary winding up is brought about by a special resolution passed by the company in general meeting, and can occur whether the company is solvent or not. Compulsory winding up on the other hand commences with the filing of a winding up Petition in Court and the resultant winding up Order.

Presentation of a Petition

Clause 447(1)(a) of the Bill increases the threshold of a debt for the statutory demand from RM500 to RM5,000 in order for a company to be deemed unable to pay its debts for the purposes of a compulsory winding up.

This higher threshold attempts to balance the need to ensure that the amount is not too high as to preclude small creditors from initiating legitimate claims whilst being high enough to avoid trivial claims.

Further, clause 447(2) of the Bill states that a winding up petition must be filed within six months from the expiry date of the statutory demand. The aim of this is to reduce the possibility of the statutory demand being abused and to prevent the threat of a winding up petition from continuing to hang over the debtor company for an inordinately long period of time.

Void Dispositions

The void disposition provision as contained in clause 453 of the Bill makes it clear that any disposition of property by the company, other than an exempt disposition, made after the presentation of a winding up petition shall be void, unless the Court otherwise orders. Similar to the equivalent Australian provision, the intent of this amended provision is to list out certain exempt dispositions which would not require a validation order by the Court.

However, the specified exempt dispositions contained in clause 453(2) do not significantly eliminate the need to obtain a validation order as it covers only a disposition by a liquidator or an interim liquidator of the company.

Powers of Liquidators

The powers of the liquidator in a court winding up situation are set out in clause 468 read with the Eleventh Schedule of the Bill. Part I of the Eleventh Schedule lists out the powers that the liquidator may exercise with the authority of the Court or the committee of inspection (“COI”) while Part II of the Eleventh Schedule lists out all the powers that may be exercisable with, or without, the aforesaid authority.

In particular, the Bill permits a liquidator to carry on the company’s business so far as necessary for the beneficial winding up of the company for a period of 180 days after the making of the winding up order. Thereafter, the liquidator is required to obtain the authority of the Court or the COI to continue with the carrying on of such business. This is a welcome increase from the present period of only 4 weeks allowed for under the Act.

Termination of Winding Up

Under the Act, the only way in which a winding up order can be brought to an end is through an order for a stay of winding up under section 243 (and the provision for a stay of winding up is preserved in clause 476 of the Bill).

The Bill introduces a new clause 477 which allows the Court to also terminate the winding up order of a company. In determining whether to terminate a Court-ordered winding up, the Court may consider various factors, such as the satisfaction of the debts, the agreement by both parties, or other facts as it deems appropriate. The termination of winding up, instead of a stay, appears to allow for an easier route to bring to an end the winding up where the debtor company has satisfied the debts owing to the petitioning creditor.

However, clauses 476 (for stay) and 477 (for termination) do not deal with the issue where directors of the wound up company have quit their office through the efflux of time or by the effect of provisions in the Articles of Association. Where there is a stay or termination of winding up, there could be no one left to manage the company. There may be a need to make further orders to appoint new directors but there is no statutory provision allowing for that. By way of comparison, section 482(3) of the Australian Corporations Act 2001 provides that in terminating a winding up, the Court may also give directions for the resumption of the management and control of the company by its officers, including directions for the convening of a general meeting of members.


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Posts by Lee Shih

Lee Shih is a corporate litigator and has a passion for international arbitration, corporate litigation and insolvency work. He juggles work with his other passion of dragon boating with the KL Barbarians team. He blogs at leeshih.com and tweets at @imleesh.

Posted on 17 February 2014. You can follow any responses to this entry through the RSS 2.0.

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