Lee Shih continues his analysis on the upcoming changes to the insolvency regime. He writes on the modifications to the scheme of arrangement and the introduction of judicial management and corporate voluntary arrangement. Read Part One here.
In Part 1, I covered how the Companies Bill intends to update the provisions relating to receivership and winding up. Receivership essentially protects the repayment of outstanding debts by the company to the secured creditor by allowing for the appointment of a receiver or receiver and manager over the company. Winding up, on the other hand, is to bring an end to the company and to allow for an orderly distribution of its assets to its creditors.
I now move on to the sections of the Companies Bill 2013 (“Bill”) which covers more on the corporate rehabilitation mechanisms. The utilisation of the scheme of arrangement, judicial management and corporate voluntary arrangement (“CVA”) offers flexibility to resuscitate and rehabilitate a financially distressed company.
SCHEME OF ARRANGEMENT
The scheme of arrangement is an existing provision in the Companies Act 1965. It allows for a company to restructure its debts to its creditors. It is usually difficult for a company to be able to implement an informal compromise with all its creditors since it requires unanimous agreement. A scheme of arrangement facilitates a formal compromise which binds dissenting participants so long as the statutory majority has been achieved and is subject to the approval of the Court.
The scheme of arrangement provisions remain largely the same except for three of the more significant changes reflected in the Bill.
Additional Safeguard of Independent Assessment
Clause 432 introduces an additional safeguard to the scheme of arrangement framework by allowing the Court, upon application, to appoint an approved liquidator to assess the viability of a proposed scheme. This would enable an independent professional in the field of insolvency to determine the viability of the scheme and take into account the interests of all the stakeholders. This is not a mandatory requirement and the applicant company is not obliged to take such a step from the outset.
Extension of the Restraining Order
For the extension of a restraining order, clause 434(2) provides that the Court may grant a restraining order for a period of not more than 90 days and may “extend this period for another two hundred seventy days” if certain requirements are met.
However, it is submitted that the present drafting could be made clearer as to whether each extension of the restraining order after the initial 90 days would be limited to a maximum period of 90 days, subject to the maximum extension of 270 days. A literal reading of clause 434(2) suggests that after the initial 90-day period, the Court may extend the restraining order for a further 270 days. As it is in the interest of all stakeholders that a scheme of arrangement should be finalised without undue delay, it is hoped that this issue will be clarified in the final Bill.
Restraining Order Will Not Extend to Regulators
Clause 434(7) makes it clear that a restraining order which restrains further proceedings against the company will not apply to any proceeding taken by the Registrar of Companies or the securities market regulator.
Further, clause 434(8) states that a restraining order will not have the effect of restraining further proceedings against any person other than the applicant company. So for instance, the directors of a company who are subject to legal proceedings on a guarantee given by them for the applicant company’s debts will not be able to rely on the restraining order granted in respect of the company.
The judicial management mechanism, modeled after Singapore, is a new component under the Bill to provide a further option to rehabilitate a financially distressed company. It allows for an application by a company or a company’s creditors for an order to place the management of a company in the hands of a qualified insolvency practitioner. A moratorium which gives temporary respite to the company from legal proceedings by its creditors is put in place automatically both during the time of the application for a judicial management order until the making or dismissal of such an application and during the period that the judicial management order is in force.
Requirements for the Grant of a Judicial Management Order
The Court is empowered under clause 392 of the Bill to grant a judicial management order if and only if —
(a) it is satisfied that the company is or will be unable to pay its debts; and
(b) it considers that the making of the order would be likely to achieve one or more of the following purposes:
(i) the survival of the company, or the whole or part of its undertaking as a going concern;
(ii) the approval of a compromise or arrangement between the company and its creditors;
(iii) a more advantageous realisation of the company’s assets would be effected than on a winding up.
The judicial management order shall, unless discharged, remain in force for 180 days and may be extended on the application of the judicial manager for another 180 days.
Protection of Debenture Holder’s Rights
Clause 395(1)(b) of the Bill requires the notice of a judicial management application to be provided to any person who has appointed, or may be entitled to appoint, an R&M of the whole or a substantial part of the company’s property. However, clause 395(1)(b) limits the type of qualifying R&M as one appointed under the terms of a debenture secured by a floating charge or by a floating charge and one or more fixed charges. It does not seem to apply to a situation where the security is by way of a fixed charge only and is unclear as to whether it applies to a receiver as well.
This provision is significant as clause 396 of the Bill effectively provides a veto right to a person who is entitled to appoint a qualifying R&M. Clause 396(1)(b) of the Bill provides that the Court shall dismiss a judicial management application if the making of the order is opposed by a person who has appointed, or is entitled to appoint, such a receiver or R&M.
The reasoning behind such a veto right is that it is thought not necessary to make a judicial management order when an R&M could achieve substantially the same objectives and clause 396(1)(b) preserves the right of the debenture holder to appoint an R&M.
Approval of Judicial Manager’s Proposals
When a judicial manager is appointed, clause 407 of the Bill provides that he has 60 days (or such longer period as the Court may allow) to send to the Registrar, members and creditors of the company a statement of his proposals for achieving the purposes for which the order was made and to lay a copy of this statement before a meeting of the company’s creditors.
As a meeting of the creditors must be summoned on not less than 14 days’ notice, the judicial manager effectively only has 46 days to come up with the proposal to rehabilitate the company. Therefore, there is the view that the Bill’s 60-day period may in reality be too short unless the Court is more flexible in allowing for more time for the preparation of this statement of proposals.
Clause 408(2) of the Bill requires a judicial manager’s proposals to be approved by 75% in value of the creditors present and voting either in person or in proxy whose claims have been accepted by the judicial manager. Once approved by the required majority, the proposals shall be binding on all creditors of the company whether or not they had voted in favour of the proposals.
CORPORATE VOLUNTARY ARRANGEMENT
The CVA is modeled after the corresponding provisions under the UK Insolvency Act. The CVA is a procedure which allows a company to put up a proposal to its creditors for a voluntary arrangement. There is minimal Court intervention in this process and the main supervision is by an independent insolvency practitioner who would report to the Court on the viability of the proposal.
Stage 1: Initiation of CVA
To initiate a CVA, the directors would have to submit to the nominee, being a person who is qualified to be appointed as an approved liquidator, a document setting out the terms of the proposed voluntary arrangement and a statement of the company’s affairs.
Under clause 422 of the Bill, the nominee shall then submit to the directors a statement indicating whether or not in his opinion —
Stage 2: Filing Papers in Court and 28-day Moratorium
Under clause 421 of the Bill, once the directors have received a positive statement from the nominee, they can then file this statement with the Court together with the other necessary documents, such as the nominee’s consent to act and the document setting out the terms of the proposed CVA.
Upon the filing of the relevant documents pursuant to clause 421, the Ninth Schedule of the Bill provides that a moratorium commences automatically and shall remain in force for a period of 28 days.
Stage 3: Meetings for the Required Majority to Approve the Proposal
Once the moratorium is in force, the nominee is to summon a meeting of the company and its creditors within the period specified in the Eighth Schedule of the Bill. The reference in clause 423 to the Eighth Schedule appears to be a typographical error and that the correct reference should be to the Ninth Schedule of the Bill.
Under the Ninth Schedule, such a meeting of the company and creditors must be called within 28 days of the date of the filing of the documents in Court. At the company’s meeting, a simple majority is required to pass a resolution to approve the proposed CVA. At the creditors’ meeting, the required majority is 75% of the total value of the creditors present and voting in person or by proxy.
If more time is needed for the stakeholders to decide, and in order to extend the moratorium period beyond the initial 28-day period, a meeting can be summoned to extend the moratorium for not more than 60 days if there is approval of 75% majority in value of the creditors and with the consent of the nominee and the members of the company.
Stage 4: CVA Takes Effect
If the meetings of the company and the creditors achieve the required majority approval, the CVA takes effect and is binding on all creditors. There is no further Court Order but at the conclusion of the meetings, the Chairman of the meetings will report the result of the meetings to the Court and would give notice to the Registrar of Companies.
The Bill brings welcomed changes in introducing further options for corporate rehabilitation in Malaysia. It is hoped that the final Bill will reflect the feedback and comments received through the public consultation process.