"Staying Afloat": Corporate Rescue & Restructuring

The imposition of the Movement Control Order on the 18th of March, 2020 has resulted in a widespread standstill of local business operations across numerous sectors. For some businesses, insolvency is beginning to look more like an eventuality, rather than a mere possibility, given the interruption of revenue streams.

Nevertheless, there are a number of corporate restructuring exercises that businesses may choose from in order to escape a situation of insolvency or having to wind-up their companies.

1. Scheme of Arrangements

A scheme of arrangement involves the gathering of a company’s creditors to seek their approval on a plan proposed by the company’s leadership to settle the debts and liabilities of the company.

Such plans would typically propose to the scheme creditors a repayment plan involving a ‘haircut’ discount on the company’s debts and/or repayment of that debt by way of share issuance, warrants, cash or a mixture of all three.

Normally, the company would appoint financial advisors and solicitors to draw up a plan for the scheme which includes sorting the company’s creditors into different classes according to their rights over the company and preparing a draft Scheme Paper and Explanatory Statement.

The company then applies to the Court for an order to hold a meeting of the company’s creditors and may, if it chooses to do so, apply for a restraining order of all prospective and ongoing litigation against it. The duration of the initial restraining order will be for a period of no more than 3 months, which may be extended by the Court to a maximum of 9 months.

If during the meetings at least 75% of creditors in each creditor class supports the scheme, the company may then return to the Court to request that it sanctions the scheme rendering the scheme legally binding on all scheme creditors.

Aside from corporate rescue, a scheme of arrangement may also be used to:

• reorganize a company’s shareholding or ownership by raising capital through a share issuance exercise;

• substitute an existing parent holding company of a group with a new holding company (often referred to as “top-hatting”), freeing up the parent company’s operations from listing requirements and obligations;

• reconstruct group structures or combine several subsidiaries into one entity to efficiently utilize group resources.

2. Judicial Management Orders

Judicial management orders are orders made by the court appointing an insolvency practitioner or approved liquidator to take managerial control over all the assets of a particular company, manage its affairs, property and businesses, protect the interests of its shareholders and creditors, and inquire into the company’s dealings.

The person appointed is thereafter known as the judicial manager who acts as both an agent of the company as well as an officer of the Court.

Once the application lodged with the Court, an automatic moratorium on all litigation, prospective or ongoing, against the company comes into force for the duration of the hearing and decision of the judicial management application. Newspaper advertisements must then be taken out to give notice to the relevant persons that a judicial management application has been filed in Court.

In granting a judicial management order, a company must be able to satisfy the Court that:

• it is unable to pay its debts;

• and that there is a reasonable probability of either rehabilitating the company, preserving all or part of its business as a going concern, or that the interest of the creditors would be better served as compared to winding-up the company; or

• it is in the public interest to do so.

Should a company succeed in procuring an order from the court to appoint a judicial manager, the judicial manager then has 60 days to prepare a proposal and present it to the Court on how they intend to achieve their objectives.

A creditors meeting is then held to consider the judicial manager’s proposal. If the proposal obtained at least 75% approval, it becomes legally binding on all of the company’s creditors.

The creditors may also choose to set up a committee of creditors to assist the judicial manager in achieving the proposal’s objective.

Three things should, however, be noted:

• the law presumes that a company is insolvent if it is unable to pay its debts as they become due (this presumption can be rebutted with evidence);

• public listed companies are not able to make use of the judicial management rescue framework; and

• a secured creditor has a right to veto an application for a judicial management order.

3. Corporate Voluntary Arrangements

A corporate voluntary arrangement is a binding compromise between a company and its creditors on the whole or part of the company’s debts and repayment timeframe. It should be noted that only private limited companies (i.e. Sdn Bhd) with no secured debt may make use of this particular corporate rescue mechanism.

Compared to schemes of arrangements and judicial management orders, a corporate voluntary arrangement is the simple form of a corporate rescue plan as it is entirely driven by the company’s leadership and does not require any court supervision.

An arrangement requires 51% of approval from the company’s shareholders and 75% of support from its creditors in order to take effect.

The arrangement is first drawn up in the form of a proposal by the company’s board of directors and a nominee insolvency practitioner is then appointed by the board to review the proposal.

The nominee then prepares a Proposal Viability Statement on whether the company’s proposal has a reasonable prospect of being approved by the company’s shareholders and creditors in terms of its financial viability and practical feasibility, and whether a shareholders’ and/or creditors’ meeting is required to consider the proposal, and whether the proposal.

Should the proposal be approved by the creditors and endorsed by the nominee, the proposal should then be filed with the Court, alongside other proposal papers. Upon filing these papers, automatic moratorium comes into force for 28 days, and can be extended for a further period of not more than 60 days with the approval of the nominee, shareholders and creditors.

During this process, the nominee is required to provide oversight over the company’s affairs. If they deem that the arrangement can no longer meet its objective, they may withdraw their consent to the arrangement.