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  • Writer's pictureThomas W. L. Chin

Exploring Debt Restructuring and Legal Protections in Malaysia

Updated: Mar 21

Navigating financial challenges can pose significant complexities for both businesses and individuals in Malaysia. Fortunately, specific legal frameworks outlined in the Companies Act 2016 and the Insolvency Act 1967 provide avenues for debt restructuring and shield against debt recovery lawsuits, bankruptcy, and winding-up proceedings. This article aims to shed light on the diverse debt restructuring processes and legal safeguards accessible to private limited companies, sole proprietorships, partnerships, and individuals.

Scheme of Arrangement | Sections 365 to 371 of the Companies Act 2016

The Scheme of Arrangement serves as a formal debt restructuring mechanism wherein creditors vote on a proposed compromise between the company and its creditors, facilitated through a court-convened meeting. This scheme is universally applicable to all types of companies. Upon approval by the creditors' meeting (requiring a 75% majority in value of the creditors) and subsequent court order, the scheme binds both the company and its creditors. Additionally, the court may, upon the company's application, issue an order to restrain any legal proceedings or execution against the company, albeit subject to the court's discretion. This restraining order, effective for up to 3 months with potential extension to 9 months, serves as a valuable tool in enabling the company and its creditors to formalize the scheme.

Corporate Voluntary Arrangement | Sections 395 to 402 of the Companies Act 2016

Similar to the Scheme of Arrangement, the Corporate Voluntary Arrangement (CVA) offers a streamlined procedure for debt restructuring. Initiated by the directors through a proposal to the company and its creditors, the CVA entails the appointment of a nominee insolvency practitioner to oversee its implementation. Limited to private limited companies without any charged property or undertaking, the CVA mandates approval by both members' and creditors' meetings. Notably, the filing of requisite documents triggers an automatic moratorium lasting 28 days, extendable up to 60 days with requisite consents. This moratorium shields the company from winding-up proceedings and legal actions, subject to specific conditions.

Judicial Management | Sections 403 to 430 of the Companies Act 2016

Designed for insolvent companies with prospects of rehabilitation, Judicial Management aims to preserve the company's business as a going concern. Upon court application, private limited companies can secure a judicial management order appointing an insolvency practitioner, displacing directors, and entrusting the management of the company's affairs to the judicial manager. Analogous to CVA, an automatic moratorium from the date of application filing until the judicial management order issuance shields the company from various legal actions, subject to specified exceptions.

Fortuna Injunction

The Fortuna Injunction, an injunction restraining a creditor from presenting a winding-up petition against a company, finds application in scenarios where such a petition is likely to fail or is based on a disputed debt. The injunction prevents reputational damage associated with the fact that the petition will be advertised or reflected in the database of credit reporting agencies.

Voluntary Arrangement | Insolvency Act 1967

Individuals, sole proprietorships, and partnerships can avail themselves of voluntary arrangements under the Insolvency Act 1967. Initiated by a debtor's proposal to creditors, subject to partners' consent in the case of firms, a voluntary arrangement entails the appointment of a nominee supervising its implementation. The interim order, effective for 90 days, prohibits bankruptcy petitions and legal proceedings against the debtor without court permission, providing temporary relief during the restructuring process.

Composition Agreements

Offering an alternative to voluntary arrangements, composition agreements necessitate unanimous creditor consent, enabling debt compromise.

Prohibited Bankruptcy Petitions

Absolute prohibitions shield social guarantors from bankruptcy petitions pertaining to specific types of loans (i.e., loans for education or research, hire-purchase of vehicle for personal use, and housing loan for personal dwelling). Whereas other guarantors require court permission for such petitions after exhausting alternative legal remedies against the principal borrower.

In conclusion, debt restructuring processes and legal protections provided under the Companies Act 2016 and the Insolvency Act 1967 offer valuable tools for individuals and businesses facing financial challenges in Malaysia. Understanding these mechanisms and seeking professional advice can help navigate complex financial situations, protect assets, and find viable solutions to debt-related issues.

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