Navigating financial challenges can be a complex task for businesses and individuals alike. In Malaysia, there are specific legal mechanisms outlined in the Companies Act 2016 and the Insolvency Act 1967 that address debt restructuring and provide legal safeguards against debt recovery lawsuits, execution of monetary judgments, winding-up, and bankruptcy proceedings. This article sheds light on various debt restructuring processes and legal protections available to private limited companies, sole proprietorships, partnerships, and individuals.
Scheme of Arrangement | Sections 365 to 371 of the Companies Act 2016
Scheme of Arrangement is a formal debt restructuring process whereby creditors are called upon to vote on a proposed scheme for a compromise between the company and its creditors through a court-convened meeting.
Generally, all types of companies can utilize this scheme.
The scheme is approved by the creditors’ meeting (75% majority in value of the creditors) and by an order of the court.
Once the scheme is approved, the company and all its creditors are bound by the scheme.
The court may, on application of the company, grant an order to restrain any legal proceeding or execution against the company except with the court’s permission. The restraining order is a useful tool to keep creditors at bay to enable the company and its creditors to formalize the scheme for the approval of the creditors. However, it must be shown that the scheme is viable and the company is not merely resorting to a restraining order as temporary reprieve from its creditors.
The restraining order lasts for up to 3 months with a possible extension for up to 9 months.
Corporate Voluntary Arrangement | Sections 395 to 402 of the Companies Act 2016
Corporate Voluntary Arrangement (CVA) is similar to Scheme of Arrangement, but involves a more straightforward procedure. The directors may initiate the CVA by making a proposal to the company and its creditors for a voluntary arrangement and appointment of a nominee insolvency practitioner to oversee the implementation of the CVA.
CVA only applies to private limited companies that has not charged any of its property / undertaking.
The CVA is approved by: -
• Members’ meeting (simple majority); and
• Creditors’ meeting (75% majority in value of the creditors)
Once the CVA is approved, the company and all its creditors are bound by the CVA.
Unlike Scheme of Arrangement, there is an automatic moratorium from the date of filing into court of requisite documents e.g. statement of company’s affairs and statement that nominee has given consent to act.
The moratorium lasts for 28 days. Nevertheless, the meeting of creditors and members may approve an extension of up to 60 days provided: -
• The members and the nominee consents; and
• 75% majority in value of the creditors vote for the extension
Among others, the effects of the moratorium are: -
• No presentation or resolution for winding-up of the company
• No legal proceeding or execution against the company, except with the court’s permission
The CVA cannot however affect the right of a secured creditor to enforce his security unless he consents.
Judicial Management | Sections 403 to 430 of the Companies Act 2016
Judicial Management is for companies that have become insolvent but with reasonable probability of rehabilitation. It is a process used to preserve all or part of the company’s business as a going concern. It must be shown that the interest of creditors would be better served by way of judicial management instead of winding-up the company.
Private limited companies can apply to court for an order to place the company under judicial management and appoint an insolvency practitioner known as ‘judicial manager’.
Once the judicial manager is appointed, the directors are displaced, and the company’s affairs, business and property are managed by the judicial manager.
Similar to CVA, there is an automatic moratorium from the date of filing of the application until the judicial management order is made.
Once made, the judicial management order has the following effects, among others: -
• No receiver / receiver & manager shall be appointed
• No order or resolution for winding-up of the company
• No legal proceeding or execution against the company, except with the judicial manager's consent or the court’s permission
The judicial management order lasts for up to 6 months, and with a possible extension of up to 6 months by application of the judicial manager.
Fortuna Injunction is an injunction to restrain a creditor from presenting a winding-up petition against the company. The rationale for such an injunction is that the reputation of the company is affected upon presentation of the petition since the petition must be advertised.
There are two grounds for applying for a Fortuna Injunction i.e.: -
• The winding-up petition is bound to fail.
• The winding-up petition is based on a disputed debt which will cause irreparable damage to the company.
Circumstances where a Fortuna Injunction would be allowed are: -
• Where the winding-up petition is used to pressure the company to pay a disputed debt.
• Where the winding-up petition is used to force full payment from the company, although there was an agreement to pay by instalments.
Voluntary Arrangement | Insolvency Act 1967
A voluntary arrangement under the Insolvency Act 1967 can be utilized by individuals, sole proprietorships, and partnerships. It is a composition in satisfaction of a debtor’s debt or scheme of arrangement of a debtor’s affairs.
A debtor may propose a voluntary arrangement to his creditors at any time before he is adjudged bankrupt. In the case of firms, consent of majority of the firm's partners must be obtained before proposing such voluntary arrangement.
The debtor must appoint a nominee to supervise the implementation of the voluntary arrangement. The nominee must be registered with the Director General of Insolvency who is either a registered chartered accountant or an advocate & solicitor.
The debtor must then make an application for an interim order of voluntary arrangement. The interim order is valid for 90 days, without any possibility of an extension.
Once made, the interim order has the following effects, among others: -
• No bankruptcy petition may be made or proceeded against the debtor
• No legal proceeding or execution may be commenced or continued against the debtor, except with the court’s permission
Before the expiry of the interim order, the nominee shall summon a meeting of creditors to approve the proposed voluntary arrangement. The proposal is approved with 75% majority in value of the creditors.
The interim order ceases to have effect at the end of 30 days from submission of the report by the nominee to the court of the decision of the creditors' meeting.
Upon cessation of the interim order, any pending bankruptcy petition stayed by the interim order is deemed dismissed unless the court otherwise orders.
The voluntary arrangement, once approved, binds every creditor who had notice and entitled to vote at the meeting.
The voluntary arrangement cannot however affect: -
• The right of a secured creditor to enforce his security unless he consents
• The priority of preferential creditors
Prohibited Bankruptcy Petitions
Absolute prohibitions | Social guarantors
There shall absolutely be no bankruptcy petitions against social guarantors who are defined as guarantors for: -
• Loans for education or research
• Hire-purchase of vehicle for personal use
• Housing loan for personal dwelling
Qualified prohibitions | Other guarantors
In the case of other guarantors, bankruptcy petitions may only be commenced with the court’s permission. The creditor must show that all modes of execution against the principal borrower have been exhausted including: -
• Seizure and sale
• Judgment debtor summons
• Garnishee proceedings
• Bankruptcy / winding-up proceedings
As an alternative to voluntary arrangement, a debtor may propose a compromise with his creditors by way of written contract called composition agreements. This however requires all creditors to agree to the compromise.
Other Automatic Moratoriums (Covid-19)
The Malaysian Department of Insolvency (MDI) announced a 6 months moratorium on monthly payments by a bankrupt until 30th September 2020.
Winding-up (definition of ‘inability to pay debts’)
The Minister of Domestic Trade and Consumer Affairs, by a direction issued on 21st April 2020, increased the threshold for statutory notice of demand from RM 10k to RM 50k.
Further, by the Companies (Exemption) Order 2020, the Minister increased the time period to respond to a statutory notice of demand from 21 days to 6 months.
Both the direction and Order are valid until 31st December 2020.
There are however no similar changes to the definition of ‘act of bankruptcy’ as at the time of writing this article. The current threshold for bankruptcy notice is RM 50k. Whereas the current time period to respond to a bankruptcy notice is 7 days.
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. As the legal landscape evolves, it's essential to stay informed about changes and adapt strategies accordingly to secure financial stability.