When a Malaysian company faces financial difficulties or needs to reorganise its business operations, corporate restructuring becomes a critical consideration. The Companies Act 2016 provides several mechanisms that allow companies to restructure their affairs, rehabilitate their business, or wind down operations in an orderly manner. This guide explains the key restructuring options available to Malaysian companies and when each might be appropriate.
Understanding Corporate Restructuring in Malaysia
Corporate restructuring refers to the legal and financial processes that allow a company to reorganise its capital structure, operations, or ownership. In Malaysia, the Companies Act 2016 introduced significant reforms to corporate rescue and restructuring mechanisms, aligning Malaysian law more closely with international best practices.
The primary restructuring options available under Malaysian law include schemes of arrangement, corporate voluntary arrangements, judicial management, and various forms of voluntary winding up. Each option serves different purposes and is suited to different circumstances.
When Should a Company Consider Restructuring?
Directors and shareholders should consider restructuring options when the company exhibits signs of financial distress or operational inefficiency. Common triggers include:
Cash flow problems: Difficulty meeting day-to-day operational expenses or paying creditors on time often signals the need for restructuring. Early intervention can prevent more serious consequences.
Mounting debts: When liabilities begin to outpace assets, or when the company struggles to service its existing debt obligations, restructuring may help restore financial health.
Creditor pressure: Receiving statutory demands, winding-up petitions, or aggressive collection actions from creditors indicates that restructuring should be urgently considered.
Strategic realignment: Even profitable companies may restructure to streamline operations, divest non-core assets, or prepare for mergers and acquisitions.
Schemes of Arrangement Under the Companies Act 2016
A scheme of arrangement is a court-supervised process that allows a company to reach a binding compromise or arrangement with its creditors or members. This mechanism is governed by Sections 366 to 368 of the Companies Act 2016.
How Schemes of Arrangement Work
The process begins with the company applying to the court for an order to convene meetings of the relevant classes of creditors or members. At these meetings, the scheme must be approved by a majority in number representing at least 75% in value of the creditors or members present and voting.
Once approved by the requisite majority, the company applies to the court to sanction the scheme. If the court is satisfied that the scheme is fair and reasonable, it will grant approval. The sanctioned scheme then becomes binding on all creditors or members of the relevant class, including those who voted against it.
Moratorium Protection
One significant advantage of schemes of arrangement is the availability of a restraining order under Section 368 of the Companies Act 2016. This moratorium prevents creditors from commencing or continuing legal proceedings against the company while the scheme is being proposed, giving the company breathing room to formulate its restructuring plan.
Judicial Management: A Corporate Rescue Mechanism
Judicial management, introduced under Part III, Division 8 of the Companies Act 2016, is a relatively new corporate rescue mechanism in Malaysia. It allows a company in financial difficulty to be placed under the management of a qualified insolvency practitioner appointed by the court.
Objectives of Judicial Management
The judicial manager's primary objectives are to achieve one or more of the following outcomes: the survival of the company as a going concern, a more advantageous realisation of the company's assets than would be achieved in a winding up, or the approval of a compromise or arrangement between the company and its creditors.
Who Can Apply for Judicial Management?
An application for a judicial management order can be made by the company itself, its directors, or any creditor of the company. However, judicial management is not available to certain types of companies, including licensed institutions under the Financial Services Act 2013 and banks regulated by Bank Negara Malaysia.
Effect of the Judicial Management Order
Once a judicial management order is made, an automatic moratorium comes into effect. No resolution may be passed for the winding up of the company, and no proceedings may be commenced or continued against the company without leave of the court. This protection allows the judicial manager to assess the company's affairs and implement a restructuring plan without creditor interference.
Voluntary Winding Up: An Orderly Exit
When restructuring or rehabilitation is not viable, voluntary winding up provides an orderly mechanism for closing down a company's affairs. There are two types of voluntary winding up under Malaysian law: members' voluntary winding up and creditors' voluntary winding up.
Members' Voluntary Winding Up
A members' voluntary winding up is available only to solvent companies. The directors must make a statutory declaration of solvency, stating that they have made a full inquiry into the company's affairs and have formed the opinion that the company will be able to pay its debts in full within twelve months from the commencement of the winding up.
This type of winding up is typically used when shareholders wish to close down a profitable company, realise its assets, and distribute the proceeds among themselves. It is controlled by the members rather than the creditors.
Creditors' Voluntary Winding Up
If no declaration of solvency is made, or if the liquidator subsequently forms the opinion that the company will not be able to pay its debts in full, the winding up proceeds as a creditors' voluntary winding up. In this case, the creditors have greater control over the process and may appoint their own liquidator.
Practical Considerations for Directors
Directors must be aware of their duties when a company faces financial difficulty. Under Malaysian law, directors may be personally liable for insolvent trading if they allow the company to continue incurring debts when they knew or ought to have known that the company was insolvent and there was no reasonable prospect of recovery.
Seeking professional advice early is crucial. Engaging qualified legal counsel and insolvency practitioners can help directors navigate the available options and fulfil their fiduciary duties. Acting promptly may also improve the chances of a successful restructuring outcome.
Choosing the Right Restructuring Option
The appropriate restructuring mechanism depends on several factors, including the company's financial position, the nature and extent of its liabilities, the attitude of key creditors, and the prospects for business recovery.
Schemes of arrangement are often suitable for complex restructurings involving multiple classes of creditors or sophisticated financial arrangements. Judicial management may be preferable when the company needs protection from creditors while a turnaround strategy is developed and implemented. Voluntary winding up is appropriate when the business is no longer viable and an orderly liquidation is in the best interests of all stakeholders.
Conclusion
Corporate restructuring in Malaysia offers companies facing financial difficulty several pathways to either rehabilitate their business or wind down their affairs in an orderly manner. The Companies Act 2016 provides a modern framework that balances the interests of companies, creditors, and other stakeholders. Understanding these options and seeking timely professional advice can make the difference between successful business rescue and unnecessary loss.
Disclaimer: This article provides general information only and does not constitute legal advice. Corporate restructuring involves complex legal and financial considerations that vary depending on individual circumstances. If your company is facing financial difficulty or you are considering restructuring options, you should consult with qualified legal and financial professionals who can assess your specific situation and provide tailored advice.