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Corporate Restructuring in Malaysia
“Corporate restructuring is an effective tool to resurrect the distressed companies with a view of giving them a new lease of lives, thus enabling them to positively contribute to the nation’s future social and economic development………….”
Many companies in an economic downturn are making losses and may find themselves in an insolvent position of not being able to pay their debts as and when they fall due. Being trapped in such position is precarious, as there is a risk of the company being wound up, causing undue hardship to employees, creditors and shareholders alike. In addition, creditors will rush to enforce their debts, which is usually a disastrous state of affairs. This may eventually lead to an end of the company via a harsh liquidation process which is costly, less efficient and time consuming; but there are revival mechanisms in place to address such issue, depending on what the cause is.
A state of insolvency can generally be categorised into any one of two types:
(i) there are insufficient assets to settle all debts, and
(ii) there are sufficient assets to settle all debts with surplus available for
distribution, but it may take time to realize such assets into cash.
In the first scenario, the question is whether the company is able to realistically propose a compromise with its creditors and to rehabilitate itself back on its feet again. Such companies will usually require an infusion of fresh capital and or new viable businesses from White Knights. In the second scenario, it would probably be possible to propose a compromise of the company's debts without any other form of infusion. Thus, the decision makers of the distressed company would have to carefully consider whether the interests of the company will lie in its winding-up or a corporate rescue.
Although in Malaysia, there is no voluntary administration procedure to restructure a distressed company which are viable to be revived, the compromise and scheme of arrangement mechanism as provided in section 176 of the Companies Act, 1965 (the Act) [similar to sections 411 to 413 of the Australian Corporations Act, 2001; Para. 26 of the UK Companies Act, 2006 ], is still operational. This mechanism allows a company, inter alias, to propose a compromise with its creditors in an orderly manner. The compromise can be a combination of seeking a haircut in the amount of debts, freezing of further interest charges and deferment of the repayment schedule.
The advantage of this procedure is that as an integral part of the scheme of arrangement, the company can propose a compromise to its creditors as a group or on a global basis, instead of having to deal with each creditor individually. It will be almost impossible to seek a compromise with each creditor as the terms of compromise will not be same with some variations for each class and there will be insufficient time for them to negotiate with each creditor per se. The acceptance or rejection of the proposal to the compromise of its debts is determined by the creditors at their respective meetings.
Before a proposal for compromise and scheme of arrangement can be brought to creditors for their consideration, the company must first make an application to the High Court for an order to convene a meeting of creditors. It is necessary to group creditors into their respective classes as there are different types of creditors for the respective amount of debts. This would enable them to vote at their respective meetings, whereas the rights, benefits and obligations of all creditors in that particular class have to be just and equitable. All information required for the decision making by the creditors regarding the proposed compromise together the scheme of arrangement which may involve the interests of equity and preference shareholders as well as the White Knights must be furnished to them in the form of an Explanatory Statement.
A meeting convened pursuant to the High Court order under section 176 has the advantage that if a sufficient majority of creditors are in favor of the proposal for the compromise and scheme of arrangement, although there may exist dissenting creditors, the scheme can be considered approved and endorsed by creditors. That sufficient majority must be of at least 75% in value of creditors’ debts and a simple majority in number for those creditors attending and having voted in the respective meetings. Where there are few classes of creditors, separate meeting for each class is required. Whether the proposal for a scheme will succeed or not depends on how the proposal is being structured and how appealing the compromise can be. Some proposals are structured in such a way that in order for the scheme to be approved and implemented, the approval of all classes of creditors is a pre-requisite condition and that any one class rejecting the proposal may spell the end of the entire restructuring effort.
It is common to make an application for an order for a moratorium period of two to three years to restrain legal proceedings against the company at the same time making an application for an order to convene the creditors' meetings. Protection for legal proceedings against the company is required as this will give the time required for the company to table the proposal for compromise and to obtain the necessary approval for the scheme from its creditors.
If the creditors vote in favour of the proposal in the court convened meetings, the company will then have to make another application to get the High Court to sanction the scheme as approved by the creditors. At this stage, creditors can still object but very good grounds will have to be shown as to why the proposed scheme which despite having been approved by the requisite majority in value and in number of the respective creditors, should not be sanctioned.
In short, as what Ramanujam (2000) has highlighted “ Corporate restructuring is designed with a view that a productive unit is to be saved and brought back to life. The anxiety underlining this objective is that if a productive unit dies, it will cause incalculable harm to the society, to the economy, to the shareholders and stakeholders including creditors, suppliers, employees and bankers alike who are serving the public by extending credits to the industry. If the industry thrives, the customers would get more supplies, the employees would get employment and the government would get more revenue and the augmented funds could be used for national building purposes.”
Given the current unfavorable economic condition in Malaysia and the ASEAN region, in the near future it is anticipated that more distressed companies are expected to resort to the compromise and scheme of arrangement mechanism as provided in section 176 of the Act, which provides an inroad for the distressed companies to be rehabilitated by giving them a new lease of lives. If they are able to be revived and will positively contribute to the nation’s future social and economic development.
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