THE coronavirus pandemic and the Movement Control Order have exposed companies and businesses to considerable risks of financial distress and insolvency. This article is written to keep companies and business owners informed of the corporate rescue and restructuring options under the Companies Act 2016 (CA 2016).
First, the Scheme of Arrangement (SOA) — Section 366 of CA 2016. SOA is a powerful, flexible and court-supervised mechanism for debt restructuring, reconstruction and amalgamation of companies, including any transfer of property or liabilities between them.
A company may apply to the court for a SOA by first seeking a court-convened creditors’ meeting. From experience, the court will order such a meeting to be convened only if a viable proposed scheme is presented. Lawyers have to work closely with scheme advisers in order to help companies achieve that.
During the meeting, the company needs to obtain approval from 75 per cent of the total value of creditors and members of the company. After approval, the company may then apply to the court to sanction the SOA. Upon obtaining the court’s sanction and with other statutory requirements met, all creditors and shareholders are bound by the SOA.
We would advise companies to apply for a court-granted restraining order under Section 368 of CA 2016 to restrict any legal action by creditors or other parties against the company. It also gives the company some breathing space to negotiate a compromise with the creditors.
Second, Judicial Management (JM) — Section 404 of CA 2016. It’s a new rescue mechanism where the management of the subject company is placed under a court-appointed insolvency practitioner, known as the judicial manager. Once an application for JM is filed to the court, an automatic moratorium (akin to a restraining order) kicks in until the application is decided.
Now, the court will grant an order for JM only if it is satisfied that the subject company is insolvent, and that JM probably helps in the survival and restructuring of the company instead of liquidation. Upon obtaining the order, the powers of the board of directors are suspended.
The JM order will be in force for six months, and it can be extended by another six months subject to the court’s approval. The judicial manager will use this six months to work out a proposal to rescue the company with the creditors and obtain their approval. Once the rescue plan is approved, all the creditors are bound by it.
Third, Corporate Voluntary Arrangement (CVA) — Section 396 of CA 2016. It allows a distressed company to work out an arrangement with creditors. The court is not involved actively in the CVA mechanism.
The directors of the company may cooperate with an insolvency practitioner and draw up a proposed CVA before proposing the same to the company and its creditors. In doing so, the directors will have to appoint an insolvency practitioner as their nominee.
When the necessary documents are ready, the company, with the assistance of lawyers, will then file the same to the court. Once the documents are filed, a 28-day automatic moratorium kicks in to protect the subject company. The nominee must convene a creditors’ meeting and obtain approval of the proposed CVA from 75 per cent of the total value of creditors. Once obtained, the proposed CVA will be binding on all creditors.
However, corporate rescue mechanisms have limitations. CVA is only available to private companies with no secured creditor i.e. there is not a single charge over the company’s assets. Also, both the CVA and JM options are not available to companies which are licensees under the Financial Services Act 2013 and Capital Markets and Services Act 2007.
Under the law, an application for JM will also be futile if it is opposed by a secured creditor. In light of these limitations, a vast number of companies are left with SOA as their only rescue option. Even then, SOA requires the court’s approval at every step and the subject company has to meet the legal threshold.
Pending legal reform which allows wider access to rescue options, it is therefore advisable for distressed companies to consult experienced lawyers before pursuing rescue options.
As economic threats loom, fiscal and monetary policies are devised at the macro level while at the micro level, astute company leaders should start exploring available corporate rescue options.
The writers are legal practitioners
The views expressed in this article are the author’s own and do not necessarily reflect those of the New Straits Times