Introduction:
On 2 February 2024, the Malaysian Government gazetted the Companies (Amendment) Act 2024 [Act 1701] which had received the Royal Assent on 24 January 2024.
The enforcement of the Companies (Amendment) Act 2024 is separated into two separate stages. On 1st April 2024, majority of the provisions in the Act has been enforced, save for the following provisions:
Section 4 (section 68 Companies Act 2016 ("CA 2016") in relation to Malaysian Business Reporting System)
Section 14 (section 395 CA 2016 in relation to Eligibility for moratorium for corporate voluntary arrangement)
Section 26 (section 576 CA 2016 in relation to Malaysian Business Reporting System)
Section 28 (section 612A in relation to SSM's website platform)
Based on the Briefing of Companies (Amendment) Act 2024 held by Companies Commission of Malaysia (SSM) on 13 May 2024, the Malaysian Government aims to enforce these provisions on the second half of 2024.
The Companies (Amendment) Act 2024 has three main objectives, namely,
Strengthening Corporate Rehabilitation Framework;
Enhancing Beneficiary Ownership Framework; and
Fortifying Corporate Governance and Practice.
In this Article, we will discuss on the first objective - Strengthening Corporate Rehabilitation Framework.
Amendment to section 395 Companies Act 2016 : Expansion of Scope of Application for Corporate Voluntary Arrangement (CVA)
The principal Act is amended as follows:
"Non-application of this Subdivision
395. This Subdivision shall not apply to—
(a) a company which is a licensed institution or an operator of a designated payment system regulated under the laws enforced by the Central Bank of Malaysia;
(b) a company which is approved or registered under Part II, licensed or registered under Part III, approved under Part IIIA or recognized under Part VIII of the Capital Markets and Services Act 2007; and
(c) a company which is approved under Part II of the Securities Industry (Central Depositories) Act 1991.”
The scope of application of Corporate Voluntary Arrangement (CVA) under the Act has been expanded to all companies regardless of whether the company has security interests over its assets. This will naturally allow more companies to take advantage of this mechanism through out-of-court negotiations.
In addition, as compared to the existing provisions which guarantee that CVA cannot be implemented without the consent of secured creditors, this has greatly broaden the opportunities for more companies that is facing financial difficulties to utilise the CVA.
In contrast with the Singapore Government's Simplified Insolvency Programme which is catered for smaller companies (which annual sales turnover must be less than $10 million), the Malaysian CVA targets to assist as much companies incorporated in Malaysia as possible.
Amendment to section 403 Companies Act 2016 : Expansion of the Scope of Application for Judicial Management (JM)
The principal Act is amended as follows:
"16. Section 403 of the principal Act is amended—
(a) in paragraph (a), by deleting the word “and” at the end of the paragraph;
(b) by substituting for paragraph (b) the following paragraph:
"(b) a company which is approved or registered under Part II, licensed or registered under Part III, approved
under Part IIIA or recognized under Part VIII of the Capital Markets and Services Act 2007; and”; and
(c) by inserting after paragraph (b) the following paragraph:
"(c) a company which is approved under Part II of the Securities Industry (Central Depositories) Act 1991.”."
Before the Companies Act 2016 is amended, Judicial Management (JM) is available for all companies save for companies which are regulated under the Capital Markets and Services Act 2007 (CMSA 2007) or Bank Negara Malaysia (BNM). JM is also not available for public listed companies under the old regime.
For your information, Judicial Management is a formal rescue mechanism where company creditor or liquidator may apply to Court for appointment of a judicial manager.
Quick Statistics:
Out of 182 application made from 2018 to 2023, the Court has approved 68 applications. From the above we can conclude that the approval rate is at 37%.
With the enforcement of Companies (Amendment) Act 2024, public listed companies are now eligible to apply for JM. This is another element used by the Malaysian Government to strengthen the corporate rehabilitation framework by improving the scope for Judicial Management in Malaysia.
Exceptions to CVA and JM:
Notwithstanding the expansion of scope provided in this Companies (Amendment) Act 2024, please keep in mind that CVA and JM do not apply to the following companies:
Companies licensed by BNM;
Companies approved/licensed under Parts II, III, IIIA and VIII of the CMSA 2007; or
Companies approved under Part II of the Securities Industry (Central Depositories) Act 1991.
The above companies shall comply with specific financial policies stipulated by BNM and Securities Commission (SC) should they face with financial downfall.
Amendment to section 367 and section 368 Companies Act 2016 : Enhancing the Scheme of Arrangement or Compromise (SOAC)
The principal Act is amended as follows:
“ 367. Power of Court to appoint insolvency practitioner
(1) The Court may, on an application for the approval of a compromise or arrangement under section 366, appoint an insolvency practitioner to assess the viability of the proposed compromise or arrangement.
(2) The insolvency practitioner appointed under subsection (1) shall prepare a report on the viability of the proposed compromise or arrangement and shall table the report at the meeting of creditors or members held under section 366.
(3) Notwithstanding subsection (1), the Court shall appoint an insolvency practitioner for the company when—
(a) the company makes an application under section 368b, 368d or 369c; or
(b) a related company of the company makes an application under section 368a.
(4) The insolvency practitioner appointed under this section—
(a) shall have the right of access to all the records of the company at all reasonable times; and
(b) shall be entitled to require from any officer of the company any information and explanation as he may require for the purposes of his duty.
(5) Where an insolvency practitioner is appointed under subsection (3), the insolvency practitioner shall prepare and submit a report on the progress of the proposed compromise or arrangement to the Court in the manner as the Court may determine before the compromise or arrangement is approved pursuant to subsection 366(4).
(6) The insolvency practitioner appointed under this section shall be entitled to receive a remuneration—
(a) as agreed between the company and the insolvency practitioner; or
(b) where there is no agreement between the company and the insolvency practitioner, as fixed by the Court in an order made under subsection (1) or (3).
(7) In making an order under paragraph (6)(b), the Court may state the person by whom the remuneration of the insolvency practitioner shall be paid.”.
Section 368 of the principal Act is amended as follows—
(a) by substituting for subsection (1) the following subsection:
“(1) Where no order has been made or resolution has been passed for the winding up of a company and a compromise or arrangement has been proposed between the company and its creditors or any class of those creditors, the Court may, in addition to any of its powers, on an application in a summary way by the company or any member or creditor of the company, grant a restraining order for a period of not more than three months from the date on which the restraining order is granted.”;
(b) by inserting after subsection (1) the following subsection:
“(1a) Upon the filing of an application for a restraining order under subsection (1) and until the application is decided by the Court or until the lapse of two months from the date of filing of the application, whichever is earlier—
(a) no order may be made, and no resolution may be passed, for the winding up of the company;
(b) no receiver or receiver and manager may be appointed over any undertaking or property of the company;
(c) no proceedings may be commenced or continued against the company other than the proceedings under
section 366, 368c, 368d, 369a or 370 except with the leave of the Court and subject to any terms as the Court
may impose;
(d) no execution, distress or other legal process may be commenced, continued or levied against any property of
the company except with the leave of the Court and subject to any terms as the Court may impose;
(e) no steps may be taken to enforce any security over any property of the company, or to repossess any goods
held by the company under any chattels leasing agreement, hire purchase agreement or retention of title
agreement,
except with the leave of the Court and subject to any terms as the Court may impose; and
(f) no right of re‑entry or forfeiture under any lease in respect of any premises occupied by the company may be
enforced except with the leave of the Court and subject to any terms as the Court may impose.”; ...”
A Scheme of Arrangement or Compromise (SOAC) allows a company in financial difficulty to either reorganize itself or reach a debt settlement agreement with its creditors. Because management retains control during a SOAC, it can be a good option for companies with a strong turnaround plan.
Quick Statistics:
The total number of SOAC applications lodged with SSM from 2018 to 2023 is 313. This makes the average SOAC application per year to 52 applications.
Clearer rules for insolvency officers: The update to Section 367 Companies Act 2016 clarifies how insolvency officers get appointed for debt restructuring plans. It also spells out their responsibilities, remunerations, and rights to examine all company records.
Streamlined restraining orders: Section 368 Companies Act 2016 now has a clearer process for applying for a restraining order. Companies can get a temporary order to stop creditors from taking action, but it only lasts for three (3) months initially. Extensions are possible for up to nine months if certain conditions are met.
New moratorium period: A new subsection 368(1A) Companies Act 2016 introduces a two-month moratorium period that starts when a restraining order application is filed under SOAC.
Preventing abuse: To avoid companies misusing the system, there's a 12-month "cooling-off" period before a new restraining order application of SOAC is allowed if a previous order was granted.
Conclusion
In summary, the amendments to the Companies Act 2016 aim to make corporate rehabilitation in Malaysia more accessible and efficient. By expanding the eligibility for both Corporate Voluntary Arrangements (CVA) and Judicial Management (JM), these changes offer struggling companies a wider range of options to restructure their debts and avoid liquidation. Additionally, the introduction of a moratorium period and clearer rules for restraining orders provide companies with more breathing room and control during the restructuring process. Overall, these amendments represent a positive step towards strengthening Malaysia's corporate rescue mechanisms.
This concludes our article on the Companies (Amendment) Act 2016: Strengthening Corporate Rehabilitation Framework. Part 2 and 3 of our article on the Companies (Amendment) Act 2016 will follow in due course.
If you have any questions regarding the above, please do not hesitate to contact our Managing Partner, Eugene Yeong for clarification.
Comments