Topic  Corporate

10 Rescue
Mechanisms
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Elaborate the different types of corporate rescue mechanisms;
2. Discuss the roles of liquidator, nominee and judicial manager;
3. Explain statutory requirements and various procedures for
initiating and implementing various corporate rescue
mechanisms; and
4. Apply the relevant process and procedures in the implementation
of various corporate rescue mechanisms.

 INTRODUCTION
The CA 2016 provides various corporate rescue mechanisms to assist the
rehabilitation of companies in financial difficulties without going through the
normal winding up process. The corporate rescue mechanism may involve both
court approval and voluntary arrangement between the company and its creditors.
Any proposal for corporate rescue tools must pass the statutory voting threshold
before it can be implemented and becomes binding on all creditors. During the
moratorium period, a company enjoys certain immunity from any proceedings or
actions taken against it.

This topic will focus on three corporate rescue mechanisms, namely the scheme of
arrangement, corporate voluntary arrangement and judicial management.

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10.1 SCHEME OF ARRANGEMENT

A scheme of arrangement is normally used by insolvent companies in their
reorganising or restructuring plans. The scheme of arrangement involves a court
process and allows companies to be protected from various forms of recovery and
enforcement actions against it through court-supervised moratorium or
restraining orders. The scheme of arrangement also allows for a formal
compromise that is approved by the court to be bound by dissenting creditors and
members as long as certain statutory voting percentage has been achieved.

10.1.1 Initiating a Scheme

In accordance with Section 366 of the CA 2016, a scheme of arrangement may be
initiated by a company, a creditor or a member of a company, the liquidator (in
the event the company is being wound up) or the judicial manager (in the event
the company is under judicial management).The law requires the person listed
under Section 366 to apply to the court for an order to convene members or class
of creditors meeting. The applicant has the liberty to decide on which creditors or
members to be included in the proposed scheme of arrangement.

At the members or creditorsÊ meeting, members or creditors may vote for the
proposed scheme of arrangement. If the proposed scheme obtained a majority of
75 per cent of the total value of the creditors, class of creditors, members or class
of members, the proposed scheme of arrangement or compromise will be binding
on the creditors, members or the liquidator and contributors. However, the agreed
scheme of arrangement or compromise must be approved by the court before it
can be implemented and enforced.

10.1.2 Assessing the Viability of a Scheme

In assessing the viability of a scheme of arrangement or compromise, the court has
the power to appoint a liquidator whose main function is to assess the viability of
the proposed scheme of arrangement or compromise and the appointed liquidator
must submit a report at the meeting of creditors or members. The scheme of
arrangement may include reorganisation of business through the issuance of
shares to new investors as capital injection, replacing the existing parent company
with a new holding company, reconstruction or amalgamation between two
companies, or the selling of profitable business, which does not fit with the
companyÊs new strategy (Aiman Nariman & Effendy Othman, 2018).

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10.1.3 Court Approval

Since the binding effect of the proposed scheme of arrangement or compromise
comes from the court approval, the implementation of the proposed scheme
requires the approval from the court as well. In granting the approval, the court
would normally consider the following (Rabindran S. Nathan, 2017):
(a) All procedural requirements have been fulfilled;
(b) The report prepared and submitted by the approved liquidator shows that
the proposed scheme is viable;
(c) All the necessary information have been given to the members or creditors
in order for them to make an informed decision; and
(d) The proposed scheme is fair and reasonable.

10.1.4 Restraining Order or Moratorium

Under the CA 2016, the applicants may apply to the court for a moratorium known
as restraining orders to prevent any proceedings or actions taken against the
company except with the leave of the court. The court may, upon application, grant
a restraining order for a period of not more than three years and may extend the
period to not more than nine months if, for example, the court is of the view that
further extension is necessary to enable the company to formalise the scheme of
arrangement or compromise for the approval of creditors or members of the
company.

During the moratorium period, the company is prevented from disposing or

acquiring property other than in the ordinary business without the leave of the
court.

SELF-CHECK 10.1
1. Who can initiate a scheme of arrangement?

2. When can a scheme of arrangement be implemented?

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10.2 CORPORATE VOLUNTARY ARRANGEMENT

Section 395 of CA 2016 provides a new corporate rescue mechanism known as
corporate voluntary arrangement (CVA). Unlike the scheme of arrangement, CVA
permits any proposed arrangement to be concluded between the company and
creditors without the need to obtain the approval from the court. The CVA is only
available for private companies. The CVA regime also excludes license holders
who are regulated by the Financial Services Act 2013 and the Capital Market
Services Act 2007 as well as companies that create a charge over its assets and
undertakings. The CA 2016 allows any proposed voluntary arrangement to be
binding on all creditors of a company, provided that the statutory voting threshold
stipulated in the Act has been reached. The proposal for CVA can be made by a
director of a company or a judicial manager for a company under judicial
management and a liquidator or Official Receiver if the company is in the process
of winding up.

10.2.1 Nominee and Duty

In the course of preparing the CVA proposal, the director or Official Receiver is
required to appoint a nominee who must be a licensed insolvency practitioner. The
director or Official Receiver has the responsibility to furnish all necessary
documents and information including documents that stipulate the terms of the
proposal and information on the affairs of the company especially particulars
relating the companyÊs creditors, debts and liabilities to the appointed nominees.
Based on the information provided, the nominee is required to form an opinion
whether the proposed CVA has a reasonable prospect of being approved and
implemented, and whether the company has sufficient funds to continue its
business during the moratorium period. It is also the duty of the nominee to lodge
all documents relating to CVA with the Registrar. If the CVA is initiated by the
judicial manager or liquidator, the judicial manager or liquidator may act as a
nominee to monitor the affairs of the company.

10.2.2 Moratorium
The moratorium commences from the filing of certain documents by the company
as stipulated under Section 398 of CA 2016 to the court. It should also include a
document which sets out the terms of the proposed CVA and a statement
containing particulars relating to the companyÊs creditors, debts and liabilities or
assets. The initial moratorium period is for 28 days from the filing of the required
documents but may be extended for a period not more than 60 days by members

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and creditors of the company. Certain activities are prohibited when the
moratorium is still in force. They include the following:
(a) Petition and resolution for winding up the company;
(b) Requisition of the companyÊs meeting;
(c) Application for judicial management;
(d) Proceedings or execution, or other legal process against the company;
(e) Any steps taken to impose security over the companyÊs assets; and
(f) Any steps taken to transfer the shares of the company or to alter the status of
members and others.

10.2.3 Meeting of Members and Creditors

During the moratorium period, the appointed nominee must call for creditors and
membersÊ meeting to consider the proposed CVA. Before the proposed CVA can
be carried out, at least 75 per cent of the total value of creditors who attended and
voted in the meeting must approve the proposal. At the membersÊ meeting a
simple majority is needed to approve the proposed CVA. Once the statutory voting
requirements have been obtained, the proposed CVA shall be binding on all
creditors. The statutory meeting may also be convened to extend the moratorium
period from the initial 28 days to up to 60 days. This is subject to the consent of
members and appointed nominees together with the consent of 75 per cent
majority in value of creditors who were present and voted in the meeting.

The moratorium will end at the end of the meeting which considers the proposed
CVA (whether the meeting approved or disapproved the proposed CVA) or if it
has been extended at the end of the extended time. The moratorium period will
also expire if the nominee withdraws his consent to act if he ceases to be a member
of a qualified professional body under Section 433(3). The law also permits the
establishment of a Moratorium Committee whose function is to assist the nominee
in the assessment of the viability of the proposal for the purpose of extending the
moratorium period.

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10.3 JUDICIAL MANAGEMENT

Judicial management is part of the corporate rescue tools, which allows the
management of a company to be placed under a judicial manager who is appointed
by the court. The judicial management is not applicable to companies licensed
under the Financial Services Act 2013 and the Capital Market Services Act 2007.
The application for the judicial management can be made by a company through
its membersÊ resolution, its directors through the BoardÊs resolution or its creditors
(including contingent or prospective creditors). The applicants must convince the
court that the company is not able to settle its debts and there is reasonable
probability that the judicial management order is able to rehabilitate and preserve
the companyÊs business or that the interests of the creditors would be better
protected than going through a normal winding up process. The applicant for
judicial management order may nominate any insolvency practitioner who is not
the companyÊs auditor to act as a judicial manager, subject to the approval from
the court.

10.3.1 Effects
Once the application for judicial management order has been made, certain
activities are prevented from being carried out including any resolution for the
winding up of the company, proceedings, execution or legal process against the
company and enforcement of a charge on or a security over the companyÊs
property, among others.

During the moratorium period, certain activities cannot be implemented including

resolution for winding up, appointment of receiver and manager, proceedings,
execution or legal process against the company, enforcement of security over the
companyÊs assets, any transfer of shares of the company and alteration of the status
of the members of the company.

10.3.2 Judicial Manager

The judicial management order will last for a period of six months but may be
extended to another six months. During the six months period, the appointed
judicial manager should prepare a proposal and submit it to the Registrar and the
creditors of the company. The judicial manager must convene a meeting of
creditors to consider the submitted proposal. The proposal must obtain the
approval from at least 75 per cent of the total values of creditors whose claims have
been accepted by the judicial manager, who were present and voted at the meeting.
Once the statutory voting threshold has been obtained, the proposal has a binding

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effect on all creditors of the company including the dissenting creditors. The result
of the meeting should be reported to the Registrar and the court.

During the period in which the judicial management order is still in force, the
power of the directors of the company will cease and the judicial manager will take
over the power of the directors in managing the companyÊs affairs, business and
property. The judicial manager is conferred with various powers including:
(a) To take control or possession of the companyÊs property;
(b) To sell or dispose the companyÊs property by public auction or private
contract;
(c) To bring or defend any action or legal proceedings on behalf of the company;
(d) To carry on the companyÊs business; and
(e) To make arrangement or compromise on behalf of the company.

The judicial manager may apply to the court for the judicial management order to
be discharged once the purpose of the judicial management has been achieved.

ACTIVITY 10.1
DE Sdn Bhd is a private limited company that was incorporated in
2016. Due to financial difficulties, the court had granted an order to
put the company under a judicial manager to handle the companyÊs
affairs in 2018. Explain the duties and powers of the judicial manager
and the effects of the judicial management order granted by the court.

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SELF-CHECK 10.2

1. What is corporate rescue mechanism all about?

2. Differentiate between scheme of arrangement, corporate voluntary

arrangement and judicial management.

3. What are the roles of a liquidator and a judicial manager under

corporate rescue mechanisms?

4. When does the proposed rescue mechanism become binding on the

creditors?

5. What are the effects of entering into a scheme of arrangement and

corporate voluntary arrangement?

 The CA 2016 provides for various corporate rescue mechanisms to assist in the
rehabilitation of companies in financial difficulties. The mechanisms include
scheme of arrangement, corporate voluntary arrangement and judicial
management.

 Corporate rescue mechanisms may involve court process such as scheme of

arrangement and judicial management or through voluntary arrangement
such as corporate voluntary arrangement.

 The CA 2016 lists down the parties who have locus standi to initiate the
proposal for various corporate rescue tools.

 The proposal for corporate rescue mechanism (including scheme of

arrangement, corporate voluntary arrangement and judicial management)
must pass statutory voting threshold at the members and creditorsÊ meeting
before the proposal can be implemented.

 All proposed rescue schemes or plans that have passed the voting threshold
will become binding on all creditors including the dissenting creditors.

 The CA 2016 sets out the moratorium period in which the approved proposal
will remain in force.

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 During the moratorium period, certain activities cannot be conducted,

including any actions or proceedings against the company.

 The appointed liquidator, the nominee and the judicial manager should
perform their functions and duties as stipulated in the CA 2016.

Corporate voluntary arrangement Moratorium

Corporate rescue mechanisms Nominee
Judicial management Scheme of arrangement
Judicial manager Winding up
Liquidator

Aiman Nariman, & Effendy Othman. (2018). Malaysia company law: Principles
and practices. Netherlands: Wolters Kluwer.

Rabindran S. Nathan. (2017). Law business research: The Asia Pacific restructuring
review – Malaysian overview. Retrieved from
https://www.shearndelamore.com/pdfs/Law-Business-Research-TheAsia
-Pacific-Restructuring-Review-2017.pdf

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