This article first appeared in The Edge Malaysia Weekly on January 14, 2019 - January 20, 2019

WHEN a company finds itself insolvent, most of the time, it is wound up and liquidated by creditors. In such a scenario, the endgame is to ensure secured creditors and lenders are paid off, without taking into consideration whether the company can be turned around.

The new Companies Act 2016 provides financially struggling companies that have the possibility of being turned around two other corporate restructuring mechanisms (CRMs) — corporate voluntary arrangement (CVA) and judicial management.

According to Ferrier Hodgson MH Sdn Bhd managing partner Andrew Heng, the new provisions, which came into force last March, are a good way for financially distressed companies — big and small — to take a breather from creditor and lender legal action or suits.

“The new CRMs are actually a good thing because it gives the company an opportunity to restructure. Previously, we only had liquidation, receivership and the scheme of arrangement under Section 176,” he tells The Edge.

“Liquidation means the company gets closed down. Receivership is mainly for the banks to sell the charged assets, so they only look after selected creditors. In this case, receivership only looks after the banks while [in] liquidation, most of the time, creditors get close to zero.

“With the two new arrangements, there is actually an opportunity for the creditors and shareholders to come up with a scheme to restructure and rehabilitate the company.”

Ferrier Hodgson specialises in corporate recovery, corporate advisory, forensic accounting and forensic IT. It is among the first audit and accounting firms to have undertaken corporate restructuring cases utilising the provisions of the Companies Act 2016.

So, what are CVA and judicial management and how do they differ from liquidation and receivership?

The most substantial aspect differentiating CVA and judicial management from liquidation and receivership is the application for a moratorium, which enables the financially struggling companies to focus on restructuring and turning around their businesses.

When the moratorium is enforced, creditors and secured lenders will not be able to take legal action against the company. However, they can still wield power in the restructuring of the company as any proposal will require their support.

CVA is for small and medium enterprises that have no loans from financial institutions. As such, no lenders will be involved in the restructuring of the company as no asset is charged to any financial institutions.

“CVA has a short span of life. It is an arrangement entered into by the company with its creditors and [the firm] prepares a proposal on how to turn itself around. It is only applicable to companies that don’t have charges,” says Ferrier Hodgson associate director Kumarakuru Jai Prakash.

The first CVA case involved The Loaf, the bakery previously co-owned by Prime Minister Tun Dr Mahathir Mohamad. The Loaf found itself in financial distress and appointed Ferrier Hodgson to be its nominee under the CVA last April.

As a nominee of the company, Ferrier Hodgson ran the business to see if it could be rehabilitated. At the time, The Loaf had 13 outlets, mostly in the Klang Valley.

Under the CVA, the company is granted a 28-day moratorium, insulating it from being wound up or having its assets seized. During this period, the nominee will work with the management to come up with a restructuring proposal.

After the first moratorium, the company, through its nominee, can apply to the courts for an extension of up to a maximum of 60 days. In the case of The Loaf, Ferrier Hodgson applied for an extension of 28 days following the expiry of the first moratorium.

During that period, the nominee managed to find a white knight for the company. The new investor took over The Loaf and paid off its creditors in full.

“If the CVA had not been allowed, the endgame for The Loaf would have been liquidation. It would not be a dollar-for-dollar return to the creditors and shareholders if the company had been liquidated as its assets were not enough to pay off the creditors,” says Kumarakuru.

As for bigger companies with financial charges, they can apply for judicial management. Unlike the CVA, creditors and secured lenders are allowed to apply for the affected company to be put under judicial management. There are two categories of companies that are excluded from being placed under judicial management — those that are licensed and regulated by Bank Negara Malaysia and those that are subject to the Capital Markets and Services Act 2007.

Similar to the CVA, judicial management is aimed at giving viable companies in financial distress a chance to be rehabilitated and restored to profitability, maximising returns to creditors.

Under judicial management, an application to the courts can be made through the company’s solicitor. There are two pre-conditions for the filing of an application — in addition to its inability to pay its debt, the company must also have a reasonable probability of being rehabilitated.

After the application is filed, a 60-day interim moratorium will automatically be enforced. This interim moratorium allows for dissenting lenders and creditors to contest the judicial management application in court through their own solicitors.

After a judicial management order is made by the court, the appointed insolvency practitioner — who is called a judicial manager — will replace directors in the company. Every decision will be made by the judicial manager on behalf of the company. This differs from the scheme of arrangement under Section 176, whereby the company’s directors continue to run the business even after the company has obtained a restraining order from the court to secure judicial protection from creditor actions.

A general moratorium of six months will be in place to allow the judicial manager to come up with a proposal to restructure the company. During this period, all payments for pre-existing debts will cease.

After the statement of proposal is drawn up, the judicial manager will have to present it to all shareholders, creditors and secured lenders for their decision. The proposal requires the consent of all creditors and lenders holding at least 75% of the value of the company’s debt.

The proposal could be in the form of a new investor injecting money into the company, a scheme of arrangement with creditors and secured lenders, sale of businesses or assets to a third party, or a winding-up.

An example of a public-listed company that has opted for judicial management is Scomi Group Bhd, which last month went for the option for its financially distressed subsidiaries Scomi Engineering Bhd, Scomi Rail Bhd and Scomi Transit Project Brazil (Sao Paulo) Sdn Bhd.

Why should struggling businesses and interested parties understand and take advantage of the CRMs?

According to Heng, the complexity of businesses and financial instruments today means that liquidation and winding-up orders may not best serve the interests of all parties involved.

“Some bonds today are secured against future receivables, which, in the event of a liquidation, cannot be sold for cash like a fixed asset such as a building. We are in new times, we have new instruments, we have new laws ... give this new law a chance as well.”

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