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Insolvency refers to the event that an individual or company becomes unable to meet its financial obligations to its creditors as debts become due. Bankruptcy and foreclosure soon follow, which is the worst-case scenario for any business.

Typically, a business tends to face insolvency for the following reasons;

  • Lack of expertise in commercial operations, lack of knowledge of business practices, internal control failure causing a tarnished company image,
  • The loss of a major client due to competition,
  • Excessive borrowing and thus the inability to repay the money,
  • An unexpected business downturn, i.e., COVID-19, the permanent disability/death of the business owner

An insolvent company can usually be revived with two options.

  • Formal procedures
  • Informal procedures, in other words, ‘Workout.’ This process begins with a ‘standstill agreement,’ which includes negotiations for deferred payment with creditors, sales of extra or idle assets, cutting costs such as reducing headcount and overheads, disposing of loss-making operations, and finally, changing the key management personnel.

Formal rescue measures are dictated by the government in various sections of legislation and categorised under the following;

  • The corporate debt restructuring committee (CDRC), with the authority of the government and Bank Negara, assists borrowers and bankers in finding a cordial settlement between all involved parties.
  • Corporate rescue schemes
  • Liquidation

Under the Companies Act 2016, the corporate rescue schemes comprise Schemes of Arrangement, the Corporate Voluntary Arrangement, and Judicial Management. A Corporate Rescue Scheme traditionally starts with the appointment of Financial and Legal Advisors. It then moves to the application of the Corporate Arrangement Scheme to court. Insolvent companies commonly use schemes of arrangement for restructuring. The company then prepares the Proposed Corporate Voluntary Arrangement. Finally, the court is to appoint a Judicial Manager who prepares a proposal for the debt settlement.

Lastly, liquidation can be categorized into the following:

  • Member’s voluntary liquidation, where 75% of a company’s members wish to close down a solvent company (realization of assets is sufficient to repay all liabilities)
  • Creditors’ voluntary liquidation is where creditors choose their preferred liquidator, and 75% of members wish to wind up an insolvent company.
  • Court liquidation, where the court issues a winding-up order seeing as the company cannot pay its debts. The creditor usually initiates it via court.

This is all to say that, with strategic implementation, a good corporate rescue plan can significantly maximize a business’ chances of continuity on a solvent basis. A solid corporate rescue plan is likely to yield better returns for the company’s creditors and shareholders compared to an immediate liquidation of the business.

 

Reference:

  • Malaysian Insolvency Laws. International Insolvency Institute. Retrieved from https://www.iiiglobal.org/sites/default/files/2-_summary.pdf
  • Rabindra, N.,(2016). Malaysia Overview. Retrieved from http://shearndelamore.com/pdfs/Law-Business-Research-The-Asia-Pacific-Restructuring-Review-2017.pdf 
  • Brad Vincent (2020, November 26). Top 9 Causes of Business Insolvency. Retrieved from  https://www.dissolve.com.au/blog/top-9-business-insolvency/

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Simon Yeo

Senior Consultant of Recovery Service

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