SMEs play an essential role in the growth of an economy. In particular, the Malaysian Government has started the following initiatives following the recently announced Economic Stimulus Package and the Second Stimulus Package to relieve the burden of the Covid-19 Pandemic on SMEs.

  •  Special Relief Fund through working capital;
  • A Wage Subsidy Programme to employers for three (3) months to keep their employees earning RM4,000.00 and below;
  • Rescheduling and restructuring of employer’s contributions for Employees Provident Fund;
  • Suspension of income tax payments for a period of 3 months; 
  • An automatic 6-month loan repayment deferment; and 
  • A tax waiver to help SMEs with their cash flows.

A more comprehensive survival kit is vital during this unprecedented period. As such, Corporate Rescue Mechanisms have been devised to avoid liquidation. These are Corporate Voluntary Arrangements (CVA), Judicial Management (JM), Scheme of Arrangement, and other available options that we will discuss further in this article. 

Corporate Voluntary Arrangements (CVA)

The CVA mechanism provides a platform for negotiations between the company and its creditors. It is best suited for companies that are without any secured debt and prefer minimal court intervention. This mechanism also requires more than 50% of members’ approval and the approval of 75% in value of creditors present and voting. The negotiation meeting must be held within 28 days of the deferment. Upon agreement, the proposal is binding to all the creditors and members, regardless of their vote.

Judicial Management (JM)

Judicial management is a new corporate rescue mechanism under the Company Act 2016 (CA 2016) that allows for a judicial manager’s appointment over an insolvent corporate debtor by the Malaysian High Court.

Key features of judicial management are as follow:

  • Public-listed companies appear to be excluded from applying for judicial management.
  • First, the filing of the court application for judicial management triggers an automatic moratorium.
  • Proof of insolvency or near insolvency to be provided and that the court must be satisfied with judicial management’s arrangement in achieving the survival, restructuring of the company, or better realization of the company’s assets.
  • It is worth noting that any secured creditors can veto the judicial management arrangement. 
  • Once the judicial management order is granted, the judicial manager has an initial term of six months to put forward a restructuring proposal to its creditors. The moratorium continues during the judicial management order.
  • The judicial manager’s proposal aims to achieve 75% in value of the creditors’ approval. The judicial manager takes the broad management powers of the BOD and may only extend the initial six-month term for a further six-months.

Scheme of Arrangement

Scheme of arrangement is applicable to all companies. Similar to the CVA, the board of directors remains in control of the company throughout the process.

There are three stages in a scheme of arrangement:

  1. The company applies to the court for an order to hold meetings for the company’s creditors. The company may also apply for a court order for an urgent moratorium known as a restraining order. Creditors are then classified into different classes based on their different legal rights.
  2. Meetings are held based on the creditor classes to achieve 75% in value of each class’s creditors’ approval.
  3. The company returns to the court to sanction the scheme. It can obtain approval once all statutory requirements have been met.

 Other available options:

Credit Debt Restructuring Committee (CDRC)

CDRC is a platform to allow for debtor companies and financial institution creditors to work out a debt restructuring without resorting to formal court proceedings under certain criteria.

Winding-up and Interim Liquidator

Winding up of a company is one of the options to preserve the remaining company’s assets and allow a controlled sale of the company. By doing so, there is a need for the appointment of an interim liquidator. 

Pre-bankruptcy Rescue Mechanism 

The pre-bankruptcy rescue mechanism is also known as a voluntary arrangement. The individual debtor will appoint a nominee to act as an independent professional to oversee and supervise the voluntary arrangement. The nominee can be a chartered accountant, advocate, solicitor, or other people to be determined by the Minister.

Exemptions and Modifications of CA 2016

This could be a temporary but rapid mechanism to allow companies to utilize all corporate rescue options fully.  As an example of a possible exemption, allow the CVA to be used by all private companies and exempt private companies from Section 395(d) of CA 2016.

Despite the implementation of the government stimulus packages, such measures may not be sufficient to protect companies and SMEs from the full impact of the Covid-19 pandemic. Hence, the purpose of this qualitative study should serve as a brief guideline for the affected SMEs to navigate through during this unprecedented challenging period. Please reach out to our team if there is any way we can assist with this.

 

References:

  •  (2016). Malaysia: The Threat to Insolvency Due to COVID-19 and Options for SMEs. Azmi & Associates.https://www.hg.org/legal-articles/malaysia-the-threat-to-insolvency-due-to-covid-19-and-options-for-smes-57217
  • D’Angelus. MM, Adhan. H.H.M., Samuel. RD, (2020, April 11). COVID-19: THE THREAT TO INSOLVENCY – OPTIONS TO SMEs. https://amcham.com.my/wp-content/uploads/Article-20200412-COVID-19-The-Threat-to-Insolvency-Options-to-SMEs.pdf
  • Lee Shih. (2020, March 24). Coronavirus: Restructuring and Insolvency for Business. TheMalaysianLawyer.com.https://themalaysianlawyer.com/2020/03/24/coronavirus-restructuring-insolvency-companies/
  • Lee Shih. (2020, April 1). Covid-19 crisis: Restructuring and rescue options for businesses. Theedgemarkets.com.https://www.theedgemarkets.com/article/covid19-crisis-restructuring-and-rescue-options-businesses

 

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