According to Section 366 of the new Companies Act 2016, the Court’s main power is to grant its approval and order a compromise or arrangement between a company and its creditors. This remedy is available provided a compromise or arrangement has been agreed by a majority of 75% of the total value of creditors or class of creditors present and voting in a meeting of creditors.

Additionally, the Court can order a meeting between creditors and shareholders to consider a proposed compromise or arrangement. The Court can also alter and impose conditions if it thinks fit on a compromise or arrangement approved by creditors.

First and foremost, a company or its shareholders should have a viable proposal to all creditors to restructure its debts and place the company on the path to solvency. It is this proposal which will be offered to the creditors at a meeting for their consideration. The power of the Court mentioned above could be used to assist the process of calling the creditors’ meeting and ordering the compromise or arrangement, should the 75% threshold be met. It is advisable for shareholders to engage appropriate professionals such as accountants, merchant bankers and lawyers to assist in preparing or proposing the compromise or arrangement and applying for assistance from the Courts.

For further information on undertaking a compromise or scheme of arrangement with creditors, kindly contact Mr Gideon Tan (gideon@gtrz.com.my), Mr Kooi Tock Ken (ken@gtrz.com.my), Mr Alfred Lai (alfredlai@gtrz.com.my) and/or Ms Irene (irene@gtrz.com.my).

The first advantage is the Court’s power to order compromise or arrangement with creditors and members even though some creditors may not agree with the scheme of arrangement. So long as the said threshold over 75% is met, subject to the Court’s approval, the remaining creditors are forced to accept the compromise or arrangement.

The second and principal advantage most insolvent companies compromise via the Court is to take advantage of Section 368 of the new Companies Act 2016 which allows the Court to restrain proceedings or actions against a company whilst it seeks a compromise with its creditors. This is akin to what is commonly known as “bankruptcy protection” for companies in the United States of America. There are, however, conditions to be fulfilled before a Court can restrain the proceedings against the company.

For further information, kindly contact Mr Gideon Tan (gideon@gtrz.com.my), Mr Alfred Lai (alfredlai@gtrz.com.my) and/or Ms Irene (irene@gtrz.com.my).

There are other avenues according to the new Companies Act 2016. Directors of a company may propose a Corporate Voluntary Arrangement according to Section 396 to Section 401 of the new Companies Act 2016. Another option is to seek judicial management according to Division 8 Sub Division 2 of the new Companies Act 2016 on Corporate Rescue Mechanisms. Judicial management is only appropriate when ‘there is a reasonable probability of rehabilitating the company or of preserving all or part of its business in the foreseeable future or that otherwise the interests of creditors would be better served than by resorting to a winding-up.’

For further information, kindly contact Mr Gideon Tan (gideon@gtrz.com.my), Mr Kooi Tock Ken (ken@gtrz.com.my), Mr Alfred Lai (alfredlai@gtrz.com.my) and/or Ms Irene (irene@gtrz.com.my).

A debenture is a debt instrument issued by a company. In the Malaysian context, when a company borrows money from a bank or financial institution to assist in the funding of its business, it is common for the lender to request from the company a debenture as security for the loan. Debentures issued by the company usually, but not always, create a charge over the assets of the company in favour of the lender. The lender is normally called the debenture holder.

A charge over the assets of a company means that the debenture holder has the right to receive money or be paid from the assets of the borrower company. Assets of a company can be put into 2 categories. One is fixed assets such as land and buildings and machinery. The other comprises assets such as cash and receivables which are variable and constantly changing. For example, a company's bank balances change constantly depending on the sales proceeds received and expenses paid. A debenture in the Malaysian context commonly creates a charge over fixed assets and floating assets. A fixed asset, such as land and buildings cannot be sold off without permission from the debenture holder. It is a fixed charge and stands as security for the loan provided by the debenture holder. A floating charge over variable assets of a company only crystallises when there is a default or non-payment by the borrower company. Therefore, assets subject to a floating charge may be used by the company for its business without prior permission from the debenture holder.

In many instances, a debenture provides for the appointment of a receiver and manager over the assets of the borrower. In respect of a fixed charge over land and buildings, the debenture would empower a receiver and manager appointed by the debenture holder to take control of the affected land and building. It is common for the receiver and manager appointed to have the necessary powers to sell the land and building to satisfy the debts owed by the borrower company. In respect of the floating charge, the charge crystallises on or before appointment of the receiver and manager and at that juncture whatever the value of those assets may be, it is the receiver and manager’s duty to realise those assets to pay the debenture holder.

The new Companies Act 2016, Section 524 now provides and sets out the rights and duties of the secured creditors. This section going forward after January 2017 will impact how receivers and managers and debenture holders disposes off secured assets.

A debenture will normally contain a clause or clauses setting out events of default. Any of these events is the triggering event when the debenture holder decides to terminate the loan arrangement with the borrowing company and appoint a receiver and manager. The most common event of default is of course the failure of the borrowing company to service or to pay the loan in accordance with the terms of the debenture. Another common event of default is the presentation of a winding-up petition against the borrowing company.

The receiver and manager takes over the management of the company from the Directors. The Directors’ powers are suspended. The receiver and manager acts as agent for the company and would be in effective control. Whilst on one hand the receiver and manager has a duty to the debenture holder to realise the assets of the company to repay the debenture holder, the receiver and manager as agent of the company also has the duty to prudently manage the company.

Commercial contracts entered into prior to receivership need not be honoured by the receiver and manager. But the receiver and manager as agent of the company is free to contract on behalf the company for services and business necessary to the company.

In reality, most receiverships mark the beginning of the end for the borrower company. The stain of receivership may not be easily overcome by a company and its business.

The directors of a company do have residual powers as directors of the company. Management may have vested in the receiver and manager but the directors can in the name of the company challenge the appointment of the receiver and manager via the Courts. If there has been a wrongful appointment of the receiver and manager it is incumbent on the directors to act swiftly to remove or at least suspend the appointment of the receiver and manager via the Courts. This is to ensure that the stain of receivership does not cause long-term detriment to the borrower company.

For further information on this topic, kindly contact Mr Gideon Tan (gideon@gtrz.com.my), Mr Alfred Lai (alfredlai@gtrz.com.my) and/or Mr Yap Yoon Jan (jan@gtrz.com.my).

Under the new Companies Act 2016, Section 376, receivers and managers can be appointed by the Court on an application by a debenture holder. In practice this is seldom used, as most debentures provide for a receiver and manager appointment without the need to obtain a Court order.

Regarding other Court-appointed receivers and managers, one is appointed only when some right of an applicant requires protection or enforcement when there is no other available adequate remedy. This is commonly exercised in a situation where assets, not necessarily held in a company, requires protection from being dissipated. The Court’s power is derived from Order 51 of the Rules of Court 2012.

For further information on Court-appointed receiver and manager, please contact Mr Brian Cumming (brian@gtrz.com.my), Mr Alfred Lai (alfredlai@gtrz.com.my), Mr Yap Yoon Jan (jan@gtrz.com.my) and/or Ms Irene Wong (irene@gtrz.com.my).

Generally, there are two commonly known types of winding-up, namely voluntary winding-up and creditors’ winding-up.

A voluntary winding-up is where shareholders of a company voluntarily wind up a company. It is done by passing a shareholder’s resolution, going through the process of liquidation and applying for the voluntary winding-up to be sanctioned by the Court. This happens when shareholders decide they no longer wish the company to continue business. The decision to discontinue business may happen for various reasons ranging from retirement of all shareholders, business being no longer viable or a parting of ways between shareholders.

Solvency is not a prerequisite to voluntary winding-up. Shareholders can voluntarily choose to wind up a company when it is insolvent and its business is not viable. The difference is that the voluntary winding-up becomes what is known as a creditor’s voluntary winding-up where creditors shall effectively control the winding-up or dissolution process. It is after all, the creditors who are most prejudiced when an insolvent company is wound up. The distinction between members and creditors voluntary winding-up is explained in Section 444 of the Companies Act 2016.

A winding-up by the Court is instituted by the creditors or contributories of a company against the company for unpaid debts. At times creditors may have sued a company and obtained a judgment from Court. If left unpaid the creditors may institute winding-up. Another common occasion is when a company fails to repay a creditor any debt exceeding RM10,000.00, the creditor is then entitled to send a Section 466 notice under the new Companies Act 2016 to demand payment. Upon the lapse of twenty-one days from the presentation of the Section 466 notice and non-payment, the company is then deemed to be insolvent and the creditor is allowed by law to present a winding-up petition to the Court.

There are less common circumstances under which a Court may order a winding-up. Section 465(1)(a) to (l) of the new Companies Act 2016 sets out all the circumstances. For further information regarding the various circumstances, kindly contact Mr Yap Yoon Jan (jan@gtrz.com.my).

In addition to the above, Section 346 of the new Companies Act 2016 allows for the possibility of winding up a company where the Court finds that there is oppression by a group of controlling shareholders against other shareholders of the company. For further information, please see the topic on Oppression of Shareholders.

Upon the Court’s order to wind up or sanction the winding-up of a company, a liquidator will be appointed for the company. The liquidator can either be the Official Receiver (Director General of Insolvency) or a private liquidator. A private liquidator must be licensed. The main function of the liquidator is to liquidate the assets of the company, pay off debts and distribute any balance or surplus amongst the contributories (shareholders) of the company.

Upon winding-up, the powers of the board of directors and management of the company will cease and be taken over by the liquidator. Practical considerations which directors and shareholders need to consider during the course of winding-up, both to themselves and the company are as follows:

1. The effect of winding-up takes place not from the time the winding-up order is made but when the winding-up petition is presented to the winding-up Court. Section 472 of the new Companies Act 2016 may make ineffective a sale of property by the company, transfer of shares or alteration of status of the company's shareholders. This is to protect assets of the company from being dissipated prior to the winding-up order being made. Please see topic on Undue Preference.
2. When a winding-up order is made, any other Court action or proceeding against the company is stayed or stopped unless the winding-up Court provides permission (Section 471 of the new Companies Act 2016).
3. Directors of companies which are wound up would in Malaysia have their credit rating adversely affected. Credit information bureaus or services will invariably have directors’ names on their database. It may adversely affect any loan application, personal or otherwise. Shareholders may be similarly affected.
4. Directors may be disqualified from being directors of other companies both present and for future business, in particular public listed companies.
5. Personal liability attributed to fraudulent trading under Section 540 of the new Companies Act 2016. For further information on fraudulent trading, please see the highlighted topic.

Secured creditors have their debts secured over defined assets of a company which are charged to them. They have separate means to recover their debts against a borrower company’s assets. Please see topics on receivership. Unsecured creditors unfortunately recover their debts in accordance with priorities set out in Section 527 of the new Companies Act 2016. In brief and not comprehensively set out, the priorities in ranking order are as follows:

1. Costs and expenses of winding-up
2. Wages and salaries of employment including commissions
3. Workers’ compensations accrued before winding-up
4. All remuneration payable to any employee accumulated before winding-up
5. All company contributions such as Employment Provident Fund (EPF), Social Security Organisation (SOCSO) and employees’ income tax contributions
6. Corporate tax payable before commencement of the winding-up

Unsecured creditors rank after the above priority payments followed by shareholders if there are any remaining monies to be distributed.

The title ‘fraudulent trading’ may sometimes be misleading. It is a common mistake even among lawyers to read a requirement for deceit, breach of trust or fraud for this section to be applicable. Fraudulent trading is found within the division of the Companies Act 2016 relating to winding-up. The issue of fraudulent trading is actually an issue of solvency, a company trading whilst insolvent without adequate means to fulfil contractual obligations. It can be commonly applicable to RM2.00 companies or under-capitalised companies, or insolvent companies entering into contracts they do not have the means to fulfil. It may be considered a fraudulent trade by creditors of the company.

The position in Malaysia is different from that in other countries. Our Section 540 differs from various other countries in that it includes not just winding-up but in any proceedings against a company. Therefore as a creditor commences action against a company for debts owing, the creditor may also according to this section include any person if the circumstances of fraudulent trading arise.

This section has not been widely applied in practice in Malaysia and many times creditors have been left without remedy from under-capitalised companies. There are situations of abuse when companies which do not have adequate capital transact, and then if business is unsuccessful wind up. Should the circumstances fit, GTRZ has advocated taking action against the personalities involved, who are normally the directors and shareholders making them personally liable.

For further enquiries on fraudulent trading, kindly contact Mr Gideon Tan (gideon@gtrz.com.my), Mr Brian Cumming (brian@gtrz.com.my), Mr Alfred Lai (alfredlai@gtrz.com.my), and/or Ms Irene Wong (irene@gtrz.com.my).