In more detail
1. Restraining Order
Without a doubt, a restraining order is a lifeline for a company under financial distress. The 2023 CA Bill proposes the following amendments to widen the application of a restraining order for companies seeking to re-organise their debts through a scheme of arrangement :-
a. An automatic moratorium that comes into force from the date of filing of an application for a scheme of arrangement. This automatic moratorium is for a period of two (2) months or until the Court decides on the scheme of arrangement application, whichever is sooner. Before these proposed amendments, stringent criteria has to be met before a restraining order may be granted.
b. Clarification on the permissible scope of a restraining order. In addition to restraining the commencement of proceedings against the distressed company or its properties, the proposed new subsections expressly provide that a restraining order may restrain the winding up of the distressed company, the appointment of a receiver, the enforcement of security or repossession, as well as the enforcement of any right of re-entry or forfeiture.
c. A mechanism for a related company of the distressed company (i.e., a subsidiary company, holding company or an ultimate holding company) to apply for a restraining order, if the related company in question plays an integral role in the scheme of arrangement of the distressed company.
d. A restriction on the grant of a restraining order to a company that have been the subject of a restraining order within the past twelve (12) months.
2. Cross-class Cramdowns
a. The proposed new Section 368D of the 2023 CA Bill introduces a "cross-class cramdown" system, where an application can be made to the Court binding all creditor classes to the scheme even when there are creditor classes that voted against the proposed scheme.
b. To trigger a cross-class cramdown:
i. A total of 75% of all present and voting creditors (calculated without separation into class) voted in favour of the scheme; and
ii. The Court is satisfied that the scheme is fair and equitable to each class of dissenting creditors and does not discriminate between creditor classes.
3. Pre-Pack Scheme of Arrangement
a. The proposed new Section 369C in the 2023 CA Bill introduces a "pre-pack" scheme mechanism, where a distressed company may apply directly for sanction of the scheme without having to first apply to the Court to convene a meeting of creditors.
b. To do so, the distressed company must first meet several procedural criteria, and must also satisfy the Court that the proposed scheme would have been approved at a creditors' meeting had such a meeting been convened.
c. In practice, we foresee that this proposed mechanism will allow distressed companies to arrive at a compromise or arrangement with its major creditors via negotiations, and to dispense with the time, costs and risks involved in calling for a vote of the proposed scheme at a meeting of creditors.
d. The proposed "pre-pack" mechanism contains provisions that are similar to those contained in Section 71 of Singapore’s Insolvency, Restructuring and Dissolution Act 2018.
4. Scheme Procedure Improvements
a. The new Section 369B extensively sets out procedures for the filing of proof of debt, the process of adjudication of the proof of debt, and the ability to inspect other scheme creditors' proof of debt.
b. The new Section 366(2A) mandates for the chairperson of the meeting of creditors to be a court-appointed insolvency practitioner or a person elected by the majority in value of the creditors or members. Before this, the chairperson is typically appointed by the distressed company, hence raising concerns as to the impartiality of the appointee.
c. Further, the 2023 CA Bill also proposes provisions mandating for an insolvency practitioner to be appointed in cases of an application (i) for super priority for rescue financing; (ii) for cross-class cramdown; (iii) for a pre-pack scheme; and (iv) by a related company for a restraining order.
d. The new Section 369A equips the Court with the power to order a revote on the scheme and to order adjustments such as a change in classification and the amount of voting debt when the scheme is tabled for court sanction.
e. The new Section 369D, on the other hand, equips the Court with the power to clarify the terms of the scheme post-sanction, and to act against any breach or omission of the sanctioned scheme.
5. Super Priority Rescue Financing for Schemes and Judicial Management
a. The 2023 CA Bill also introduces super priority rescue financing for schemes of arrangement (and judicial management). Super priority rescue financing enables rescue financiers to attain better priority or security over other creditors in distress.
b. The Court may grant three types of security or priority to rescue financiers:
i. The giving of priority to the debt arising from rescue financing, and for this debt to be paid immediately after winding up costs are paid. In other words, the debt arising from rescue financing would rank below winding up costs but above preferential debts.
ii. The creation of security over unsecured assets.
iii. The creation of equal-ranking or even higher-ranking security over existing security, with a caveat that the interest of the existing security holder is adequately protected.
6. Corporate Voluntary Arrangement for More Companies
a. The proposed new Section 395 allows more companies to utilise corporate voluntary arrangements ("CVA"). Debates exist around whether a public listed company is subject to the Capital Markets and Services Act 2007; the Court of Appeal has ruled that it does. However, the Companies Act 2016 initially explicitly excluded public listed companies but this amendment removes the explicit exclusion of public listed companies and instead stipulates the exclusions below.
b. Under the 2023 CA Bill, the companies excluded from applying for CVAs would only be those that are licensed and registered under:
i. The laws of the Central Bank of Malaysia.
ii. Certain Parts of the Capital Markets and Services Act 2007.
iii. A central depository company.
7. Judicial Management for More Companies and Court Extension
a. The proposed new Section 405 enables wider judicial management. The list of companies excluded from applying for judicial management mimics that of companies excluded from CVA-application.
b. Under the existing Act, judicial management orders only are valid for six months and allow for one further extension of a subsequent six months.
c. The proposed amendment equips the court with the discretion to permit an extension of any longer period, subject to the court's terms. This is helpful where there is a genuine proposal to turn the distressed company around but more time is required.
8. Restriction on Rights to Terminate Contract with company undergoing scheme of arrangement
a. The new Section 430A restricts a counterparty’s right to enforce a contractual clause allowing for the termination of a contract upon the occurrence of an insolvency-related event (e.g., when the company becomes subject of a scheme of arrangement proceedings), if the contract in question relates to the supply of "essential goods and services". A supplier wishing to enforce such a clause must inform the company in writing at least 30 days before exercising his right under the clause.
b. "Essential goods and services" are the supply of water, electricity or gas, point of sale terminals, computer software and hardware, information, advice and technical assistance in connection with the use of information technology, data storage and processing and website hosting.
Key takeaways
The proposed amendments as envisaged by the Bill are much-needed and welcomed. Although at this point it is too early to tell what these changes would look like in practice, we are optimistic that the changes will serve to streamline scheme of arrangement proceedings, and to better balance the rights and interests of both the company in distress and the creditors of the company.
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This client alert was issued by Wong & Partners, a member firm of Baker McKenzie International, a global law firm with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a "partner" means a person who is a partner or equivalent in such a law firm. Similarly, reference to an "office" means an office of any such law firm. This may qualify as "Attorney Advertising" requiring notice in some jurisdictions. Prior results do not guarantee a similar outcome.
