Received: 21 July 2019 Revised: 3 March 2020 Accepted: 24 May 2020
DOI: 10.1002/iir.1384
RESEARCH ARTICLE
Paradigm shift from a liquidation culture to a corporate rescue culture in Malaysia: A legal review
Thim Wai Chen1,2 | Ruzita Azmi1 | Rohana Abdul Rahman1
1School of Law, Universiti Utara Malaysia, Kedah, Malaysia Abstract 2Advocate & Solicitor, High Court of The company law landscape in Malaysia has witnessed Malaya, Kedah, Malaysia a significant change in its insolvency law with the adoption of two new corporate rescue mechanisms, the Correspondence Thim Wai Chen, School of Law, corporate voluntary arrangement and judicial manage- Universiti Utara Malaysia, Kedah, ment under the Companies Act 2016 (CA 2016), which Malaysia. has repealed the Companies Act 1965 (CA 1965). Previ- Email: [email protected] ously, the insolvency laws under the CA 1965 were based on the traditional pro-creditor laws of winding up and receivership, which embodied the liquidation culture. This article examines the transition of the insolvency laws in Malaysia from a liquidation culture under the CA 1965 to a corporate rescue culture under the CA 2016. It also reviews the necessary changes to the pro-creditor laws, which are preserved under the CA 2016 in order to accommodate the pro-debtor laws with the introduction of the corporate rescue mecha- nisms, which came into force on March 1, 2018. Through comparative and critical analysis of similar laws in the United Kingdom and Singapore, this article argues that while the corporate rescue mechanisms are regarded as pro-debtor however the review reveals that the position of secured creditors are impeding its appli- cation and reforms ought to be considered.
© 2020 INSOL International and John Wiley & Sons Ltd
Int Insolv Rev. 2020;29:181–203. wileyonlinelibrary.com/journal/iir 181 182 CHEN ET AL.
1 | INTRODUCTION
On January 31, 2017, the Companies Act 1965 (CA 1965) in Malaysia was repealed by the Com- panies Act 2016 (CA 2016). The objectives of enacting the CA 2016 are to modernise the law in Malaysia relating to companies accompanied by a reduction in the costs of doing business,1 and at the same time, to provide a framework to facilitate the rescue of financially distressed compa- nies.2 The corporate rescue mechanisms are found in Division 8 of Part III in the CA 2016 and are in the form of Corporate Voluntary Arrangement (CVA),3 and Judicial Management (JM),4 which are effective on March 1, 2018. With the introduction of these two corporate rescue mechanisms, it is expected that Malaysian insolvency laws will attain the modern international standards pertaining to corporate rescue, where statutory mechanisms are available to facilitate the rescue of those companies whose failures are caused by temporary financial problems, but which are still economically viable.5 The corporate rescue mechanisms were introduced based on reforms recommended by the Corporate Law Reform Committee (CLRC),6 which was set up by the Companies Commission Malaysia (CCM) on December 17, 2003. The CLRC produced several reports for law reform, which included a Consultative Document on Reviewing the Corporate Insolvency Regime— The Proposal for a Corporate Rehabilitation Framework [No. 10] (CD No. 10), published in 2007 and which recommended the corporate rescue mechanisms.7 With the introduction of cor- porate rescue mechanisms in the form of CVA and JM, the insolvency law for companies in Malaysia has apparently changed from that of a liquidation culture,8 under the CA 1965, to that of a corporate rescue culture,9 under the CA 2016. The term, 'corporate rescue' owes its origin to the United States (US) as a term used: “to describe measures taken for the rescue of companies as an alternative to their dissolution.”10 This trend in insolvency law in the world on the adoption of a corporate rescue culture has been described as: “a marked shift from liquidation and creditor wealth maximisation to corporate rescue and value preservation.”11 Notwithstanding that the objectives of the corporate rescue mechanisms under the CA 2016 are to facilitate the rescue of distressed companies, this article will conclude that more reforms are needed to overcome the veto rights of creditors to enable those objectives to be attained.
2 | PRO-DEBTOR AND PRO-CREDITOR LAWS
The inspiration for a corporate rescue culture, as embraced by the United Kingdom (UK) and Singapore insolvency laws, came from the US Chapter 11, which is regarded as a pro-debtor law.12 The main features of a pro-debtor law embodied in Chapter 11 provide for: the process to be initiated by the company as a form of protection against its creditors; the retention of the existing management, which will draw up a reorganisation proposal for the creditors' consider- ation; a moratorium to restrain the creditors from enforcing their claim; super priority financ- ing to assist in the reorganisation of the company; and a cramming down of the secured creditors' enforcement of their security to enable the reorganisation proposal to proceed.13 On the other hand, the liquidation culture with its pro-creditor laws would have one or more of the following features14: the entitlement of creditors to wind up a debtor company on default of payment; the entitlement of the secured creditor to enforce his security including the CHEN ET AL. 183 appointment of receivers to realise the security to settle his claim; and the application of the pari passu principle15 for an equal distribution of the debtor company's assets among the unsecured creditors.
3 | BACKGROUND OF THE COMPANIES ACTS
3.1 | The CA 1965
The CA 1965 was largely based on the model provided by the UK Companies Act 1948 (UKCA 1948) and the Australian Uniform Companies Act 1961 (AUCA 1961), a position which was acknowledged by the Supreme Court in Indo Malaysia Engineering Co Bhd v Muniandy Rengasamy & Co.16 On April 15, 1966, the CA 1965 repealed and replaced the Companies Ordi- nance 1946, which had applied the Straits Settlements Companies Ordinance 1940 (1940 Ordi- nance) with modifications to the whole of Malaya.17 The 1940 Ordinance was itself largely based on the UK Companies Act 1929.18 The history of company law in Malaysia followed closely that of UK company law since it was a transplant of UK company law up until the CA 1965. Even though the CA 1965 was mod- elled after the AUCA 1961, the link between the CA 1965 and UK company law was not completely severed at all, since the Australian Act was itself based on the UKCA 1948.19 Not- withstanding that Singapore had split from Malaysia when the CA 1965 came into force, the Singapore Companies Act 1967 (SCA) was in many aspects similar to the provisions in the CA 1965, despite the subsequent amendments in both Acts.20
3.2 | The CA 2016
The CA 2016 replicated many of the insolvency provisions in the CA 1965 relating to winding up and receivership, but some significant changes were made so as to accommodate the novel corporate rescue mechanisms, the CVA and JM. The CVA is based on similar laws applicable in the UK, while the JM procedure is modelled on the Singapore law,21 which was itself borrowed from the administration regime in the UK.22
4 | CORPORATE INSOLVENCY AND CREDITORS
It is usual for a private company limited by shares to commence its business with its initial capi- tal contribution from its shareholders, but it is inevitable that, in order to continue its opera- tions or to pursue any plans for expansion, it will have to resort to borrowing from financial institutions and the securing of credit from its suppliers (also known as its trade creditors) such as deferred terms of payment for goods and services.23 According to Goode: “a world without credit is impossible to imagine”,24 and credit is defined as a “contractual deferment of debt.”.25 In the event of default of payment of the debt, the creditors' recourse is directed against the company, since shareholders are normally shielded by virtue of the concepts of separate legal personality of the company and the limited liability of the shareholders.26 In general, creditors are grouped into those holding security (secured creditors) and those without the benefit of such securities (unsecured creditors). Both the CA 1965 and the CA 2016 184 CHEN ET AL. allude to the term of “secured creditor,” but offer no definition for it. Instead it was left to the courts, which have held that provisions of the Bankruptcy Act 1967 (now known as the Insol- vency Act 1967) (IA 1967),27 on the definition of “secured creditor,” can apply to matters per- taining to winding up of companies.28 Section 2 of the IA 1967 defined a “secured creditor” to mean: “A person holding a mortgage, charge or lien on the property of the debtor or any part thereof as a security for a debt due to him from the debtor but shall not include a plaintiff in any action who has attached the property of the debtor before judgment.” Thus, a creditor is regarded as a secured creditor only if he held security on the property or assets of the debtor at the commencement of the liquidation.29 Property may either be moveable or immoveable. Moveable property is defined to mean property other than immoveable prop- erty and the latter is defined to mean land and any interest in, right over or benefit arising or to arise out of land.30 The secured creditor enjoys an advantage in law over unsecured creditors in that the security held by the secured creditor is unaffected by the liquidation of the debtor and he may therefore realise the security to settle his claim against the debtor and if after realisa- tion, there is any excess, then he is obliged to forward it to the liquidator.31 The difference between a mortgage and a charge in the definition of “secured creditor” prin- cipally involves a transfer of title in land: in a mortgage, the borrower's land is transferred to the lender subject to an equity of redemption which on full payment of the debt, the lender is obliged to transfer the land back to the borrower and in the case of a charge, the land is not transferred to the lender but constitute an encumbrance on the title which on default of pay- ment, the lender is entitled to foreclose the land by auction to settle the debt.32 A charge over property in the form of land is registered under the National Land Code 1965 (NLC),33 which governs matters pertaining to land. The holder of such a registered charge over the land of a borrower under the NLC, which is registered in the relevant land office is regarded as a secured creditor.34 While the mortgage as a security for land is not recognized under the NLC,35 it may still be relevant as a security for other moveable property such as aircrafts,36 and ships.37 Another form of charge granted by a company is found in a debenture, a contractual docu- ment between a lender and the borrower, which apart from being an acknowledgement of the indebtedness of the borrower often contains charges over the property of the borrower.38 The nature of the charge can be in the forms of fixed and floating charges over the property of the borrower, which do not involve the transfer of ownership of that property.39 The holder of a debenture is a secured creditor, but there is an important distinction to be made between a fixed and a floating charge. While a fixed charge attaches to and binds the specific property, a floating charge hovers over certain types of property, such as the goods of the borrower who remains in a legal position to transact and give good title to those goods until a contractually determined event, such as a default of payment of the loan or the appointment of a receiver or receiver and manager, which when triggered then converts the floating charge into a fixed charge.40 This conversion of the floating charge into a fixed charge is also known as an automatic crystalliza- tion of the floating charge.41 It has been noted that the unique nature of a floating charge allows the holder of such a charge, which covers the whole or substantially the whole of the borrower's company to appoint a receiver or receiver and manager to displace the management of the bor- rower's company.42 In contrast to a secured creditor, an unsecured creditor of a company has higher exposure to risk due to the absence of holding a security of the company as a collateral for the debt.43 The security of the company held by the secured creditor offers a form of control over the assets, which constitute the security and is available to the secured creditor to enforce his claim against CHEN ET AL. 185 the company in the event of default in the payment of the debt.44 However, both sets of credi- tors are empowered by the CA 1965 to present a winding up petition against the debtor45 and it has been observed that: “the bulk of the reported cases in respect of court winding up involve petitions presented by creditors of a company.”46 It has been noted by Farrar and Hannigan47 that the secured creditors are invariably bank- ing and financial institutions while the unsecured creditors are usually trade creditors who sup- ply goods on credit to the company.
5 | THE CORPORATE INSOLVENCY FRAMEWORK UNDER THE CA 1965
In dealing with corporate insolvency, the CA 1965 provides debt recovery remedies for creditors of distressed companies in the form of winding up,48 and the appointment of receiver or receiver and manager.49 The corporate insolvency framework in the CA 1965 and the SCA were based on the AUCA 1961, which has its roots in the UKCA 1948 and its predecessor statutes in the UK.50 In line with the liquidation culture adopted from the UKCA 1948 and the AUCA 1961, the provisions on winding up in the CA 1965 have features of a pro-creditor law,51 by empowering creditors to wind up a company on default of payment of debts and an equal distri- bution of the assets of the company among its unsecured creditors.52 The other feature of a pro-creditor law is concerned with the rights of a secured creditor, which is exhibited in the law on receivership where the secured creditor is empowered to appoint a receiver or receiver and manager to act as an agent of the company to realise the secured property to settle the indebtedness of the company to the secured creditor.53 This mech- anism allows the secured creditor to maintain control over the secured property.
6 | WINDING UP
6.1 | Types of winding up
The winding up of companies has been associated with the ending of the statutory life of com- panies.54 The CA 1965 provided two main categories of winding up, being a voluntary winding up and a compulsory winding up (also known as a court-ordered winding up),55 which is repli- cated in the CA 2016.56 The voluntary winding up is instituted at the instance of the members of a company by passing a resolution to wind up the company where it is solvent,57 but it may be converted into a creditors' winding up if the initial process commenced by the members lacked a directors' declaration of solvency or where the initial liquidator appointed by the mem- bers is of the opinion that the company is insolvent.58 However as noted earlier, the bulk of reported cases on winding up of companies belong to the category of compulsory winding up.59
6.2 | Winding up under the CA 1965
In section 218(1) of the CA 1965, 11 grounds are provided for the winding up of companies.60 The most common ground for a company to be wound up is its inability to pay its debts as they 186 CHEN ET AL. fall due.61 The CA 1965 provides for the commencement of the winding up to be at the time of filing the application for the winding up and not when the winding up order is made.62
6.2.1 | Unable to pay its debts
The inability of a company to pay its debts as they fall due is not only the most common ground to support an application for winding up but it is also a simple ground to be satisfied.63 The sim- plicity of this ground is facilitated by a deeming provision in the CA 1965, which allows for the ground to be satisfied by the failure of a debtor company to pay a stated sum in a demand in three weeks after a service of the demand.64 Until the CA 1965 was repealed on January 31, 2017 by the CA 2016, only an amount in excess of MYR 500 was required to be stated in the demand during the entire period of operation of the CA 1965.65 On the other hand, for personal bankruptcy, the IA 1967 had increased the minimum debt amount for the presentation of a bankruptcy petition from MYR 10,000 to MYR 30,000.66 It is now MYR 50,000.67 The compari- son between the minimum debt amount for winding up and personal bankruptcy shows the rel- ative ease in which a company is deemed insolvent for winding up purposes,68 but does not reflect the effect of inflation on the value of the ringgit from 1965 until the repeal of the CA 2016 in January 2017, a period of over 50 years.69
6.2.2 | Commencement of winding up
It would be quite reasonable to regard the commencement of winding up as the date of an order of court granting the winding up but for the short phrase in section 219(2) of the CA 1965, which reads as follows: “In any other case the winding up shall be deemed to have commenced at the time of the presentation of the petition for the winding up.” In its early days, section 219(2) gave rise to two conflicting decisions in the High Court. In the first case, Pembinaan KSY Sdn Bhd v Lian Seng Properties Sdn Bhd & Anor (KSY case),70 Lim Beng Choon J appeared to regard section 219(2) of the CA 1965 as applicable even to situa- tions, where a winding up petition has been filed but the granting of a winding up order has not been decided.71 In the second case, Development & Commercial Bank Bhd v Kredin Sdn Bhd (Kredin case),72 based on similar facts involving a filing of a winding up petition against the debtor company and the intended execution of judgment process by a third party, VC George J (as he then was) declined to follow the decision in the KSY case.73 His Lordship opined that the deeming provisions in section 219(2), being a statutory fiction, only took effect on the making of a winding up order and not merely upon the filing of a winding up petition. On appeal (Kredin case [Appeal]), the Court of Appeal by the decision of Siti Norma Yaakob JCA (as she then was), in allowing the appeal, found favour with the decision in the KSY case, that is, a winding up is deemed to commence at the time of filing of the winding up presentation, irrespective of whether or not a winding up order is ultimately made.74 This decision has been approved by the Federal Court, without much arguments, in the case of Savant-Asia Sdn Bhd v Sunway PMI-Pile Construction Sdn Bhd.75 The decision in the Kredin case (Appeal), was not shared by judicial decisions in other jurisdictions,76 based on provisions in pari materia with section 219(2) of the CA 1965 and the views of both local and foreign commentators,77 especially one local commentator who had appropriately CHEN ET AL. 187 commented on the lack of arguments that had been raised and considered by the Court of Appeal in arriving at its decision.78
6.2.3 | Ease of winding up companies under the CA 1965
The CA 1965 with its insolvency framework, especially with the very low unchanged limit of MYR 500 at which a winding up petition may be filed over a period of over 50 years, meant that many debtor companies were subject to the threat of winding up proceedings. The courts' inter- pretation of section 219(2) of the CA 1965 on the commencement of winding up would also contribute to the hardship encountered by a debtor company facing a winding up petition being filed in court. This is exacerbated by the strict requirement upheld by the court that the winding up petition must be advertised in newspapers, regardless of the damage caused to the debtor company, failing which the petition would be dismissed.79 The advertisement would then enable banks and suppliers to take notice of it. An obvious action taken by banks would be to terminate any banking facilities granted to the company, since the commencement of winding up, interpreted by the courts as a filing of a winding up petition, would constitute one of the events of default for the contractual agreement pertaining to the banking facilities.80 Even where no banking facilities are involved, yet the business of a company may be crip- pled by the banks' action of freezing the bank accounts of the company after having been apprised of the filing of the winding up petition through the advertisement, which has been deemed a mandatory procedure by the courts. In the case of Malayan Banking Berhad v Emaslink New Pacific Management Sdn Bhd and Anor,81 the Court of Appeal held that the bank was legally entitled to freeze the bank account of its customer after having read of the advertise- ment in a newspaper on the filing of a winding up petition against the customer. In insolvency law, the date of commencement of winding up is significant, as laws are in place to ensure that the assets of the company are intact in relation to that date by providing that any disposition of them is void so as to enable an equitable distribution, after its realiza- tion, among the unsecured creditors.82
7 | RECEIVERSHIP
7.1 | Nature of receivership
Unlike public companies, private companies are unable to source funds from the public to finance its operations.83 Instead, the private companies usually opt for sourcing, either from its members via the issuing of shares, or from financial institutions such as banks.84 In recognition of the importance of the latter activity to a company, the ability of a company to borrow is auto- matically provided in the statutes governing companies.85 In giving out loans to private companies with its separate legal personality and the limited liability of its shareholders, it is usual for financial institutions to require security from the com- panies.86 In addition, those financial institutions will have three main concerns over the secu- rity taken: first, whether it is effective in the event of the insolvency of the company; secondly, whether the priority of the security will prevail in the event of a conflict with a third party who has a proprietary interest in it; and, thirdly, whether the security can be enforced in the event of the company facing insolvency proceedings.87 188 CHEN ET AL.
Those concerns of the financial institutions are addressed by including a power to appoint a receiver or receiver and manager in the debenture containing a floating charge, which as a form of security is granted only by companies.88 A typical debenture, apart from containing an acknowledgement of indebtedness of the company, is comprised charges in the form of a fixed charge on the specific assets and a floating charge over assets, which are “ambulatory and shifting in its nature” such as its book debts and stock in trade.89 The nature of a floating charge was examined by the Court of Appeal in the case of Affin Bank Bhd v Malayan Banking Bhd (Affin Bank case),90 with the view that it is comprised three characteristics: first, it floats or hovers over the present or future assets of the company and does not, unlike a fixed charge, fas- ten onto it; secondly, during this period, the company is legally able to dispose or trade or deal in those assets; and, thirdly, certain events when triggered will terminate its floating status and convert it automatically into a fixed charge.91 The third characteristic of an automatic conversion of the floating charge into a fixed one is better known as automatic crystallization,92 which is linked to the event of receiver- ship of companies. The automatic crystallization clause is now part of the standard clauses found in debentures93 and will include crystallization events, such as when a company is being wound up or on the commencement of winding up,94 cessation of a company's busi- ness, appointment of a liquidator or a receiver or a receiver and manager,95 whichonthe happening on any of the stipulated events will automatically convert the floating charge into a fixed charge.96 The debenture as a security device serves to allay the concerns of secured creditors, especially where the debtor company is insolvent, with its features, such as the automatic crystallization clause, the requirement of registration of the debenture withtheCCM,whichamountstoconstructivenoticeofit,97 and the provisions for appoint- ment of a receiver or receiver and manager. The latter event, known as receivership, is an exercise of the powers by the secured creditor as a holder of the debenture to appoint profes- sionals as receiver or receiver and manager,98 in contrast to an appointment by court,99 which will pave the way for the realization of the secured assets to repay the debts due from the company to the secured creditor.100
7.2 | Receivership under the CA 1965
The CA 1965 provides for appointment of receivers by court,101 but out of court appointments are made through express powers incorporated into debentures by the secured creditors.102 The provisions governing receivership are contained in Part VIII of the CA 1965, which are mod- elled on the UKCA 1948 and the AUCA 1961.103 The appointed persons are termed as receiver or receiver and manager (R & M), which are extensively mentioned in the Act, but for which a definition is lacking.104 The distinction between the two positions of a receiver and a R & M lies in the scope of power granted by the debenture and the latter position represents a common appointment by debenture holders.105 Under the CA 1965, the source of the powers of a R & M is the debentures under which they are appointed.106 The R & M, by virtue of powers granted by the debenture, has a principal duty to his appointor to realise the properties with a view to settling the debts of the company to the debenture holders. After all, the purpose of having the debenture is to pro- tect the interest of the debenture holder who had lent money to the company.107 The anoma- lous position of the R & M lies in his appointment by the debenture holder, but his designation as an agent of the company in the debenture.108 CHEN ET AL. 189
8 | THE CA 2016 AND THE LIQUIDATION CULTURE
Under the CA 1965, the liquidation culture prevails in the absence of any corporate rescue mechanism with the availability of winding up and receivership processes, which have the fea- tures of pro-creditor laws.109
8.1 | Winding up under the CA 2016
ThewindinguplawsundertheCA2016areinmostinstancesthesameasthatundertheCA1965, but two significant changes have reduced the harshness of the previous law for debtor companies:
8.1.1 | The “unable to pay its debts” definition and the threshold limit
Under the CA 2016, the threshold limit is now MYR 10,000,110 as compared to the previous limit of MYR 500 under the CA 1965. While the increase is considerable, the amount still pales in comparison to the present limit of MYR 50,000 for personal bankruptcy under the IA 1967.111 Another factor to note is that the increase of MYR 10,000 from MYR 500 in the limit has only been made after a period of over 50 years.
8.1.2 | Commencement of winding up
In line with the recommendations of the CLRC, after having noted the legislative changes made in Australia, New Zealand, and Singapore,112 the CA 2016 now provides that the commence- ment of winding up is the date of the winding up order granted by the court.113
8.2 | Receivership under the CA 2016
The law on receivership was reviewed by the CLRC in conjunction with its proposal for laws introducing corporate rescue.114 Based on the recommendations by the CLRC, two significant changes to the law on receivership were introduced to the CA 2016, which are as follows:
1 Codification of agency status
The present law stipulates that the R & M is an agent of the company and not an agent of the deben- ture holder, the secured creditor, unless the debenture appointing him to that position otherwise pro- vides.115 This is to remove any doubts as to his position in the absence of express provision in the debenture or which was inadvertently left out,116 a clear indication on the need to establish the position of a R & M in order for him to perform his functions and to exercise his powers on behalf of the company.117
2 Codification of powers of receivers and R & Ms
The CLRC saw the need to establish and standardise a minimum set of powers for receivers and R & M rather than having to refer to each debenture, which may differ from case to case 190 CHEN ET AL. resulting in ambiguities being referred to the courts for deliberation.118 The law now provides for a minimum set of powers for receivers and R & Ms, which may be overridden by specific and inconsistent powers in the debenture.119 With the codification of the agency status of receivers and R & Ms and the provision of a minimum set of powers, the CA 2016 has reinforced the law of receivership. Receivership is generally regarded as a pro-creditor process. However, in practical terms, its principal objective is to ensure payment of the company's debt to the debenture holder or the secured creditor only, regardless of its adverse consequences on the business of the company or other creditors, with many cases ending in liquidation,120 a position which remains unchanged under the CA 2016.121 In any case, the event of receivership will result in a removal of the powers of the com- pany to deal with the secured property, either under a fixed charge originally or after its crystal- lization from a floating charge, a termination of services of employees, unless the employment is continued by the R & M, and rendering previous suppliers into unsecured creditors.122 The new liquidation culture with amendments made to both the laws on winding up and receivership now co-exists with the novel corporate rescue culture in the CA 2016. The next part looks at the corporate rescue culture in Malaysia and discusses the corporate rescue con- cept embedded in the CA 2016 with a focus on issues relating to secured creditors.
9 | A CORPORATE RESCUE CULTURE
9.1 | Purpose of corporate rescue
The earlier insolvency framework in Malaysia cultivated the liquidation culture with winding up as the only viable option for insolvent companies.123 As for receivership, which is reserved for secured creditors, the fate of the companies also lies in liquidation after the assets of the debtor company are sold off to settle the debts due to the secured creditors, since the companies are then left practically with nothing much for the unsecured creditors.124 The modern insolvency laws in Malaysia and other jurisdictions recognize that not all insol- vent companies should be liquidated, unless they are no longer economically viable.125 One of the tests of insolvency is based on cash-flow, resulting in a company being regarded as insol- vent, if its financial situation is such that, although it has assets and a viable business, it is unable to pay its debts as they fall due.126 Similarly, the Cork Report viewed the inability to pay debts as the moment that insolvency has set in, stating that: “In practical terms insolvency arises at the moment when debts cannot be met as they fall due.”127 This ability to pay debts as they fall due is a common ground in Malaysia for a winding up action.128 During this period of insolvency, the lack of coordination on the part of unsecured creditors will lead to a disorganised and frenzied rush to collect the debts, inevitably leading to the demise of the debtor company by way of liquidation, even if the going concern value of the debtor company or its assets may be higher.129 The end result for the unsecured creditors is an inefficient return on their claims against the debtor company.130 The failure of a company will also result in termination of the services of its employees, non-payment to suppliers and will contribute to a lower growth in the economy of a country.131 However, though an “insufficiency of liquid assets does not necessarily indicate inability to pay”, this factor is not taken into account in the cash-flow insolvency test, since what matters is the inability to pay the debts when due.132 According to Mokal, a company which is facing temporary cash-flow problems CHEN ET AL. 191 may still have a viable business, that is a financially distressed company may still be economi- cally viable with its assets potentially able to realise a higher value as a going concern compared to when it is liquidated or the assets are broken up for realization in the event of receivership.133 The notable reforms to insolvency laws in the form of adoption of a corporate rescue culture were first mooted in the Cork Report, owing to economic recession in the UK during the period from the late 1970s until the early part of the 1980s, which led to an increase in the number of corporate insolvency cases.134 This report marked an important contribution to the changes to be sought in the area of corporate insolvency by drawing attention to the effects of insolvency on other stakeholders other than the debtor company and its creditors as well as the contribu- tion of the preservation of viable companies to the growth of the country.135 It then proceeded to propose, amongst other things, a procedure by which an administrator is appointed by the court to manage the insolvent company and most importantly, resulting in an order of morato- rium on the company's creditors, with a whole chapter devoted to this procedure.136 Another proposed rescue procedure was to avail the insolvent company of a formal and binding but out of court arrangement, with the approval of its creditors.137 Both the former and latter proce- dures are represented in the UK Insolvency Act 1986 (UKIA 1986) as administration and com- pany voluntary arrangements (UKCVA), respectively.138 According to Goode, those proposals “evolved what has become known as the rescue culture”, with its objective of rescuing the insolvent companies by rehabilitating them to achieve profitable trading and escape from the demise of liquidation.139
9.2 | Concept of corporate rescue in the CA 2016
Corporate rescue of distressed private companies under the CA 2016 refers to rescue carried out in a formal manner, which may be achieved by utilising the corporate rescue mechanisms under the CA 2016, that is the CVA or the JM, or perhaps even a Scheme of Arrangement (SOA), which was previously used under the CA 1965 to rehabilitate companies. The CLRC had based its recommendations for the introduction of those corporate rescue mechanisms with ref- erence to the Cork Report and the laws in the UK and Singapore. Corporate rescue has been defined by Belcher as an exercise which represents “a major intervention necessary to avert eventual failure of the company”,140 that is, to ward off a liqui- dation of the distressed company, by way of a company rescue or business rescue.141 However, that definition does not spell out the expected or preferred methods of securing a corporate res- cue as to whether it will take the form of a company rescue or business rescue. What this amounts to is that the rescue intervention serves the purpose of avoiding a failure of the dis- tressed company, but without necessarily restoring it to its pre-insolvency position.142 In rec- ommending the introduction of the corporate rescue mechanisms in Malaysia, the CLRC stated that a corporate rescue framework is able to provide the “preservation of the economic value of the company as a going concern for all stakeholders in that business” and in the event of the company's insolvency then at least an “increasing returns to all creditors.”143 The ideal outcome of a corporate rescue is a company rescue, also described as a pure res- cue, which amounts to the restoration of the company's financial position to its previous healthy status with the management and workforce intact.144 However, it has been observed that this goal is difficult to achieve in practice.145 A more realistic outcome is a business rescue, which is a sale of the business of the company as a going concern sale or partial going concern 192 CHEN ET AL. sale,146 which can be achieved through the JM process. Another form of corporate rescue may be achieved through the CVA by saving the distressed company in whole or in part with the agreed composition of its debts by its unsecured creditors, thus enabling the company to con- tinue its business and preserving the employment of its employees.147 In the UK, where the rescue mechanisms similar to the CVA and JM are available in the form of the UKCVA and administration, respectively, it was observed by Campbell that, in most cases, major “surgery” will be performed in order to rescue the distressed company, which will result in the “survivor” company retaining its old name, but which is in many aspects different, including changes often made in its management and operations.148 Parry alluded to the term, “corporate rescue” as rather misleading, as it is capable of referring to a pure rescue or alterna- tively a preservation of the value of the business of the distressed company in order to offer a better return to its creditors as opposed to a liquidation.149
10 | THE CORPORATE RESCUE MECHANISMS AND SECURED CREDITORS
10.1 | Malaysia
While the CVA and the JM in the CA 2016 were introduced as corporate rescue mechanisms based on the recommendations of the CLRC, however the position of secured creditors remain intact with priority being given to the security of receivership, which may not be compatible with corporate rescue.
10.1.1 | CVA
The CVA is modelled on the UKCVA but is subject to four restrictions on its application.150 The first three restrictions refer to companies which are public companies,151 licensed financial institutions,152 and companies which are subject to the Capital Markets and Securities Act 2007 (CMSA 2007).153 These share a common feature with the UKCVA with the objective of restricting its availability to smaller businesses, that is, private companies.154 However, its prac- tical use is significantly handicapped by the fourth restriction where it is not available to “a company which creates a charge over its property or any of its undertaking”,155 because in Malaysia, financial institutions would, more often than not, require even private companies in seeking loans to provide securities in the form of a charge over its property or undertakings.156 Despite the fourth restriction, it is provided in section 400(4) that a secured creditor may consent to include his security in the proposal for consideration by unsecured creditors, a posi- tion similar to that in the UK.157 This rather odd and puzzling position may be due to the adop- tion of similar laws in the UK, but then adding a conflicting and irreconcilable fourth restriction, which would make the CVA quite difficult to implement.
10.1.2 | JM
The JM is based on the Judicial Management procedure in Singapore (SJM). Its application is not available to companies which are financial institutions and those subjected to the CMSA CHEN ET AL. 193
2007.158 While its scope of coverage is wider than the CVA, with its availability open to both public and private companies, but for those companies with secured creditors, its usage may be vetoed by those creditors.159 In the first decision on JM in Malaysia, Leadmont Development Sdn Bhd v Infra Segi Sdn Bhd,160 the court alluded to the powers of a secured creditor to veto the JM application, but only if the two conditions in section 409 are satisfied.161 The first condi- tion is where a receiver or R & M has been or will be appointed by a secured creditor followed by a second condition that that creditor is opposing the JM application. Section 409 differs from the model provision in the SCA,162 which is read disjunctively in view of the word, “or” between the two conditions, but that difference is now legislatively removed.163 The amended section 409 allows a secured creditor to veto the JM application if either of the two conditions is satisfied, which makes it easier for a secured creditor to object to the application. However, the drastic effect of section 409 is tempered by the court finding that the “public interest” aspect of rescuing the distressed company can outweigh the objection of the secured creditors.164 The attempts in resorting to 'public interest' to overcome the objections of the secured creditors have been limited to two reported cases in Singapore, which were unsuccess- ful.165 It is also not helped by the absence of any definition for “public interest” in both the Acts in Singapore and Malaysia, which is left to judicial determination on a case to case basis.166
10.2 | The UK
The UKCVA concerns a debt arrangement proposal by a company, whether distressed or not, to be considered by unsecured creditors, but it will include the secured creditor if he has con- sented in the inclusion of his security in the proposal. However, unlike the position in Malaysia, having a secured creditor does not prevent the application of the corporate rescue mechanism. The voluntary compromise with the creditors, for extra time to pay their debts or for a portion of it to be waived,167 allows the debtor company to continue to trade, although it may involve closure of underperforming business or stores, reduction in rentals, and changes in the manage- ment team.168 As for the administration regime, a concern that it was not sufficiently utilised due to the absence of rescue-orientated elements in the law has witnessed the introduction of the Enter- prise Act 2002 (UKEA 2002),169 which has, inter alia, abolished receivership,170 a favourite mode of the secured creditors for securing repayment of its debts from the distressed compa- nies.171 The UK Government noted its concern in the White Paper preceding the Act that the administration procedure was underutilized due to the ability of the secured creditor with a floating charge in appointing a receiver, which will have the effect of dismantling the business of the distressed company and impeding any rescue plans.172 It was also observed by the courts that this change was consistent with the intention not to frustrate the rescue culture, which seeks to preserve viable business.173
10.3 | Singapore
The SJM, many of whose provisions were adopted in the JM in Malaysia, provides for two mea- sures to curtail the powers of the secured creditors in vetoing its application. Both measures were left to the wisdom of the courts, first on the balancing of the interests of the secured credi- tors and those of the unsecured creditors174 and, secondly, on the element of “public interest,” 194 CHEN ET AL. which is adopted in the CA 2016.175 The first measure was introduced in 2017 to improve the SJM as a corporate rescue process.176 The new law now shifts the burden onto the secured cred- itor to show that the granting of the SJM application would prejudice his interests “dispropor- tionately greater” than those of the unsecured creditors.177
11 | CONCLUSIONS
Prior to the CA 2016, the corporate insolvency laws in Malaysia only offered winding up or receivership without any corporate rescue mechanisms to financially distressed companies.178 The previous corporate insolvency framework adopted a liquidation culture. The embedding of the CVA and the JM as corporate rescue mechanisms in the CA 2016 heralded a step towards an adoption of a corporate rescue culture in Malaysia, which was assisted with an amelioration of the previously harsh laws on winding up. However, the laws on receivership under the previ- ous regime were fortified in the CA 2016. While the CA 2016 with its CVA and JM, a position not unlike that of the UKIA 1986, which is fundamental to the rescue culture,179 provides a platform for corporate rescue in Malaysia, however, the usefulness of the CVA and JM as corporate rescue mechanisms are hampered by its limitations, since they are either not available (as in the case of CVA in private companies with secured credi- tors) or may be vetoed (in the JM process, by secured creditors with floating charges and the right to appoint receivers). The secured creditor-friendly laws are incompatible with the corporate rescue culture.180 As observed by Omar, the laws on insolvency and corporate rescue in the world do not remain stagnant but continue to evolve.181 Malaysia having adopted the corporate rescue laws from the UK and Singapore made its first amendment to the CA 2016 in 2019.182 It was a missed oppor- tunity to consider and incorporate the necessary changes in regard to secured creditors as was done in the legislation in both the UK and Singapore.
ENDNOTES 1Siti Faridah Abdul Jabbar and Suzana Muhamad Said, “Malaysia's Companies Act 2016: A Jump Start!” (2018) 39(1) Company Lawyer 28, 28. 2Azrol Abdullah, Gan Chee Keong and Joshua Tee Yee Khuan, “Recent Developments of Corporate Insolvency Law in Malaysia” (2016) 5(12) International Journal of Humanities and Social Science Invention 33, 34. 3See sections 395–402, CA 2016. 4Ibid., sections 403–430. 5Abdullah et al. (above note 2), 34. 6The CLRC was established pursuant to sections 17 and 19, Companies Commission of Malaysia Act 2001:
9Generally, the corporate rescue culture does not adopt liquidation of distressed companies as its objective in contrast with the liquidation culture but it rather encourages measures to revive those companies with the aim of restoring its business to viability. See Aishah Bidin, “Insolvency and Corporate Rescues in Malaysia” (2004) 15 (11) ICCLR 344, 347. 10Paul Omar, “Insolvency Law in Malaysia: A Case for Reform” (1998) 4 MLJ xix, xx. 11Bo Xie, “The Customisation Effect of Pre-arranged Sales under Anglo-American Insolvency Law and Practice: Accountability Deficits and Possible Remedies” (2018) JCLS 1, 1. 12Omar (above note 10), xx. Chapter 11 is to be found in the US Bankruptcy Code 1978. 13Alexandra Szekely, “Chapter 11: One size fits all?” (2008) 9 JIBFL 457. See also Rebecca Parry, “Introduction”, in Katarzyna Gromek Broc and Rebecca Parry (eds), Corporate Rescue—An Overview of Recent Developments (2nd edn, Kluwer Law International, 2006) 9. 14Sir Gavin Lightman, “Attitudes and Values: Developments in Insolvency Law: Part 1” (2001) 14(8) Insolvency Intelligence 57, 58. 15The pari passu principle is an old equitable principle and a cornerstone of the insolvency law structure, which provides for equal distribution of the assets of the wound-up company among its unsecured creditors. See Andrew Keay, McPherson, The Law of Company Liquidation (4th edn, LBC Information Services, 1999), 574–577; Pembinaan Lagenda Unggul Sdn Bhd (dalam penggulungan voluntari pemiutang-pemiutang) v Geohan Sdn Bhd and another appeal (2018) 196 MLJU [142]–[146]; Malaysian Trustees Bhd v Transmile Group Bhd & Ors (2012) 3 MLJ 679, 689. 16[1990] 3 MLJ 301, 305. 17Solaiappan & Ors v Lim Yoke Fan & Ors (1968) 2 MLJ 21, 23. 18Petra Mahy and Ian Ramsay, “Legal Transplants and Adaption in a Colonial Setting: Company Law in British Malaya” (2014) Singapore Journal of Legal Studies 123, 138. 19Janine Pascoe, “Corporate Law Reform and some 'Rule of Law' Issues in Malaysia” (2008) 38(3) Hong Kong Law Journal 769, 769. 20Paul Omar, “Cross-Border Jurisdiction and Assistance in Insolvency: The Position in Malaysia and Singapore” (2008) 1 Potchefstroom Electronic Law Journal 1, 6. See also Yeo Hwee Ying, “Introduction”, in Tan Cheng Han (ed), Walter Woon on Company Law (Revised 3rd edn) (Sweet & Maxwell, 2009), 15. 21Abdullah et al. (above note 2), 35. 22TC Choong and VK Rajah, Judicial Management in Singapore (Butterworths, 1990), 5–6. 23Len Sealy and Sarah Worthington, Sealy & Worthington's Cases and Materials in Company Law (10th edn) (Oxford University Press, 2013), 594. See also Vanessa Finch. Corporate Insolvency Law: Perspectives and Princi- ples (2nd edn) (Cambridge University Press, 2009) 71; Low Chee Keong, “Automatic Crystallization and Reflotation Clauses: The Advent of a New 'Pouncing' Security?” (1995) 3 MLJ xcvii, xcvii. 24Sir Roy Goode, Principles of Corporate Insolvency Law (2nd edn) (Sweet & Maxwell, 1997), 2. 25Idem. 26Philip Wood, Principles of International Insolvency (2nd edn) (Sweet & Maxwell, 2007), 8. See also Mackt Logis- tics (M) Sdn Bhd v Malaysian Airline System Bhd (2014) 2 MLJ 518, 525. The relevant provisions are section 16 (5), CA 1965 and sections 10(2) and 20, CA 2016. The concept of limited liability of a shareholder means that the shareholder's liability to the company is limited to the amount unpaid on his shares. 27Amended by Bankruptcy (Amendment) Act 2017 [Act A1534] (effective on October 6, 2017), for which see:
31Phileoallied Bank (M) Bhd v Bupinder Singh a/l Avatar Singh & Anor (2002) 2 MLJ 513, 529; Jashin Scaffolding (M) Sdn Bhd v Chew Ai Eng Sdn Bhd; OCBC Bank (Malaysia) Berhad (2004) MLJU 225. 32Ambank (M) Berhad v CA Steel Sdn Bhd (2012) MLJU 421, [14]; K Balasubramaniam Liquidator for Kosmopolitan Kredit & Leasing Sdn Bhd v MBF Finance Bhd & Anor (2005) 2 MLJ 201, 223; Kimlin Housing Development Sdn Bhd (Appointed receiver and manager) (In liquidation) v Bank Bumiputra (M) Bhd & Ors (1997) 2 MLJ 805, 817. 33The NLC governs land matters, such as charges over land in the whole of Peninsula Malaysia, while similar matters in Sarawak and Sabah are governed by the Sarawak Land Code (Cap 81) and the Sabah Land Ordinance (Cap 69), respectively. See Teo Keang Sood and Khaw Lake Tee, Land Law in Malaysia—Cases and Commentary (3rd edn, LexisNexis Malaysia, 2012), 6 and Chapter 7 for more details on charges over land. In general, a charge over land will take effect as a security for a loan given by the lender upon registration of the charge in the land office. 34Abric Project Management Sdn Bhd v Palmshine Plaza Sdn Bhd & Anor (2007) 3 MLJ 571, 585. 35Perwira Habib Bank Malaysia Bhd v Lum Choon Realty Sdn Bhd (2005) 4 CLJ 345. 36Regulation 158, Civil Aviation Regulations 1996. 37Section 41, Merchant Shipping Ordinance 1952. 38Krishnan Arjunan, Company Law in Malaysia—Cases and Commentary (Malayan Law Journal, 1998), 479– 481. See also Shanthy Rachagan, Janine Pascoe and Anil Joshi, Principles of Company Law in Malaysia (Malayan Law Journal, 2002), 283, 292. 39Rachagan et al. (above note 38) 293. The property includes book debts, stock in trade, raw materials, and goods in process of the borrower, see Sir Roy Goode, Legal Problems of Credit and Security (3rd edn) (Sweet & Maxwell, 2003), 122–128. Section 108, CA 1965 requires that certain types of charges must be registered with the Registrar of Companies, which serves as a constructive notice to the world of the charge and will determine priorities among competing charges. See Rachagan et al. (above note 38), 304–307, on the mechanics of registration and for a fuller discussion. 40Ibid., 294–295. The labelling of a charge as a fixed charge may not be conclusive and will be subject to chal- lenges and determination by the court, aptly illustrated in Affin Bank Bhd v Malayan Banking Bhd (2009) 2 MLJ 74, as to whether a charge over the shares owned by the borrower is a fixed or floating charge. 41Rachagan et al. (above note 38), 298–299. The validity of a clause in the debenture automatic crystallization of floating charges has been upheld and enforced in Malaysia by the courts in NGV Tech Sdn Bhd (receiver and manager) appointed) (in liquidation) v Ramsstech Ltd (2015) MLJU 671; Malaysian International Merchant Bankers Bhd v Highland Chocolate and Confectionary Sdn Bhd & Anor (No 2) (1998) 4 CLJ Supp 32; Silverstone Marketing Sdn Bhd lwn Hock Ban Hin Trading Sdn Bhd & Yang Lain (The Pacific Bank Bhd sebagai pihak men- untut) (1998) 2 MLJ 695. 42Goode (above note 39), 119. 43Alice Belcher, Corporate Rescue: A Conceptual Approach to Insolvency Law (Sweet & Maxwell, 1997), 155–156. 44Eilis Ferran, Principles of Corporate Finance Law (Oxford University Press, 2008), 347. See also Andrew Keay and Peter Walton, Insolvency Law: Corporate and Personal (2nd edn) (Jordan Publishing Limited, 2008), 485. 45Ganda Holdings Bhd v Pamaron Holdings Sdn Bhd (1989) 2 MLJ 346, 346–347, sets out a list of persons who may be regarded as creditors to present a winding up petition against a company since the CA 1965 did not con- tain a definition of the term “creditor”. The Federal Court in Dato' Prem Krishna Sahgal v Muniandy a/l Nadasan & Ors (2018) 2 MLJ 693, 715, opined that the word “creditor,” for winding up under section 217, CA 1965 and fraudulent trading under section 304, CA 1965, includes a prospective creditor “whose claim for debt or right to enforce such claim is expected or likely to happen in future.” 46Ben Chan, Philip Koh and Peter Ling, Chan & Koh on Company Law—Principles & Practice (2nd edn) (Sweet & Maxwell, 2006), 879. Other court winding up petitions may be presented by the company, shareholders or the personal representative of a deceased contributory (shareholder) or the trustee in bankruptcy or the Official Assignee of the estate of a bankrupt contributory (shareholder), the liquidator, the Minister, Bank Negara CHEN ET AL. 197
Malaysia (the Central Bank of Malaysia) or the Registrar of Companies pursuant to section 217(1), CA 1965 or section 464(1), CA 2016. 47John Farrar and Brenda Hannigan, Farrar's Company Law (4th edn) (Butterworths, 1998), 13. 48Low Chee Keong, “Recovery from Directors of Insolvent Companies: A Case for Reform” (1996) 1 MLJ xlix, xlix, commented that the two terms, liquidation and winding up, mean the same and are used interchangeably. Those terms are, however, not to be confused with “bankruptcy,” which only applies to individuals pursuant to the Bankruptcy Act 1967, now known as the Insolvency Act 1967, see Rachagan et al. (above note 38), 661. 49Aishah Bidin, “Corporate law reform and corporate governance in Malaysia—responses to globalization” in P. M. Vasudev and Susan Watson (eds), Corporate Governance after the Financial Crisis (Edward Elgar, 2012), 235– 236. See also Omar (above note 20), 6–7. 50Beluga Chartering GmbH (in liquidation) v Beluga Projects (Singapore) Pte Ltd (in liquidation) and another (Deugro (Singapore) Pte Ltd, non-party) (2013) 2 SLR 1035, 1,048. 51See text to above note 14. 52Mosbert Berhad (In Liquidation) v Stella D'Cruz (1985) 2 MLJ 446, 447. See also Arjunan (above note 38), 614; Keay (above note 15), 1, 574; Derek French, Applications to Wind Up Companies (2nd edn) (Oxford University Press, 2007), 7. 53Melantrans Sdn Bhd v Carah Enterprise Sdn Bhd (in receivership) & Anor (2000) 3 MLJ 304, 307. 54Andrew Keay, “What Future for Liquidation in light of the Enterprise Act Reforms?” (2005) JBL 143, 143. 55Aiman Nariman Mohd Sulaiman, Aishah Bidin, Pamela Hanrahan, Ian Ramsay, and Geoff Stapledon, Com- mercial Applications of Company Law in Malaysia (2nd edn) (CCH Asia Pte Limited, 2005), 523. See section 211, CA 1965. 56Chan Wai Meng, Essential Company Law in Malaysia—Navigating the Companies Act 2016 (Thomson Reuters Malaysia, 2017), 426. See section 432, CA 2016. 57See sections 254–258, CA 1965; sections 439–443, CA 2016. 58See sections 259–261, CA 1965; sections 447–448, CA 2016. A new provision in section 444, CA 2016, clarifies the distinction between the two modes of voluntary winding up as being the lack of a directors' declaration of insolvency of the company in the case of a creditors' voluntary winding up. 59See text to above note 46. 60Rachagan et al. (above note 38), 670–672. The 11 grounds pertaining to companies, other than licensed finan- cial institution, Islamic or otherwise and licensed insurance companies, include the passing of a special resolu- tion by the company, the default in lodgement of statutory report, the failure to commence business within a year of its incorporation, and the company's inability to pay debts. 61Ibid., 670. See also Alex Chang Huey Wah (advisory editor), Companies Winding-Up Handbook (Malayan Law Journal, 1998), 35; Arjunan (above note 38), 659. 62Ibid., 679. See section 219(2), CA 1965. It is discussed in detail in the text to below notes 70–78. 63Ibid., 674. 64Ibid., 674–675. See section 219(2)(a), CA 1965. There are also two other situations where a company is deemed to be unable to pay its debts: first, by section 219(2)(b), where an execution or other process issued on a judge- ment, decree or order of any court in favour of a creditor of the company is returned unsatisfied in whole or in part; and, secondly, by section 219(2)(c), the court, after taking into account any contingent and prospective lia- bilities of the company, is satisfied that the company is unable to pay its debts. See KNM Process Systems Sdn Bhd v Mission Biofuels Sdn Bhd, (2014) 8 MLJ 434. 65The courts have generally ordered a winding up, where the debts are not disputed or where the debtor com- pany has not substantiated the dispute as bona fide or real so long as the undisputed amount exceeds MYR 500. See Chip Yew Brick Works Sdn Bhd v Chang Heer Enterprise Sdn Bhd (1998) 2 MLJ 447, 448; Ann Joo Metal Sdn Bhd v Pembenaan MY Chahaya Sdn Bhd (2000) 5 MLJ 708, 718–719. 198 CHEN ET AL.
66Khoo Kay Ping, Khoo's Law and Practice of Bankruptcy in Malaysia (2nd edn) (Malayan Law Journal, 2003), 102. 67Above note 27. 68Chan et al (above note 46), 890. 69Fatemeh Shayegi and ND Gong, “Companies: From Demise to Interment Salient Issues for the Unsecured Creditor” (2013) 4 MLJ c, iv. 70(1992) 1 MLJ 571. 71Ibid., 579. The case involved only the filing of a winding up petition and whether any execution of judgement was void after the commencement of winding up under section 224, CA 1965. The learned judge held that sec- tion 224, read together with section 219(2), resulted in the voiding of the execution of judgement process which was done after the winding up petition was filed. 72(1995) 1 MLJ 441. 73Ibid., 443–444. 74Kredin Sdn Bhd v Development & Commercial Bank Bhd (1995) 3 MLJ 304, 309. 75(2009) 5 MLJ 754, 765–766. 76Eversendai Engineering Pte Ltd v Synergy Construction Pte Ltd (Ministry of Education, Third Party) (2004) 129 SGHC [Singapore]; Fleet Motor & General Insurance Co (Aust) Pty Ltd v Tickle (1984) 2 ACLC 282 [Australia]; Vermeulen and another v CC Bauermeister (Edms) Bpk and others (1982) (4) SA 159 (T) [South Africa]; Re Miles Aircraft Ltd (1948) 1 All ER 225 [UK]. 77“Insolvency Law” (2004) 5 SAL Ann Rev 302, 306–308; HGJ Beukes, “When Is the Winding-up of a Company Deemed to Have Started?” (2002) 14 SA Merc LJ 796; Robert Pennington, Pennington's Corporate Insolvency Law (Butterworths, 1991), 188, where the learned author commented on the identical provision in section 129(2), UK Insolvency Act 1986: “When a company is wound up by order of the court, the winding up is deemed to have commenced when the winding up petition was presented on which the winding up order was made. This does not mean that a company is in liquidation as soon as a winding up petition is presented against it; it means instead that if the petition is successful and a winding up order is made, the commencement of the winding up is ante-dated to the date of the petition, and the company is treated retrospectively as having been in liquidation since that date.” 78Krishnan Arjunan, “Companies Winding Up: Commencement and Disposition of Property under Companies Legislation in Malaysia, Singapore and Hong Kong” (1999) 1 MLJ lxxxi; cf Samsar Kamar bin Hj Ab Latif, “Recent Developments in Company Liquidation” (1996) 3 MLJ xciii, c. 79Chip Yew Brick Works Sdn Bhd v Chang Heer Enterprise Sdn Bhd (1988) 2 MLJ 447, 449; Savant- Asia Sdn Bhd v Sunway PMI-Pile Construction Sdn Bhd (2009) 5 MLJ 754, 767–768. Once a winding up petition is filed, the courts would not entertain the granting of an injunction to restrain the advertisement of the petition, see Azman & Tay Associates Sdn Bhd v Sentul Raya Sdn Bhd (2002) 4 MLJ 390, 396. 80Aiman Nariman Mohd Sulaiman and Effendy Othman, Malaysia Company Law: Principles and Practices (2nd edn) (Commerce Clearing House (Malaysia), 2018), 962. 81Rayuan Sivil (Civil Appeal) No. D-02-2,303-09 (CA, September 24, 2013). 82Rachagan et al. (above note 38), 679–680. The avoidance laws are contained in sections 223–224 and 293–294, CA 1965. 83See section 15, CA 1965; section 43, CA 2016. 84Low (above note 23), xcvii. 85Ibid. See paragraph 13, Third Schedule, CA 1965, which not only empowered the company to borrow but to do so by utilising its assets as security. In the case of section 21, CA 2016, companies have unlimited capacity and powers to carry on or undertake any business or activity provided that they are lawful, as stipulated in section 14(2). 86Wu Min Aun, “Credit and Security” (1996) 3 MLJ i, i. CHEN ET AL. 199
87Richard Calnan, Taking Security—Law and Practice (Jordan Publishing, 2006), 1. 88Wu (above note 86), xxiii-xxiv. See also Arjunan (above note 38), 478. 89Ibid., xxiii. See also Arjunan (above note 38), 479. The courts in Malaysia, in view of the modern times, are pre- pared to give the term “debenture” a more liberal interpretation other than just “a document which either cre- ates a debt or acknowledges it”, as was held in Levy v Abercorris Slate and Slab Co (1887) 37 Ch D 260. Thus, the High Court, in Bensa Sdn Bhd (in liquidation) v Malayan Banking Bhd & Anor (1993) 1 MLJ 119, held that a memorandum of deposit in respect of moneys kept in a fixed deposit in a bank was a debenture and the charge over it was a fixed charge. 90(2009) 2 MLJ 74. 91Ibid., 83–84. See also WJ Gough, Company Charges (2nd edn) (Butterworths, 1996), 85, for a restatement of the three characteristics of a floating charge which was approved in the Affin Bank case (above note 90), and Chapter 5 for a detailed description. 92See text to above note 41. See also Silverstone Marketing Sdn Bhd lwn Hock Ban Hin Trading Sdn Bhd & Yang lain (The Pacific Bank Bhd sebagai pihak menuntut) (1998) 2 MLJ 695, 701–704, for the view that crystallization may either be automatic where no further action is required or one which requires an affirmative action, the nature of which will depend on how the clause in the debenture is drafted. 93See Malaysian Precedents and Forms—Banking (Malayan Law Journal, 2000), [1592], sample debenture in [1863] with automatic crystallization in clause 5.3. See also Edward Bailey and Hugo Groves. Corporate Insol- vency: Law and Practice (3rd edn) (LexisNexis Butterworths, 2007), 447. 94Director of Customs, Federal Territory v Ler Cheng Chye (Liquidator of Castwell Sdn Bhd, in liquidation) (1995) 2 MLJ 600, 612. See also James Lingard, Bank Security Documents (3rd edn) (Butterworths, 1993), 162. 95Mohd Sulaiman and Othman (above note 80), 251. See United Malayan Banking Corporation Bhd v Aluminex (M) Sdn Bhd & Anor (1993) 3 MLJ 587, where the floating charge was crystallized on the appointment of receivers and managers by the debenture holder. 96Peter Blanchard and Michael Gedye, The Law of Company Receiverships in Australia and New Zealand (2nd edn) (Butterworths, 1994), 38–39. 97The registration of the debenture including fixed and floating charges are required under section 108(3), CA 1965 or, presently, under section 353, CA 2016, which is done in a specific form with spaces for the debenture holder to include salient terms and conditions of the instrument. The registration operates as constructive notice of the charge. See Mohd Sulaiman and Othman (above note 80), 259–262. The present law in Malaysia on regis- tration as constructive notice was well summarised in NGV Tech Sdn Bhd (receiver and manager appointed) (in liquidation) v Ramsstech Ltd (2015) MLJU 671, [162]–[166]. 98The qualifications of such professionals are contained in section 182(1), CA 1965 and now sections 372–373, CA 2016. Presently, he must be an approved liquidator qualified under section 433, CA 2016 or the Official Receiver, but cannot be a corporation; or an undischarged bankrupt; or a mortgagee of any property of the com- pany or an auditor of the company or an officer of the company or any corporation, which is a mortgagee of the property of the company. 99The court is empowered to appoint receiver or receiver and manager on the application of a debenture holder or any interested person pursuant to section 376, CA 2016. See Mohd Sulaiman and Othman (above note 80), 273–274. 100Mohd Sulaiman and Othman (above note 80), 272. 101See section 185, CA 1965. However, the Act is silent on the persons who are qualified to make such applica- tions. For further discussion, see Ruzita Azmi and Adilah Abd Razak, “Corporate Receivership and Corporate Rescue: The Malaysian Perspective” (2016) 27(11) ICCLR 367, 370–371; Rachagan et al. (above note 38), 635– 637. The High Court is empowered to appoint a receiver, pursuant to section 25(2), Courts of Judicature Act 1964, in which a receiver may also be appointed upon the dissolution of a partnership. See Chan et al. (above note 46), 811, 817. 102See Azmi and Abd Razak (above note 101), 369; Rachagan et al. (above note 38), 633. 200 CHEN ET AL.
103See Azmi and Abd Razak (above note 101), 367. 104Ibid., 368. See also Mohd Sulaiman and Othman (above note 80), 501; Chan et al. (above note 46), 811–813. 105See Azmi and Abd Razak (above note 101), 368; Yayasan Bumiputera Sabah & Anor v Apoview Wood Products Sdn Bhd (receiver and manager appointed) (2012) 6 MLJ 668, 675. 106Tan Ah Teck (t/a Plumcon Plumbing & Construction Co) v Coffral (Malaysia) Sdn Bhd (1992) 1 MLJ 553, 558. See Samsar Kamar bin Hj Ab Latif, “Powers of Receiver and Manager” (1995) 3 MLJ lxxiii, lxxiii; Azmi and Abd Razak (above note 101), 372–377; Saheran Suhendran bin Abdullah, Lim Tian Huat and Edwin Chew, Corporate Receivership—The Law and Practice in Malaysia and Singapore (Butterworths Asia, 1997), Chapter 7, for a detailed examination of the powers of R & M such as the power to take possession of the secured property, power to take legal proceedings, power to carry on business and power to sell the company's property. 107Tan Ah Teck (t/a Plumcon Plumbing & Construction Co) v Coffral (Malaysia) Sdn Bhd (1992) 1 MLJ 553, 558; Dato' Seri Dr. Kok Mew Soon & 3 Ors v Mustapha bin Mohamed & 2 Ors (2009) 4 AMR 281, 296. See also Azmi and Abd Razak (above note 101), 378. 108See Chan et al (above note 46), 838, where it is noted that such designation clauses are common in debentures to avoid the decision in Tan Ah Teck (t/a Plumcon Plumbing & Construction Co) v Coffral (Malaysia) Sdn Bhd (1992) 1 MLJ 553, 558, which states that, in the absence of such designation clauses, the R & M is not an agent of the company. Cf the case of Amanah Merchant Bank Bhd v Sumikin Bussan Kaisha Ltd (1992) 2 MLJ 832, 840, where the court held that the R & M was the agent of the borrower company, even if the debenture was silent about it. However, the Federal Court in K Balasubramaniam, Liquidator for Kosmopolitan Credit & Leasing Sdn Bhd (In Liquidation) v MBf Finance Bhd & Anor (2005) 2 MLJ 201, 220, opined that the agency of a R & M for the borrower company comes into effect on his appointment and ceases upon the winding up of the company but he still retains his power over the charged assets. The use of this device of the designation clause achieves two purposes: first it empowers the R & M to be in a position to effectively manage the company as its agent and not that of the debenture holder; secondly, it enables the R & M to act without attaching any liability to the debenture holder as a result of his acts—see Abdullah et al. (above note 106), 99–101. 109See text to above notes 52–53. 110Mohd Sulaiman and Othman (above note 80), 954. 111Above note 27. 112Consultative Documentation on Company Liquidation—Reforms and Restatement of the Law (Malaysia) No. 4, Section C, paragraph 1, available at:
“Malaysia—The Asia-Pacific Restructuring Review 2020”, 72, available at:
145Ibid., 249, citing the findings made by the UK Association of Business Recovery Specialists (R3) where it was noted that “full company survivals had a relatively low frequency”. See also Belcher (above note 43), 22–23; Finch (above note 23), 243. 146Idem. See also Parry (above note 120), 2; Finch (above note 23), 244. 147Quoted in Nick Davis, “The Rescue Culture in the United Kingdom” (1997) 2 Insolvency Litigation and Prac- tice 3, 4, as cited in Frisby (above note 144), 249. 148Campbell (above note 142), 16. 149Parry (above note 120), 2. 150Section 395, CA 2016. 151Ibid., section 395(a). 152Ibid., section 395(b). 153Ibid., section 395(c). The CMSA 2007 regulates activities and markets in the capital markets in Malaysia. 154Mohd Sulaiman and Othman (above note 80), 922. 155Section 395(d), CA 2016. 156Mohd Sulaiman and Othman (above note 80), 922–923. Typically, the charge would be found in company debentures. 157Section 4(3), UK Insolvency Act 1986. 158Section 403, CA 2016. 159Ibid., section 409. 160(2018) 10 CLJ 412. 161Ibid., 420. 162Section 227B(5), SCA. 163Section 12, Companies (Amendment) Act 2019 [Act A1605] (with effect on January 15, 2020). 164Sections 409 and 405(5), CA 2016, which are adopted from sections 227B(5) (before its amendment in 2017; for the amended version, see subsection 10.3 below) and 227B(10), SCA, respectively. Similar provisions do not appear in the UK. 165Re Cosmotron Electronics (Singapore) Pte Ltd (1989) 1 SLR(R) 121; Re Bintan Lagoon Resort Ltd (2005) 4 SLR (R) 336. For an analysis of the concept of “public interest”, see Tracey Evans Chan, “The Public Interest in Judi- cial Management” (2013) Sing J Legal Stud 278. 166Leadmont Development Sdn Bhd v Infra Segi Sdn Bhd (2018) 10 CLJ 412, 420. 167Geoffrey Weisgard and Michael Griffiths, Company Voluntary Arrangements and Administrations (3rd edn) (Jordan Publishing Limited, 2013), 4. 168“England and Wales—The Restructuring Review 12th ed 2019”, 56, available at:
174Section 227B(5), as amended by the Companies (Amendment) (Singapore) Act 2017 reads: “(5) Subject to sub- section (10), the Court must dismiss an application for a judicial management order if—(a) the making of the order is opposed by a person who has appointed, will appoint or is entitled to appoint, a receiver and manager mentioned in subsection (4); and (b) the Court is satisfied that the prejudice that would be caused to the person mentioned in paragraph (a) if the order is made is disproportionately greater than the prejudice that would be caused to unsecured creditors of the company if the application is dismissed.” 175See text to above note 164. 176Walter Woon (general editor), Woon's Corporations Law—2019 Desk Edition (LexisNexis, 2019), 995. 177Idem. Such prejudice may occur in the case where the company is “hopelessly insolvent”,asinRe Genesis Technologies International (S) Pte Ltd (1994) 2 SLR(R) 298. 178CD No. 10 (above note 7), 23–24. The SOA was not viewed as a corporate rescue mechanism, since it was also available to financially healthy companies for purposes, which include a reorganization of its share capital or a merger of a group of companies or reconstruction of a company involving a cancellation of its shares coupled with issuance of new shares of different classes, for which see Bahrin Kamarul, “Insolvency Law in Malaysia”,in Roman Tomasic (ed), Insolvency Law in East Asia (Ashgate Publishing, 2006), 338. 179Powdrill v Watson (1995) 1 BCLC 386, 398. 180Hunter (above note 124), 511–512. 181Paul Omar, “Thoughts on the Purpose of Corporate Rescue” (1997) 12(4) Journal of International Banking Law 127, 131. 182Companies (Amendment) Act 2019 [Act A1605] (gazetted on October 9, 2019).
How to cite this article: Chen TW, Azmi R, Abdul Rahman R. Paradigm shift from a liquidation culture to a corporate rescue culture in Malaysia: A legal review. Int Insolv Rev. 2020;29:181–203. https://doi.org/10.1002/iir.1384