Paradigm Shift from a Liquidation Culture to a Corporate Rescue Culture in Malaysia: a Legal Review

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 has repealed the Companies Act 1965 (CA 1965).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 mechanisms, 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 application 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181 182 CHEN ET AL. 1 | INTRODUCTION On January 31, 2017, the Companies Act 1965 (CA 1965) in Malaysia was repealed by the Com- panies Act 2016 (CA 2016).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 companies.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 corporate 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 modelled 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 pertaining 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 property 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

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