MALAYSIA: An Introduction to Dispute Resolution

Weathering the Storm in the Time of Coronavirus 

By Puteri Shehnaz Majid & Ng Juen Yee 

As the viral tsunami crashed on and swept the world over in March 2020, Malaysia plunged into an unprecedented total lockdown, which saw an abrupt cessation of virtually all business and commerce for 47 consecutive days in the nascent pandemic. Some twenty months and several lockdowns later, the balance between the individual need to survive and thrive in a fully reopened economy, and the public need to curb the spread of the virus, remains difficult and elusive. As Malaysia continues to grapple from wave to wave, various relief measures have emerged giving financially sunk companies a breath of fresh air. The courts too have lent crucial succour in these precarious times.

Winding-up 

Changes to the winding-up provisions in the Companies Act 2016 were made as early as April 2020 by the Ministry of Domestic Trade and Consumer Affairs in swift response to the immediate impact felt by corporations large and small. Two important relief measures were implemented by the government to aid companies who were unable to pay their debts when they fell due during this period, which would most certainly have abated litigation and prevented many companies spiralling into liquidation. Firstly, the value of indebtedness upon which a winding-up petition may be presented was increased from MYR10,000.00 to MYR50,000.00 for the period of 23 April to 31 December 2020. This was later extended to 31 March 2021, and is still at MYR50,000.00, without a sunset date. Secondly, companies were given an extended period of 6 months (instead of the statutory 21 days) after service of the statutory demand to pay the debt, before the presumption of inability to pay debts would arise under the Act thus entitling a creditor to petition for winding-up. This extension was only from 23 April to 31 December 2020, and reverted to the statutory 21 days from 1 January 2021 onwards.  

Scheme of arrangement 

Companies may also avail themselves of the arrangement or reconstruction provisions in the Companies Act for capital or debt restructuring with members and creditors under a scheme of arrangement. A scheme may be initiated by the company, creditor, member, liquidator (if the company is in liquidation) or judicial manager (if it is under judicial management). Generally, a scheme of arrangement comprises three stages: the convening stage, where an application to court is made for leave to convene a creditors' meeting, after which the company negotiates the terms of the proposed scheme with its creditors; the meeting stage, where the proposed scheme is presented to the creditors and must obtain a majority of 75% of the total value of creditors present and voting; and the sanction stage, where a final court order is needed to sanction the scheme.

Pre-pandemic, when the court observed that a company did not have actual funds to implement the proposed scheme (e.g. where there was no white knight or the applicant did not have assets and cash to rehabilitate and revive the business), the courts had less qualms in setting aside orders granted for leave to convene the creditors’ meeting, and that would be the end of it. In cases reported during the pandemic, the courts appear more inclined to give the company a fighting chance even though the source of funds for the implementation of the proposed scheme may be dependent upon matters that are beyond the control of the ailing company.

In one scheme of arrangement case we conducted earlier this year, the court approved the proposed scheme even where the financial statements of the company clearly showed that it did not have the means to fund it. However, the court had also ordered the appointment of an independent liquidator to prepare a report on the viability of the proposed scheme in order to assist the scheme creditors in making their commercial decisions. Such “oversight” would help prevent companies from abusing the rescue mechanism.

While the courts seem more inclined to give companies a chance by at least allowing the creditors’ meeting to be convened so that the creditors can make their own commercial decisions on the viability of the scheme (as the courts are decidedly reluctant to delve into the commercial aspects), the cases show that the courts are also hesitant to allow a company to proceed if it can be shown that the demands of public policy would outweigh any plea by the company for an opportunity to be heard on the scheme before its creditors.

Judicial management 

Under the Companies Act, the court also has the power, on the application of a company or a creditor, to order that the company be placed under judicial management. A judicial manager may be appointed to step into the shoes of the directors to manage the affairs, business, and property of the company. The objective is to rehabilitate companies that are under financial distress and to reduce the number of cases where companies are wound up. It is a rescue mechanism that gives the company a new lease of life as a going concern.

The applicant must show that the company is or will be unable to pay its debts, and the making of the order would be likely to achieve one or more of the following purposes: survival of the company as a going concern, approval of a compromise or scheme of arrangement between the creditors and shareholders, or a more advantageous realisation of the company’s assets than on a winding-up. The overriding consideration is public interest.

Upon filing of an application for the appointment of a judicial manager, an automatic moratorium will trigger under the Act where no winding-up order can be made against the company, no steps can be taken to enforce any charge on or security over the company’s property (except with leave of court), and no proceedings can be commenced or continued against the company (except with leave of court) pending the disposal of the application, which must be within 60 days (unless extended by the court). If the application is allowed by the court and a judicial manager is appointed, this will trigger a further and wider moratorium that will last the entire duration of the judicial management order, which is valid for a maximum of 12 months. The moratorium is to protect the company and its assets, and to allow the judicial manager to continue the business and implement his proposals.

Although the protection afforded to the company under this rescue mechanism is statutory (via the far-reaching moratoria that often serves as an immediate and absolute shut-out to creditors intending to pursue and recover), the courts will not readily grant an order for the appointment of a judicial manager if it can be shown that the application is not bona fide. In an application we successfully opposed earlier this year on behalf of a creditor, the court refused to appoint a judicial manager – even though there was a purported white knight – on the grounds that the applicant company lacked bona fides. The application was filed just days before the hearing of our client’s winding-up petition against the company, which triggered the no winding-up moratorium and thwarted the winding-up proceedings. Creditors can take some comfort that although there is nothing much they can do about the automatic triggering of the statutory moratoria under the judicial management provisions, which do offer much-needed relief in genuine cases, the Malaysian courts will readily consider the bona fides of the application if it is called into question, in addition to assessing the viability of the scheme, before sanctioning relief.

Notwithstanding the relief measures available, over 37,000 small and medium-sized enterprises in Malaysia have folded. While downward revenue is forcing businesses to re-evaluate their survival plan and respond to changing norms in unprecedented ways, we stand ready with our experience and expertise in this practice area to provide our clients with the necessary legal solutions to help them navigate and weather the storm, and remain competitive in the tumultuous waters of the new norm.