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Corporate restructuring

In an economic downturn, many companies may find themselves in a position of not being able to pay their debts when they are due. Being in this position is precarious, as there is a risk of the company being wound up, causing hardship to employees, creditors and shareholders. In addition to that, creditors will rush to enforce the debts owing to them, which is usually a disorderly state of affairs. This may eventually lead to the demise of the company. But there are mechanisms in place to address the inability to pay debts, depending on what the cause is.

An inability to pay debts can generally be split into two types: (i) there are insufficient assets to settle all debts, and (ii) there are sufficient assets to settle all debts but the time required to convert such assets into cash will take time. In the first situation, the question is whether the company is in a position to realistically propose a compromise and arrangement with its creditors and put itself back on its feet again. Such companies will usually require an infusion of fresh capital. In the second situation, it would probably be possible to propose a compromise of the company's debts without an infusion of fresh capital. The board of such companies would have to carefully consider whether the interests of the company lies in its winding up or in its rescue.

In Malaysia, there is no voluntary administration procedure to restructure a company which may be viable. However the scheme of arrangement mechanism, which is found in section 176 of the Companies Act, 1965, is available. This mechanism allows a company to propose a compromise with its creditors in an orderly fashion. The compromise can be a combination of seeking a haircut in the amount of debt that is to be paid, freezing of further interest charges and deferment of payment of debt. The advantage of this procedure is that the company can propose the compromise and arrangement to its creditors as a group, instead of having to approach each creditor individually. It will be almost impossible to seek a compromise with each creditor individually as terms of compromise will not be standard and there will not be sufficient time to negotiate with creditors on a one to one basis. The acceptance or rejection of the proposal to compromise debts is determined by the creditors at a meeting.

Before a proposal for compromise can be brought to creditors for their consideration, the company must make an application to the High Court for an order to convene a meeting or meetings of creditors. It is necessary to group creditors into their respective classes as there are different types of creditors. This would enable them to vote at their respective meetings, where the rights and obligations of the other creditors in that class are similar. All information required for informed decision making by the creditors regarding the proposal must be provided to them in the form of an Explanatory Statement.

A meeting convened pursuant to an order of the High Court under section 176 has the advantage that if a sufficient majority of creditors are in favour of the proposal for a compromise, although there are dissenting creditors, the scheme can be considered approved by creditors. That sufficient majority must be of at least 75% and a simple majority in number for those creditors attending and voting. Where there are many classes of creditors, many meetings are required. Whether the proposal for a scheme will succeed depends on how the proposal is structured. Some proposals are structured in such a way that in order for the scheme to be implemented, the approval of each class of creditors is a condition and any one class rejecting the proposal would spell the end of the effort to restructure the debts of the company.

It is usual to make an application for an order to restrain proceedings against the company which is unable to pay its debts as and when they fall due at the time of making the application for an order to convene the creditors' meetings. Protection for proceedings against the company is required as this will give the time needed for the company to table the proposal for compromise to its creditors.

If the creditors vote in favour of the proposal in the court convened meeting, the company will then have to take out another application to get the High Court to sanction the scheme, as agreed to by the creditors. Creditors can still object at this stage but very good reasons will have to be shown as to why the proposed scheme, accepted by the requisite majority in number and in value of creditors, should not be sanctioned. More companies in Malaysia are expected to resort to the compromise mechanism provided in section 176 in the near future if the economy worsens.

Mak Lin Kum

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