In 2024, the Companies (Amendment) Act 2024 (‘the Amendment Act 2024’) was passed to amend some of the existing provisions in the Companies Act 2016 (‘CA 2016’) relating to the scheme of compromise or arrangement and corporate rescue mechanisms. It also widened the scope of the qualification of auditors. The Amendment Act 2024 also introduced new provisions relating to the reporting framework, disclosure of beneficial ownership information and publication of announcements on the Companies Commission of Malaysia’s website. This article will highlight the changes made to the CA 2016, which are pertinent to the syllabus for Corporate and Business Law (Malaysia).
Scheme of compromise or arrangement
The provisions on the scheme of compromise or arrangement in Subdivision 2 Division 7 of Part III of the CA 2016 have been substantially revised. The following are some of the amendments:
Applicants
Section 366(1) was amended to clarify that the following persons may apply to the court for an order of compromise or arrangement with creditors and members:
- The company itself (‘the subject company’)
- A creditor or class of creditors
- A member or class of members
- A liquidator
- A judicial manager.
Moratorium period
Before the proposed scheme of compromise or arrangement can be formalised, the proposed scheme may be frustrated by a legal action against the company. Thus, an application is usually made to the court for an order to restrain actions or proceedings against the company (‘restraining order’). Section 368(1A) now provides that upon the filing of an application to the court for a restraining order, an automatic moratorium period of two months shall take effect. No action or proceeding can be commenced or continued against the company during this moratorium except with the leave of the court.
Restraining order
The court may grant a restraining order of not more than three months from the date of the order (s.368(1)). It may also grant an extension of not more than nine months to the initial three months order (s.368(2)). The court may also restrain the disposition of the subject company’s property (s.368C).
Extension of the restraining order to related companies
A new s.368A provides that the subject company’s subsidiary, holding company and ultimate holding company (‘related company’) may apply to the court for a restraining order for a period of not more than the period of the order granted to the subject company under s.368. The related company has to show, among others, that the compromise or arrangement will be frustrated if the restraining order is not extended to the related company.
The role of insolvency practitioner
The Amendment Act 2024 has enhanced the role of insolvency practitioners. Section 367 now prescribes that the court may appoint an insolvency practitioner to evaluate the viability of the proposed scheme for the compromise or arrangement.
In addition, s.367 provides that an insolvency practitioner must be appointed if the subject company applies to the court for rescue financing (s.368B), to cram down (s.368D) and for approval of a compromise or arrangement without a meeting of creditors (s.369C). Further, an insolvency practitioner must be appointed if a related company applies for an extension of the restraining order to it (s.368A).
Section 367 lays down the duties and rights of the insolvency practitioner. They will receive remuneration as agreed with the company. Where there is no agreement, the court will determine the amount of their remuneration and the person who is to pay it.
Rescue financing
The subject company may require financing. To entice potential lenders, the company may apply to the court for an order that the lenders be given super priority over the company’s other debts if the company is liquidated (s.368B).
Cram down
A new s.368D allows the company or a creditor of the company to apply to the court for a cram down order which will bind the company and all classes of creditors to the scheme, despite any objections by certain classes of creditors.
Approval without meeting
A new s.369C provides that the court may, on an application made by the company, grant an order approving the scheme without any meeting of the creditors or class of creditors, provided the conditions in that provision are complied with. One of the conditions is that the court is satisfied that had a meeting of the creditors or class of creditors been summoned, the scheme would have received approval from the required majority.
Checks and balances
The Amendment Act 2024 has inserted some checks and balances to further enhance this scheme. For example, s.366(2A) and s.369A(3) require all meetings held pursuant to the court order to be chaired by either an insolvency practitioner or a person elected by the majority in value of the creditors or members.
To prevent an abuse of process by a company to frustrate its members and creditors, a new s.368(3B) provides that the court will not grant a restraining order if any of the following orders has been granted to the company within the past 12 months: a restraining order under s.368(1), rescue financing under s.368B, cram down under s.368D, or compromise or arrangement without creditors meeting under s.369C. Similarly, the court will not grant a restraining order to a company if a restraining order has been granted to its related company pursuant to s.368A in the past 12 months.
Corporate rescue mechanisms
The CA 2016 introduced two corporate rescue mechanisms for companies facing a financial crisis, namely corporate voluntary arrangement (‘CVA’) and judicial management (‘JM’). These mechanisms had some shortcomings, and the Amendment Act 2024 has addressed some of the issues.
Corporate voluntary arrangement
The CVA was available to only private companies that did not create any charge over any of its property or undertaking. The Amendment Act 2024 has now extended the availability of the CVA to all companies which are not regulated by the Central Bank of Malaysia or which are not licensed, approved or registered under the Capital Markets and Services Act 2007 and the Securities Industry (Central Depositories) Act 1991. It is also not material that the company has created a charge over its property or undertakings (s.395).
In view of the extension of the CVA to companies which have created securities over their assets, the Amendment Act 2024 has introduced a provision allowing a secured creditor under certain circumstances, to exercise their rights against the secured property notwithstanding the moratorium pursuant to the CVA (s.398A). The rights include taking possession of the secured property. However, it must be noted that under this section, secured property is defined to mean any property other than immovable property which is subject to a charge or other security.
Judicial management
The ambiguity on the availability of JM to companies whose shares are listed on the stock exchange was clarified with the amendment to the relevant provision. Similar to the CVA, the JM is now made available to all companies, other than those regulated by the Central Bank of Malaysia and those which are not licensed, approved or registered under the Capital Markets and Services Act 2007 and the Securities Industry (Central Depositories) Act 1991 (s.403).
The initial duration of the JM is six months and may be extended subject to such terms as the court may impose (s.406(1)). There appears to be no cap on the duration. Nevertheless, while the JM is still in force, a secured creditor of the company is entitled to enforce their security over movable property under certain circumstances (s.411(5)).
A company under JM is also allowed to obtain rescue financing. To entice potential lenders, the judicial manager may apply to the court for an order that the lenders be given super priority over the company’s other debts if the company is liquidated (s.415A).
Protection for essential goods and services
Contracts with suppliers for essential goods and services may contain a clause on termination or suspension of the contract when the company becomes insolvent. A new s.430A requires the supplier of selected essential goods and services which are listed in the new Schedule Ninth A to continue supplying the goods and services notwithstanding the presence of such clause.
Auditors
Prior to the amendment to the CA 2016 in 2024, a company was not allowed to appoint an auditor if the spouse of a partner of the audit firm is an officer of the company. However, this is now permitted if it does not compromise the independence of the auditor and the firm of auditors (s.264(4A)).
Beneficial ownership
A company is a separate entity from its members. As there is a ‘veil’ between the company and its members, companies may be misused to carry out illegal activities such as money laundering. The Amendment Act 2024 has introduced basic criteria for identifying a beneficial owner of a company (s.60A). It has incorporated provisions requiring a company to maintain a register of beneficial owners and lodge the relevant information with the ROC (s.60B). A company is also required to lodge this information in its annual return (s.68).
Publication or advertisement on Companies Commission of Malaysia’s website
There are provisions in the CA 2016 requiring publication or advertisement of information in a newspaper. As newspapers may no longer be a good platform to publish announcements, a new s.612A provides an alternative avenue, namely, the website of the Companies Commission of Malaysia.
Conclusion
The CA 2016 was amended to enhance the scheme of compromise or arrangement, corporate voluntary arrangement and judicial management. The CVA and JM mechanisms are now available to most companies undergoing financial distress. In addition, the CA 2016 was amended to bring it in line with international practices, such as on the reporting of beneficial ownership. There are also amendments to make the Act more current, such as providing for the website of the Companies Commission of Malaysia as an option for publication of information. All these changes are beneficial to businesses in Malaysia.
Written by a member of the LW-MYS examining team
