Corporate Rescue in Malaysia: Corporate Voluntary Arrangement, Judicial Management and Scheme of Arrangement Compared
A company that cannot pay its debts is not necessarily a company that should be wound up. Many businesses in financial distress are viable if the debt can be restructured, the creditors held off and the management given time. The Companies Act 2016 provides three tools for this, and the Companies (Amendment) Act 2024, in force from 1 April 2024, has significantly strengthened all three. This article explains what each mechanism does, who can use it and how to choose between them.
The three mechanisms at a glance
A corporate voluntary arrangement (CVA) is an out-of-court, debtor-in-possession process in which the company proposes a plan to its unsecured creditors, supervised by an insolvency practitioner. Judicial management (JM) is a court process in which the court appoints an insolvency practitioner, the judicial manager, to take over the management of the company and formulate a rescue plan. A scheme of arrangement is a court-supervised, debtor-in-possession process in which the company proposes a compromise to its creditors or classes of creditors, which becomes binding on all of them once approved by the required majority and sanctioned by the court.
Corporate voluntary arrangement
A CVA under sections 395 to 399 is the fastest and least expensive option. The company’s directors prepare a proposal with a nominee insolvency practitioner and file the prescribed documents in court. From the moment of filing, an automatic moratorium of 28 days takes effect, during which no winding up petition can be presented, no receiver appointed and no legal proceedings commenced without leave. The moratorium can be extended by the creditors for up to 60 days in total. The proposal is put to a meeting of creditors and, if approved by the required majority in value, binds all unsecured creditors who had notice of the meeting.
Before 2024 the CVA was available only to private companies that had not created a charge over any of their property, which excluded almost every company with bank borrowings. The Amendment Act 2024 removed that restriction. A CVA is now available to all companies other than those regulated by Bank Negara Malaysia or licensed under the capital markets legislation, whether or not they have granted security. The CVA still does not bind secured creditors without their consent, so it is best suited to companies whose problem is trade debt rather than bank debt.
Judicial management
Judicial management under sections 403 to 430 is appropriate where the existing management has lost the confidence of creditors or lacks the capacity to run a restructuring. The company or a creditor applies to court for a judicial management order. The court may make the order if the company is or will be unable to pay its debts and the order is likely to achieve the survival of the company as a going concern, the approval of a scheme, or a more advantageous realisation of assets than a winding up. On the making of the order the directors’ powers are suspended and the judicial manager takes control.
A moratorium applies from the filing of the application and continues while the order is in force. The order lasts for six months and the 2024 amendments give the court discretion over extensions, removing the previous rigid limit. The judicial manager must present a proposal to creditors within the period fixed, and the proposal binds the company and creditors if approved by 75 percent in value of the creditors present and voting. The 2024 amendments also widened access to JM in line with the CVA changes, and introduced super-priority for rescue financing, so that a lender who advances new money to a company in JM can be given priority over existing unsecured creditors with the court’s approval.
Scheme of arrangement
A scheme of arrangement under section 366 is the most flexible tool and the one used in the largest restructurings. The company applies to court for an order convening meetings of its creditors, or classes of creditors, to consider the proposed scheme. If a majority in number representing 75 percent in value of each class present and voting approves the scheme, and the court sanctions it, the scheme binds every creditor in that class, including those who voted against it. Management remains in control throughout.
The scheme has no automatic moratorium, but the company may apply under section 368 for a restraining order that stays all proceedings against it. The 2024 amendments enhanced the restraining order regime and codified the scheme process in detail, including provisions on the adjudication of proofs of debt, the chairing of scheme meetings, the court’s power to order a revote and to review acts after approval, and the introduction of cross-class cram-down, which allows the court to sanction a scheme even where a dissenting class has voted against it, provided the statutory safeguards are met. Pre-packaged schemes, in which the company negotiates creditor support before filing, are now expressly recognised, as is super-priority rescue financing.
Choosing the right mechanism
The choice usually turns on four factors: whether the company’s creditors are mainly unsecured trade creditors or secured lenders, whether the existing directors can credibly lead a restructuring or need to be replaced, how quickly protection from creditors is needed, and the cost the company can bear. A CVA suits a smaller company with trade debt and credible directors. JM suits a company whose lenders and creditors will only support a plan led by an independent practitioner. A scheme suits a larger company with multiple classes of debt and the resources to run a court process. The mechanisms are not mutually exclusive; a judicial manager frequently proposes a scheme, and a CVA moratorium can buy time to prepare one.
Directors’ duties in the zone of insolvency
Directors of a company approaching insolvency should remember that their duties shift. Continuing to trade and incur credit when there is no reasonable prospect of paying it exposes directors to personal liability for fraudulent trading under section 540 and, in a subsequent liquidation, to claims by the liquidator to unwind transactions at undervalue and preferences. Invoking a corporate rescue mechanism early is the clearest evidence a director can produce that he acted responsibly. Leaving it until a winding up petition has been served removes most of the options.
Frequently asked questions
What is the difference between judicial management and a scheme of arrangement in Malaysia?
In judicial management the court appoints an insolvency practitioner who takes over management and formulates the rescue plan. In a scheme of arrangement the directors remain in control and propose a compromise which binds creditors once approved by 75 percent in value and sanctioned by the court.
Can a company with bank loans use a corporate voluntary arrangement?
Yes, since 1 April 2024. The Companies (Amendment) Act 2024 removed the restriction that excluded companies which had granted a charge over their assets, but a CVA still does not bind secured creditors without their consent.
How long does a moratorium last in a CVA?
An automatic moratorium of 28 days begins on filing the CVA documents in court and can be extended by the creditors to a maximum of 60 days in total.
What is a restraining order under section 368?
A court order that stays all legal proceedings against a company while it prepares and proposes a scheme of arrangement, protecting it from winding up petitions and enforcement action during the restructuring.
How NZSK Legal can help
NZSK Legal acts for distressed companies, directors, creditors and insolvency practitioners in corporate voluntary arrangements, judicial management applications, schemes of arrangement and restraining order applications in the High Court. If your company is facing creditor pressure, an early consultation on the available rescue mechanisms is the single most valuable step you can take.
