Paradigm shift from a liquidation culture to a corporate rescue culture in Malaysia: A legal review

• Date: 01 June 2020
• Author: Ruzita Azmi,Rohana Abdul Rahman,Thim Wai Chen
• DOI: http://doi.org/10.1002/iir.1384
• Published date: 01 June 2020

RESEARCH ARTICLE

Paradigm shift from a liquidation culture to a

corporate rescue culture in Malaysia: A legal

review

Thim Wai Chen

1,2

| Ruzita Azmi

1

| Rohana Abdul Rahman

1

1

School of Law, Universiti Utara

Malaysia, Kedah, Malaysia

2

Advocate & Solicitor, High Court of

Malaya, Kedah, Malaysia

Correspondence

Thim Wai Chen, School of Law,

Universiti Utara Malaysia, Kedah,

Malaysia.

Email: thimwchen@yahoo.com

Abstract

The company law landscape in Malaysia has witnessed

a significant change in its insolvency law with the

adoption of two new corporate rescue mechanisms, the

corporate voluntary arrangement and judicial manage-

ment under the Companies Act 2016 (CA 2016), which

has repealed the Companies Act 1965 (CA 1965). Previ-

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 mecha-

nisms, 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 appli-

cation and reforms ought to be considered.

Received: 21 July 2019 Revised: 3 March 2020 Accepted: 24 May 2020

DOI: 10.1002/iir.1384

© 2020 INSOL International and John Wiley & Sons Ltd

Int Insolv Rev. 2020;29:181–203. wileyonlinelibrary.com/journal/iir 181

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On January 31, 2017, the Companies Act 1965 (CA 1965) in Malaysia was repealed by the Com-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 compa-

nies.

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 cor-

porate 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 features

14

: 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

182 CHEN ET AL.