Corporate Rescues and Covid-19: The Way Forward

The current battle with COVID-19 has created stress points for many companies. Fears of business slowdown or going under, or just to survive are issues.

Restructuring is a mechanism designed to rescue and rehabilitate distressed corporations. Restructuring allows valuable time for viable companies to realign their practices and customer demands

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In the current situation, companies are likely to face losses. This in turn may well lead to a position of insolvency i.e. unable to pay their debts as and when they fall due. Whilst no company can be truly insulated from the effects of a downturn in the economy, the added dilemma presented is COVID- 19. 

Companies facing liquidity issues but otherwise commercially viable or have assets that are of sufficient value to attract potential investors could employ or adopt one of the corporate rescue mechanisms that are available.

Before determining what is best, it is useful for the company to consider the following:

• review the financial position of the business;
• identify the key factors for financial distress;
• analyse the future viability of the business e.g. cash flow projections and estimated profits/losses;
• review the short term and long term options available to the company; and
• develop a viable plan to rescue and rehabilitate the business.

This can be done by engaging a Corporate Finance Advisor licensed by the Securities Commission.

Rescue Options

A. Corporate Debt Restructuring Committee (CDRC)

Companies that intend to resolve their debt obligations through CDRC must fulfill the following broad criteria:

1. aggregate indebtedness of RM10 million or more;
2. at least two financial creditors;
3. not in receivership or liquidation, except for those where receivers have been appointed only over certain specified assets and the directors remain in control over the companies’ overall operations;
4. experiencing difficulties in servicing their debt obligations but may not have already defaulted, provided they meet criteria (1) and (2).

OR

Any company listed on Main Market or ACE Market of Bursa Malaysia (“Bursa”) that has already been classified as a PN17 or GN3 company respectively.

The expectation is that companies are viable as a going concern post-restructuring in all cases undertaken under the auspices of the CDRC.

This mechanism is only applicable for creditors who fall within Bank Negara Malaysia’s (“BNM”) jurisdiction. Where there are a combination of different types of creditors including those within BNM’s purview, the company may have to consider whether to adopt the CDRC route combined with another rescue mechanism. 

B. Companies Act 2016 (CA)

Scheme of Arrangement

Whilst not limited to only insolvent companies, section 366 CA does provide a mechanism by way of a scheme of arrangement that is quite often used by insolvent companies. This mechanism is driven by the company. Companies undertaking this scheme may obtain the benefit of court-supervised restraining orders against recovery and enforcement proceedings. Assuming the requisite voting majority is achieved, and the court approves the scheme of arrangement, the terms of the scheme can be imposed on dissenting creditors and/or members.

Corporate Voluntary Arrangement (CVA)

The CVA is more recent to the corporate landscape having only been introduced via legislation on 1 March 2018. However, unlike schemes of arrangement, the CVA mechanism excludes the following:

• public companies;
• licensed institutions or operators of designated payment systems regulated by BNM;
• companies subject to the Capital Markets and Services Act 2007; and
• companies that have created a charge over its property or any of its undertaking.

These exclusions, particularly the fourth, severely limit the application of this mechanism. 

Judicial Management (JM)

This is another recent feature introduced by legislation on 1 March 2018.  The High Court is now empowered to appoint a judicial manager to manage an insolvent company that fulfills the statutory conditions. The pivotal conditions are that the High Court must be satisfied:

• there is a reasonable prospect of preserving all or part of the business of the company as a going concern; or
• there is a likelihood that an approval under section 366 for a compromise or arrangement can be achieved; or
• the interests of creditors would be better served by JM rather than by being wound up.

Certain companies are excluded from utilising this mechanism but the exclusions are not as extensive as in the case of a CVA. They are:

• licensed institutions or operators of designated payment systems regulated by BNM; and
• companies subject to the Capital Markets and Services Act 2007.

A distinguishing feature of the JM compared to the other mechanisms discussed earlier is that the process is “managed” by a judicial manager, a qualified insolvency practitioner, appointed by the court. 

Practice Note 17 (PN17) or Guidance Note 3 (GN3) Companies

Companies regulated under the Main Market Listing Requirements and the ACE Market Listing Requirements once classified as distressed are provided time to put together a regularisation plan.

A listed company is considered distressed if among others:

• Its shareholder equity is 25% or less of its share capital, and its shareholder equity is also less than RM40 million. This triggering condition applies to both Main Market and ACE Market.
• For ACE Market, there are additional triggers including a situation where a company suffers loss equal or greater than the amount of its shareholder equity and such shareholder equity is not more than ½ of its share capital; or aggregated loss over two financial year period exceed shareholder equity, loss in the second year is double the first year, and shareholder equity is not more than ½ of its share capital.

C. Pre-emptive M&A

An M&A transaction to pre-empt a potential distressed status, with valuation remaining on a going-concern basis, could also be a viable way forward. This is especially so where a company is already considering:

• expansion to seek strategic investors to share its risks and rewards, or
• to remove its non-core assets so that it becomes leaner to be able to excel at what it does best.

Each corporate rescue mechanism has its challenges to overcome and requirements to satisfy. Each mechanism is designed to apply to companies in varying states of economic distress. The key is to take the first step to analyse your situation with a Corporate Finance Advisor.

Reference:

Corporate Rescues and Covid-19: Tackling economic distress and emerging stronger, Zico Law, 13 June 2020 (https://www.zicolaw.com )