Corporate Voluntary Arrangement (CVA) Requirements for Implementation

INTRODUCTION

Companies may fall into financial distress due to unforeseeable market elements or inefficient business management. Should this occur, companies would face difficulties in fulfilling their debt obligations and this will threaten the companies’ survival. Therefore, the Companies Act 2016 (“CA”) has introduced two corporate rescue mechanisms: (i) Corporate Voluntary Arrangement (“CVA”);[1] and (ii) Judicial Management (“JM”)[2]. Both mechanisms facilitate and rehabilitate financially distressed companies and provide liquidation alternatives.

CVA is an agreement between the company and its creditors to achieve a compromise on the company’s debts and their repayment. Under CVA, management control is preserved but the mechanism is supported by independent oversight from a “nominee”, who is an insolvency practitioner[3]. Furthermore, there is no court involvement, except for when documents are filed in court. In contrast, JM is a court-supervised rescue scheme. Under JM, a “judicial manager”, who is an insolvency practitioner, is empowered with interim management and supervision of the financially distressed company.

In this article, we will examine the requirements to implement CVA.

REQUIREMENTS

The legal requirements for the implementation of CVA can be found in Subdivision 1 of Division 8, Part III, and in Companies (Corporate Rescue Mechanism) Rules 2018 (“CRM”).

1. Persons who may apply for CVA
   Under S.396(1) of CA, directors of a company may make a CVA proposal to the company and its creditors. Additionally, a proposal for CVA may be made by a judicial manager if the company is under judicial management or by a liquidator if the company is being wound up.[5]
2. Types of companies that cannot undergo CVA
   According to S.395 of CA, the following are excluded from applying for a CVA, namely: (a) a public company; (b) a company which is a licensed institution or an operator of a designated payment system regulated under the laws enforced by the Central Bank of Malaysia; (c) a company which is subject to the Capital Markets and Services Act 2007 (“CMSA”); and (d) a company which creates a charge over its property or any of its undertaking. Therefore, only a private limited company that has not created a charge over its property or any of its undertakings can utilise the CVA mechanism.
3. The proposal for a CVA
   S.397(1) provides that directors intending to adopt a CVA scheme must appoint a nominee and submit documents with the information specified in the subsection to the nominee. S.397(2) further states that the nominee shall review the proposal by submitting a statement of his opinion to indicate whether or not: (a) the proposed voluntary arrangement has a reasonable prospect of being approved and implemented; (b) the company is likely to have sufficient funds during the moratorium to enable the company to carry on its business; and (c) whether meetings of the company and creditors should be summoned to consider the proposed arrangement. If the nominee endorses or approves the proposal, the documents outlining the terms of the CVA can be filed to court via Form 2 of the First Schedule of CRM.
4. The moratorium
   A moratorium commences automatically once prescribed documents are filed in the Court pursuant to S.398(1) of CA. As specified in Paragraph 3 of the Eighth Schedule of CA, the moratorium shall remain in force for 28 days upon commencement. It can be extended for a further period of not exceeding 60 days with: (a) the approval of 75  percent of the company’s creditors; and (b) the consent of the nominee and a simple majority of the company members. The effect of the moratorium is that the company is protected from all actions specified under Paragraph 17 of the Eighth Schedule.
5. The meetings of members and creditors, and the requisite majority to approve the CVA proposal
   By S.399 of CA, the nominee shall summon a meeting of the company and a meeting of its creditors during the moratorium period. The term “creditors” includes all individuals having any pecuniary claims against the company, including those whose claims are future or contingent as held in Re Butterworth Products & Industries Sdn Bhd (Khaw Saw Mooi & Ors, Petitioners) [1992] 1 MLJ 429.
   
   The meeting is summoned to decide whether to approve or reject the proposed arrangement.[6] To approve the proposed arrangement, the statutory majority required under S.400(2) and (3) are: (a) 75 per cent of the total value of creditors present and voting either in person or by proxy at the creditors’ meeting; and (b) a simple majority of members present and voting either in person or by proxy at the members’ meeting.
   
   It is pertinent to note that members and creditors are prohibited from approving any proposal which affects the right of a secured creditor to enforce his security, unless said secured creditor concurs to such[7] Additionally, members and creditors are not allowed to modify the proposed arrangement during the meetings.[8]
   
   Once the proposal is approved by the requisite statutory majority, it takes effect immediately and binds all creditors, including dissenting creditors[9]. The High Court in Sisu Capital Fund Ltd & Ors v Tucker [2005] EWHC 2170 (Ch) confirmed that where the creditors approved the proposal, the law treats the company and creditors as though they had entered a contract, giving effect to the terms of the CVA proposal. After which, the nominee is required to report the outcome/results of the meetings to the court and give notice of the results to the Companies Commission of Malaysia (“SSM”) and to such other persons or bodies as the court may approve.[10]
6. Implementation of the CVA
   Once the proposal becomes effective and binding, the nominee will assume the role of “supervisor” of the proposal[11]. The supervisor will monitor the implementation of the proposal including the distribution of payment to creditors. Notwithstanding the aforesaid powers, the company’s directors shall retain their powers over the day-to-day management of the company’s business or affairs.

CONCLUSION

To recapitulate, companies interested in availing themselves of CVA must satisfy their respective requirements as discussed above.