Background
On 27 March 2020, the International Monetary Fund (IMF) officially declared that the global economy had entered a recession as a result of the spread of the COVID-19 pandemic, which had shut down economic activities across the world.
Malaysia was not spared from the impact of the COVID-19 outbreak, which further exacerbated an already dire economic situation. The economic uncertainty burdens the repayment capability of a large part of the business community in Malaysia. Yet, there remain contractual obligations, the failure to perform which will inevitably result in legal suits followed by a consequent liquidation process upon enforcement of judgments. The business community is therefore under the threat of financial distress.
Can the financial distress be avoided?
A moratorium mechanism can serve as a rescue for the business community to avoid the threat of financial distress caused by COVID-19. A moratorium is a legally authorized period of delay in the performance of a legal obligation or in taking legal action for the payment of a debt.
The Singapore government has proposed passing the COVID-19 (Temporary Measures) Bill, whereby a 6-month moratorium on certain legal actions is provided.
Despite the various rescue measures announced by the Malaysian government and Bank Negara Malaysia, including PRIHATIN and PRIHATIN TAMBAHAN, there is no indication that Malaysia will enact a similar law providing a moratorium in relation to contractual obligations, particularly commercial or construction contracts.
However, the business community may look to moratorium mechanisms already available under the Companies Act 2016 (“CA 2016”) and the Insolvency Act 1967 (“IA 1967”).
The statutory moratoriums
The CA 2016 applies to body corporates, while the IA 1967 applies to individuals, sole proprietors, or partners in a partnership.
CA 2016: There are two types of moratoriums provided under the CA 2016. One is a Corporate Voluntary Arrangement (“CVA”), and the other is Judicial Management (“JM”).
IA 1967: A moratorium is available under the IA 1967 when a debtor proposes to his creditors a scheme of arrangement of business affairs before being adjudged bankrupt. This is known as a Voluntary Arrangement (“VA”).
How long are the moratoriums?
CVA: A CVA moratorium commences automatically for a period of 28 days from the filing of the requisite documents by the company to the Court and can be extended for a period of not more than 60 days by creditors representing at least 75% in value.
JM: A JM moratorium commences automatically from the date of filing the Court application for JM and lasts until a decision is made by the Court. The JM order remains in force for a period of 6 months from the date it is granted, unless otherwise discharged, and may be extended by the Court for another 6 months.
VA: The moratorium under a VA commences when the Court makes an interim order for the VA, which shall be valid for a period of 90 days.
Key considerations
The purpose of CVA, JM, and VA is to provide temporary cash-flow relief for both businesses and individuals so that they can regularize their financial position with a view to avoiding liquidation or bankruptcy.
Generally, to resort to these rescue mechanisms, there must be a plan or scheme supported by evidence to prove a prospect of recovering money or assets within a reasonable time to pay debts. In addition, for a CVA, the company must show that it is likely to have sufficient funds during the proposed moratorium to continue its business. The Court in a JM application will also consider whether making the order will allow the business to continue for the foreseeable future.
As for a VA, the repayment plan should be based on an amount the debtor can reasonably afford after taking into account his financial capacity.
In view of the above, the key to the viability of the rescue mechanisms is whether the financial repayment plan is acceptable to the creditors. The statutory moratorium provides breathing space for a company or individual to develop a financial repayment plan without the threat of legal proceedings or liquidation processes.
For any queries, please contact:
Foo Joon Liang
Partner
Gan Partnership
joonliang@ganlaw.com
Lee Xin Div
Senior Associate
Gan Partnership
xindiv@ganlaw.com
Gan Khong Aik
Partner
Gan Partnership
khongaik@ganlaw.my
Kang Mei Yee
Senior Associate
Gan Partnership
meiyee@ganlaw.my
DISCLAIMER: This article is for general information only and should not be relied upon as legal advice. The position stated herein is as at the date of publication on 6th April 2020. For any enquiries on this article, please contact Gan Khong Aik (khongaik@ganlaw.my) or Foo Joon Liang (joonliang@ganlaw.com).
