DOES JUDICIAL MANAGEMENT IN MALAYSIA SUFFICIENTLY EMBODY A RESCUE CULTURE?

• Date: 01 December 2020
• Author: Rabindra S NATHAN LLB (Hons) (University of Canterbury) (New Zealand), LLM (Hons) (University of Cambridge); Barrister and Solicitor (New Zealand); Advocate and Solicitor (Malaysia).
• Published date: 01 December 2020

On 31 August 2016, the Companies Act 2016 (Act 777) formally introduced and embedded the judicial management framework into Malaysia's statutory corporate insolvency framework. It has been more than a year since the judicial management provisions came into effect, and therefore, this article will explore the extent to which judicial management in Malaysia, in its present iteration, sufficiently embodies a rescue culture. To achieve this, this article will examine the law reform efforts leading to the introduction of judicial management and the decisions of the Malaysian courts thereafter, and juxtapose the same against reforms and decisions in other jurisdictions, namely the UK and Singapore. Ultimately, there will be an evaluation on the adequacy of the law reforms undertaken that led to the introduction of judicial management in Malaysia.

I. Introduction

1 Is a rescue mechanism a rescue mechanism if it is not set up to have rescuing the company as a going concern as its first objective?1 This article asks this question of the new judicial management framework in Malaysia. Judicial management was formally introduced and embedded into Malaysia's statutory corporate insolvency framework on 31 August 2016 when the Companies Act 20162 (“CA 2016”) was enacted in place of its predecessor, the Companies Act 1965. Nevertheless, the actual judicial management provisions themselves only came into force on 1 March 2018, more than a year after the other parts of the Act itself came into force.

There have been several judicial management applications and it is not as yet evident that this new mechanism has achieved a good take up rate. The new judicial management provisions are located in Division 8 of the CA 2016 together with another innovation called “Corporate Voluntary Arrangement”. The title to Division 8 is “Corporate Rescue Mechanism”. Judicial management and corporate voluntary arrangements are thus intended to operate as corporate rescue mechanisms. A corporate rescue mechanism should facilitate a corporate rescue, whether of the business or the company itself. Such a mechanism should therefore also be infused with and embody a corporate rescue culture. This article explores the extent to which the description “Corporate Rescue Mechanism” is apt to describe judicial management in Malaysia and whether the legislation can be said to embody a rescue culture in its present iteration.

2 The framers of the judicial management framework in the CA 2016 used the regime for judicial management in the Singapore Companies Act3 as a blueprint. At the time the CA 2016 was enacted, the Singapore judicial management framework was already the subject of review and re-evaluation by the Singapore Insolvency Law Reform Committee (“ILRC”).4 In its comprehensive Final Report, the ILRC had recommended several reforms to address deficiencies in the then existing regime in Singapore. Eventually in 2017, the Singapore judicial management model was reformed and modernised.5 None of the recommendations originating out of the Singapore insolvency law reform process found their way into the draft Companies Bill that underwent the pre-enactment consultation process in Malaysia, prior to the enactment of the CA 2016.

3 Prior to the Singapore ILRC recommendations, a major shift had taken place in the UK in terms of the balance between a debenture holder's rights and those of unsecured creditors in the receivership and administration regime under the Insolvency Act 19866 in the UK. This recalibration of rights and approach took place with the enactment of the Enterprise Act 2002,7 which came into force on 15 September 2003.8 The ostensible purpose of the framers of the Enterprise Act was to strengthen

the core corporate rescue foundation underpinning the UK provisions. This rebalancing of rights and approaches, which has been described as having revolutionised the law of receivership and administration in the UK,9 has been far reaching in effect. Despite this having happened in the UK in 2003, there was no room in the pre-enactment consultation and dialogue over the shape, substance and form of the proposed new Malaysian judicial management framework for any of these considerations that have so fundamentally altered the UK insolvency landscape.

4 Without these and other improvements that corporate insolvency rescue regimes elsewhere in the Commonwealth have implemented or are in the course of implementing, including recommended improvements to the Singapore regime itself which have since become a reality, judicial management as it exists in Malaysia does not either sufficiently embody the concept of corporate rescue or provide a meaningful platform for restructuring. Therefore, for all intents and purposes, it has rendered the much-heralded new corporate rescue mechanism less effective than it ought to be, or worse still, dead in the water in the long term.

5 This article examines the law reform efforts that led to the introduction of judicial management as a new corporate rescue mechanism between 2004 and 2015. Legislative developments and reform initiatives in other common law jurisdictions with which Malaysia shares its company law legislative ancestry are traced and examined. The question is then asked whether these reform initiatives and legislative developments ought to have been considered in a more fundamental way at a more conceptual level to address questions relating to the objectives and range of outcomes of judicial management. The article also asks whether a corporate rescue mechanism such as judicial management ought to cater for a more diverse set of stakeholders and interests than just the limited constituency catered for in the current Malaysian provision. Most importantly, the article seeks to evaluate whether sufficient regard was paid to reforming the veto rights that secured creditors enjoy under the current judicial management framework and to address not only the position of unsecured creditors but also the intangible interests of other stakeholders, the broader community in which every company carries on business and possibly the interests of the nation itself.

6 The article will also review the decisions of the Malaysian courts since 1 March 2018 on applications under the new judicial management provisions. The outcomes, and the driving forces behind those outcomes, will also be considered. The article also considers decisions of the Singapore

courts on the equivalent provisions of the Singapore regime, and will examine what resulted from the Singapore ILRC's recommendations as to changes to the judicial management framework in Singapore. This article asks whether, as a minimum, the Malaysian regime should embrace the changes to date in Singapore that are intended to enhance the efficacy of the Singapore judicial management framework.

7 The author will also trace the emergence of what is known as the rescue culture in insolvency law and the recognition of such a culture in several decisions of the courts in some of the leading jurisdictions in the Commonwealth. This then leads to the discussion on the reforms to the administration and administrative receivership procedures in the UK in 2002 and their impact on corporate rescue in the time since then. These UK reforms included the removal of the debenture holder's veto right to block the appointment of an administrator under the UK administration regime and the abolition of administrative receivership for all floating charges created on or after 15 September 2003. The article will examine the reasons that led to the abolition of administrative receivership and the removal of the debenture holder's veto right to block administration under the UK insolvency regime. The question then arises as to whether reform along these lines is necessary or desirable in Malaysia in order to make the Malaysian judicial management framework a more rescue-orientated regime? Inevitably, in the course of considering this, the issue of whether this debate ought to have in fact occurred in Malaysia in the lengthy law reform process leading up to the enactment of the CA 2016 and the introduction of the Malaysian judicial management regime in its present form, will arise. The hard question will then be whether in order for judicial management in Malaysia as it exists to stand any chance of being a true rescue mechanism, changes to modify or extinguish the veto rights of secured creditors are needed in order to reset the balance between secured and unsecured creditors in judicial management.

II. Legislative reform of Malaysia's corporate insolvency framework

8 Historically, legislation governing Malaysian company law and insolvency law has generally followed English and Australian statutory models. By the early 1960s, the earlier colonial era legislation had become outdated, and newly independent Malaysia needed a modern company law statute. Eventually, the Companies Act 1965 was enacted. It was based on the 1961 Australian legislation (but with some elements from the 1948 English Companies Act). The draftsman of the Australian Uniform Companies legislation assisted in the preparation of the Bill of what was to become the Companies Act 1965. This remained law for 51 years.

9 Reform was nevertheless on the cards. In December 2003, the Companies Commission of Malaysia established the Corporate Law Reform Committee (“CLRC”) and charged the CLRC with the twin goals of creating a legal and regulatory structure that would facilitate business and promote accountability and protection of corporate directors and members in line with international standards, while taking the interests of other stakeholders into account. The CLRC embarked on what it called a law reform programme, and in the course of that programme, issued 12 “consultative documents” for public consultation. The CLRC published its Final Report in 2008,10 and the Cabinet approved most of its recommendations in...