DESPITE various short-term relief measures introduced by the government to aid a myriad of businesses and cushion the financial impact of Covid-19, companies seeking to protect themselves may want to consider one of the corporate rescue mechanisms in the form of judicial management.
What is judicial management?
In essence, judicial management is a court facilitated restructuring of the company and its debts, carried out mainly by a person known as the judicial manager – who is an insolvency practitioner but is not the auditor of the company.
The judicial management regime is a fairly new regime introduced under the Companies Act 2016 and is unique in that the moment a judicial management application is made, a moratorium begins automatically with the effect that: (i) the company cannot be wound-up; (ii) charges or security cannot be enforced; and (iii) no legal proceedings can continue against the company.
This is crucial where time is of the essence and for the company to continue as a going concern.
It is worth noting that unlike schemes of arrangement, it is the court and not the creditors who needs to be satisfied that a judicial management order should be granted. This may prove useful for a company facing hostile or difficult creditors. That said, the creditors of the company may challenge the application in court. Ultimately, if the court is satisfied that two conditions are proven, it may make a judicial management order.
These conditions are: (i) the company is or will be unable to pay its debts (same meaning as in the context of winding-up); and (ii) the court considers that the making of the judicial management order would be likely to achieve either the survival of the company; the approval of a compromise or arrangement; or a more advantageous realisation of the company’s assets than on a winding up.
Effect of a judicial management order
Once a judicial management order has been granted, it is effective for six months and may be extended for a further six months. During this time, the previously stated moratorium against the company will continue in force. It is also during this period that the judicial manager will step into the shoes of the directors, with all powers and duties of the company’s directors being performed by the judicial manager and not by the directors themselves.
The judicial manager will also manage all the affairs, business and property of the company, and the shares of the company cannot be transferred and the status of the members cannot be altered unless there is judicial permission to do so. The company will also need to state that it is under judicial management in all its business documents, correspondence and on its website.
Once appointed by the court, the judicial manager’s main duty is to resuscitate the company or at least ensure a more advantageous realisation of the assets of the company by managing the affairs of the company. The judicial manager will be required to study the financial situation of the company and present a proposal that requires the approval of 75% of the total value of creditors whose claims have been accepted by the judicial manager.
There are, of course, provisions in the Companies Act 2016 to protect the company, shareholders and creditors under the judicial management mechanism. Creditors or shareholders may apply to court for relief if the judicial manager has exercised his function in a manner which is prejudicial to the interests of the creditors or shareholders, for instance, where there is undue preference.
Application for judicial management – potential applicants and practical tips
While a majority of companies are eligible to make a judicial management application, there are limits under the Companies Act 2016. Companies that are not eligible, which are: (i) licensed institutions under laws enforced by Bank Negara Malaysia; (ii) operators of designated payment systems regulated under laws enforced by Bank Negara Malaysia; and (iii) companies regulated by the Capital Markets and Services Act 2007. Also, the court will generally dismiss a judicial management application if the company has already gone into liquidation or is under receivership, unless it is in the public interest to grant such an application.
Some practical tips for the business owners concerned include preparing true and accurate financial statements evincing the prospects of rehabilitation, and reaching out to a reputable and reliable insolvency practitioner (who is not the company’s auditor) to be the nominee of the company for judicial manager.
So, who should consider making an application for judicial management?
If your company is or will be unable to pay its debts (which is one of the grounds for the winding up of a company) or is suffering from temporary illiquidity, but you foresee or believe that there is a reasonable probability that the company could be resuscitated (e.g. your company has significant assets or a potential source of future income), and you are avoiding winding up in the meantime, or if you are a creditor of such company, you should consider making an application for judicial management to assist the company to regain its footing.
This article was contributed by Joseph Khor of Christopher & Lee Ong.
Source: The Sun Daily
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