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ASIAN DEVELOPMENT BANK
REGIONAL TECHNICAL ASSISTANCE
TA NO: 5795-REG
INSOLVENCY LAW REFORM
SUPPLEMENTARY REPORT
ON
MALAYSIA
Rabindra Nathan
Shearn Delamore & Co
A. Insolvency Processes
1. Please supply number and details of cases of:
(a) corporations whose financial affairs have been or are
being handled under the relevant process, framework or agreement
governing informal corporate debt restructuring [the numbers
should be from the date that the process, framework or agreement
was established to facilitate informal restructuring; details
of the corporations should relate to size, industry type
, debt level];
The main informal insolvency process is the informal
workout process overseen by the Corporate Debt Restructuring
Committee ("CDRC") established by Bank Negara Malaya ("Bank
Negara"), the central bank, to provide impetus to informal
workouts. The number of companies that are or have been
involved in the CDRC is approximately 63. In 1999, the following
public listed companies are a sample of those debtors that
have successfully entered into debt restructuring agreements
with their lenders via the CDRC process:
(1) Tongkah Holdings Berhad [Engaged in manufacturing,
IT services, financial services and healthcare]. Secured
debt of RM392.447 million and unsecured debt of RM161.996
million.
(2) Lien Hoe Berhad - [Property holding
and development]. Debt level of RM212.062 million.
(3) Nam Fatt Corporation Berhad -
[Construction, engineering, property, leisure and manufacturing].
Secured debt of RM312.3 million and unsecured debt of
RM207.8 million.
(4) Chongai Corporation Berhad - [Consumer products]
Secured debt of RM3.26 million and unsecured debt of RM55.75
million.
(b) corporations which have been placed in formal liquidation
under the relevant insolvency law [numbers and details should
be from January 1999].
The number of corporations placed in formal liquidation
in Malaysia between January 1999 and June 1999 are:
[Still awaiting statistics from Official Receiver's Office]
(c) corporations whose financial affairs have been or
are being handled under the relevant insolvency law governing
reorganisation [numbers and details as in (b)].
The main insolvency laws concerning reorganization of companies
are:
(i) The scheme of arrangement and reconstruction
law contained in section 176 of the Companies Act 1965.
No official statistics on the number of such companies
exists. However, from a variety of sources, the approximate
number of corporations whose financial affairs are still
being handled under such a law are between 125 - 175.
Between July 1997 and December 1998, one source has put
the number of companies that had resorted to the procedure
as 131 private and 32 public listed companies. See R Thillainathan,
Corporate Governance & Restructuring in Malaysia - A Review
of Markets, Mechanisms, Agent and the Legal Infrastructure,
(1999) Paper prepared for joint OECD/World Bank Survey of
Corporate Governance.
(ii) The Pengurusan Danaharta Nasional Berhad ("Danaharta")
Act of 1998. The Special Administrators appointed by
Danaharta over companies whose assets were taken over by
Danaharta have the power to initiate workout proposals.
The latest published figures are up to 30th June 1999. As
at that date Danaharta had acquired the debts of 1,780 corporate
debtors totaling RM39.3 billion. Of these, the loan workout
progress is as follows:
- 1% representing 23 borrowers have been fully settled.
- 6% representing 105 borrowers have proposals finalised
and are pending implementation.
- 3% representing 55 borrowers have proposals evaluated
pending finalisation.
- 15% representing 263 borrowers have had proposals submitted
and are pending evaluation.
- 20% representing 340 borrowers have had recovery initiated
pending submission of proposal.
- 54% representing 931 borrowers are awaiting initiation
of recovery.
2. Provide details and copies of any published comments,
opinions or statements describing how the above processes
are working and the level of success or otherwise.
The Operations Report and Annual Report published
by Danaharta contain comments and/or statements concerning
the process of reorganizing distressed companies whose
debts have been taken over by Danaharta and details of
actual case studies of successful work-outs. Press releases
are also issued from time to time advising of appointments
of special administrators, loan restructuring guidelines,
etc. These can be found at http://www.danaharta.com.my.
The CDRC periodically issues press releases that can be
obtained via the Bank Negara Malaysia website at http://www.bnm.gov.my.
The CDRC's own website is not operational as at the date
of this report.
B. Insolvency Reforms
1. Provide details of any reforms that have occurred
in relation to insolvency law and practice and related areas
(such as corporate governance, secured transactions and
so forth) since January 1999.
There have been no statutory insolvency reforms of any great
significance since January 1999.
However, in the sphere of corporate governance, at the initiative
of the Hon. Minister of Finance, Malaysia, a committee was
set up in 1998 to establish a framework for corporate governance
in Malaysia and to set industry standards of best practice.
This has resulted in the 'Malaysian Code
on Corporate Governance' (February 1999). The Code can
be viewed at http://www.sc.com.my.
Briefly, the Code covers:
- Appointment and re-election of directors, supply of information,
compositional balance within the board.
- Procedure and disclosure obligations in relation to directors'
remuneration.
- Communication/dialogue between company and shareholders.
- Financial reporting, internal controls and relationship
between the board and the external auditors.
In late 1998, the Securities Industry Act 1983 was amended.
The amendment provided, for the first time, that action
could be taken by the Kuala Lumpur Stock Exchange ("KLSE")
against a director of a company that is subject to the
KLSE's Listing Requirements for failure to observe, enforce
or give effect to the KLSE's rules and listing requirements.
The same applies to directors of companies that are subject
to the rule or any clearing house recognised under the
said Act.
Also, the new Malaysian Code on Take-overs and Mergers
1998 came into force on 1.1.99. The new Take-overs Code
greatly enhances the position and treatment of minority
shareholders in public listed companies and larger private
companies.
2. Provide details of any proposed reforms
as above.
The only proposal of any significance in terms
of insolvency law reform is the proposed judicial management
provision. The proposed judicial management provision,
which is envisaged as an amendment to the Companies Act
1965, has gone through various drafts and comments by
various private bodies, such as the Malaysian Institute
of Accountants, but has not seen the light of day as yet.
C. Corporations
1. Identify and detail the areas in which it is considered
that relevant accounting practice or regulation is weak
and could be strengthened [for example, accounting and financial
information; projections of income/expenditure; valuation
of assets; debtor and creditor control]
The Financial Reporting Act 1997 established the Financial
Reporting Foundation and the Malaysian Accounting Standards
Board ("MASB"). The MASB's functions under the act include:
- Issuing new accounting standards.
- Review, revise or adopt as approved accounting standards,
current accounting standards.
- Issuing statements of principle for financial reporting.
In late 1998, various sections of the Companies Act 1965
inter alia, sections 169(15) and 174(2) were amended
to require directors and auditors respectively to state
whether the accounts have been prepared in accordance with
applicable approved accounting standards.
The following areas of concern remain:
- Valuation of assets and of businesses. Recipients of
valuation reports should ask themselves the question of
for whom and for what purpose was the valuation prepared?
The other weakness is that unrealistic valuations are not
uncommon. In Malaysia, the Board of Valuers, a statutory
body, regulates valuers, but their duties tend to be defined
by the common law and not statute. Questionable valuations
could lead to a mismatch of assets as against liabilities.
- Another weakness is the mismatch of, or imbalance in,
information as between debtor (in control of the information)
and the lender (dependent on disclosure by the debtor).
This is a situation that is not addressed by the law, but
dealt with by some lenders by way of covenants requiring
continuous quarterly or monthly disclosure. For publicly
listed companies at least, the Kuala Lumpur Stock Exchange
("KLSE") has on 11th March 1999 announced new listing requirements
dealing with quarterly reporting of financial statements,
enhanced corporate disclosure, etc.
- Lax ethical standards amongst some segments of the accounting
profession. There is now a willingness within regulatory
bodies to initiate complaints to the governing body, the
Malaysian Institute of Accountants, about non-compliance
with approved accounting standards.
3. Identify and detail areas of weakness in corporate
governance by reference to such factors as director's
duties and their performance; financial management and
responsibility; the interests of shareholders and creditors.
If possible, provide specific examples of cases in which
examples of such weaknesses have been found to exist.
A survey undertaken in 1998 {Corporate Governance: 1998
Survey of Public Listed Companies, KLSE/PricewaterhouseCoopers}
indicated the following areas of concern amongst those
who sent in responses:
- Improve reporting standards including more disclosures
in the accounts on related party transactions and directors'
dealings;
- Maintain and enhance investors' interest and confidence
in the capital market by improving reporting standards;
- Protect minority shareholders' interests by improving
Board and management accountability;
- Clearly define the roles and responsibilities of directors
including separating the ownership and management of the
company; and
- Monitor and enforce rules and regulations by the regulatory
authorities.
- Further improvements in the dissemination of information
to the market place and greater emphasis on the extent of
disclosure of corporate information in annual reports.
- The need to ensure greater protection of minority shareholders'
interests and the need to further clarify the roles and
responsibilities of directors.
- The regulatory authorities should take the lead in identifying
areas of improvements, formulating action plans and ensuring
strict enforcement of all new and existing rules and regulations.
One weakness in the corporate governance systems of companies
in Malaysia is in the failure, in certain instances, of
management oversight procedures, such as failure to detect
breaches of internal financial controls. Several examples
have come to light now with the initiation of criminal proceedings
against the persons involved. One example is the case of
top management of a bank disbursing a loan in contravention
of the conditions stipulated by the board of directors of
the bank.
The other weakness is the absence of adequate transparency
in deals between two public listed companies, especially
related party transactions. Two public listed companies
linked to one controlling shareholder, were involved in
a sale of a building that aroused much comment, and a concomitant
dramatic drop in the share price when disclosed. The reason
was the nominal price at which the building was sold. The
same transaction gave rise to criminal proceedings against
the controlling shareholder, for false disclosure of alleged
interest in shares of the second company. The KLSE deals
with this by the introduction, for public listed companies,
of more exacting disclosure provisions through amendments
to the stock exchange listing requirements. Restrictions
have been placed by the KLSE on the ability of controlling
shareholders to exercise voting rights when the general
meeting is considering related party transactions.
Clearly, shareholders and creditors are affected by these
events, but without disclosure lack any real means of becoming
aware of such situations, and therefore can only rely on
the supervision of the regulatory bodies concerned, such
as the Securities Commission and the Kuala Lumpur Stock
Exchange. The new Corporate Governance Code proposes that
the board of directors be composed of at least 1/3 'independent'
directors.
4. Identify and detail areas of concern regarding political,
government or commercial links with corporations, by reference
to such factors as "cronyism", "patronage" and corruption.
There have been studies conducted into the relationship
between the state, the ruling political party and major
corporate groups in Malaysia. These studies refer to a web
of links between business and politics and conclude that
there has a blurring of state, party and private interests
giving rise to an amalgam of both rentier-capitalists and
true entrepreneurs [For example, Searle, The Riddle of Malaysian
Capitalism (1999)]. To this extent, there is some cause
for concern over such links and the exposure to charges
of cronyism and patronage that it can lead to.
There is no empirical evidence of corruption as such. A
study of the correlation between time spent by managers
of firms with government bureaucrats and levels of corruption
contained in a World Bank report [Gray & Kaufman, Corruption
and Development (March 1998)] indicated that corruption
in Malaysia was neither particularly high or low.
5. Identify and detail areas of concern regarding the
size and power of corporations, corporate groups or conglomerates.
The largest company in Malaysia in terms of market capitalization
is Telekom Malaysia Berhad. Telekom Malaysia has a huge
grip on the fixed line telephone network in Malaysia, having
been, prior to its privatization, the sole provider of such
services. Today, Malaysia has liberalised the telecommunications
sector, and many other service providers are active. Telekom
nevertheless still has a massive advantage in the fixed
line sector. Its dominant position could give rise to concerns
that are of interest to economists, but no legal concerns
as such arise under Malaysian law.
As for corporate groups in Malaysia, there are several examples,
and their size would ordinarily give rise for concern about
the concentration of power and economic activity in certain
sectors of the economy. A group could be involved in,
inter alia:
- public transport;
- transport infrastructure;
- Public engineering works, contracting and property development.
- Telecommunications.
- Banking
This kind of group, with its strategic ownership of infrastructure
and other important segments of the economy, creates the
potential conflicts of interest, and subordination of one
group member's interest in favour of another.
Group-wide financial re-structuring, are problematic, particularly
if borrowings of one member company have been guaranteed
by another, or secured by assets of another within the group.
It could give rise to problems for bank creditors, particularly
where national interests clash with lenders' interests and
wishes, both foreign and domestic. Foreign lenders are usually
less moved by national aspirations, and often have to be
dealt with on their terms. This is the dilemma confronting
the CDRC when attempting to work out group wide restructuring.
Corporate governance issues could also arise, such as:
- Management oversight and financial irregularities in
subsidiaries;
- Related party transactions on terms that are not truly
arm's length;
- Failure of 'owner' nominee-directors sitting on boards
of subsidiaries to protect the interests of external creditors
and minority shareholders in listed subsidiaries; and
- In at least two instances, failure to undertake mandatory
general offers under Malaysia's take-over laws to the possible
detriment of minority shareholders.
6. Is it practical and might it be of benefit to introduce
legal guidelines on director duties and responsibilities
and to provide sanctions or penalties for breach or non-observance
of such duties? If so, outline the areas to be covered and
the nature of any sanctions.
The Law Society of England and Wales' Company Law Committee
has recently rejected an attempt at codification of directors'
duties in England [The Company Lawyer, March 1999]. The
principal reasons are that it would be unrealistic to suppose
that such duties could be simplified sufficiently to be
readily intelligible without legal advice.
There is now a recommendation in Malaysia that directors'
fiduciary duties should be codified in statutory form: the
Finance Committee on Corporate Governance. This proposal
is arguably subject to the criticism referred to above.
Furthermore, the codification might endanger the development
of a 'business judgment rule' that would encourage entrepreneurial
activity.
Nevertheless, the 'Malaysian Code on Corporate Governance'
(supra) will be used as broad standards of best practice
when measuring actual exercise of directors' powers. It
contains explanatory notes, explaining the provisions of
the Code, for the benefit of those whose conduct it regulates.
There also exists a 'Code of Ethics for Company Directors'
issued by the Registrar of Companies, Malaysia.
7. Would directors of corporations benefit from education
and training on such areas such as financial management
and responsibility, negotiation of a financial restructure,
informal work out techniques? If so, detail the areas and
the type of program.
There is no empirical evidence to suggest it, but it would
not be unrealistic to generalise that many directors of
corporations are ignorant of these areas. They should be
educated on:
(a) First, the philosophy underlying insolvency laws. (b)
The importance that creditors' rights be recognised. (c)
The mechanics of a workout, particularly in multi-banked
companies;
(d) The fact that to build trust and confidence, it is preferable
for the corporation to initiate the process when in financial
difficulties rather than be 'found out' by creditors;
(e) The fact that creditors require up to date information
to make assessments of prospects of turnaround;
(f) the dangers of withholding such information from creditors
and of carrying on trading when the corporation is or is
nearly insolvent;
(g) the fact that the accounting records of the company
have to be maintained as accurately as possible to facilitate
workouts.
(h) the various methods of informally restructuring debt.
(i) Corporate governance generally.
D. Banks/finance providers
1. Identify and detail the areas in which it is considered
that the lending practices of domestic banks are weak and
might be improved or strengthened.
The reasons for the banking crisis in Asia have been explored
in various papers [Asian Development Bank, The Financial
Crisis in Asia, Asian Development Outlook 1999; Demigurgic-Kunt
and Enrica Detragiache, The Determinants of Banking Crises:
Evidence from Developed and Developing Countries, World
Bank/IMF, May 1997].
The areas in which domestic banks in Malaysia could be said
to be weak are:
- Over-concentration of lending in one sector of the economy
thereby concentrating, rather than spreading, sector risks.
In other words, failure to diversify their loan portfolio.
- Failing to appraise exchange control movement risks and
taking currency stability for granted.
- Failure to appreciate the return mismatch between loaning
to domestic lenders in local currency and borrowing from
foreign sources in foreign currencies.
- Excessive enthusiasm for property based lending.
- Failure to make informed credit evaluations and failure
to conduct adequate credit screenings;
- Failure to monitor collateral adequacy on an ongoing
basis.
- Overemphasis on relationship lending.
2. Identify and detail areas of concern regarding
the involvement of banks with corporations (for example,
through equity holding, long term relationship, government
association).
Equity holding by banks and financial institutions in
Malaysia in companies is prohibited except with Bank Negara
Malaysia approval: section 66 of the Banking and Financial
Institutions Act 1989 ("BAFIA"). Therefore the dangers
are minimal.
Banks and financial institutions are permitted however
to acquire an interest in shares by way of security for
giving any credit facility: ibid.
BAFIA contains strict prohibitions on lending to parties
related to the lender, including parties related to directors
of lenders. Therefore although some banks are part of
a large corporate group, there is no danger of lending
within the group as such.
Relationship banking does pose problems because of the
close ties over a long period of time between a lender
and a borrower. In such cases, the lender pays less attention
to and consequently fails to appreciate the reality of
borrower's current debt servicing capability, and focuses
on the borrower's long-term ability to repay. This leads
to problems when the economy as a whole is in decline
and the long term view is thrown into disarray.
There is no overt 'government association' that can be
pointed to in the case of any bank or financial institution
in Malaysia. Nor is there any empirical evidence of any
policy direction to banks to lend to certain companies.
The government owns or controls some of the local banks,
including Malaysia's largest bank. There is no empirical
evidence of any overt government policy direction in relation
to the lending practices of such banks.
3. Would officers/employees of banks/finance institutions
benefit from education and training on such areas as lending
practices, formal insolvency practices, informal work
out techniques and practices? If so, detail the areas
and the type of program.
Bank officers in Malaysia now routinely attend seminars,
both in-house and external, on these areas. An education
program should include the following areas:
Lending practices
- Understanding how to sort out viable from non-viable businesses.
- Learning how to evaluate whether the business' income
can support the debt servicing obligations.
- Critical analysis of adequacy of collateral being offered.
- Avoiding over-concentration in certain economic sectors
and ensuring loan portfolio diversification.
- Scrutiny of adequacy of corporate governance procedures
adopted by the borrower.
Formal Insolvency Practices
- An understanding of philosophy underlying the law of
insolvency in Malaysia.
- Understanding the ranking of claims and of distributions
of estates.
- Understanding the roles and functions of receivers &
managers and liquidators.
- Understanding the procedures and aims of rehabilitation
laws such as s. 176 of the Companies Act 1965 and special
administration under the Danaharta Act 1998.
Informal Work out techniques & practices
- Appreciation of the advantages/benefits of a work out.
- Formulating a set of objectives to be achieved during
the work out, and ensuring that these are fulfilled.
- Understanding the typical inter-creditor issues within
a work out.
- Understanding the roles of component parts of a typical
workout, such as the steering committee, creditors' committee,
lead bank and independent consultants.
- How to handle potential investors.
- Strategies for asset disposals.
- Ways of enhancing borrower incentives to turnaround.
E. Property law
1. To what extent might the law relating to ownership,
mortgages and the creation of other security interests in
land and other property be improved/reformed to enable secured
transactions to be transacted more efficiently?
The law relating to security interests in land in Malaysia
could be reformed in the following ways:
- There are doubts over recognition and enforcement or
equitable fixed charges over land contained in debentures.
Presently, doubts exists over the efficacy of such equitable
fixed charges and anything short of registered charges under
the National Land Code, in light of certain dicta in the
decision of the Supreme Court of Malaysia in Kimlin Housing
Development Co. Sdn Bhd (In Liquidation)(Receiver and Manager
Appointed) v Bank Bumiputra Malaysia Berhad [1997] 2 MLJ
805 (details are set out in the Main Report for Malaysia).
The decision provides that where land is subject to a fixed
charge in a debenture and a registered charge under the
national Land Code 1965, the land must be sold by judicial
sale. A receiver and manager cannot apparently sell the
land by entering into a private treaty sale.
- Remove the inflexibility of judicial sales for landed
assets held under loan cum assignment documentation for
landed not held under titles, and restore the lender's ability
to sell by private treaty coupled with re-assignment by
the lender, holding a power of attorney, in favour of third
party purchasers.
- In this regard, a contrast may be drawn between the ease
with which Danaharta can exercise rights as chargee over
land, which rights were acquired by stepping into the shoes
of lenders holding charges. Amendments to the National Land
Code provided for this, and allow sales by private treaty
after the expiry of 30 days from a notice to remedy a breach
under a charge. On the other hand, as stated above, court
decisions have made private treaty sales of land all but
impossible for chargee banks.
- Issuing strata titles expeditiously for property such
as floors in office and apartment buildings over which security
interests can be created and enforced in the same manner
as landed property.
2. Are there particular commercial or other practices
(as distinct from formal laws) associated with the laws relating
to property and secured transactions which impede or restrict
the latter?
No.
F. Secured transactions
1. What are the major impediments to the enforcement
of security rights over property?
- From a creditor's perspective, in so far as landed property
is concerned, the major impediments are the insistence of
the courts that such land be sold by judicial sale under
the auspices of the Courts, ostensibly on the grounds that
such a sale affords valuable safeguards to the registered
owners, and the delays attendant upon such judicial sales.
Naturally, borrowers would not share that perspective. This
emphasis on judicial sale negates the effectiveness of receiverships.
- In so far as apartments and office floor space based
security is concerned, by analogy with landed security,
the same courts are insisting on judicial sale.
- In so far as movable property is concerned such as shares,
there are no major impediments save for one. This is the
need for regulatory approvals when selling certain categories
of shares, such as shares of a company that is the controlling
shareholder of a licensed financial institution, where Bank
Negara Malaysia approval is required under the Banking and
Financial Institutions Act 1989 ("BAFIA"), which regulates
ownership and control of banks and financial institutions.
The need to apply for such approval delays the expeditious
sale of shares and rules out taking speedily advantage of
favourable market conditions by creditors holding charges
over publicly quoted shares.
2. How might these impediments be best overcome?
- In the case of land, the solution may be to expressly
recognise equitable fixed charges and permit receivers and
managers to sell such land, in the process of which receivers
and managers will be subject to a duty to act in good faith
and to realise the market price.
- The same solution is suggested for apartments and office
floor space based security.
- In the context of selling bank holding company shares,
the regulatory body to confer, at the time the security
over shares is created (which requires prior regulatory
body approval), on the lender in advance the future right
to sell without the need to seek further approval. However,
it is conceivable that this may cause unease at the inability
of the state to control, in the public interest, the identity
of the new owner of the bank or financial institution concerned.
3. Is there a fair balance between the enforcement
of secured property rights and the restraint on those
rights under relevant insolvency law? If not, in which
areas is there an imbalance and outline what improvements
might be made.
The discussion takes place in two different contexts.
The first is under the Danaharta Act of 1998 and the second
is under the scheme of arrangement provisions in section
176 of the Companies Act 1965.
Under the Danaharta legislation, there is a fair
balance between the enforcement of secured property rights
on the one hand, and the restraint on those rights under
the moratorium provisions in section 41 of the Danaharta
Act (as to which see the Main Report for Malaysia). There
is a one year period during which the exercise of rights
of secured creditors are restrained as against companies
that have had a special administrator appointed. This
period can be extended. During this time, the Special
Administrator will conceive of a workout proposal to be
placed before the creditors of the company. Because the
process is under the control of the Special Administrator,
overseen by the Oversight Committee constituted under
the same act, there is no room for abuse of the moratorium
by management of the debtor. Management's powers are in
fact suspended whilst a special administrator is in place.
(Abuse is prevalent and is a feature of moratoriums under
scheme of arrangement procedures, see below). Genuine
efforts are made by special administrators to come up
with a workable and acceptable proposal. Secured creditors
will be less likely to feel that they are being unfairly
restrained. Conversely, many, though not all, restraining
orders granted by courts under section 176(10)
of the Companies Act 1965 have been abused. The average
duration of the initial orders granted when the economic
crisis first hit was 9 months, with extensions of three
months at a time being granted in many cases. Even if
creditors exercised procedural rights to intervene and
set aside the restraining orders, the inability of the
court to expeditiously dispose of such an application
owing to heavy judicial lists inevitably negated the effectiveness
of such procedural maneuvers. In many cases, management
simply did not bother to use the breathing space created
by such restraining orders to produce a workable scheme
that could be proposed to creditors. Management simply
carried on business during the period of restraint, and
funds otherwise available for distribution to creditors
in a liquidation would be dissipated. Creditors did not
initially have any check or balance on the free hands
that management had. An amendment to section 176 sought
to redress the balance by, amongst others, providing creditors
with a representative on the board, and by limiting the
life span of such orders to 90 days. Concerns about the
possibility of shadow directorship liability, and fears
of potential nominees about director-liabilities have
deterred creditors from nominating persons and individuals
from taking on such appointments. Secured creditors, and
even unsecured creditors, suffer in the meantime. It is
here that the balance may need to be tilted back to neutral,
not necessarily in favour of creditors, if anything by
expediting hearings of applications by creditors, particularly
those wishing to enforce security.
G. Insolvency law
1. What are the major substantive defects in the corporate
insolvency law viewed from the respective positions of:
(a) banks/financial providers
(b) secured creditors
(c) unsecured creditors
(d) employees
(e) corporations
(f) directors
(g) shareholders?
(a) Banks/financial providers
- Uncertainty over interpretation of insolvency law provisions.
- Court imposed restrictions on methods of sale of landed
property otherwise than through judicial sales.
- Restructuring not sufficiently quick.
- Imbalance in information known to borrowers and what
is made available to banks.
(b) Secured Creditors
- Uncertainty over interpretation of insolvency
law provisions.
- Court imposed restrictions on methods of sale of landed
property otherwise than through judicial sales.
- Recent ruling by an appeals court (Kimlin Housing
Development Company Sdn Bhd (In Liquidation)(Receiver and
Manager appointed) v Bank Bumiputra Malaysia Berhad [1997]
2 MLJ 805) that receiverships come to an end once a liquidator
is appointed.
- Abuse of section 176(10) restraining orders.
- Shareholders remain owners and management often remains
in control.
- Moral hazard.
- Restructuring not sufficiently speedy.
- Imbalance in information known to borrowers and what
is made available to banks.
(c) Unsecured Creditors
- Delays in court recovery procedures.
- Limited influence over and little say in formal and informal
restructuring processes.
- Little or no information provided to them for an informed
decision to be made.
(d) Employees
- Limited influence over and little say in formal and informal
restructuring processes.
- No security or assurance of jobs.
- Little or no information provided to them about the restructuring
process.
- Very limited preferential claims in a winding up
(e) Corporations
-
Limited options available in terms of formal and informal
insolvency procedures.
-
Inability to seek court protection such as Chapter 11
type protection in the United States.
-
(f) Directors
Same as (e) above.
(g) Shareholders
Same as (f) above.
2. What are the major practical defects in the application
of the insolvency law viewed from the respective positions
of:
(a) Corporations
Inability of creditors, courts and other bodies to distinguish
between the causes of insolvency i.e. situations where
external circumstances have wrought financial distress
upon a well run borrower, and on the other hand, borrowers
that are mismanaged and over-geared. Consequently, the
absence of a US style Chapter 11 provision to assist distressed
borrowers of the first variety.
(b) Creditors?
- Delays in court enforcement and recovery procedures.
- The existence of moral hazard when debtors realise that
procedures exist for their reorganization without relinquishment
of control of management.
- Inability to prevent and/or redress corporate fraud and
mismanagement.
H. Judicial System
1. Has there been any discernable improvement or change
in the operation of the judicial system in relation to the
conduct of:
(a) debt collection/recovery processes;
(b) enforcement processes in respect of secured property
rights;
(c) recovery or enforcement processes in respect of leased
property;
(d) formal corporate insolvency processes?
If possible, provide some detail of cases in which any such
change or improvement has been made apparent
There has been little or no improvement since the Main Report.
2. What reforms, if any, have been made to improve the
operation of the judicial system in relation to the above
4 areas?
Apart from the addition of two additional commercial courts
in the High Court at Kuala Lumpur, as at to date, there
has been no other improvement.
3. Are there any identifiable proposals for reforms in
these areas?
No.
4. What are the main problems or difficulties regarding
the operation and application of the corporate insolvency
law through the court system?
The main problems and difficulties are:
I. Informal work out techniques
1. Provide detailed examples of some cases of successful
informal work outs and also cases of genuine attempts at
informal work outs which have not been successful.
There are no useful known examples of unsuccessful workouts
at this stage of this report. There are several examples
of successful informal workouts. The examples below represent
one from each of the CDRC, Danaharta and Section 176 procedures:
The CDRC Example: The Restructuring of the Renong Group/UEM
The restructuring of the Renong Berhad ("Renong") and United
Engineers (Malaysia) Berhad ("UEM"), both public listed
companies under the same stable, was conducted under the
auspices of the CDRC. Renong holds 37.1% of UEM, and UEM
holds 32.4% of Renong.
The indebtedness of the group totalled over RM8 billion.
Renong did not consider a capital raising exercise or an
asset disposal programme to be viable in the economic climate
in Malaysia. Renong would not be able to meet pre-requisites
for raising of capital, and the asset disposal programme
would be construed as a distress sale, thereby not maximising
values. Accordingly, the proposal was:
- to settle the debts of secured creditors of Renong and
UEM in full in cash (in original currency of indebtedness)
at completion by reference to the amount outstanding as
at 30th June 1999 (exclusive of default interest and charges);
and
- the unsecured creditors were to be paid 50% of the amount
as at 30th June 1999 in cash and in the original currency
of indebtedness at completion and 50% would be settled in
PLUS Bonds (PLUS or Projek Lebuhraya Utara-Selatan Berhad
is another company that is 100% owned by UEM). PLUS holds
the lucrative concession over the North-South Highway in
West Malaysia.
Completion was supposed to be 2nd August 1999 according
to the proposal.
A section 176 Example: The Case of Taiping Consolidated
Berhad
Taiping Consolidated Berhad ("TCB") is a public listed
company. Through various subsidiaries, before the restructuring,
TCB owned the Marriott Hotel building and Star Hill Shopping
Complex in Kuala Lumpur, and the neighbouring Lot 10 shopping
complex. These properties were in a prime and prestigious
location. The properties were charged under registered
National Land Code charges and debentures to secure borrowings
from a syndicate of lender banks and insurance companies.
TCB and its subsidiaries obtained a restraining order
under section 176 of the Companies Act 1965 on 30th July
1998 pending a scheme of arrangement being proposed.
On 20th October 1998, TCB entered into a conditional sale
and purchase agreement for the sale of the properties
to YTL Land Sdn Bhd ("YTL Land"), a subsidiary of another
public listed company known as YTL Corporation Berhad.
From the disposal of the properties, TCB was able to pay
the syndicate lenders the principal amounts in full. Under
the scheme of arrangement, the lenders, together with
other creditors of TCB and/or its subsidiaries, would
receive Irredeemable Convertible Preference Shares ("ICPS")
on the basis of 1 ICPS for every RM1-00 of debt. The interest
payable to the syndicate lenders would therefore be settled
via the ICPS.
The sale of the properties has been completed, the lenders
have been paid, and the scheme of arrangement has been
approved.
A Danaharta Example: The Case of Capitalcorp Securities
Sdn Bhd
Prior to the restructuring of its debt, Capitalcorp Securities
Sdn Bhd ("Capitalcorp") was a licensed stockbroking company.
In 1997 it ran into financial difficulties.
Throughtout 1998, there were three attempts to resolve
Capitalcorp's financial problems under the section 176
scheme of arrangement provisions. These failed.
On 4th January 1999, Danaharta appointed special administrators
over Capitalcorp. A workout proposal was submitted to
creditors within 2 ? months and was approved by the secured
creditors on 16th March 1999. The salient features of
the workout proposal are:
- Secured creditors will be paid in full in cash by way
of instalments.
- Unsecured creditors will be repaid with a combination
of redeemable convertible preference shares, redeemable
non-convertible preference shares and loan stocks.
- Shareholders' contributions are a combination of cash
and asset injection, waivers of inter-company debts into
equity and a capital reduction of existing shares.
97% of the secured creditors voted in favour of the workout
proposal.
2. In practice, are such technique/s operating efficiently
and successfully?
The only informal workout procedure is the one overseen
by CDRC. This may not be the most efficient or speedy, but
it is a major step in the right direction.
3. What are the major problems in the application of
these technique/s?
Applying moral suasion over all the secured bank creditors,
particularly foreign bank creditors, within the CDRC framework
is the single biggest problem in the application of the
CDRC procedures.
4. Is it considered that training and education in the
operation of these technique/s would be valuable and, if
so, in what areas and to whom should the training be directed?
Education for bank officers in the culture of informal workouts
would be useful, as such procedures are new to most officers.
Officers should also be trained to approach such workout
efforts in ways other than by focussing on financial restructuring
only, and not with, in the words of one expatriate manager,
"minimal attention to wider business functions and necessary
improvements required in financial controls, management
information systems¡K". [T.R. Slater, 'Corporate
Debt Restructuring: Framework, Options & Challenges", March
1999].
J. Insolvency Administration System
1. Comment on the extent of development, expertise
and efficiency regarding both public and private sector
administration of formal cases of:
(a) corporate liquidation; and
(b) corporate reorganisation
Public Sector Administration
Public sector administration of formal cases of corporate
liquidation is through the office of the Official Receiver's
Department. It is adequate and there is acceptable expertise,
but given the volume and the number of staff available,
the process can be slow and decision-making is frequently
cumbersome.
The Official Receiver's Department does not typically get
involved in reorganization of companies. It may be reasonably
surmised that the Department would not have the requisite
expertise.
On the other hand, Danaharta, assuming it is appropriate
to class Danaharta as 'public sector', is staffed by professionals
who have experience and expertise in corporate reorganization
of companies whose debts have been acquired by Danaharta,
and they are efficient.
CDRC is also assisted by individuals on the staff who have
expertise in the various disciplines such as economics and
law. CDRC is also advised by experienced external insolvency
practitioners.
Private Sector Administration
Private sector administration of formal cases of corporate
liquidation is through the appointment of private liquidators
from among the licensed, approved company liquidators. Private
appointments are preferred by secured creditors, and with
the staff of the accounting firms to which these liquidators
come from providing back up services, the expertise is there,
and the process can be said to be adequate.
The same can be said of private sector involvement in corporate
reorganization.
2. Is it considered that education and training in these
areas would be valuable and, if so, in what areas?
It may be good to expose the Official Receiver's Department
to other aspects of insolvency than the typical case of
formal liquidation. Other than that, there does not appear
to be any especial need for education and training as such.
3. Is it considered desirable to introduce more formal
structures of both public and private sector administration
of insolvency cases?
The present set up is adequate.
K. Information & Statistics
1. Is it desirable to establish systems to gather information
concerning:
- Incidence and results of formal insolvency cases under
the insolvency law
- Incidence and results of informal work out cases
- Statistics of value of assets and liabilities
- Causes of financial failure, main area/s of business?
Yes, it would be desirable.
2. If so, how best might such system/s be established?
It may be best if such statistics were maintained
by the Central Bank, Bank Negara Malaysia, on the basis
of statistics provided to them by licensed banks and financial
institutions since these banks and financial institutions
are usually best placed to provide such feed-back.
L. General Insolvency Information and Developments
1. Provide details of any other relevant information
or developments since January 1999 in regard to such issues
as the effect of insolvency law policies on areas such as
employment, fiscal/revenue debts, detection and recovery
of corporate fraud, domestic and foreign investment and
etc.
There have been no major developments since January 1999.
There has however been remarkably greater emphasis by the
regulatory authorities on prosecuting individuals for suspected
securities and corporate governance offences.
2. Is there any evidence of a change in attitudes (such
as social/commercial stigma, aversion to strict legal processes,
fear of loss of control) toward the use of:
(a) formal insolvency processes; and
(b) informal insolvency processes
in respect of corporations in financial difficulty or insolvent
corporations? If possible, provide details of any specific
cases which might reflect evidence of change.
If anything there is a greater inclination on the part of
debtors to initiate either CDRC or section 176 procedures,
having seen that these can bring some measure of respite
from their secured lenders whereas at the initial stages
of the economic crisis, there was some element of complacency.
By resorting to these procedures, debtors maintain their
control of management. Other than this, there is no real
discernible charge in attitudes. Many managers and controllers
still exhibit indifference to lender's concerns, and past
mistakes are glossed over or blamed on lenders themselves.
There is no discernible aversion by borrowers to legal process
at least in so far as measures are available for their protection.
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