Judicial Management in Malaysia

One of the many ways in which the Companies Act 2016 offers relief to financially distressed companies is through a corporate rescue tool known as judicial management.

With global headwinds forecasted to affect Malaysia’s economy in the coming year, and with 2023 predicted to already be an economically challenging year for countries around the world, local SMEs may be faced with uncertainties and battle with unforeseen cashflow issues.

One of the many ways in which the Companies Act 2016 offers relief to financially distressed companies is through a corporate rescue tool known as judicial management. Under Division 8 of the Companies Act 2016, a Company successfully placed under judicial management is entitled to carry on its business without worrying about (1) winding up orders made against the company or (2) any enforcement of charges or securities over the Company's assets or (3) legal or execution proceedings being commenced against the Company.

In short, creditors of the Company are instructed by a court to come to a compromise with the debtor Company so as to accommodate the Company’s financial rehabilitation.

1. Under section 404 of the Companies Act 2016, a Company may apply to be placed under judicial management if the following requirements are satisfied:-

   1. The Company is unable to pay its debts;

   2. There is a reasonable probability of rehabilitating the Company or of preserving all or part of its business.

2. From the time when the application for judicial management is made until a court order for judicial management (‘Judicial Management Order’) is granted:-

   1. No resolution shall be passed or order made to for the winding up of the Company;

   2. No steps shall be taken to enforce any charge on or security over the Company’s assets or to repossesses any goods in the Company’s possession;

   3. No other proceedings and no execution or legal process shall be commenced or continued and no distress may be levied against the Company (except with leave of Court).

3. Once a Judicial Management Order is granted:-

   1. The Company shall be placed under the management of a court appointed Judicial Manager;

   2. Any winding up application made against the Company shall be dismissed;

   3. During the period of the Judicial Management Order (for a period of 6 months which may be extended):-

      1. No resolution shall be passed for a winding up of the company;

      2. No steps shall be taken to enforce any charge on or security over the Company’s assets or to repossesses any goods in the Company’s possession;

      3. No other proceedings and no execution or legal process shall be commenced or continued and no distress may be levied against the Company (except with leave of Court);

      4. No steps shall be taken to transfer any share of the company or to alter the status of any member of the company except with the leave of the Court.

During the time the judicial management order is in place, the appointed judicial manager will consult with key creditors and come up with a proposal to rehabilitate the company. This proposal must be developed and issued within 60 days from the judicial manager’s appointment. If the proposal is approved by 75 percent in value of the creditors whose debts have been accepted by the judicial manager, the judicial manager’s proposal becomes binding on all creditors irrespective of whether they voted for the proposal or not.

Judicial managements are open to not just companies themselves, but creditors too may apply for judicial management though so far this has been rare. It is worthwhile noting that public listed companies are not eligible for judicial management under the present Companies Act 2016.

---

Legal Disclaimer

We trust that you have gained some information from this article. If you have any specific questions related to this article, please contact us at askdonny@dwc.com.my.

This article is posted for general information purposes only and should not be construed as legal advice. Facts and circumstances differ from case-to-case. Please consult your lawyer for specific legal advice and action to be taken.

This article is brought to you by Cheong Su Yin from Messrs Cheong Su Yin & Co. and is copyrighted accordingly.