Corporate Rescue Mechanisms – saving the company before it sinks

By Bryan Boo

It is unsurprising that a company in dire financial state would have to eventually contend with the dilemma of whether or not to wind up the company. At times, such a winding up action may be commenced by a creditor who has yet to be paid its debts owed and due. It is heartbreaking to see the investments of money, time and effort put into building a company all be for nought. For some, the company itself holds the legacy of the generations before and therefore has a value that cannot be quantified. Fortunately, the Companies Act 2016 provides corporate rescue mechanisms by which a company in financial distress may employ to rescue the company from the jaws of winding-up.

Judicial Management

A company in financial distress sometimes need an independent party to manage and/or restructure the company. In these circumstances, the company may consider judicial management. Judicial management is a process by which the company or its creditors apply for the management of the company to be placed in the hands of another independent party in hopes that the company may be rescued from this financial distress. Of course, this independent party is not just any random person but rather a qualified insolvency practitioner which will be known as a judicial manager.

Once the court grants an order for judicial management, a moratorium automatically applies. Simply put, a moratorium is a period in which that company cannot be wound up nor can any legal proceedings be initiated against the company.

In deciding whether or not to grant an order for judicial management, the courts will take into consideration the following factors:

  1. whether or not the company is or will be unable to pay its debts;
  2. the survival of the company as a going concern;
  3. the approval of a compromise or arrangement between the company and its creditors; and
  4. whether or not it would be a more advantageous realisation of the company’s assets than on a winding up.

However, under judicial management, the directors would generally not have any more powers in terms of the management of the company. Such management of the company will be in the hands of the judicial manager to ease and facilitate the restructuring and rehabilitation process.

Should a company in financial distress wish to rescue the company from such a dire state without losing the power of management of the company, such company may consider the corporate voluntary arrangement.

Corporate Voluntary Arrangement

The Corporate Voluntary Arrangement (“CVA“) also requires the involvement of a qualified insolvency practitioner.

Under the CVA, the company will put up a debt restructuring proposal to its creditors for a voluntary arrangement. Such a proposal will also be assessed by the nominated insolvency practitioner with regards to its viability. The nominated insolvency practitioner will then provide a positive statement as to:

  1. whether or not such a proposal has a reasonable prospect of being approved; and
  2. whether the company has sufficient funds to continue its business during the proposed moratorium.

Within the moratorium period, the nominated insolvency practitioner will call a meeting of the company with its creditors to vote on the proposal – of which would require 75% of the total value of the creditors for approval. Once approved, such proposal will be binding on all the creditors.

Scheme of Arrangement

Similar to the CVA, the Scheme of Arrangement is also a debt restructuring procedure with the creditors, except that such meeting with the creditors is convened by the court. The company would have to show the court that the company has a viable scheme of arrangement to be proposed to the creditors before the court orders that the creditors’ meeting be convened.

As with the CVA, the company would have to obtain the approval of at least 75% of the total value of the creditors for the scheme to be accepted and an order of the court to be granted.

However, unlike with the CVA, the Scheme of Arrangement does not have an automatic moratorium. The company would have to make an application to court for such a moratorium.

Conclusion

It is not unreasonable to expect companies to face times of hardship. The COVID-19 pandemic is a testament to how even the most successful of companies may sometimes face financial difficulties through no fault of any party. In such situations, where the company is headed towards the possibility of having to wind up, these rescue mechanisms under the Companies Act 2016 may be explored to hopefully save the company from its dire state and avoid the need of winding up.