Brief description of the insolvency regime in Malaysia

An insolvent company incorporated under the Malaysian Companies Act 2016 (MCA) may either be wound up by an order of the court or by its members or creditors.

Set out below briefly are the processes for a court winding up, a members' winding up and a creditors' winding up in relation to an insolvent company incorporated under the MCA:

In the case of a court winding up, an official receiver or interim liquidator (used interchangeably) will be appointed by the court if the petitioners do not wish to appoint a liquidator. Alternatively, the petitioners may engage a private liquidator and, if so, the petitioners are usually obliged to provide a salary or remuneration to the private liquidator before they will agree to act. The private liquidator will usually draw their fees from the assets of the company and, in the absence of any assets, the petitioners will bear those fees. Once the liquidator is engaged or appointed (including an interim liquidator), they will take all the property to which the company is or appears to be entitled into their custody or under their control.

All of the company's property and assets are vested in either the liquidator (for a voluntary winding up) or the Director General of Insolvency of Malaysia under the capacity of an Official Receiver (for a compulsory winding up). They will be distributed in an equitable way among its creditors according to their respective rights. These creditors will be paid in the following order of priority:

• Secured creditors
• Preferential unsecured creditors (as specified in this answer below in relation to unsecured creditors)
• Other unsecured creditors

Nevertheless, unsecured debts in the same class (also see below) shall rank pari passu and shall be paid in full, unless the property of the company is insufficient to meet the debts, in which case the payment shall be reduced and the rate of reduction shall be in equal proportion. Therefore, all creditors are required to prove their debts.

Note that a contributory (which includes past and present members) is not personally liable in relation to payment of the company's debts. However, the liquidator has the power to direct the contributory to pay the amount, if any, unpaid on the issue price of its shares.

Rights of secured creditors on the insolvency of a company

The rights of secured creditors are highly dependent on the terms of the facilities (or other) agreement and the security documents that they have entered into with the company. The secured lenders will take first priority over the secured assets in the insolvency of the company. If there is more than one secured creditor with security over the same asset of the company, the first in time will take precedence (subject to registration where necessary).

If there is a shortfall, the secured creditor should file a proof of debt in relation to the amount owing that has not been repaid from the realization of the secured asset. In those circumstances, the status of the secured creditor will be changed to an unsecured creditor in relation to the amount owing that has not been repaid from the realization of the secured asset (see below). However, on the other hand, if after the realization of the secured asset there is a surplus after the repayment of the amount owing to the secured creditor, the secured creditor must give the remaining proceeds to the liquidator. These remaining proceeds will become part of the company's estate.

Rights of unsecured creditors on the insolvency of a company

Under the MCA, the payment of unsecured debts on the insolvency of a company occurs in the following descending order of priority:

1. The costs and expenses of the winding-up, including the taxed costs payable to a petitioner, the remuneration of the liquidator and the costs of any audit carried out.
2. All wages and salaries, whether or not earned wholly or in part by way of commission, including any amount payable by way of allowance under any contract of employment or award or agreement regulating conditions of employment of any employee not exceeding MYR 15,000 or such other amount as may be prescribed from time to time whether in relation to time or for piecework in respect of services rendered by them to the company within a period of four months before the commencement of the winding-up.
3. All amounts due in respect of worker's compensation under any written law relating to worker's compensation accrued before the commencement of the winding-up.
4. All remuneration payable to any employee in respect of vacation leave, or in the case of their death to any other person in their place, accrued in respect of any period before the commencement of the winding-up.
5. All amounts due in respect of contributions payable during the 12 months immediately before the commencement of the winding-up by the company as the employer of any person under any written law relating to employees' social security contributions and superannuation or provident funds or under any scheme of superannuation or retirement benefit that is an approved scheme under the federal law relating to income tax.
6. The amount of all federal tax assessed under any written law before the date of the commencement of the winding-up or assessed at any time before the time fixed for the proving of debts has expired.

Other unsecured creditors will be paid only after those listed in paragraphs (i) to (vi) above have been paid.

Yes, there is a procedure under the MCA that enables a company to enter into a moratorium by way of an application to the court before insolvency. The court may agree to a moratorium (subject to any alterations or conditions as it thinks just) where a compromise or arrangement is proposed between the company and its creditors that aims to keep the company afloat. The court order will be binding on all creditors.

Yes, the following pre-insolvency transactions can be set aside:

• An undue preference, being a transaction between the company and a creditor, or any person on trust for any creditor, where the creditor obtains a preference, priority or advantage over other creditors in the winding-up, unless the transfer or conveyance of the property was made for valuable consideration and without any actual notice of that undue preference.
• Any transfer or assignment by a company of all its property to the trustees for the benefit of all its creditors.
• Any sale at an undervalue or an acquisition at an overvalue of property, business or undertaking for cash consideration where the counterparty is a director or a company with the same director.
• Onerous contracts, such as any estate or interest in land that is burdened with onerous covenants, shares in corporations and unprofitable contracts that may be disclaimed by the liquidator with leave of the court or the committee of inspection.
• A floating charge created within six months of the commencement of the winding-up, which will be invalid unless it is proved that the company was solvent immediately after the creation of the charge, except in relation to the amount of cash paid to the company at the time or following the creation of, and in consideration of, the charge together with 5% interest per annum.

Rights of enforcement of security are contractual in nature and, therefore, depend on the terms of the relevant security documents.

In the case of the enforcement of security over land, an application to the court for an order for sale (which is a lengthy and highly administrative procedure) is required.

Depending on the provisions of the security documents, a lender may also have the right to appoint a receiver and manager to act within the scope of the provisions set out in the security documents (typically a debenture) by carrying on the trade or business arising from the secured assets.

A receiver or receiver and manager shall have the powers and authorities expressly and impliedly conferred by the instrument or by the order of the court, by or under which the appointment was made. A minimum list of powers of a receiver or a receiver and manager is now statutorily codified in the Sixth Schedule of the MCA.

Yes. The statutory limitation period for a contractual claim is six years from the accrual of the cause of action. In most instances, time starts to run from the date of the infringement of the contract or the default in payment.

Having obtained judgment, a successful claimant has 12 years from the date of the judgment to enforce it, but it should be noted that enforcement proceedings taken after six years from the date of judgment require the leave of the court.

No. 

No.

No. 

There are, of course, many different arbitration regimes, but generally, in contrast to litigation, arbitration is a quicker process that mostly deals with commercial decisions and technical disputes, e.g., when the quantum of the claim is challenged. Furthermore, by design, the arbitration process is less formal than traditional courtroom litigation (which tends to be more adversarial in nature). If a lender wishes to have a continuing relationship with a borrower, the lender may therefore prefer arbitration. Furthermore, to preserve its goodwill and reputation, in some circumstances, a lender may prefer arbitration, which is held in private rather than in open court.

Under the Malaysian Reciprocal Enforcement of Judgments Act 1958 (REJA), a foreign judgment may be enforceable in Malaysia if it is of a court in a country that is listed in the First Schedule to the REJA and registered under the REJA. A Malaysian court may register a foreign judgment provided that it is satisfied that the Malaysian court rendering the judgment has jurisdiction over the subject matter; that the judgment is not obtained by fraud or contrary to the public policy of Malaysia; and that the defendant was duly served and given the opportunity to defend the action in the foreign courts.

If a foreign judgment is not within the ambit of the REJA, the only method of enforcing it in Malaysia is at common law. The foreign creditor will need to sue on the judgment in the local Malaysian courts as an action in debt.

It is possible to have a hybrid enforcement provision that allows the lenders to opt for either arbitration or litigation as they see fit. However, this may create another dispute as to which is the most suitable dispute resolution avenue.

This issue has not yet come before the courts.