Corporate Group liability in Insolvency - a Malaysian Perspective.

1
Corporate Group liability in Insolvency - a
Malaysian Perspective.

• Aiman Nariman Mohd-Sulaiman
• Law Faculty, IIUM.

2
Lifting the corporate veil

• Need to establish fraud
• One economic entity
• One management
• Distinguish between common directorship and
  controlling directors.
• Undercapitalisation.
• Wholly-owned subsidiary.

3
Creditors protection Company Act 1965

• Personal liability of directors for an insolvent
  companys debts.
• A holding company may be a shadow director
• the definition of 'director' under section 4
  includes 'any person in accordance with whose
  directions or instructions the directors of a
  corporation are accustomed to act'.
• Contribution order in an insolvency.

4
-Cont.-

• Dividends payment under s 365
• Available profits means profits of the holding
  company and not the subsidiary
• a subsidiary can give its profits to its holding
  company by distribution of dividends
• the transfer of the profits or assets
• common directors makes this much easier to carry
  out provided company is solvent.

5
Fraudulent trading under 304(2)

• Involvement in subsidiarys business,
• with intent to defraud creditors.
• Contribution order under 304(1)

6
Wrongful trading provision under 303(3)

• Section 303(3) an officer of a company who was
  knowingly a party to the company contracting a
  debt, at the time the debt was contracted, had no
  reasonable or probable ground of expectation of
  the company being capable of paying the debt
• Contribution order under 304(2)

7
Court-ordered schemes of arrangements under 176.

• - separate meetings of several classes of
  creditors.
• -In Malaysia where there is a rise of Islamic
  based financing, this would give rise to a
  different class of creditors.

8
Reliance on the law of contract

• Corporate guarantee and directors personal
  guarantee
• The voluntary scheme of arrangements under the
  CDRC

9
Corporate guarantee and directors personal
guarantee

• cross-guarantees from one or another company of
  that group
• Subject to the following rules
• ultra vires the company's objects clause s 20
  of CA 1965
• In parent/subsidiary company the paramount
  interest is the interest of that company in the
  group

10

• some commercial benefit or advantage to the
  company giving the guarantee.
• easier to find a corporate benefit accruing to a
  holding company on a guarantee for its subsidiary
• E.G.- giving of guarantee enables subsidiary to
  carry on business profitably, allowing holding
  company as its shareholder to share in the
  profits through payment of dividends

11

• Harder to justify guarantee from subsidiary to
  holding/ company of same level
• The Singaporean Companies Act (Cap 50) section
  76(8) - given by a subsidiary for the
  indebtedness of its holding company if given in
  good faith and in the ordinary course of
  commercial dealings.

12
The voluntary scheme of arrangements under the
CDRC

• The CDRC workout process
• starts with initial meetings with debtors and
  creditors to consider debt restructuring obtain
  a temporary standstill.
• Appointment of Creditors Committee and a Lead
  Creditor for the debtor.
• financial institutions as secured creditors
  give grace period to the debtors for the CDRC to
  determine the financial viability of the debtor's
  business.

13
-cont.-

• - the creditors will not commence insolvency
  proceedings, legal proceedings or secure or
  demand payment of debts. Credit lines to
  continue.
• arrangements in place unless and until the
  debtors or creditors formally terminates the
  restructuring exercise
• payment of the debts owed to the creditors,
  either by way of staggered payments by the
  issuance of warrants and bonds or by way of
  conversion of debt into equity..

14
-cont.-

• E.g., Renong Group of companies, Mycom Group of
  Companies, Nam Fatt Group of Companies .
• utilise the assets of the group for settlement
  of claims. A viable subsidiary makes bond issue
  to external creditors, exchange of new bonds with
  existing creditors and intra-group loans with the
  parent company.
• The parent company give guarantee over its
  assets to the subsidiary.

15
Problems faced by shareholders

• Monitoring problems
• Consolidated group accounts
• Oppression.
• 181 of the Companies Act 1965.

16

• Related party transaction
• KLSEs listing rules preventing an interested
  party from voting in a related party transaction
• I.e. transaction involving acquisition /disposal
  of asset or property of a listed company/sub to
  or from a related company.
• Interested party substantial shareholder or
  director