Judicial Management: Are Companies In Capital Markets Excluded?
May 28, 2020
Judicial management (JM) is a new corporate rescue mechanism introduced by the Companies Act 2016 (CA 2016). However, there is much uncertainty as to the scope of the exclusion list embodied in Section 403 of the CA 2016, which reads:
This Subdivision shall not apply to:
(a) A company which is a licensed institution or an operator of a designated payment system regulated under the laws enforced by the Central Bank of Malaysia; and (b) A company which is subject to the Capital Markets and Services Act 2007.
The uncertainty revolves around the interpretation of Section 403(b) – which class of company is deemed ‘subject to the Capital Markets and Services Act 2007’ (CMSA 2007)?
Judicial Management Under CA 2016
The CA 2016 was the brainchild of the Corporate Law Reform Committee (CLRC) established by the Companies Commission of Malaysia (CCM) in 2003. The CLRC recommended the introduction of two forms of corporate rescue mechanism: JM and Corporate Voluntary Arrangement (CVA). Only the CVA was previously available under the old Companies Act 1965 – known as ‘scheme of arrangement’.
It has been held that the raison d’etre of JM is ‘to rehabilitate companies that are under financial distress and to reduce the number of cases where companies are wound up’. JM may be applied by the company or its creditor on the basis that:
The company is or will be unable to pay its debts.
There is a reasonable possibility that the company can preserve its business as a going concern, or that the interests of creditors are better served than winding-up.
The power to make a JM order and appoint a judicial manager lies with the Court, where the effect of the Court making a JM order is twofold:
Any receiver or manager shall vacate office.
Any application for the winding-up of the company shall be dismissed.
Meanwhile, the CVA has an exclusion clause similar to Section 403, albeit with two additional excluded classes (i.e. public company; and company which creates a charge over its property or undertaking). The CVA may be applied by the director, judicial manager or liquidator.
Regulated Entities Under CMSA 2007.
The CMSA 2007 regulates capital markets in Malaysia. ‘Capital market products’ include securities, derivatives, private investment scheme, and unit trust scheme. Broadly, there are four types of regulated entities in the CMSA 2007:
Approved – stock exchange or derivatives exchange, clearing house and private retirement scheme administrator.
Recognised – self-regulatory organization.
Licensed – stockbroker, derivative broker, fund manager, corporate finance advisor, investment advisor, and financial planner.
Registered – licensed bank, licensed finance company, licensed discount house, licensed insurance company, takaful operator, recognised market operator, venture capital corporation, credit rating agency, bond pricing agency, and specified entities (e.g. Bank Simpanan Nasional).
Regulated entities are monitored and supervised by the Securities Commission (SC) (e.g. capital or prudential requirements, risk management, governance, and audit). In contrast, public listed companies (PLCs) merely require approval from SC to list their capital market products. Aside from record-keeping and disclosure obligations on key personnel (i.e. chief executive and directors and auditors), PLCs are not subject to the SC’s oversight. In fact, Bursa monitors and watches over PLCs, including its compliance with Listing Rules.
The operative keywords in Section 403(b) are ‘company’ and ‘subject to the CMSA 2007’. The CA 2016 defines ‘company’ as ‘a company incorporated under this Act or under any corresponding previous written law’ – almost identical to the old CA 1965. Under the CMSA 2007, ‘company’ carries ‘the meaning assigned to it in the Companies Act 1965’.
However, the corresponding phrase ‘subject to the CMSA 2007’ is overly-broad and ambiguous. There is a wide range of entities under the CMSA 2007 vested with different roles and responsibilities. To construe such phrase as encompassing all companies without distinction is to render the words ‘subject to’ redundant and superfluous.
In this regard, can Section 403(b) be construed as referring to PLCs on Bursa Malaysia? Not quite, as the semantical link is even more tenuous. This is because CMSA 2007 already reserves a specific definition for PLCs: ‘listed corporation’ which means a ‘corporation whose securities or any class of its securities have gained admission to be quoted on a stock market of a stock exchange’. Had Parliament truly intended to disallow PLCs to enter into JM, the Parliament could have easily adopted such definition. This can be contrasted with the CVA regime where ‘public company’ was expressly added on the exclusion list.
In light of the uncertain scope of the term ‘company… subject to the CMSA’ in Section 403(b), it would scarcely be proper to attach an arbitrary meaning that would effectively disqualify all companies active in capital markets from entering JM (regardless of the level of regulation under the CMSA 2007). Hence, the true construction of Section 403(b) can only be deciphered by applying the purposive and contextual approaches.
CLRC’s Recommendation 4.19 materialised in the 2013 Draft Bill which provided that a JM order shall not be granted to ‘a bank, a financial institution or an insurance company licensed under the Financial Services Act 2013 and Islamic Financial Services Act 2013’. Influence may have been drawn from other jurisdictions. Meanwhile, the CLRC’s Recommendation 4.23 to ‘freeze’ transfer of shares during JM has been incorporated in Section 411(4)(e) of CA 2016 (albeit no exception being made for PLCs).
There are two compelling rationales to exclude a specific class of companies from JM. First, there already exists a statutory regime protecting and regulating such companies. Second, such companies engage in high-risk activities that affect the public. Regulated entities under the CMSA 2007 squarely meet these criteria. They form the foundational base in capital markets. They are regulated and supervised by the SC. The CMSA has comprehensive provisions to deal with any systemic risk of its regulated entities which does not include PLCs. This includes provisions modifying insolvency laws to meet their circumstances.
The impetus behind the JM was to inject a new ‘leash of life’ for companies teetering at the brink of collapse. Support for its incorporation has been overwhelming in the CLRC’s consultative documents and Parliamentary debates culminating to the passing of CA 2016. As the CMSA 2007 casts a wide net over many different entities, the term ‘company which is subject to CMSA 2007’ is ambiguous. It is difficult to imagine Section 403(b) operating as a ‘blanket ban’ depriving all companies active on capital markets recourse to JM and CVA.
The more sensible interpretation is that Section 403(b) was intended to only exclude regulated entities under the CMSA 2007 (primarily in Part II, III and IIIA). The reasoning is two-fold:
There are clear provisions in the CMSA in regard to regulated entities which exclude PLCs.
The restructuring mechanisms under JM may not be appropriate for regulated entities under CMSA.
In sum, only regulated entities (and not PLCs) under the CMSA 2007 are excluded from availing to JM by virtue of Section 403(b) of CA 2016.