Corporate Group liability in Insolvency - a Malaysian Perspective. Aiman Nariman Mohd-Sulaiman Law Faculty, IIUM.

Lifting the corporate veil Need to establish fraud One economic entity One management – Distinguish between common directorship and controlling directors. – Undercapitalisation. – Wholly-owned subsidiary.

Creditors protection :Company Act 1965 Personal liability of directors for an insolvent company’s 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.

-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.

Fraudulent trading under 304(2) – Involvement in subsidiary’s business, – with intent to defraud creditors. – Contribution order under 304(1)

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)

Court-ordered schemes of arrangements under 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.

Reliance on the law of contract Corporate guarantee and directors’ personal guarantee The voluntary scheme of arrangements under the CDRC

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

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

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.

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.

-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..

-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.

Problems faced by shareholders Monitoring problems – Consolidated group accounts Oppression. – 181 of the Companies Act 1965.

Related party transaction: – KLSE’s 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