Corporate Group liability in Insolvency - a Malaysian Perspective.

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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.
Corporate Group liability in Insolvency - a Malaysian Perspective.Aiman Nariman Mohd-SulaimanLaw 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 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. 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
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