Insolvency and Directors’ Duties

The scale of the COVID-19 crisis will undoubtedly lead to many businesses facing severe financial difficulty with some inevitably facing insolvency. In such circumstances, there are some key points that Directors should consider in managing the business.

Responsibilities of Directors

Directors have certain fiduciary duties and responsibilities, including to act in good faith about the interests of the company and honestly about the conduct of the affairs of the company.

A director should also be aware that in circumstances where it is deemed that the company has traded in a reckless and fraudulent manner while insolvent, that the director can be made personally liable for the debts of the company.

In these challenging times, it is essential to ensure that all material business decisions are documented at board meetings to demonstrate good faith, reasonableness and sound judgement in continuing to trade the company.  

Key challenges which companies will face over the coming months include:

  • Maintaining cashflows to pay staff and creditors as they fall due
  • Ability to perform contractual obligations to customers, suppliers, financial institutions and the Inland Revenue Board of Malaysia (IRBM) and Royal Malaysian Customs Department (RMCD)
  • Will debtors continue to pay on time or potentially not be recoverable
  • Does your business remain viable if there is reduced trade for a protracted period - at what point are you insolvent or ought to have been aware you were insolvent?
  • Protecting staff, customers and the public from infection as well as other hazards 
  • Loss of key personnel due to illness

Concerned About Your Company

There are many actions you can take if you are concerned your business will struggle to survive the current situation:

  • Review your cost base to see if it can be adjusted to meet current activity levels
  • Can you seek emergency funding if you believe the business is ultimately viable?
  • Subject to proper procedure and consultation, reduce staff numbers or pay scales
  • Engage with your creditors and seek to restructure repayments

Formal Restructuring Options

If you believe there is no prospect of your business being viable during the current crisis or even once we emerge from it, you may need to consider whether a formal insolvency procedure is appropriate.

There are, however, options if you believe that your business is viable in the medium-term. Still, the coming months may see it accumulating liabilities which will impact on its ability to continue once we emerge from the COVID-19 crisis. These options include:

Scheme of Arrangement

A scheme of arrangement allows the company the option of agreeing on a debt compromise arrangement with its creditors

Under this option, the company prepares a compromise proposal to its creditors regarding its liabilities and a meeting of the creditors is convened to review and discuss the same.

If 75% of creditors of the company vote in favour of the scheme it is approved by the High Court and the company’s debts are written down accordingly.

Advantages of scheme of arrangement include

  • Write down of debts
  • The company continues to trade, and Liquidation is avoided
  • It is legally binding

General Considerations

  • Review critical contracts with suppliers, customers, employees etc. to see if they contain force majeure clauses that may impact on your business strategy 
  • Does your insurance cover include business interruption and if so, what are the specific terms and conditions surrounding the same? We recommend that you discuss this directly with your insurance broker
  • Are you a personal guarantor for any of the commitments and liabilities of the company - Examinership does not remove exposures under personal guarantees