MALAYSIA Law and Practice Contributed by: Will Fung, Penelope Gan and Kee Shao Yee, Richard Wee Chambers
Fixed charges generally provide stronger priority and enforcement control, particularly in insolvency. As a result, private credit providers typically seek fixed security over material or value-critical assets wher - ever feasible. This may include additional control mechanisms, such as account control arrangements or restrictions on disposal of charged assets. 5.3 Downstream, Upstream and Cross- Stream Guarantees Malaysian companies may grant downstream, upstream and cross-stream guarantees, subject to the CA 2016. Guarantees must be properly author - ised, supported by corporate benefit, and granted while the company is solvent. Solvency and validity are assessed at the time of entry into the guarantee. Sections 224 and 225 restrict guarantees linked to loans to directors or connected persons. Section 123 prohibits financial assistance for the acquisition of a company’s own shares or those of its holding com - pany unless the statutory procedures under Sections 124 or 125 are complied with. Risk is mitigated through board approvals, solvency confirmations, holding company structures, and, where appropriate, arm’s length guarantee fees. Where different tranches have different guarantee levels, priority and proceeds allocation are governed by intercreditor agreements and contractual waterfall provisions. 5.4 Restrictions on the Target Section 123 of the CA 2016 generally prohibits a com - pany from giving financial assistance, including guar - antees or security, for the acquisition of its own shares or, where it is a subsidiary, shares in its holding com - pany. This restriction applies whether the assistance is given directly or indirectly and captures acquisition financing structures involving target-level security. Section 125 provides limited exceptions. Financial assistance may be permitted in the ordinary course of business, under approved employee share schemes, or in certain regulated lending contexts. For private companies whose shares are not listed, financial assistance for an acquisition may also be allowed if a statutory “whitewash” procedure is followed.
Under this procedure, the assistance must be approved by special resolution, the directors must resolve that the transaction is in the company’s best interests and on just and reasonable terms, and a sol - vency statement must be made on the same day. The amount of assistance must not exceed 10% of the company’s share capital and reserves, must be for fair value, and must be provided within 12 months of the solvency statement. 5.5 Other Restrictions For land, prior consent from the relevant state author - ity may be required where the land title contains express conditions or restrictions on interest govern - ing the use of, or dealings with, the land, including prohibitions on the creation of a charge without state authority approval. Applications for such state author - ity consent are generally subject to administrative fees as prescribed by the relevant state government. Hardening periods in Malaysia shall include but is not limited to the following: • Undue Preference: This refers to a transfer of asset or payment of debt by a company that has the effect of unfairly preferring one unsecured creditor over others in the order of distribution. A transac - tion constitutes an undue preference if it is entered into within six months prior to the presentation of a winding-up petition and a winding-up order is subsequently made, in which case the transaction may be treated as fraudulent and void. • Transaction at an Undervalue or Overvalue: This refers to any disposal of assets at an undervalue or an acquisition at an overvalue, involving a property, business or undertaking for cash consideration where the counterparty is a director or a company with the same director. 5.6 Release of Typical Forms of Security In Malaysia, the release of security generally depends on the nature of the security instrument and the under - lying obligation. Once the secured obligations have been fully performed or satisfied, the secured party is expected to take the necessary steps to release the security. The typical forms of security and their modes of release are outlined below.
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