MALAYSIA Law and Practice Contributed by: Will Fung, Penelope Gan and Kee Shao Yee, Richard Wee Chambers
7.5 Risk Areas for Lenders If a borrower, security provider or guarantor becomes insolvent, lenders in Malaysia face several legal and commercial risks which may materially affect enforce - ment, priority and recoverability, notwithstanding the existence of contractual protections or security arrangements. Pursuant to Section 471 of the CA 2016, there is a risk that enforcement actions may be stayed or delayed. Upon the commencement of winding-up proceedings, actions or proceedings against the company may not be commenced or continued without leave of court, which may result in enforcement delays and increased recovery costs. 7.6 Transactions Voidable Upon Insolvency Malaysian law allows certain pre-insolvency transac - tions to be set aside to protect creditors collectively. For companies, Section 472 of the Companies Act 2016 provides that any disposition of property made after the presentation of a winding-up petition is void unless validated by the court. Section 528 permits the setting aside of unfair preferences, where a company unable to pay its debts grants a transfer, payment or security to a creditor within six months prior to the presentation of the petition. For individuals, Sections 52 and 53 of the Insolvency Act 1967 allow the avoidance of voluntary settlements and fraudulent preferences. Gifts or non-commercial dispositions may be void if bankruptcy follows with - in two years (or within five years unless solvency is proven), and preferential transactions made within six months prior to a bankruptcy petition may also be set aside. 7.7 Set-Off Rights Set-off is recognised on insolvency in Malaysia and operates as an exception to the pari passu principle. Where there have been mutual credits, debts or deal - ings between a company and a creditor prior to the commencement of winding-up, such amounts are automatically set off by operation of law. Only the net balance is provable in the liquidation. Although the CA 2016 does not contain an express insolvency set-off provision, Malaysian courts apply
common law insolvency set-off principles, requiring strict mutuality and that the dealings arise before the commencement of winding-up (which, in compulsory winding-up, is deemed to begin upon presentation of the petition). Set-off takes effect before distribution under Section 527 of the CA 2016 and may therefore improve a creditor’s recovery position relative to other unsecured creditors. The doctrine is subject to limitations, including where transactions are entered into with knowledge of insol - vency and intent to obtain preference. Contractual set-off is recognised but operates subject to manda - tory insolvency set-off rules once winding-up begins. 7.8 Out-of-Court v In-Court Enforcement In Malaysia, a typical private credit out-of-court restructuring is a consensual, lender-led process. It usually starts with a standstill or forbearance while lenders receive updated financial information and assess viability. The restructuring is implemented con - tractually and may involve maturity extensions, pay - ment holidays, interest adjustments, covenant resets, partial write-downs, debt-to-equity conversions, new money with enhanced security, or asset disposals. These arrangements bind only consenting parties and rely on near-unanimous creditor support. Equity holder co-operation is often required, particu - larly where the restructuring affects the capital struc - ture. This may include equity injections, approval of share issuances or capital reductions, waiver of pre- emption rights, or acceptance of dilution or loss of control. Co-operation from other stakeholders, such as key trade creditors or landlords, may also be nec - essary to maintain business continuity. The main limitation of an out-of-court process is the lack of statutory protection: there is no automatic mor - atorium and dissenting creditors cannot be bound. By contrast, an in-court process can provide a court- ordered moratorium, bind dissenting creditors through court sanction, and allow assets to be realised or transferred in an orderly manner, effectively free of unsecured claims. Court supervision also provides greater certainty and finality where creditor consensus cannot be achieved out of court.
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