Malaysia Financial Law - Danaharta Act

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FINANCIAL LAW - Danaharta Act

Related Topics : Banking Law . Offshore Banking Law . Broker Disputes . Commodities Law . Investment Terms . Raising Capital . Securities Law . Buying On Hire Purchase . Exchange Control Rules . Danaharta Act

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Summary Of The Act

Preamble

The Act provides for special laws in the public interest for the acquisition, management, financing and disposition of assets and liabilities by Pengurusan Danaharta Nasional Berhad ("Danaharta").

Danaharta is established to:

assist financial institutions by removing impaired assets;
assist the business sector by dealing expeditiously with financially distressed enterprises; and
promote the revitalization of the nation's economy by injecting liquidity into the financial system.

These goals are to be achieved through the acquisition, management, financing and disposition of assets and liabilities by Danaharta, which is empowered by the Act to implement its objectives for the public good promptly, efficiently, economically and effectively.

Expeditious administration and management of persons whose assets or liabilities have been acquired by Danaharta requires the creation and appointment of Special Administrators whose duties, powers and obligations are derived from existing legislation of Australia, the United Kingdom and the United States.

To promote transparency and the essential safeguarding of third party rights, Independent Advisors are created in the Act and appointed to review the proposals of the Special Administrators, taking into consideration the interests of creditors (whether secured or unsecured) and members of the affected person. As a further safeguard and demonstration of independence, the Act creates an Oversight Committee which approves the appointment of Special Administrators and Independent Advisors as well as any extension of moratoria over affected persons.

Part I: Preliminary

Part I states the short title to the Act and deals with its application and commencement. [section 1] It also defines words used in the Act. [Section 2]

Part II: The Corporation

Part II confirms Pengurusan Danaharta Nasional Berhad as the Corporation for purposes of the Act. [Section 3] In addition to its powers under its Memorandum and Articles of Association, Danaharta is empowered to carry on business as an asset management company to acquire, manage, finance and dispose of assets and liabilities. [Section 4]

The directors of Danaharta, who will be appointed by the Minister of Finance, will comprise:

a non-executive chairman;
a non-voting managing director;
two members representing the Government;
three members from the private sector; and
two members from the international community. [Section 5]

The First Schedule contains provisions dealing with board appointments and meetings.

Subject to the Act, Danaharta's affairs will be regulated by its Memorandum and Articles of Association. [Section 6] In order to ensure transparency, a director is not allowed to participate or vote on any matter in which he has a conflict of interest. [Section 7] As a company, Danaharta is required to keep its accounts in accordance with the Companies Act, 1965 and is also required to send a copy of its audited accounts to the Minister. [Section 8]

Part III: Acquisition of Share Capital of The Corporation By The Minister of Finance

Part III provides for the share capital of Danaharta to be acquired and held initially by the Minister of Finance incorporated under the Minister of Finance (Incorporation) Act, 1957. [Section 9]

Part IV: Guarantee By The Government

Part IV allows for the Government to guarantee Danaharta's borrowings subject to section 14 of the Financial Procedure Act 1957. [sections 10-12]

Part V: Acquisitions and Dispositions By The Corporation

In order for Danaharta to acquire and subsequently dispose of assets promptly, efficiently arid economically, Danaharta must possess the means to obtain and convey absolute title to those assets subject only to a defined set of obligations and without unduly disturbing the interests of others. Failure to do so, especially in relation to distressed assets, would expose Danaharta and any party acquiring the assets from Danaharta to an unquantifiable and, thus, unacceptable financial and legal risk.

Existing law also imposes statutory and contractual impediments to the transfer of assets to and from Danaharta. Failure to remove these impediments will prevent financial institutions from selling portions of their loan portfolios and impede their ability to deal with their non-performing loans. It has also deprived the market of needed liquidity. The Act's provisions remove these impediments while preserving essential third party rights.

In order for Danaharta to obtain the entire benefit of the seller's interest in the asset (such as valuable licenses, permits and security interests) and maximize its value to Danaharta and subsequent buyers, the Act permits Danaharta to "step into the shoes" of the seller. This concept is analogous to the provision in section 50 of the Banking and Financial Institutions Act, 1989.

Part V provides Danaharta with certainty of tide over assets acquired by Danaharta under Part V. Danaharta may, with the consent of the seller elect to acquire assets pursuant to Part V, which applies with any necessary changes to an acquisition by a prescribed subsidiary of Danaharta. [Section 13]

Under Part V, an asset acquired by Danaharta vests in Danaharta on the vesting date specified in a vesting certificate issued by Danaharta. The vesting certificate is conclusive evidence that the asset has been vested in Danaharta. On and from the vesting date, Danaharta acquires all of the seller's rights, title and interests in the asset subject only to registered interests and claims disclosed to Danaharta before the vesting date. Danaharta also assumes certain obligations disclosed to it by the seller. If the asset is a security for the payment or discharge of a liability (such as a charge), Danaharta will have the priority that the seller had. The effect of vesting is to preclude any person from raising any claim against Danaharta in respect of the asset unless the claim is a disclosed claim. [Section 14]

However, a person with such a claim continues to have recourse against the seller. [Section 15]

Any person maintaining a register or record of ownership, interest or security (such as the Registrar of Land and Registrar of Companies) must do all things necessary to give effect to the vesting upon delivery of the vesting certificate. Thus, for example, if the asset is an interest over land the Registrar of Land will make a memorial on the register document of title. [Sections 16 & 17]

A vesting certificate may relate to an asset outside Malaysia. [Section 18]

A person acquiring an asset from Danaharta is also able to enjoy the benefits of vesting conferred under Part V subject only to approval of the relevant regulatory bodies and State Authorities. [Section 19]

Disclosures relating to a proposed acquisition or proposed disposition are permitted notwithstanding any law or agreement. [Section 20]

Part VI: Management of Assets

Current Malaysian legislation (including section 176 of the Companies Act1 1965) does not provide for administration or judicial management of assets. Current practice in Malaysia is accordingly restricted to consensual workouts and the appointment of a receiver, manager or liquidator. In the current economic environment, options for maximizing value through financial and operational restructuring and the necessary injection of skill and cash arc virtually absent.

The respective and understandable self-interests of borrowers and creditors present a deadlock which in other economies is generally freed by formal administration or judicial management. To divert the economy from a surge in value-destroying liquidations and channel the nation's energies toward revitalization of distressed enterprises, properly qualified and experienced Special Administrators approved by an independent Oversight Committee will be appointed to manage and control distressed enterprises. These appointments may occur when Danaharta is petitioned by the distressed enterprises themselves or when Danaharta has, through its diligent evaluation, demonstrated that the distressed enterprise will no longer be able meet its obligations to creditors and that such Special Administration will result in maximization of value or will serve public interests.

Independent Advisors, who are also approved by the Oversight Committee, are appointed to scrutinize the restructuring proposed by the Special Administrator. The Independent Advisor will prepare a report in which the interests of creditors (secured and unsecured) and members of the distressed enterprise are specifically taken into consideration.

These safeguards, together with the approval of secured creditors for all workout proposals by a Special Administrator and the requirement for public notices as set out in the Act, serve to ensure transparency and certainty of process, while at the same time providing the ability of skilled specialists to turn around the performance of distressed enterprises through carefully defined powers and restrictions which have been tested in other countries. Danaharta will play a key coordinative role to ensure this process results in maximizing value of the distressed enterprises.

In the absence of the Special Administrator, lenders will increasingly look to liquidation and holders of security will rush to enforce their security, bringing down weakened enterprises and erasing value from the enterprises' records. With the Act's provisions, powers and controls are balanced and effective, with a view to a measured rejuvenation of enterprises and revitalization of the economy.

Part VI establishes a framework and the powers by which Danaharta may manage the assets it acquires should formal restructuring be appropriate.

Part VI provides for the appointment of a Special Administrator of an affected person which is defined to mean a corporate borrower, a subsidiary that has given security or a subsidiary the shares of which have been charged as security. [Section 21]

It also establishes an Oversight Committee comprising representatives from the Ministry of Finance, Bank Negara Malaysia and the Securities Commission to approve:

the appointment of Special Administrators
the appointment of Independent Advisors;
extensions of moratoria; and
termination of Special Administrators. [Section 22]

An affected person may request Danaharta to appoint a Special Administrator. If Danaharta is satisfied that the affected person is unable to pay its debts or fulfill its obligations to creditors (or likely to be unable to pay its debts or fulfill its obligations), it may recommend the appointment of a Special Administrator to the Oversight Committee established for this purpose. [Section 23] Likewise, Danaharta may itself request the Oversight Committee to approve the appointment of a Special Administrator. [Section 24]

In either case, Danaharta must be satisfied that the appointment is in the public interest or could achieve one or more of the following purposes:

the survival of the affected person as a going concern; or
a more advantageous Realization of the affected person's business. [Section 25]

Where a Special Administrator is appointed, Danaharta will appoint an Independent Advisor approved by the Oversight Committee. [Section 26]

Danaharta may not appoint a Special Administrator where a liquidator has been appointed, where a scheme of arrangement has been approved by creditors or over certain specified persons (such as insurance companies and financial institutions). [section 27]

The administration of the affected person starts from the date of appointment of the Special Administrator. [Section 28]

Once appointed, the Special Administrator must, within two days, notify the affected person and, within seven days, notify the Registrar of Companies and publish a notice of his appointment. [Section 29]

The Special Administrator is empowered to manage the assets and affairs of the affected person. [Section 30] Detailed powers of the Special Administrator are contained in the Second Schedule.

The Special Administrator will act in accordance with the directions of Danaharta and, once a workout proposal is approved, in accordance with the proposal. [Section 31]

The Special Administrator is the agent of the affected person. [Section 32]

The powers of all other officers are suspended and no person may deal with the assets of the affected person without the consent of the Special Administrator. [Sections 33 & 34] In addition to committing an offense, a person who does so is liable to compensate anyone who has suffered loss or damage. [Section 35]

The officers of the affected person are required to deliver books and records to the Special Administrator and otherwise assist the Special Administrator. [Section 36] The Special Administrator may also require officers and employees of the affected person to provide it with information, require delivery of books and records, seize property belonging to the affected person and disclaim or avoid certain assets. [Sections 37, 38, 39, 40, 42 & 43]

Upon the appointment of the Special Administrator, a moratorium on all claims and proceedings against the affected person takes effect. This moratorium lasts for 12 months unless extended in accordance with the Act. [Section 41]

The Special Administrator's main task is to prepare a proposal for the turnaround or rehabilitation of the affected person. An Independent Advisor approved by the Oversight Committee will review the reasonableness of the proposal taking into consideration the interests of creditors (secured and unsecured) and shareholders. [Section 44] The proposal is then submitted to Danaharta who may approve the proposal. [Section 45]

If the proposal is approved by Danaharta, the Special Administrator will hold a meeting of secured creditors to obtain their approval of the proposal. [Section 46] If a majority in value of secured creditors approve the proposal, the Special Administrator will publish that fact and proceed to implement the proposal subject to regulatory approvals. [Sections 47 & 49] Modifications to the proposal may be made and, if the Independent Advisor thinks that they are sufficiently material, it may require the Special Administrator to convene a meeting of secured creditors to consider the modifications. [Section 48]

If a proposal is not approved or is abandoned, Danaharta may request the Special Administrator to submit a new proposal, remove the moratorium or appoint a replacement Special Administrator. [Section 50]

The remainder of Part VI contains provisions dealing with:

the minimum qualifications of Special Administrators and Independent Advisors;
joint appointments of Special Administrators;
obligation to report misconduct;
saving of things done; and
preservation of statutory time limits. [Sections 51-56]

Part VII: Additional Rights As Chargee

Part VII ensures that Danaharta and any person acquiring an asset from Danaharta, as chargee of any land, are able to dispose of such land by way of private treaty. [Section 57] Among other things, Part VII is intended to overcome the uncertainties resulting from the decision of the Federal Court in Kimlin Housing Development Sdn Bhd v Bank Bumiputra [M] Bhd [1997] 2 MLJ 805. That decision cast doubt on a chargee's ability to exercise a power of sale conferred on the chargee by contract.

Part VIII: Application Of Other Act

Part VIII excludes the application of the Islamic Banking Act 1983, the Moneylenders Act 1951 and section 132G of the Companies Act 1965 to Danaharta. [Section 58] These exclusions are required given Danaharta's unique mission.

Part IX: Application of The Act

Part IX clarifies the application of the Act to Danaharta and its subsidiaries. Danaharta may transfer assets among subsidiaries and itself through the statutory vesting procedures in Part V. [section 59] A subsidiary is an entity (such as a company or unit trust scheme) which is controlled by Danaharta.

The Act applies to each subsidiary prescribed by the Minister so long as it remains a subsidiary. The Act will also cease to apply to that subsidiary if it no longer carries on activities pursuant to the objectives of Danaharta and the Minister revokes the prescription. [Section 60]

The Minister may also direct that all or certain provisions of the Act cease to apply to Danaharta if the Minister of Finance incorporated ceases to hold more than 50% of the issued capital of Danaharta. [Section 61] However, any guarantee given by the Government pursuant to Part IV continues to subsist. [Section 62]

Part X: General

Part X contains provisions dealing with judicial notice, secrecy and immunity. [Sections 63, 65 & 66] Danaharta is taken to be an entity falling within section 4(6) of the Companies Act, 1965. [Section 64] No person other than the Minister may institute winding up (or similar) proceedings against Danaharta. In addition, certain protections are made available to Danaharta, its officers and employees to ensure that they are not prejudiced by reason of the fact that they are officers or employees of a company that may be technically insolvent. [Section 67] These provisions are necessary given the nature of Danaharta's activities.

Part X also allows the Minister to make regulations and preserves anything done for Danaharta in anticipation of the enactment of the Act. [Sections 68 & 69] The Minister may terminate the operation of the Act when he believes it is no longer necessary for it to remain in force. [Section 70]

Information compiled and extracts
from Danaharta Nasional Berhad

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Last Updated : ©1999-2000
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