Vol 8 (2011) - Issue 5

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Corporate Workout: The Corporate Debt Restructuring Committee Revisited

I. Introduction

A corporate workout is described as financial rescue of a company in distress which takes place outside the limits of insolvency law. According to Belcher a workout is 'the restructuring of the terms of a companys debt contracts to remedy or avoid default achieved by private negotiations with its creditor outside formal bankruptcy or insolvency proceedings.' A corporate workout includes arrangements or negotiations between the corporate debtor and its creditor/bankers outside the formal rescue process and such informal workout covers arrangements to obtain financial investments or rescheduling or restructuring of debts. Such workout is normally arranged by the company’s leading banks, but sometimes also involves major shareholders, bondholders, clients and suppliers, who have a direct interest in the continued existence of the company. The concept of 'workout' involves 'restructuring' of the company’s operations, structure, business, workforce or terms of company’s debt as the company responds to the corporate crisis.

In Malaysia, the Corporate Debt Restructuring Committee (CDRC) was formed in July 1998 and was under the patronage of the Central Bank of Malaysia (CBOM). The establishment of the CDRC with guidance and headship from the CBOM was inspired by the Bank of England (BOE) supervision in the corporate workout. The CDRC was formed to provide a platform for the financial institutions (FIs) and corporate borrowers to work out possible debt restructuring schemes amicably and collectively without resorting to legal proceedings. Such voluntary debt restructuring exercises could be considered as one of the typical forms of informal corporate rescue regime.

The restructuring of these corporate debts is to ensure that companies with viable business are rescued and continue to receive financing in order to generate new economic activities and support the economic recovery process, since the grounds of distress for many companies are mainly associated with financing which, if resolved, will greatly improve the companies’ prospects and viability.6 Perhaps it is in everyone’s interest that these companies should be rescued as jobs are safeguarded and productive capacity will be saved with the least amount of losses to the shareholders and creditors.

It is fair to say that the CDRC offered the momentum for informal workout by way of negotiations between bankers and debtor companies whereby it usually facilitates instead of directing these negotiations. It should be noted that CDRC’s strength is being part of the Central Bank with the steering committee headed by the Governor of the CBOM as well as relying on the Central Bank’s moral persuasion powers to lend more weight in dealings with financial institutions.

In this paper, the writers aim to examine the corporate debt restructuring process and framework within the ambit of CDRC which include the changes brought to companies’ eligibility to participate in a restructuring exercise under the CDRC when CDRC is revisited in 2009. The writers also will evaluate the role of the CDRC in corporate rescue.