Question

In the event of a bond default, the bondholder rights are protected under the Companies Act 1965.

Discuss the above statement.

Answer 1

Answer:

The Companies Act 1965, is a Malaysian law which relates to companies.

Bond default is the failure to pay interest and/or principal when due i.e. debtor is unable to meet the legal obligation of debt repayment. When a company issues bonds, it's obligated to make regular interest payments to bondholders and repay their principal investments once the bonds come due. A default may also be in the form of a missed interest payment or a missed principal payment.

Some probable reasons of Bond default could be:

• The deteriorating financial health of Issuer
• Liquidity crunch - Borrower cashflow is severely affected
• Leveraged Balance Sheet & excessive borrowings
• Overestimation of projected income/cashflow
• Business environment
• Mismanagement
• Willful default (fraud & breach of trust)
• Regulatory changes
• Political intervention

Who to call when bondholder rights have been breached?

• Bond Trustee
• Securities Commission Malaysia (SC) - Authority and regulatory body

Bondholders can lodge complaints if they feel their rights are violated. They can go to SC, Capital Market Compensation Fund Corporation (CMC), and also Securities Industry Dispute Resolution Center (SIDREC).

What option lies in the case of bond default?

• Debt restructuring
• Winding-up
• Judicial management

Sometimes bond defaults resolve themselves. It can happen that an issuer experiences a temporary cash-flow problem that causes it to miss a payment but then makes that payment a week later. While this type of scenario technically constitutes a default, it is not harmful from a bondholder perspective.

Bondholder Rights under the companies act 1965

In Malaysia, bondholder rights are protected under the Companies Act 1965 and Securities Industry Act 1993.

Under the Companies Act, creditors, including bondholders, can file a winding-up petition for a company when the debtor is unable to pay its debts. When a winding-up order is made, the court appoints a liquidator who oversees the liquidation process.

SC could play its roles in ensuring that the restructuring or the recovery process are conducted within the regulations and laws is there to ensure the issuers of these securities as well as the rating agencies to follow the correct regulations to avoid the violation of investors’ rights.

However, individuals can avoid the impact of defaults by sticking with high-quality individual securities or lower-risk bond funds.