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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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Background To The Danaharta Act

About Danaharta

Pengurusan Danaharta Nasional Berhad is a public company incorporated under the Companies Act, 1965. It is owned by the Minister of Finance Incorporated.

Danaharta was established by the Government of Malaysia to act as the national asset management company (or AMC). Its prime objectives are to re-energise the Malaysian financial sector by buying non-performing loans (NPLs) from financial institutions and maximize their recovery value.

By buying NPLs from financial institutions, Danaharta will allow them to focus on their core business of lending. A re-energised financial sector promotes confidence which in turn will assist in revitalizing the real economy.

Why the Danaharta Act?

The new legislation - the Pengurusan Danaharta Nasional Berhad Act 1998 - is required to provide the legislative framework for Danaharta to undertake its unique mission.

The Act ensures that Danaharta is able to do its job in an efficient and economic manner. This is important because the quicker Danaharta can complete its special mission the greater the benefits to the economy and taxpayers.

For this reason, AMCs around the world have had special legislation passed to confer on them the necessary powers for them to achieve their mission.

What does the Act do?

The Act sets out Danaharta's main objective which is to act as the asset management company and to acquire, manage, finance and dispose of assets and liabilities. Danaharta's detailed objects are contained in its Memorandum and Articles of Association.

Under the Act, Danaharta will have a board of nine directors appointed by the Minister of Finance, most of whom will be from the private sector. As shareholder, the government will have two representatives on the board. Danaharta's management is led by a managing director who will be a non-voting member of the board.

The Act contains provisions to protect Danaharta's independence and integrity. These include the requirement to disclose conflicts of interests and obligations of secrecy. Danaharta's detailed powers and how it will operate are regulated by its Memorandum and Articles of Association. This reflects the fact that Danaharta is a company under the Companies Act and also the Government's desire that Danaharta operates along commercial lines.

Danaharta's special powers

The Act confers on Danaharta two special powers. First, the ability to buy assets through statutory vesting. This is essential to enable Danaharta to acquire assets with certainty of title.

Second, the ability to appoint special administrators to manage the affairs of distressed companies. The features of a special administration under the Danaharta Act combine those of administration in Australia and the United Kingdom and Chapter 11 in the United States.

Statutory vesting

Before Danaharta can buy an asset, it must agree on the terms of the acquisition with the seller. If, for example, Danaharta wants to buy an NPL, it must first agree on the terms and conditions of the acquisition (including price) with the selling bank. Once those terms and conditions have been agreed by both parties, they can then proceed with the acquisition.

The Danaharta Act allows Danaharta and the selling bank to effect the acquisition by way of statutory vesting. On completion of the acquisition, Danaharta will issue a vesting certificate to evidence the acquisition. The vesting certificate will then be used for purposes of registration. Thus, for example, upon presentation of the vesting certificate at the Land Registry or Land Office, the Registrar of Land or Land Administrator will record Danaharta's interest as the new chargee in place of the selling bank.

Diagram I summarizes the effect of statutory vesting. Essentially, it allows Danaharta to step into the shoes of the selling bank. Danaharta is then able to take the same interest and enjoy the same priority as the selling bank. If the selling bank had a first charge over land as security for the NPL, Danaharta would also have a first charge over the land.

In addition, Danaharta would acquire the NPL subject to all registered interests and claims disclosed to it. The selling bank will remain responsible for any undisclosed claims. If a second charge was registered over the land by another bank, that second charge would continue to exist without any change in priority (see Diagram 2). Likewise, any caveats lodged over the land would continue to subsist. This means that although statutory vesting allows Danaharta to buy the NPL, Danaharta must deal with the existing registered interests before it can foreclose on the land. In this manner, the Act preserves essential third party rights.

Once Danaharta has bought the NPL, it may choose to sell it through statutory vesting. This will allow Danaharta to pass on the same interest it has in the NPL to the buyer. The buyer must, however, obtain all relevant regulatory approvals and, where land is involved, also the approval of the relevant State Authority.

Special Administration

Where a borrower is a company, Danaharta may choose to appoint a Special Administrator over the corporate borrower if the corporate borrower is unable to pay its debts or fulfill its obligations. In addition, Danaharta must be satisfied that the appointment could maximize value or is in the public interest.

Before a Special Administrator can be appointed, Danaharta must seek the approval of an Oversight Committee formed for this purpose. The Oversight Committee will comprise three representatives, one each from the Ministry of Finance, Bank Negara Malaysia(the Central Bank of Malaysia) and the Securities Commission.

Once appointed, the Special Administrator will take over the control and management of the assets and affairs of the corporate borrower. In order to preserve those assets until the Special Administrator is able to finish its job, a 12-month moratorium automatically takes effect. During that time, no one may take action against the corporate borrower.

The Special Administrator will prepare a workout proposal which is then given to an Independent Advisor approved by the Oversight Committee. The Independent Advisor's role is to review the reasonableness of the proposal taking into consideration the interests of all creditors (whether secured or unsecured) and shareholders. The proposal together with the Independent Advisor's report are then given to Danaharta for approval.

If Danaharta approves the proposal prepared by the Special Administrator, the Special Administrator will call for a meeting of secured creditors to consider and vote on the proposal. A majority in value of secured creditors at the meeting must approve the proposal before it can be implemented. Once approved by secured creditors, relevant regulatory approvals (such as from the Securities Commission) must be obtained.

Diagram 3 shows the flow of events from the appointment of a Special Administrator to implementation of a workout proposal.

Impact of the Act

The Act provides a framework which will enable Danaharta to operate efficiently, economically and effectively for the public good. It allows Danaharta to obtain and convey title to assets subject only to a defined set of obligations without unduly disturbing the interests of others.

The special administration of corporate borrowers provides a much needed option for maximizing value through the use of skilled specialists to turn around distressed enterprises. Without this option, lenders will increasingly look to liquidation and holders of security will rush to enforce their security. This in turn will bring down weakened enterprises and erase value.

The safeguards contained in the Act ensure that the special powers conferred on Danaharta are balanced and effective with a view to a measured rejuvenation and revitalization of the economy.

Information compiled and extracts
from Danaharta Nasional Bhd.

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