Insolvency

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CORPORATE INSOLVENCY:
COMPANIES ACT 2016

Business is a combination of war and sport!!

– Andre Maurois

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INSOLVENCY –

Insolvency – what does it mean?

Cessation of companies

New Corporate rescue mechanisms

Insolvent companies – what options are available?

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Insolvency is inability to pay debts.

When a company is unable to pay its debts, it may be subject to various insolvency proceedings.

The aim of insolvency approaches is for the insolvency administrator to take over the affairs of the debtor company in order to settle the debts of the creditors and distribute the insolvency proceeds to the rightful persons in accordance with law and equity.

Receivership

Compromise & Arrangement

Reconstruction and amalgamation of companies

Insolvency : Alternative Mechanisms

Corporate recovery plans

Cessation of business

Additional measures –introduced in CA2016

The aim is to help financially distressed companies to allow them to restructure their debts, to remain as a going concern and to avoid winding up.

Corporate Voluntary Arrangement (CVA)

Judicial Management (JM)

Winding up

Members’ voluntary winding up

Creditors’ voluntary winding up

Winding up by Court (compulsory)

Striking off

RECEIVERSHIP

Let’s start by briefly discussing on how lender’s interests are protected

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Receivership

“A company going into receivership would mean that its affairs are being managed by a ‘receiver’ or a ‘receiver and manager’. The company is not in liquidation except that the directors will have to surrender their rights to run the company’s business to the ‘receiver’ or ‘receiver and manager’ as a going concern”.

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INTRODUCTION TO RECEIVERSHIP

When a financial institution / debenture holders provides a financial loan or facility (or other creditors provide credits) to a company, the financial institution would want to have some form of security to recover the debt.

One form of security is through a charge on the immovable property of the company. The charge can take a form of fixed charge or floating charge.

The fixed and floating charge will commonly be set out in the debenture. The terms of the debenture will commonly allow for the appointment of a ‘receiver’ or ‘receiver and manager’ and has duty to realise the charged assets and utilise the proceeds to repay the financial institution.

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RECEIVERSHIP

A company goes into receivership when receiver is appointed by the debenture holder (or trustee) under a power contained in debenture or trust deed, or Court upon application.

The appointment by debenture holder is normally made in the event of a breach by the co of the conditions attached to the debentures.

The powers of the receiver under this form of insolvency administration are usually specified in a contractual agreement between the secured creditor and the company.

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RECEIVERSHIP

A receivers’ task is to take possession of assets covered under the charge, to safeguard them and to receive the income from them for the benefit of secured debenture holder.

A receiver can only dispose of the asset charged, pay off the debts due to the secured creditors.

He may be also appointed as a “receiver and manager” to empower him to continue managing the business as a going concern until the secured debt is discharged.

The director will remain in the office but their power to deal with assets of co in charge cease.

The ultimate objective of contractual agreement is repayment of that secured creditor.

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SCHEMES OF ARRANGEMENT

Let’s see how the co can make a compromise & arrangement with creditors & shareholders

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SCHEMES OF ARRANGEMENT

a statutory mechanism to carry out a formal compromise to bind all dissenting participants.

an arrangement in which parties of conflicting interests agree to accommodate each side by adjustment or modification of their interests.

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Compromise & Arrangement with creditors & members (sec 366)

Court may direct a co to hold a meeting to agree with resolution of C&A by majority of 75% of total value of creditors or members present and voting.

The provision in CA2016 remain the same as previous Act except:

1. The Court may appoint an approved liquidator to assess the viability of the scheme of arrangement proposed and prepare a report for submission to the meeting of creditors and members. This is on the basis that an independent liquidator will be able to adopt a more objective assessment of the commercial viability of a proposed scheme, and accordingly provide necessary assistance to the Court.

2. Limits the maximum duration for a restraining order (RO) to 3 months with extensions to a not more than 9 months only.

3. A restraining order cannot be applied against:

(a) any action or proceeding to be taken against company by the CCM or the SC

(b) any action or proceeding against any person of the co

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Procedures

1. A Court order on an application by either the company, any creditor or member of the company, liquidator or judicial manager (if the company is under judicial management), to summons for a meeting is to be obtained [S. 366].

2. A notice summoning such meeting is to be send to every creditor or member of the company, accompanied by [S. 369 (1)];

(a) An explanatory statement of the effect of the arrangement and any material interests of the directors and the effect of the arrangement (if it has different effect on different class of creditors or members) and

(b) Advertisement of the notice.

3. Next is the putting forth of the scheme at the meeting to creditors and members of the company to be agreed upon by a majority of 75% of total value of creditor present and voting, either in person or by proxy or at the adjourned meeting [S. 366(3)].

4. Upon obtaining the requisite approval, a further order by the Court is to be obtained to sanction the scheme of arrangement [S. 366(3)].

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Corporate Voluntary Arrangement (CVA)

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Relevant provisions in CA 2016:

S395 – 402; and Seventh and Eight Schedule

What is CVA?

What are the key features?

Any excluded companies?

What is the process?

1) What is CVA?

“Voluntary Arrangement” means a composition in satisfaction of a company’s debts or a scheme of arrangement of a company’s affairs.

It is a procedure which allows a private company to put up a proposal to its creditors for a ‘voluntary arrangement’ without the need for the compromise or arrangement to be approved by the Court.

The CVA relies on the involvement of a nominee who must be a qualified insolvency practitioner who will supervise and implement the scheme – the trustee/supervisor.

The scheme however will originate from management, making it suitable in situations where the shareholders and creditors still have confidence in existing management.

2) What are the key features?

directors appoint an approved person (approved liquidator) as nominee and he gives positive opinion on the proposed CVA.

papers filed in Court and 28-day moratorium.

meeting of members and creditors called within the 28 days.

S395 – CVA cannot apply to:

Public companies

Licenced institution etc. under Bank Negara laws

A company subject to the Capital Market Services Act 2007

A company which creates a charge over its property or any of its undertaking

3) Any excluded companies?

4) What is the process?

Stage 1: Nominee for CVA (S397)

directors of company submit to nominee the proposed CVA and statement of affairs

nominee issues statement with his view on whether the proposed CVA has reasonable prospect of being approved and implemented

Stage 2: Filing and Moratorium (S398)

directors to file with the Court the necessary documents, e.g. proposed CVA, consent from nominee, and nominee’s statement

Moratorium automatically applies for 28 days (Can be extended for not more than 60 days if approved by 75% creditors and consent of nominee).

[moratorium means during this period no proceedings may be taken against the company  the company cannot be wound-up, no Judicial Manager can be appointed, no security can be enforced, no shares can be transferred etc.]

[However, a secured creditor may appoint a receiver to deal with the charged property of a company during the moratorium. **]

Stage 3: Calling of meeting

within 28 days (with 14 days of notice given) of the moratorium period, the nominee shall summon a meeting of the company and a meeting of its creditors at the time, date, and place as the nominee thinks fit.

The proposed CVA can be approved by:

a simple majority of shareholders; and

at least a majority of 75% in value of creditors present and voting at a creditor’s meeting.

Stage 4: CVA takes effect

Once approved, the arrangement shall be binding on ALL creditors.

at conclusion of the meetings, Chairman of meetings to report the result of the meetings to the Court and give notice to the Registrar

Judicial Management

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Judicial Management

Judicial Management : S403 – 430

A judicial management is a temporary court-supervised rescue plan for ailing companies but not available to companies licensed by BNM or regulated by SC.

Management of company placed in hands of an approved liquidator (Judicial Manager)

JM to draw up rescue plan acceptable to majority creditors

Plan implemented once approved by creditors and sanctioned by Court.

Judicial Management

When there is a reasonable probability of rehabilitating an insolvent company as a going concern, the shareholders, directors or creditors of the company may apply to Court to place the management of the company in the hands of an independent and qualified Judicial Manager.

The aim of JM is to strive to resuscitate a distressed company and nurse it back to financial health under the supervision of the Court.

Judicial Management

The Court can only make an order for JM if – and only if – the company is or will be unable to pay its debts**; and the making of the order will be likely to achieve one or more of the following purposes:

The survival of the company, or the part of its undertaking as a going concern;

The approval of a compromise or arrangement between the company and its creditors; and

A more advantageous realisation of he company’s assets than winding up.

** unable to pay its debts – as defined under s466.

Judicial Management

After a judicial management order is granted:

a moratorium of 180** days takes effect during which the company cannot be wound-up, no receiver can be appointed, no security can be enforced, no shares can be transferred etc..

The board of directors ceases to function

The Judicial Manager will be appointed to:

(a)assess the condition of distressed company; to resuscitate a distressed company and nurse it back to financial health under the supervision of the Court.

(b)Formulate a proposal to manage the company; the Judicial Manager will prepare a workable restructuring plan which must be approved by a majority of 75% in value of creditors present and voting at a creditor’s meeting. and

(c) Once the proposal is approved by the requisite number of creditors and sanctioned by Court , the restructuring plan will be implemented.

**the period can be extended by Court for a further 6 months, on application of Judicial Manager.

Effect of Judicial Management

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no resolution can be passed for winding up of the company;

no steps can be taken to enforce any charge on or security over the company’s property or to repossess any goods in the company’s possession under any hire-purchase agreement, chattels leasing agreement or retention of title agreement, except with leave of the Court; and

no other proceedings and no execution or other legal process can be commenced or continued and no distress may be levied against the company or its property except with the leave of the Court.

WINDING UP

Let’s now continue with discussion on how companies life are ended

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Winding Up

“The winding up of a company is the process of bringing an end to a company. The company’s assets are sold off and then used to pay off the company’s debts. Any excess proceeds are then returned to the shareholders of the company”.

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WU order made by Court

S432(1)(a) – order made by the Court

WINDING UP MAY BE EFFECTED BY:

Voluntary WU

S432(1)(b) – WU process is carried out without the need for Court order

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MODES OF WINDING UP (s432)

Compulsory WU order made by Court

There are 12 grounds upon which a WU order can be made; one of the most common one is where the Court finds that the company is unable to pay its debts (s465(1)(e).

Voluntary WU effected by a resolution:

by a members’ voluntary WU where:

The company is solvent; and

The liquidator is appointed by the members at the members’ meeting

Voluntary WU effected by a resolution:

by a creditors’ voluntary WU where:

The company is insolvent; and

The liquidator is appointed by the creditors at the creditors’ meeting**.

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Circumstances for Winding Up

Voluntary Winding Up

When a period fixed for the duration of the co by constitution, or occurrence of the event which the constitution provide that the co to be dissolved and has passed ordinary resolution in General Meeting.

If the co so resolves by special resolution.

(Sec 439)

Compulsory Winding UP

Done usually upon petition by

Refer to sec 464

Circumstances in which court may order WU

Refer to sec 465

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A) MEMBERS’ Voluntary WU – Procedures

Declaration of Solvency (s443) – majority of directors make a written declaration that (i) the directors have made inquiry into the affairs of the company; and (b) at a meeting of directors, the directors have formed an opinion that the company will be able to pay its debts in full within 12 months after the commencement of the WU.

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Members’ Voluntary WU – Procedures

Pass Members’ Resolution (s439) – pass special resolution at members meeting; the company shall cease to carry on its business except liquidator is in the opinion that it is beneficial for the WU.

Appointment of liquidator – a liquidator is appointed at members meeting. On the appointment of liquidator all the powers of the directors shall cease.

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B) CREDITORS’ Voluntary WU – Procedures

Directors Statutory Declaration of Solvency (s440) –directors make the necessary statutory declaration that (i) the company cannot by reason of its liabilities continues its business; and (b) that meetings of the company and its creditors have been summoned for a date within 30 days of the date of the declaration.

[The lodgement of statutory declaration will trigger the commencement of the creditors’ voluntary WU.]

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B) CREDITORS’ Voluntary WU – Procedures

Appointment of interim liquidator – upon the lodgement of the statutory declaration, the directors must appoint an approved liquidator to be the interim liquidator (s 440)  the term ‘interim liquidator’ in CA 2016 replaces the term ‘provisional liquidator’ under old Act

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B) CREDITORS’ Voluntary WU – Procedures

Meeting of the company members– directors must hold the meeting of the company members within 30 days of the date of the statutory declaration made under s440 of the CA 2016. At this meeting the members may pass the special resolution requiring the company to be wound up voluntarily.

[the members shall nominate a liquidator during this meeting. However, the creditors’ choice of liquidator will take priority over the members’ choice of liquidator]

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B) CREDITORS’ Voluntary WU – Procedures

Meeting of the company’s creditors– due to the insolvency of the company and with insufficient assets to repay the creditors’ debt, the creditors’ interests must be safeguarded. Creditors can nominate their choice of liquidator to manage the realisation and distribution of the insolvent company’s assets. A meeting of the company’s creditors must be held on the same day or the next day of the meeting of the company’s members.

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B) CREDITORS’ Voluntary WU – Procedures

Appointment of liquidator – on the appointment of the liquidator, all the powers of the directors shall cease.

Note: in creditors’ voluntary WU, the liquidator may also be appointed at the members’ meeting and where the creditors choose not to nominate a liquidator

[committee of inspection – optional; this is to protect creditors’ interests – act as check and balance of the powers of liquidator]

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Power of the Liquidator in a Voluntary WU

In a voluntary WU, the liquidator may exercise the powers and duties as specified in the Eleventh Schedule of CA 2016.

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C) COMPULSORY WINDING UP

A compulsory WU – is by way of a winding up order made by the court.

Sec 465 – circumstances in which company may be wound up by court.

Sec 466(2) – a petition to wind up a company shall be filed in the court within 6 months from the expiry date of the notice of demand.

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Circumstances in which court may order WU
(Sec 465)

The company has by special resolution resolved that the company is to be wound up by the Court;

The company defaults in lodging the statutory declaration under subsection 190(3);

The company does not commence business within a year from its incorporation or suspends its business for a whole year;

The Court is of the opinion that it is just and equitable

The company has no member;

The company is unable to pay its debts;

the directors have acted in their own interests rather than in the interests of the members as a whole or acted in any other manner which appears to be unfair or unjust to members;

when the period, if any, fixed for the duration of the company by the constitution expires or the event, if any, occurs on the occurrence of which the constitution provide that the company is to be dissolved;

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Circumstances in which court may order WU (cont.)

the Court is of the opinion that it is just and equitable that the company be wound up;

the company has held a licence under the Financial Services Act 2013 or the Islamic Financial Services Act 2013, and that the licence has been revoked or surrendered;

the company has carried on a licensed business without being duly licensed or the company has accepted, received or taken deposits in Malaysia, in contravention of the Financial Services Act 2013 or the Islamic Financial Services Act 2013, as the case may be;

the company is being used for unlawful purposes or any purpose prejudicial to or incompatible with peace, welfare, security, public interest, public order, good order or morality in Malaysia; or

the Minister has made a declaration under section 590.

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Inability to pay debts

Sec 466(1) – the company is indebted in a sum exceeding the amount as may be prescribed by the Minister and a creditor by assignment or otherwise has served a notice of demand, by himself or his agent, requiring the company to pay the sum due by leaving the notice at the registered office of the company, and the company has for 21 days after the service of the demand neglected to pay the sum or to secure or compound for it to the satisfaction of the creditor.

“Sec 466 notice” – statutory demand issued to company by or on behalf creditors. Statutory demand can be made if debt exceed RM10,000 (Gazette dated 26 Jan 2017).

Sec 466(2) – a petition to wind up a company shall be filed in the court within 6 months from the expiry date of the notice of demand.

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Procedures for winding up

General procedures for WU are similar although the modes of WU may differ:

A special resolution is passed or Court makes an order for the co to be wound up;

A liquidator is appointed by the members and/or creditors or by Court to oversee the entire process of liquidation; The co’s assets and affairs generally pass into the hands of the liquidator;

The liquidator converts the assets into cash, calls in any uncalled capital and pays the creditors in order of priority. Any surplus is distributed to the members of the company; and

The company is dissolved.

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Statutory Duties of Liquidator

Liquidator’s account (S514) – statement of receipts and payments

Need to be lodged within thirty days

after expiration of the period of 6 months from the date of appointment of liquidator;

of every subsequent period of 6 months after his appointment; and

after he ceases to act as a liquidator.

Be audited by an approved co auditor. For the purpose, liquidator shall furnish the auditor with such vouchers and information required.

Auditor may inspect any book of accounts kept by liquidator.

Cost of audit fixed by official Receiver and be part of expenses of winding up.

A copy of account shall be kept by liquidator and shall be opened to the inspection by any creditors or any person interested at the office of the liquidator

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Statutory Duties of Liquidator

Annual meeting (S458)- if VWU continues for more than a year, within 3 month of each anniversary of the commencement of WU summon a

meeting of members -in case of members’ WU

meeting of members and creditors – in case of creditors’ WU

Unclaimed asset (S508)- pay all unclaimed dividend and other money which remained unclaimed for more than 6 months the moneys become payable; and all unclaimed money arising from the property after making final distribution.

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STAY AND TERMINATION OF WINDING UP

Stay of Winding Up

Sec 492(1) – provides power to court to stay the winding up of a company for a specified time.

The liquidator, creditor or contributory of the company can apply for a stay; the wound up company cannot apply for a stay.

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STAY AND TERMINATION OF WINDING UP (Cont.)

Termination of Winding Up

Sec 493 – new provision under CA 2016; Court may order termination of compulsory WU on the application of the liquidator or of any creditor or of contributory.

Sec 493(2) – the court will take into consideration the following facts:

the satisfaction of the debts;

any agreement by the liquidators, creditors, contributories, and other interested parties; or

other facts that the court considers appropriate.

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Options available to secured creditors in the event of winding up – Section 524

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Realise property subject to charge

Value the charged property and claim for the balance as an unsecured creditor

Surrender the charged property and claim the whole amount as unsecured creditor

OPTION 1

OPTION 2

OPTION 3

Sec 524(8) provides that the liquidator may at any time, by notice in writing, require a secured creditor , within 21 days from the receipt of the notice to elect which of the powers the creditor wishes to exercise;

If the secured creditor fails to exercise any of the options (having received the notice from the liquidator as referred to in sec 524(8) , it is taken as having surrendered the charge to the liquidator for the general benefit of creditors, and hence may only claim in liquidation as an unsecured creditor for the whole debt (sec 524 (9).

STRIKING OFF

Finally, let’s look at how companies are removed from register by SSM

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STRIKING OFF

Strike off means remove the name of the co from the register

a. by CCM (S549) or

b. upon an application by a director, member or liquidator (S550)

Sec 549 – allows the CCM to strike off a co if:

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the company is not carrying on business or is not in operation;

the company has contravened this Act;

the company is being used for unlawful purposes or any purpose prejudicial to or incompatible with peace, welfare, security, public interest, public order, good order or morality in Malaysia;

in any case where the company is being wound up and CCM has reasonable cause to believe that—

no liquidator is acting;

the affairs of the company are fully wound up and for a period of six months the liquidator has been in default in lodging any return required to be made by him; or

the affairs of the company has been fully wound up under a winding up by the Court and there are no assets or the assets available are not sufficient to pay the costs of obtaining an order of the Court dissolving the company.

Strike off upon application (S550) The following requirements need to be fulfilled :

The resolution of the shareholders have been passed for the initiation of the application on the basis that the company is not carrying on business or not in operation

has no assets and liabilities at the time when the application is made

has no outstanding charges in the Register of Charges

has no outstanding penalties or offer of compounds under the CA 2016

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has no outstanding tax or other liabilities with any Government Department or Agency

The information of the company with the Registrar is up to date

not involved in any legal proceeding within or outside Malaysia

has not made any return of capital to the shareholders

not a holding company

not a “Guarantor Corporation”

Source: http://www.ssm.com.my/Pages/Legal_Framework/Document/Guidelines%20for%20Striking%20Off%20_Section%20549_190419.pdf

LET’S REVIEW SOME CONCEPTS

Strike off

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Compromise & Arrangement

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Receivership

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Members’ Voluntary WU

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Creditors’ Voluntary WU

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Compulsory WU by Court

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“When you take risks you learn that there will be times when you succeed and there will be times when you fail, and both are equally important.” – Ellen DeGeneres

“You build on failure. You use it as a stepping stone. Close the door on the past. You don’t try to forget the mistakes, but you don’t dwell on it. You don’t let it have any of your energy, or any of your time, or any of your space.” – Johnny Cash

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“Failure should be our teacher, not our undertaker. Failure is delay, not defeat. It is a temporary detour, not a dead end. Failure is something we can avoid only by saying nothing, doing nothing, and being nothing.” – Denis Waitley

DON’T BE AFRAID OF FAILURE

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THANKS!

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