What is a Scheme of Arrangement?
A Scheme of Arrangement is a legal mechanism used by companies to reorganise their financial structure or debt repayment plan. Normally, companies who are financially distressed or on the verge of insolvency will undertake this process to protect their companies from being wound up by creditors. In Malaysia, these companies must apply to the court for approval to convene a Creditors’ Meeting in accordance with Section 366 of the Companies Act 2016 (“CA 2016”) to introduce and propose the Scheme of Arrangement to the affected creditors.
What is a Restraining Order?
A Restraining Order under a Scheme of Arrangement is an order granted by the Court to temporarily stop or prevent creditors from taking any legal proceedings against the Company, including legal suits, winding-up petitions and execution proceedings, while the Scheme of the Arrangement is proposed to the creditors and to be negotiated until the conclusion of the Creditors’ meeting. Companies that apply for an order under Section 366 of CA2016 inevitably and concurrently apply for a Restraining Order under Section 368(1) of CA 2016 to provide protection from any legal actions from the creditors. Nevertheless, a creditor may bring a legal proceeding against the said company subject to the leave of court.
Importance: A Restraining Order provides a breathing space for the company to prepare for the restructuring process and to formulate a comprehensive Scheme of Arrangement without the immediate threat of legal actions. This period is crucial for the company to negotiate effectively with creditors and develop a viable Scheme of Arrangement.
What are the procedures to apply for Scheme of Arrangement and Restraining Order under the Companies Act 2016?
1. Under Section 366(1) of CA 2016, the following parties (the Applicant) may apply at the High Court for an order to convene a meeting to propose a Scheme of Arrangement:-
- the company;
- any creditor or member of the company;
- the liquidator, if the company is being wound up; or
- the judicial manager if the company is under judicial management.
This meeting is known as ‘Creditors’ Meeting’.
2. Concurrently, pursuant to Section 368(1) of CA 2016, the Applicant may apply on an ex parte basis[1] for a Restraining Order to restrain any legal proceedings being taken against the company, except with the leave of court. Section 368(2) of CA 2016 provides the requirements in granting the Restraining Order wherein the High Court must be satisfied of the following:-
- there is a proposal for the Scheme of Arrangement;
- the Restraining Order is necessary to enable the company and its creditors to formalise the Scheme of Arrangement;
- there is a statement of affairs of the company made up to a date not more than three (3) days before the application is filed; and
- there is a person nominated by a majority of the creditors to act as a director for the purpose of this process.
Failure to satisfy any of the above conditions may be a ground for setting-aside by a creditor.[2]
3. In accordance with Section 366(1) and Section 368(1), the High Court may, on the application of the Applicant make an order to convene the meeting and to restrain further legal proceedings against the company up to three (3) months, or an extension to a period of not more than nine (9) months.
4. Upon the grant of the order, the company shall, within seven (7) days from the order, lodge the order with the Companies Commission of Malaysia (CCM) and advertise a notice of the order by publishing it in a widely circulated newspaper in Malaysia (See Section 368(5) of CA 2016).
5. Thereafter, the company must give a sufficient notice to all creditors to ensure attendance to all creditors and an explanatory statement is given to expound on the Scheme of Arrangement.
6. The company thereafter may convene the Creditors’ Meeting to propose the Scheme of Arrangement.
7. Pursuant to Section 366(2) of CA 2016, a Scheme of Arrangement will only be approved if a resolution is passed with at least 75% in value of the creditors voting, either in person or proxy, in favor of the Scheme.
8. Once approved, the Applicant will then make another application to the High Court to sanction the approved Scheme of Arrangement (“Court Sanction”). According to Section 366(4) of CA 2016, the Court may make alterations or conditions to the Scheme of Arrangement as the Court thinks just. At this stage, the Court must be satisfied of the following[3]:-
- the requirements and the provisions under CA 2016 have been complied with;
- that the class of creditors and/or members was fairly represented and that there is not any coercing of the minority by the majority;
- that the scheme is fair and reasonable, according to an intelligent and honest person, being a creditor or member of the class may reasonably approve[4]; and
- that there is no ‘blot’ or defect in the Scheme.
In sanctioning the Scheme, “the Court shall not act as a mere rubber stamp to endorse the Proposed Scheme” notwithstanding that the Scheme has obtained a majority vote and that it is in compliance with the statutory requirements under CA2016. This means that the Court must thoroughly examine the fairness and reasonableness of the Scheme and evaluates the Scheme proposed. The Court Sanction is not merely a formality.[5]
9. According to Section 366(3) of CA 2016, if a resolution is passed and the Scheme of Arrangement is approved, the Scheme of Arrangement becomes binding on all creditors, the members of the company, the company itself, and, if the company is being wound up, the liquidator and contributories, notwithstanding any creditors who did not vote or voted against the Scheme.
10. Following the Court Sanction, the company shall implement and execute the Scheme of Arrangement in accordance with its terms and conditions. In so far as the implementation and execution of the Scheme is concerned, CA 2016 is silent in cases where the company fails to implement or execute the Scheme thoroughly and accordingly.
[1] See Mansion Properties Sdn Bhd v Sham Chin Yen & Ors [2021] 1 MLJ 527 (FC)
[2] See Re Sumatec Resorts Berhad & Anor [2011] 1 LNS 1538 (HC)
[3] Re Sateras Resoucres (Malaysia) Bhd [2005] 6 CLJ 194 (HC); Re Noble Group Ltd [2018] EWHC 3092 (Ch); Airasia X Bhd v BOC Aviation Ltd & Ors [2021] 10 MLJ 942 (HC); Sham Chin Yen & Ors v Mansion Properties Sdn Bhd [2019] MLJU 1830 (COA); Transmile Group Berhad & Anor v. Malaysian Trustee Berhad & Ors [2013] 2 MLRH 427 (HC)
[4] Sentoria Bina Sdn Bhd v Impak Kejora Sdn Bhd & Ors [2021] 12 MLJ 690 (HC)
[5] Re Sateras Resoucres (Malaysia) Bhd [2005] 6 CLJ 194 (HC)