Corporate Restructuring 101: Scheme of Arrangement

The first time I came across the term “Scheme of Arrangement”, I was completely clueless. This is not something they taught in law school (or if they did, I probably didn’t pay attention...).

So, here is me sharing what I’ve learned in the process of familiarizing myself with corporate restructuring. This is in hopes that whatever produced here would be helpful to another similarly clueless (read: struggling) associate out there probably googling the same thing.

Let’s start with the basics.

?1.?????????????????? What is a scheme of arrangement?

• Let’s call this “SOA”.
• It is a rescue mechanism for a financially struggling company.
• This is the best option to keep the company afloat (and operating), rather than being wound up.
• This scheme would adjust members’ or creditors’ rights against the company. Their debts would be restructured in view of the insolvent state of the company.
• SOA could also be opted to reorganize the share capital of a company.
• In a way, it could be said that it is an arrangement to compromise creditors rights to the company.
• To borrow the explanation of the Federal Court in Mansion Properties Sdn Bhd v Sham Chin Yen & Ors [2021] 1 MLJ 527: "Scheme of arrangement provides companies saddled with debts, a brief respite from their daily struggles of managing their affairs and the demands of the creditors."

2.?????????????????? What is the process involved?

• First step – The proposal stage.
• The company needs to prepare a proposal on the arrangement.
• This would usually involve financial advisors who would advise on the financial aspect and the viability of the proposal.
• Their role here is strictly advisory in nature.
• At this stage, the proposed SOA is presented in an “Explanatory Statement”.
• Second step – Leave for meeting.
• See Section 366 of the Companies Act 2016 (“CA 2016”).
• Once a proposal is ready, the company needs to get the creditors approval to the proposed scheme. For this, a creditors meeting needs to be held.
• So, the company needs to apply to court for approval before a meeting can be held.
• Third step – Creditors meeting.
• This is when the proposed SOA will be tabled and voted upon by the creditors.
• How is it approved at this stage? – Unanimous agreement is not necessary. It has to be agreed by a majority of 75% of the total value of creditors or members or class of members present and voting at the Creditors Meeting either personally or in proxy (or the adjourned meeting, as the case may be).
• Fourth step – The sanction stage.
• Once the majority approval is obtained, now the company has to get the court’s stamp of approval over the SOA.

• The court would review the scheme and go through the following stages.
• The court would see that: - The provisions of the statute have been complied with. – This would mean, that a meeting was held, according to the statutory requirements, then the required majority has approved the SOA. - The class was fairly represented by those who attended the meeting and that the there was no coercion over the minority (by the majority).??- The arrangement is one that an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might approve.
• If the court sees it fit and necessary to make some alterations or conditions, it will be empowered to do so under Section 366(4) of the CA 2016.
• If the court is satisfied that all the above are complied, the court would then approve the SOA. In other words, the company would obtain the court’s sanction to implement the SOA.
• But the court is not concerned with the commercial merits of the scheme. This is a matter exclusive to the creditors’ decision.
• Final step – the implementation stage.
• And of course, the company would then proceed to implement the SOA.

3.?????????????????? What is the effect of a SOA?

?

• It becomes binding on the creditors, members and company. This includes the minority who may have opposed the SOA.

4.?????????????????? Our Malaysian court's position, post-sanction?

?

• Justice Ong Chee Kwan has succinctly discussed this in Top Builders Capital Bhd & Ors v Seng Long Construction & Engineering Sdn Bhd [2023] MLJU 580.
• It is impossible to anticipate in all situations, any exigencies which may arise while implementing the scheme. Even when the best and detailed arrangement is prepared, there could still be hitches along the way.
• So, in ensuring that the SOA is fully and effectively carried out, the court assumes a supervisory role until its completion.
• The court can still make the necessary orders (even post-sanction) to give full effect to the SOA. To adopt the learned judge's words – the court's role is “to ensure fair play to all the creditors."
• In this case, a SOA was describe to be akin to a consent judgment. The terms of the SOA have been agreed to between parties (here, it is between the company and its creditors).
• Without such agreement, the court does not have the power to approve of the order.
• So, here, a SOA is a statutory contract binding on all creditors. Then, the court gives its stamp of approval subject to the court’s satisfaction.
• Similar to a consent judgment, the court cannot vary or set aside a SOA.

5.?????????????????? So what happens when there is a major breach of the SOA?

• Again, the position vis-a-vis consent judgment and SOA is adopted here.
• The court has no power to set aside a SOA when there is a repudiatory breach.
• Any repudiatory breach that goes to the root of the SOA, would effectively result in the termination of the SOA. All the scheme creditors would then be released from their obligations under the scheme.

?