THE RIGHTS OF CREDITORS UNDER A SCHEME OF ARRANGEMENT IN MALAYSIA

Introduction

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A scheme of arrangement is an agreement which allows a company in financial distress to fulfil its obligations to its creditors by restructuring the debts of the debtor company and varying, whenever appropriate, the rights of its creditors.

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In?a moratorium scheme of arrangement, the creditors and the debtor company agree that the debt will be restructured. Although the payments are postponed, the creditors will be paid in full.

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In a compromise scheme of arrangement, the creditors agree that they will not be paid the full amount owed to them. Once the discounted amount agreed upon is paid, the debtor company will be discharged by the creditor[1].

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There are three stages of the restructuring process under section 366 of the Malaysian Companies Act 2016. The three stages are the application stage, the meeting stage, and the sanction stage.

The application stage

Section 366(1) of the Companies Act 2016 provides that where a scheme of arrangement is proposed between the company and its creditors, an application may be made to the court to order a meeting of the creditors. The court will consider the following factors in determining whether to order a creditors’ meeting:

(a)??????????public policy;

(b)?????????commercial morality; and

(c)??????????creditors’ interest[2].

The court will not order the meeting if the company is insolvent and unable to pay its debt in full at any given time[3].

It is common for the debtor company to also apply at this stage for a restraining order from the court to restrain further legal proceedings against the company except with the court’s leave. This restraining order is necessary to prevent creditor(s) who does not agree to the scheme from taking legal action or winding up the company when the scheme is still being formulated and pending approval from the court.

The meeting stage

At the meeting stage, the proposed scheme of arrangement may be passed if 75% or more of the total value of creditors or class of creditors or the members or class of members voted in favour of the implementation of the scheme of arrangement, either in person or by proxy at the meeting.

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At this stage, the opposing creditors may be outvoted by the other creditors who are in favour of the scheme.

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However, it is still important for the opposing scheme creditors opposing the proposed scheme to attend the creditors’ meeting and exercise their voting rights to oppose it. Otherwise, the opposing scheme creditors are taken to have waived their rights to raise their objections at the subsequent sanction stage.

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The sanction stage

At the sanction stage, the court may exercise its power to order a company to undergo a scheme of arrangement if 75% or more of the total value of creditors or class of creditors or the members or class of members voted in favour of the implementation of the scheme of arrangement.

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This court order is binding on all creditors, members and liquidator(s) of the debtor company including the creditors who opposed the scheme.

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It is important for the opposing creditor to file an application to intervene in the sanction stage at the earliest opportunity. This will enable the court to hear the views of all parties before deciding whether to sanction the scheme of arrangement.

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It is well-established that, in deciding whether to sanction a scheme of arrangement, the court does not act as a mere rubber-stamp. Its sanction is “not a mere formality”; instead, it must be satisfied not only that the procedural requirements for approval of the scheme by the company creditors have been satisfied, but also that the scheme, is, in substance, a reasonable one.

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Since the court is concerned in this context with the substance of the scheme, it must follow that it may inquire, for example, into the reasonableness of excluding a particular creditor from the scheme even if the requisite majority of the other creditors have approved the scheme on those terms. The excluded creditor in such a case may not be a party to the scheme, but the debt accruing to that creditor under its agreement with the company could be affected by the court’s decision, for example, to make it a condition of the scheme that the debt should also be subject to the terms of the scheme.

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It cannot reasonably be argued that the court lacks the authority to hear and inquire into such matters since the court is ultimately concerned with whether it will sanction the scheme and may, in that context, have regard to any matter that could reasonably have a bearing on that decision[4].

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The court must consider the scheme with a critical eye as to whether it is indeed a viable one so as to conciliate the relationship between the applicant and its separate classes of creditors for the common benefit of the same classes of creditors to whom the scheme was intended to address[5].

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In Re Sateras Resources (Malaysia) Bhd [2005] 6 CLJ 194 HC, the court held that its approval to sanction the scheme of arrangement may only be given if the following considerations are satisfied:

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(a)??????????That the provisions of the statute have been complied with;

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(b)?????????That the class was fairly represented by those who attended the meeting and that the statutory majority are acting bona fide and are not coercing the minority in order to promote interests adverse to those of the class whom they purport to represent; and

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(c)??????????The arrangement is such that an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve.

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In Sri Hartamas Development Sdn Bhd v MBf Finance [1990] 3 CLJ (Rep) 106, the High Court had held that while it is not equipped to inquire into the practical implications of the scheme, it can evaluate and consider whether a scheme of arrangement is reasonable and fair as to benefit all classes of creditors. The court is entitled to take into account questions of public policy and commercial morality and the court is also bound to regard the interest of creditors. Further, there must be a bona fide attempt to conciliate the relations between the applicant and respondent for the common benefit of the other creditors to whom the scheme is also intended to be addressed.

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Companies proposing a scheme need to ensure that their businesses are viable and the terms proposed are realistic.

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Over the years, the author has seen some scheme of arrangements which are dubious in nature. This includes:

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(a)??????????a scheme where the creditors will only be paid if the debtor company is successful in an arbitration proceeding by the debtor company against another debtor. This scheme is not viable since the outcome of the arbitration proceeding is uncertain.

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(b)?????????a scheme where the debtor company will sell off all its plant and machinery to pay the unsecured creditors a discounted amount of 10% of the value of their outstanding debts. This is contrary to the purpose of Section 366 of the Companies Act 2016 which is to ensure that the debtor company can continue with its business and operations in the future once the scheme of arrangement is sanctioned by the court.

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Conclusion

The court will not act as a mere rubber stamp in giving its approval to sanction a scheme of arrangement.

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A scheme creditor who was outvoted in the creditors’ meeting can still apply to intervene in the High Court in the sanction application to oppose the scheme of arrangement.

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In certain situations, the court may still refuse to sanction a scheme of arrangement although 75% or more of the total value of creditors or class of creditors present in the creditors’ meeting had voted in favour of the scheme.

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This material is for general information only and is not intended to provide legal advice. If you have any queries on matters related to the above, please contact the author at [email protected]

[1] Rabindra S Nathan, Law and Practice of Corporate Insolvency in Malaysia (Sweet and Maxwell, 2019) at 38-39

[2] Re Price Mitchell Pte Ltd (1984) ACLC 524

[3] Sri Hartamas Development Sdn Bhd v MBf Finance [1990] 3 CLJ (Rep) 106

[4] The Royal Bank of Scotland NV (formerly known as ABN Amro Bank NV) and others v TT International Ltd (nTan Corporate Advisory Pte Ltd and others, other parties) and another appeal [2015] 5 SLR 1104 at pp. 1145-1146, CA

[5] Sri Hartamas Development Sdn Bhd v MBf Finance [1990] 3 CLJ (Rep) 106 at 108