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What are the Special Director’s Duties when a Company has filed for a Restraining Order and is doing a Scheme of Arrangement?

The director owes a fiduciary duty and duty of care toward the company and the shareholders. Under the duty of care, the director is required to act in the best interest of the company and to make appropriate decisions for the success of the company. Under the Malaysia Companies Act 2016 (“CA 2016”), when a company is financially distressed, the director could opt for the three methods: winding up, receivership, or scheme of arrangement (“SOA”) to manage his difficulty. A company could still propose an SOA even if it is not wound up and/or have a receiver and manager appointed. In this case, the company’s Board of Directors would still be able to maintain control of the company’s affairs and management1. Considering that there are different methods that a company could take up during insolvency, this article will focus on SOA, and restriction order which could come hand-in-hand with the application.

 

SOA

The term ‘SOA’ has been defined as a form of a scheme of compromise and/or arrangement between the creditors and/or members of the company which permits the establishment of varied arrangements to settle outstanding claims2. It provides a platform for companies to suggest to their creditors at an early stage of financial distress. This would also provide a clearer picture for the company as to where the resources of the company should be focused on, and other methods that can be used to reduce cash flow issues3.

The conditions and procedures for a company to apply for SOA are helpfully laid down in Section 3664: Power of Court to order compromise or arrangement with creditors and members, where: –

1. Leave of court should be obtained to call for a meeting between the company and its members and/or creditors. This could be applied by either—

(a) the company;

(b) any creditor or member of the company;

(c) the liquidator, if the company is being wound up; or

(d) the judicial manager, if the company is under judicial management.

2. During the meeting, the SOA will be presented by the company to the creditors, class of creditors or members, or members of the company. For the SOA to proceed to another stage, it must be approved by seventy-five per centum (75%) of the total value of creditors/class of creditors or the members/class of members present and voting either in person or by proxy at the meeting.

3. The agreed SOA shall be binding on—

(a) all the creditors/ class of creditors;

(b) the members/ class of members;

(c) the company; or

(d) the liquidator and contributories (if the company is being wound up)

4. The Court may grant its approval to a compromise or arrangement subject to such alterations or conditions as the Court thinks just.

5. The approved SOA will then be lodged with the Registrar in order for it to come into effect. It must also be annexed to every copy of the company’s constitution issued after the approved SOA comes into effect5.

 

Restraining Order

During the process of application for SOA, the court could grant a restraining order for the financially distressed company. When a restraining order is in place, no further legal action can be taken against the company on the subject, this is crucial as this allows the company to have a moratorium from creditors’ actions and to allow for a successful restructuring of the company’s debts through the SOA. A restraining order is usually granted for 3 months. However, if the company applies for an extension, it may be extended for an additional 9 months.

The conditions for the court to impose a restraining order are laid down in Section 3686: Power of Court to restrain proceedings, where:

(a) The proposed SOA between the company and its creditors or any class of creditors representing at least one-half (50%) in value of all the creditors;

(b) Restraining order is necessary to enable the company and its creditors to formalise the SOA;

(c) The company has submitted (alongside the application for a restraining order) a statement of particulars as to the affairs of the company for not more than three (3) days before the application for a restraining order is submitted7; and

(d) the company has nominated a person that is approved by the majority of the creditors to act as a director in the application, and this nomination must be approved by the court8.

 

Recent Development of the Law

The law in this area has developed in recent years. A financially distressed applicant company can now make an application for a restraining order in a scheme of arrangement without notice. This can be seen in Mansion Properties Sdn Bhd v Sham Chin Yen & Ors [2021] 1 MLJ 5279, where the Federal Court allows an ex-parte (without notice) application. This development would be beneficial for the company concerned, as they could seek urgent moratorium protection through a restraining order, and they can then pursue the debt restructuring in an SOA to obtain stability10. Furthermore, it was made clear that the creditor and/or any parties who wished to apply for a restraining order must ensure full adherence to the requirements set down under Section 368 of the Act whereby failure to do so shall be detrimental.

 

Conclusion

From the discussion above, it is suggested that under SOA, the Court could grant the power for the company concerned to have an arrangement between the company and its members which may be used to effect a reorganisation of a company or a corporate group, to restructure its debt, or to implement a plan for the settlement of outstanding claims. It is submitted that directors, in this case, would have to ensure that the proposed SOA is sound and viable to meet the threshold of 75% agreed votes by the members. It is also highly encouraged that the directors plan their strategies carefully and adopt the support and flexibility given by the CA 2016 that provides a longer moratorium of restraining orders, subject to the fulfilment of requirements laid down above11.

 

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1. Jason Yong Kok Yew, ‘Schemes of Arrangement 101’, (Malaysian Litigator,n.d.),<https://malaysianlitigator.com/2020/03/23/schemes-of-arrangement-101/ > accessed 14 July 2022.

2. Fareez Shah & Partners, ‘The Law in relation to Scheme of Arrangement in Malaysia’, (Fareez Shah & Partners, n.d.), <https://fareezlaw.com/company/the-law-in-relation-to-scheme-of-arrangementin-malaysia/> accessed 13 July 2022

3. Ibid.

4. Section 366 Companies Act 2016.

5. Fareez Shah & Partners, ‘The Law in relation to Scheme of Arrangement in Malaysia’, (Fareez Shah & Partners, n.d.), <https://fareezlaw.com/company/the-law-in-relation-to-scheme-of-arrangementin-malaysia/> accessed 13 July 2022.

6. Section 368 Companies Act 2016.

7. Fareez Shah & Partners, ‘The Law in relation to Scheme of Arrangement in Malaysia’, (Fareez Shah & Partners, n.d.), <https://fareezlaw.com/company/the-law-in-relation-to-scheme-of-arrangementin-malaysia/> accessed 13 July 2022.

8. Ibid

9. Mansion Properties Sdn Bhd v Sham Chin Yen & Ors [2021] 1 MLJ 527.

10. Lee Shih, ‘Case Update: Federal Court Decided that Restraining Order Can be Applied Without Notice’ (TheMalaysianLawyer.Com, n.d.), <https://themalaysianlawyer.com/2020/12/02/case-update-federal-court-decides-restraining-order/> accessed 11 July 2022.

11. Halim, Hong and Quek, ‘Scheme of arrangement – updates and developments’ (Halim Hong & Quek, n.d.),<https://hhq.com.my/publications/scheme-of- arrangement-updates-anddevelopments/> accessed 10 July 2022.

 

Written by:

Nattawynn Su Wit (general@azmilaw.com)

Ling Shin Ying (Trainee Solicitor) lingshinying@azmilaw.com