Developments in judicial management in Malaysia

In summary

March 2018 saw the arrival of a corporate rescue mechanism in Malaysia termed ‘judicial management’. Over the years, the law on judicial management has seen much development of juridical and commercial significance since its introduction. The proposed and much-needed Companies (Amendment) Bill 2020 remains in legislative limbo and has yet to become law. This article focuses on significant developments in the Malaysian courts regarding judicial management in the past two years.

Discussion points

• The judicial management process under Malaysian law
• Recent developments in the law concerning judicial management
• Discussion of the proposed reforms

Referenced in this article

• Capital Markets and Services Act 2007
• Companies Act 2016
• Companies (Corporate Rescue Mechanism) Rules 2018
• Consultative Document on the Proposed Companies (Amendment) Bill 2020
• Insolvency, Restructuring and Dissolution Act 2018 (Singapore)
• Insolvency Act 1986 (UK)
• Re Scomi Group Bhd
• Syed Ibrahim & Co (applying as a legal firm) v Trans Fame Offshore Sdn Bhd (under judicial management) (formerly known as Transfame Sdn Bhd) (BAP Resources Sdn Bhd & Ors, interveners)
• Jepak Holdings Sdn Bhd v TNB Repair and Maintenance Sdn Bhd & Ors

Introduction

Judicial management is a corporate rescue mechanism that was introduced in the Companies Act 2016. The Companies Act 2016 is the statute that replaced the outdated Companies Act 1965. Although most parts of the Companies Act 2016 came into force on 31 January 2017, the judicial management provisions did not come into force until 1 March 2018. The provisions have thus only been in use for slightly over four years. However, in that time, the Malaysian courts, especially the first instance courts, have had the opportunity to interpret and apply the new provisions on a case-by-case basis.

The development of the law by the Malaysian courts has helped guide practitioners and Malaysian corporates in how the law is to be used and applied. Although this guidance has been useful, there is room for improvement. Major reforms were proposed by the Companies Commission of Malaysia in 2020. These reforms were supposed to have been introduced through an amendment to the Companies Act 2016 in 2021^[1] but have not yet materialised owing to various factors that have nothing to do with the regulator. Without these reforms, there are still difficulties that Malaysian corporates face in the judicial management space. This article focuses on significant developments in the Malaysian courts in judicial management in the past two years.

The judicial management process

Judicial management is a corporate rescue mechanism that allows a Malaysian company that is or will be unable to pay its debts, or its directors or its creditors, to apply to the High Court for a judicial management order to be made and for a judicial manager to be appointed over the company. There are several conditions that must be satisfied before a company is eligible for judicial management:

• the company is or is likely to be unable to pay its debts; and
• making a judicial management order will be likely to achieve one or more of the following purposes:
  • the survival of the company or its undertaking (whether in whole or part), as a going concern;
  • the company will obtain the approval of a scheme of compromise or arrangement under section 366 of the Companies Act 2016; or
  • a more advantageous realisation of the company’s assets would be achieved compared to through a winding up.

A judicial management order will be in effect for six months unless it is otherwise discharged before that period ends. The court-appointed judicial manager can seek an extension of the judicial management order for a further period of six months. The making of a judicial management order has several mandatory consequences:

• any existing receiver or receiver and manager will have to vacate office and no new appointment may be made;
• any pending winding up application must be dismissed;
• no resolution for voluntary winding up of the company can be made;
• no legal proceedings of any kind or execution process of any kind can be commenced or continued unless the judicial manager consents or the court permits;
• no enforcement of any form of security over the company’s property can proceed unless the judicial manager consents or the court permits; and
• no goods, equipment or chattels under hire purchase, leasing arrangements or retention of title arrangements can be repossessed unless the judicial manager consents or the court permits.

During the time the judicial management order is in place, the judicial manager will normally consult with key creditors and devise a plan for the rehabilitation of the company. The judicial manager’s plan, which is formally known as the proposal, must be developed, and issued within 60 days of the judicial manager’s appointment, unless the High Court allows a longer time. This proposal is then issued to all creditors and placed before a creditors’ meeting summoned for this purpose. If the proposal is approved by 75 per cent in value of the creditors (present and voting) whose claims have been accepted by the judicial manager, it becomes legally binding on all creditors, regardless of whether they voted in favour of the proposal or not.

After the proposal is put to the creditors and voted upon, the judicial management order must be discharged either because:

• the proposal was accepted by the statutory majority and has become binding in law and the process has been successful; or
• the creditors rejected the proposal that failed to achieve the statutory voting threshold and, therefore, the judicial management process has come to its logical end.

The judicial manager will vacate office and leave the company proceeds under the control of its board of directors, either as a rehabilitated going concern if the judicial management was a success, or as a company that is potentially headed for formal insolvency if the judicial management was unsuccessful.

Recent developments in the law of judicial management

Public listed companies and judicial management

The first recent development relates to clarification by the Malaysian courts that public listed companies in Malaysia are ineligible to apply for judicial management.

It is provided under section 403 of the Companies Act 2016 that public listed companies regulated by the Malaysian Securities Commission (SC) under the Capital Markets and Services Act 2007 (CMSA) or by the Central Bank of Malaysia, also known as Bank Negara Malaysia (BNM), are ineligible to apply for judicial management under various statutes.

In Re Scomi Group Bhd [2022] 7 MLJ 620, the High Court held at [23] and [29] that the applicant, as a listed company under the CMSA, is caught by section 403(b) of the Companies Act 2016. Thus, it cannot avail itself of judicial management. On 23 May 2022, the Court of Appeal orally affirmed the findings of the High Court.

Under section 405(1) of the Companies Act 2016, the directors of an eligible company and any creditor or contingent creditor of such a company have standing to apply for a judicial management order. The effect of the Malaysian Court of Appeal’s confirmation in Re Scomi Group Berhad means that directors, creditors, and contingent creditors of a listed company equally cannot make the application if it concerns a listed company.

There is a significant difference between the more restrictive approach in Malaysia with respect to public listed companies and judicial management, and the more liberal position under Singapore law. In Singapore, a company listed on the Singapore Exchange (SGX) placed in judicial management must comply with several obligations under the Listing Rules that are tailored to address the impact of judicial management applications and orders. When an application is filed with a court to place the listed company or its significant subsidiary under judicial management, trading in the shares of the listed company is suspended.^[2]

One of the proposed reforms^[3] was to enable public listed companies to apply for judicial management similar to the equivalent Singapore provisions, but that is still some way off owing to the uncertainty over when the amending legislation will complete the parliamentary process and become law.

In the course of the hearing in the Re Scomi Group case, the High Court was referred to the Companies Commission of Malaysia’s Consultative Document on the Proposed Companies (Amendment) Bill 2020, which noted that:

…the benefit of judicial management is not available to companies which are regulated under [the CMSA] including listed companies. The proposed amendment would assist all companies facing financial difficulties including listed companies an avenue to rehabilitate their situations through judicial management.^[4]

Thus, until the Companies (Amendment) Bill 2020 is passed by the Malaysian parliament, public listed companies will remain ineligible to apply for judicial management. In the meantime, a vital corporate rescue mechanism will be unavailable to such companies. It is likely that for as long as the law remains unamended, schemes of arrangement will continue to be the only corporate insolvency restructuring process that public listed companies will be able to utilise.

Eligiblility of subsidiaries of public listed companies for judicial management

While listed companies are themselves ineligible for judicial management, there is no restriction on subsidiaries of a public listed company from having recourse to judicial management as a corporate rescue tool. A recent example is the attempt in February 2022 by four subsidiaries of a listed company called Serba Dinamik Holdings Berhad to seek the appointment of a judicial manager over each applicant company. Those applications were eventually withdrawn in late March 2022 owing to strong opposition from creditors of those four subsidiaries.

Possibility for a second judicial management order application

In the case of Syed Ibrahim & Co (applying as a legal firm) v Trans Fame Offshore Sdn Bhd (under judicial management) (formerly known as Transfame Sdn Bhd) (BAP Resources Sdn Bhd & Ors, interveners) [2022] MLJU 1380, the High Court had to consider whether a second application for a judicial management order could be made.

The High Court observed that on a reading of sections 404 and 405 (1) and (2) of the Companies Act 2016, those provisions do not contain any indication whether Parliament had intended the Companies Act 2016 to restrict any applications for a judicial management order to a one-time application only. The court noted that had Parliament intended that a second judicial management order application was not possible, it would have surely made that clear by including a provision to that effect.

Adopting a purposive approach to the judicial management framework in Division 8, subdivision 2 of the Companies Act 2016, the court held that if a judicial management order is discharged or comes to an end after its initial six-month lifespan, the court still retains the ability to make a fresh judicial management order based on a second application, provided all the conditions laid down in sections 404 and 405 of the Companies Act 2016 are met.

While the court held that a second application for a judicial management order can be made, the court also went on to hold that the applicant must necessarily comply with all the statutory prerequisites when making the second application. The court also held that any subsequent judicial management application must be made bona fide and with full and frank disclosure of all the material facts.

Creditors seeking a judicial management order

As mentioned earlier, section 405(1) of the Companies Act 2016 enables a creditor of an eligible company to apply for a judicial management order. However, reported examples of judicial management order applications by creditors have been rare. Recently, the position has been clarified.

In Spacious Glory Sdn Bhd v Coconut Three Sdn Bhd (previously known as Nexgram Land Sdn Bhd) [2022] 7 MLJ 76 at [25], the High Court held that section 405 of the Companies Act 2016 clothes creditors with locus standi to apply under section 404 of the Companies Act 2016 for a judicial management order. Here, the applicant was an unsecured creditor. This decision was subsequently applied and followed by the same court in Loh Teck Wah v Fintree Capital Sdn Bhd [2021] 1 LNS 782; [2021] MLJU 995 at [61].

In Singapore, the case of Re Bintan Lagoon Resort Ltd [2005] SGHC 151; [2005] 4 SLR 336 is an example of an application for judicial management being filed by creditors.

When interested parties put forward different nominees for judicial manager

A starting point is the general position under the judicial management framework. It is expressly provided that the applicant may appoint an insolvency practitioner to be the judicial manager under section 407 of the Companies Act 2016. However, by virtue of subsection (2) thereof, the court may refuse the nomination of the applicant’s nominee under subsection (1). In such circumstances, the court may appoint another person who is an insolvency practitioner as the judicial manager.

In Jepak Holdings Sdn Bhd v TNB Repair and Maintenance Sdn Bhd & Ors [2021] 11 MLJ 625, the High Court recognised that the court’s power to refuse the nomination of the applicant stems from the express words of section 407(2). The court also held that from a natural and ordinary meaning of the words in section 407(2), the discretion of the court is unfettered and may be exercised by the court when, for example, there are obvious issues of conflict of interest or bias or the fact that the nominee proposed is not qualified to act is sufficiently demonstrated to the satisfaction of the court. The court also observed that it would ultimately have to decide each matter on a case-by-case basis.

The next issue is dealing with multiple nominations by different interested parties. Section 407 of the Companies Act 2016 deals with the ability to nominate the judicial manager. The initial nomination is always made by the applicant – that can be the company itself, or the directors of the company or a creditor or a contingent creditor. One possibility is provided under section 407(2) where the High Court can reject the applicant’s nominee and appoint another qualified insolvency practitioner as the judicial manager. Another possibility is that under section 407(3), the creditors who collectively comprise a majority in value of all creditors of the subject company are entitled to persuade the judge to accept the nomination of an alternate insolvency practitioner that they propose.

The words of section 407(3) of the Companies Act 2016 refer to ‘a majority in value of the creditors’. The issue arose recently in the Jepak case as to whether a minority creditor can invite the court to consider its nomination of an insolvency practitioner as the judicial manager and, if so, whether the court is bound to accept it.

In Jepak the High Court held at [33] that subsections 407(2) and (3) should be read disjunctively. In other words, the power of the court to refuse the applicant’s nomination and to appoint an insolvency practitioner as judicial manager under subsection (2) and the power to invite majority creditors to nominate their judicial manager candidate under subsection (3) are mutually exclusive. Therefore, there is no place for a minority creditor to invite the creditors pursuant to subsection (3) to appoint a judicial manager other than the applicant’s choice. A minority creditor can, by all means, rely on subsection (2) alone to oppose the nomination, but it must make way for majority creditors as subsection (3) is to be given primacy over subsection (2).

A comparison can be made to the position in the United Kingdom under the Insolvency Act 1986. The main concern in the United Kingdom is to ensure that the appointment of an administrator is conducive to the proper operation of the process of the administration and the court is not bound by the view of any creditors. In Healthcare Management Services Ltd v Caremark Properties Ltd [2012] EWHC 1693 (Ch), the English High Court held at [24] that the majority view does not bind a court that has the final say. In that way, the majority of the creditors do not have an absolute right to choose the identity of the liquidator or the administrator (this being an administration case). There are also contrary views in, for example, Med-Gourmet Restaurants Ltd v Ostuni Investments Ltd [2010] EWHC 2834 (Ch) where Lewison J held that the court would normally be guided by the wishes of the majority of creditors.

In Malaysia, it seems quite clear now that the court must give priority to the nomination by the majority of the creditors in value.

Independence and impartiality of the proposed judicial manager

In the Jepak case, the High Court had to deal with the issue of the independence of the nominated candidate for the role of judicial manager. There are no specific independence rules or requirements laid down in the statutory framework under the Companies Act 2016; however, the same rules that would disqualify a liquidator are likely to apply in relation to a potential judicial manager.

This issue arose squarely in the Jepak case. There, none of the creditors of the company were objecting to the making of a judicial management order itself. The only issue was whether the person nominated by the applicant to be the judicial manager was impartial and free of bias. The High Court recognised the possibility that the nominee for judicial manager might not be independent of the company or its controlling shareholder and would not, in those circumstances, be sufficiently independent. The court referred to the Australian case of Aboriginal & Torres Strait Island Commission v Jurnkurakurr Aboriginal Resource Centre Aboriginal Corp (in liq) (1992) 10 ACSR 121, where the Supreme Court of the Northern Territory examined multiple grounds to remove a liquidator; among the grounds was ‘some unfitness of person’ that included the lack of probity or impartiality.

In Jepak, the High Court also considered the Singapore case of Cendekia Candranegara Tjiang v Yin Kum Choy & Ors [2002] 4 SLR 48. There the judicial manager was also the special accountant to a related company, as well as a personal adviser to and nominee for the company’s directors, the Kwan brothers. The Singapore High Court found that the judicial manager was wearing multiple hats and was thus held to be in a position of conflict.

On the facts, the High Court in the Jepak case found that the proposed judicial manager was sufficiently independent. The fact that prior to the filing of the judicial management order application, the nominated judicial manager had advised the company in relation to its judicial management application was held to be not a bar to his appointment or a matter that compromised his independence. The court also dealt with an additional ground that had been advanced as part of the challenge to the independence of the proposed judicial manager, namely, the fact that the nominee had been provided with an indemnity for his fees by a related party to the applicant company that also happened to be a supporting creditor. The court held this was perfectly proper given that section 407 of the Companies Act 2016 allowed the judicial manager’s fees to be agreed upon with the creditors.

It is useful to make a comparison to the position in England. In Re Ve Interactive Ltd (in administration); Ve Vegas Investors IV LLC and others v Shinners and others [2018] EWHC 186 (Ch), the applicants were creditors of a company. The company encountered financial difficulties and its directors appointed insolvency practitioners to advise on and effect a pre-pack sale of the company’s business and assets. The insolvency practitioners could not obtain financial information and clarity over the extent of the sale of assets from the company. As a result, only one external purchaser was identified. Insolvency practitioners were appointed administrators of the company by the court but they did not report the difficulty that they had in obtaining sufficient information from the company directors. The day after their appointment, the administrators then sold the business and assets to a new company set up by the company directors.

The company’s creditors then applied to appoint new administrators to investigate claims against the company’s directors and the insolvency practitioners relating to the pre-pack sale that either prevented other options from being pursued or caused the undervalued transaction. The application also sought the removal of the existing administrators from office.

The English High Court held that an application to remove administrators on grounds of conflict of interest required the court to decide whether there was a serious issue for investigation, but not whether the claims identified for investigation had merit. The court did not have to decide whether any claims existed, but whether the respondents should be removed from office, because of the need to investigate the existence of a conflict of interest.

In Re One Blackfriars Ltd (in liquidation) Hyde and another (as joint liquidators of One Blackfriars Ltd) v Nygate (in his capacity as representative of the estate of James Joseph Bannon, former joint administrator of One Blackfriars Ltd appointed under CPR R 19.8(1)) and another [2021] EWHC 684 (Ch), the applicants who were joint liquidators of One Blackfriars Ltd (the company) claimed that the latter was mishandled by its former administrators who allegedly failed to act independently. The applicants alleged that the former administrators were in a conflict of interest when they appointed CB Richard Ellis Ltd as their adviser, which was also acting for a syndicate of banks that foreclosed on the company’s plot of land in Central London owing to the company’s default in repayment to the syndicate of banks. The English High Court found that the facts did not give rise to a conflict of interest.

In Singapore, section 91(3)(b) of the Insolvency, Restructuring and Dissolution Act 2018 requires the nominated judicial manager to statutorily declare that they are not in a position of conflict. There is no Malaysian equivalent. The Companies Commission of Malaysia should consider whether this is sufficiently important to be included in the judicial management statutory framework in subdivision 2 of Division 8 of the Companies Act 2016.

Submitting an affidavit or an expert report supporting the application

There is strictly no requirement under the judicial management framework in subdivision 2 of Division 8 of the Companies Act 2016 for the proposed judicial manager to submit an affidavit or report to give an indication to the court of whether the statutory objectives of judicial management will be satisfied if a judicial management order is made. The question has arisen in Malaysian courts as to whether it is necessary for the proposed judicial manager to make an affidavit or report containing such an assessment.

In Re Biaxis (M) Sdn Bhd [2022] 7 MLJ 443, the High Court held that the nominated judicial manager had not affirmed an affidavit to support the application; consequently, there was no satisfactory explanation as to the rationale of the proposal for the fulfilment of the statutory objectives and how the intended judicial management, if ordered, would achieve those objectives.^[5] The High Court went on to hold that without the proposed judicial manager’s expert opinion and verification of the material facts relating to the status of the company and its prospects for survival, there was nothing credible before the court for it to even consider that the proposal would be likely to achieve the statutory objectives.

In Re Sin Soon Hock Sdn Bhd [2020] 1 LNS 976; [2020] MLJU 1242, the same judicial commissioner reaffirmed the need for such an affidavit or report.^[6] Because a judicial manager will eventually be the one responsible for the statutory proposal, there should be some statement in their impartial and professional wisdom that such a proposal can achieve the intended statutory purpose.

However, after considering this point, a recent High Court decision in the case of Federal Power Sdn Bhd v Dara Consultant Sdn Bhd [2022] 7 MLJ 563 went in the opposite direction. The High Court stressed that such burden on the prospective judicial manager does not exist under the Companies Act 2016 or the Companies (Corporate Rescue Mechanism) Rules 2018. The High Court did not disagree with the earlier decision in Re Biaxis, noting that it cannot be denied that such an affidavit would assist the court in assessing whether any proposals put forth are viable. Nonetheless, the High Court ultimately did not find that a supporting affidavit was necessary when faced with an application to appoint a judicial manager.

It is useful to compare this with the position in the United Kingdom. As far back as 1991, in the case of Re Land and Property Trust Co plc [1991] BCLC 849, a petition for an administration order under section 8(1) of the Insolvency Act 1986 was supported by a substantial report prepared by the proposed administrators, who were insolvency practitioners, and an addendum that addressed the issue of whether the statutory purpose of administration was achieved. In Re Arrows Ltd (No. 3) [1992] BCLC 555, a report was also prepared by two insolvency practitioners nominated by the applicant, although their independence was in some doubt. Reports feature in a long line of administration application cases to date.^[7]

The reports prepared by the insolvency practitioners were actually mandated by the applicable rules under the Insolvency Act 1986. Rule 2.2 of the Insolvency Rules 1986, which applied at the time the Insolvency Act 1986 was first enacted, required an independent report to be prepared by the person proposed as administrator.^[8] The report had to specify the purposes consistent with the statutory objectives of administration, which in the opinion of the person preparing it, might be achieved. The Insolvency Rules 2016 are differently worded but contain similar requirements.

The Companies Commission of Malaysia should consider whether to enshrine similar requirements in the Companies (Corporate Rescue Mechanism) Rules 2018. Incorporating the need for a report to be made by the proposed judicial manager specifically addressing whether the statutory purposes specified in sections 405(1)(b)(i) to (iii) will be capable of being satisfied and why will significantly contribute to the material information and evidence placed before the court for its consideration during the application.

^* With the assistance and contribution of Wong Yong Jim, a pupil-in-chambers in the Dispute Resolution department of Shearn Delamore & Co.

Notes