Judicial Management is a mechanism introduced in the Companies Act 2016 (“CA 2016”) aimed at rehabilitating a financially distressed company. Governed by Subdivision 2 of the Corporate Rescue Mechanisms under the CA 2016, an application for judicial management can be made on the belief that the company is or will be unable to pay its debts, and there is reasonable probability that the mechanism would preserve all or part of the business, or the mechanism would better serve the interests of creditors. The Court is then empowered to grant a judicial management order upon being satisfied that the requirements set out in Section 405 of the CA 2016 have been fulfilled.

A judicial manager will then be appointed by the court to carry out his duties and turn the company’s finances around into a state of profitability. A key aspect of this mechanism and the core of this article can be found at Section 410 of the CA 2016. Once an application for a judicial management order has been made, the Company is automatically in moratorium and no legal proceedings can commence nor continue except with leave of Court, in certain circumstances.

In October 2022, the Court of Appeal delivered its judgement in PNL Capital Sdn Bhd & Ors v Loh Teck Wah & Ors [2022] 6 MLJ 304 where the judicial management mechanism was abused to leverage its automatic moratorium feature.

The facts

Loh is an individual who is a minority shareholder and director in the PNL Group.

Liew was a senior employee in the PNL Group who resigned and was later appointed as the sole director of a company named Fintree Capital Sdn Bhd (“Fintree”).

Fintree is a rival company incorporated and funded by Loh in which it carried out the same business as the PNL Group.

Upon Liew’s departure from the PNL Group, it was discovered via a forensic investigation that confidential information had been downloaded from the PNL Group’s office server and uploaded to Liew’s personal cloud. This led the PNL Group to obtain an Anton Piller Order against both Liew and Fintree where more confidential information belonging to the PNL Group were discovered to be in their possession.

Considering the ample amount of evidence unearthed by the PNL Group, Liew and Fintree decided to record a consent judgement that would, among others, prevent them from accessing and/or using the confidential information.

Unfortunately, before the terms could be recorded, Loh filed an ex parte application for a judicial management order (“JMO”) which effectively put Fintree in an automatic moratorium. This had the further effect of preventing Liew and the PNL Group from recording the said consent judgement.

The reason behind Loh’s decision to disable Liew and Fintree from recording the consent judgement with the PNL Group was because Loh was actually a shadow director of Fintree, and the JMO was strategic in light of his bigger battle with the majority shareholders of PNL Group.

At the time Loh filed the JMO application, Liew was his biggest liability because the consent judgement would have been an admission to PNL Group’s claim of breach of confidential information and fiduciary duty with intent to injure PNL Group’s business. Since the puppet was no longer obeying the puppet master, Loh had to take the circumventing step of filing this JMO.

The High Court

The learned judicial commissioner was of the view that as long as the requirements listed in Section 405 of the CA 2016 are satisfied, the application should be granted. There was no necessity to go into any surrounding facts, especially when those facts form the subject matter of a dispute in a different court i.e., the shareholders’ dispute.

This led the judicial commissioner to grant Loh’s JMO application.

The Court of Appeal

On appeal, however, the JMO was set aside. The Court of Appeal found that:

• The requirements under Section 405 of the CA 2016 were never satisfied because the company was actually able to pay its debts.
• Had the High Court considered the shareholders’ dispute between Loh and PNL Group, it would have found that Loh and the majority shareholders of PNL Group could not agree on how they were to go about their separate ways. Loh claimed that since he was not able to swap shares with one of the shareholders to take over PNL Capital, he was allowed to start his own company and to bring along staff from the PNL Group.
• The High Court should have also considered the fact that Liew affirmed that his wrongdoings were executed under Loh’s instructions.
• The JMO was apparently a tactic to remove Liew from his control of Fintree, especially since Liew was no longer taking Loh’s instructions and intended to record a consent judgement with PNL Group.
• The Court of Appeal remarked that while there is no need to decide on the shareholders’ dispute, it must still have regards to the facts of the dispute to ascertain the intention behind the application for the JMO.

 

A key takeaway from this case is that while Parliament may enact the best of laws with the best of intentions, there will always be an attempt at utilizing the law for malice. The courts would then be the last line of defence to prevent the execution of those intentions, which is why it is important for the courts to consider the surrounding circumstances, without stepping over its jurisdiction and deciding on them.

Written by: Irdina Azira Edzlyzam ([email protected]), pupil reading in the chambers of Chan Kheng Hoe ([email protected]).