S 366 CA 2016
When a company is riddled with debt and facing a worsening financial position, an option for the company to temporarily escape their predicament is to apply for an order under s 366 CA 2016 for a scheme of arrangement. A scheme of arrangement is ‘a statutory mechanism for the implementation of a transaction between the company and its members and creditors and in recent years, it has become an increasingly popular tool for companies seeking to effect a debt restructuring’ (see Pathfinder Strategic Credit LP and another v Empire Resources Pte Ltd, 2019 at paragraph 27).
Under this section, the distressed company will have to ‘seek permission from the court to conduct a meeting between its creditors and members to discuss on the proposed scheme of arrangement’ (s 366(1) CA 2016). Once the court grants leave to conduct this meeting, the Court will order under s 366(1) and (2) CA 2016 for parties involved to attend the same, hence such meeting is considered as a ‘Court convened meeting’. In this ‘Court Convened Meeting’, ‘the proposed scheme of arrangement will be negotiated and will only be valid if it is approved by 75% of the total value of creditors or class of creditors or the members or class of members present and voting either in person or by proxy at the meeting’ (s 366(2) CA 2016). If approved, the proposed scheme becomes binding on all the parties involved’ (s 366(3) CA 2016).
The time taken to convene the meeting up to the tabling of the proposed scheme is often viewed as a ‘brief respite for the distressed company from its daily struggles of managing their affairs and the demands of the creditors’ (see Mansion Properties Sdn Bhd v Sham Chin Yen & Ors, 2021 at para 26). Oftentimes, such scheme would be a last-ditch attempt for the distressed company to save itself, failing which, the company will likely be wound-up.
S 368 CA 2016
At the same time when applying for an order under s 366 CA 2016, the distressed company has also the option to apply for a restraining order under s 368 CA 2016. Both orders are usually applied together. Under the restraining order, the Court has the power to effectively restrain any legal proceedings that has been or would be initiated against the applicant company. The Court ‘may grant a restraining order to a company for a period of not more than 3 months, though, the Court has the discretion to extend this period for not more than nine months if the company fulfils the requirements set under s 368(2)(a)-(d) CA 2016.
Definitely, a restraining order would provide some relief against the creditors. Without such an order, the distressed company would be spending considerable time and resources to resist a multitude of legal suits from creditors seeking to recover their debt. With legal proceedings put on hold momentarily, the company can focus on restructuring its debt with the eventual hope of keeping the company afloat.
It is common practice for both orders to be applied ex parte. Of course, disgruntled creditors would view such an application as merely an attempt to delay the inevitable. Some creditors contend that applications ought to be made inter partes to allow creditors to be heard. The Federal Court had occasion to consider the issue in Mansion Properties Sdn Bhd (2021).
Background facts of Mansion Properties Sdn Bhd
Mansion Properties Sdn Bhd [MPSB] was a developer for the D’Mansion hotel and condominium project. Respondents were purchasers of the condominium. Due to late delivery of vacant possession, the respondents sued MPSB for damages.
MPSB filed for orders under ss 366 and 368 CA 2016 seeking an order to convene a meeting with its creditors to propose a scheme of arrangement, and at the same time to restrain any legal proceedings against MPSB. The Court granted the s 366 CA 2016 order [1st Order]. Dissatisfied, the respondent sought to intervene to set aside the order, and proceeded to reject the proposed scheme of arrangement and to seek leave to continue their suit against MPSB.
Concurrently, MPSB reached agreement with creditors excluding the respondents and filed an ex parteapplication for the Court to sanction the scheme [2nd Order]. The Court granted the 2nd Order. MPSB served the 2nd Order on the respondents, who again applied to intervene, set aside the 2nd Order, or have it stayed until their application against the 1st Order was determined.
Decision of the High Court
The High Court dismissed the respondents’ applications to set aside both the 1st Order and 2nd Order. The Court considered the proposed scheme as a genuine attempt by MPSB to compromise with its creditors. The respondents appealed.
Decision of the Court of Appeal
The Court of Appeal disagreed with the High Court, and set aside the 1st Order and 2nd Order. The Court of Appeal held that the proposed scheme was not binding on the respondents because:
- The application for the 2nd Order ought to have been made inter partes since the respondents were already challenging the 1st Order. This procedural non-compliance is an abuse of process.
- The application for the 2nd Order ought to have been made to the same judge. MPSB’s conduct in applying for the 2nd Order before a different judge when the respondents’ application against the 1stOrder was pending shows that MPSB was not acting bona fide.
MPSB appealed to the Federal Court. The question of law to be determined was “(whether) an Order made pursuant to an application under s 366 and s 368 of the CA 2016 subsequently served on the creditors is an abuse of the Court process which renders the entire Court scheme or entire Court-sanctioned scheme liable to be set aside”.
In other words, ought the application for the 2nd Order pursuant to ss 366 and 368 CA 2016 be made inter partes?
The Federal Court’s decision
The Federal Court overturned the Court of Appeal’s decision, and ruled in favour of MPSB. These are their reasons:
- The legislative purpose of s 368(1) CA 2016 is to preserve the status quo, and to prevent efforts to develop and approve a scheme of arrangement from being thwarted by the dissipation of the company’s assets. There is necessary for immediate action and speedy procedures, thus an ex parte application would be suitable and appropriate to achieve the legislative purpose.
- The affected creditors can always seek to intervene to apply to set aside the ex parte order under s 368 CA 2016 once it was granted. Hence, the mere fact that orders were obtained initially on an ex partebasis without serving the same on the respondents caused no prejudice or breach of natural justice.
- S 368(2) to (7) CA 2016 already provides mandatory measures, which if not complied with, would render any restraining order liable to be set aside for irregularity. Hence, the legislature had already set the conditions to avoid any abuse of process. Since Parliament did not require an application to be made inter partes, or even served prior to hearing, hence it is not for the Federal Court to impose additional requirements not envisaged by Parliament.
It has been a common practice amongst companies to apply for orders under ss 366 and 368 CA 2016 on anex parte basis. This is oftentimes met with objection that such applications were made mala fides, with intention to delay the inevitable and amounts to an abuse of process.
By the Mansion Properties Sdn Bhd case, it is now made clear by the Federal Court that an ex parte application does not amount to an abuse of process. Aggrieved creditors therefore would have to contend with the substantive merits of the scheme of arrangement proposed, which would have been the intention of ss 366 and 368 CA 2016 in the first place.
Lycia Goh ([email protected]), Pupil-in-chambers.
Table of Cases
Mansion Properties Sdn Bhd v Sham Chin Yen & ors  1 MLJ 527.
Pathfinder Strategic Credit LP and another v Empire Resources Pte Ltd  SGCA 29.
Table of Statutes
Companies Act 2016, s 366.