Case Update: The First Judicial Management Decision in Malaysia

Summary

The High Court case of Re Leadmont Development Sdn Bhd [2018] MLJU 1320; [2018] 1 LNS 1420 is the first decision on judicial management in Malaysia.

Judicial management orders were granted ex parte for two related companies, Leadmont Development Sdn Bhd (“Leadmont”) and its subsidiary Sierra Delima Sdn Bhd (“Sierra Delima”). The judicial management orders were to facilitate the rehabilitation of these two companies. The companies wanted to successfully complete their project, the Selayang StarCity Project. A secured creditor of the companies, Infra Segi Sdn Bhd (“Infra Segi”), intervened after the grant of the judicial management orders to set aside the orders.

Image: http://www.selayangstarcity.com.my/

The decision is important for setting out the background and statutory framework of the judicial management provisions in Malaysia. It spells out the test for the grant of a judicial management order. The Court ultimately exercised its inherent jurisdiction to set aside the earlier judicial management orders.

Background Facts

Leadmont is the developer of a project known as the Selayang StarCity Project. This project had stalled as the main contractor, Sierra Delima, and the sub-contractors had not been paid. Their contracts had been subsequently terminated.

It was not in dispute that Leadmont was unable to pay its debts.

The successful rehabilitation of both Leadmont and Sierra Delima hinged on the successful completion of the project. In turn, this depended on the securing of a foreign currency loan of USD40 million from a foreign bank and for certain advances from another company, Augment Prosperity Sdn Bhd. It was proposed that the funds will be utilised to complete the Selayang StarCity Project.

In separate proceedings, Leadmont and Sierra Delima successfully applied ex parte for judicial management orders with the aim of carrying out this rehabilitation plan. Subsequent to the judicial management orders, Infra Segi intervened in both the proceedings. Infra Segi applied to set aside the orders on the grounds that there had been material non-disclosure of facts and on mala fides.

Legal Principles

(i) The Legislative Purpose of Judicial Management

The Honourable Judicial Commissioner Wong Chee Lin first set out the brief history of the Corporate Law Reform Committee (“CLRC”) process. The CLRC had been set up on 17 March 2003. Its aims were to undertake a fundamental review of the legislative policies on corporate law and to propose amendments . The CLRC’s consultation documents and Final Report recommended that the Court should be empowered to make a judicial management order if certain conditions were satisfied.

Next, the Court referred to the Hansard debate of the Companies Bill where it was clear that judicial management was introduced to rehabilitate companies that are under financial distress.

The Court then went through the relevant provisions under the Companies Act 2016 (“CA 2016”).

(ii) Test for Judicial Management

The test for judicial management is set out in section 405(1) of the CA 2016.

The first condition is where the Court must be satisfied that the company is or will be unable to pay its debts. The term ‘satisfied’ indicates that there must be a higher threshold of persuasion (referring to Hoffman J (as he then was) in Re Harris Simons Construction Ltd [1989] BCLC 202 in a decision on the UK administration procedure). On being ‘unable to pay its debts’, this is as set out in section 466(1) of the CA 2016.

The second condition is where the Court considers that the making of the judicial management order will likely achieve one or more of the three purposes in section 405(b)(i) to (iii) of the CA 2016.

Under the first purpose set out in section 405(b)(i), it refers to “survival of the company … as a going concern.” The phrase ‘going concern’ would mean ‘continue its operations for the foreseeable future’. The second purpose set out in section 405(b)(ii) refers to approval for a scheme of arrangement. The third purpose set out in section 405(b)(iii) refers to a more advantageous realisation of the company’s assets than winding up.

The Court also highlighted that the Court retains an overriding power under section 405(5)(a) of the CA 2016 to make a judicial management order if it considers the public interest so requires. “Public interest” is not defined in the Act and so, must be determined on a case to case basis.

The special right to oppose an application for judicial management is only conferred on one specific type of secured creditor. That is a debenture holder who can appoint a receiver or R&M over the whole, or substantially the whole, of a company’s property.

On the other creditors of the company, the Court expressed the view that other creditors can only appear at the hearing of the judicial management application to oppose the nomination of the judicial manager. They cannot oppose the making of the judicial management order itself.

(iii) Discharge or Setting Aside of the Judicial Management Order

For a setting aside of the judicial management order, statute only spells out four situations where such an order can be discharged.

  • The first is where the creditors do not approve the judicial manager’s proposal (section 421(5) of the CA 2016).
  • The second is where the purpose of the judicial management order has been achieved (section 424(1) and (2)(a) of the CA 2016).
  • The third is where the purpose of judicial management is incapable of achievement (section 424(1) and (2)(a) of the CA 2016).
  • The fourth is where there is unfair prejudice (section 425(1)(a) and 425(3)(d) of the CA 2016).

The Court noted that there is a glaring lack of a provision in the CA 2016 and the Companies (Corporate Rescue Mechanism) Rules 2018 (“Rules”) for the setting aside of a judicial management order by a creditor. Unlike in Malaysia, the UK provisions expressly allows for the setting aside of an administration order.

Decision on the Setting Aside

First, the Court held that the general provisions under the Rules of Court 2012 to allow for setting aside of an ex parte Order did not apply. In particular, Order 32 rule 6 of the Rules of Court 2012 only applied to an ex parte Order made in a notice of application. In this case, the ex parte Order was made pursuant to an Originating Summons.

Secondly, the Court nonetheless accepted that it had the inherent jurisdiction for the setting aside of an ex parte Order. The Court’s inherent jurisdiction is very wide and would allow for the setting aside if the Order was obtained without full and frank disclosure or was obtained mala fides or was otherwise defective on substantial grounds. The Court drew an analogy with the decision in PECD Bhd [2010] 1 CLJ 940 where the High Court set aside an ex parte Order for leave to convene a creditors’ meeting and a restraining order in a scheme of arrangement.

The Court then proceeded to consider the various arguments raised on the alleged lack of full and frank disclosure. The Court assessed each of the factual grounds raised. In the end, the Court held that there should not be a setting aside on the ground of non-disclosure of material facts or mala fides. Although more information should have been given during the application for the judicial management order, the applicant companies had disclosed sufficient facts to satisfy the threshold for the granting of the order. The facts which were not disclosed would not have led to the Court refusing the order.

Thirdly however, the Court considered one further ground. Together with Infra Segi, six sub-contractors of Sierra Delima had exhibited letters to confirm that they were opposed to the judicial management order and wished to have it set aside as well. The total creditors’ claims in opposition to Sierra Delima amounted to 46.9% of the total value of creditors. Infra Segi’s debt amounted to 26% of the total indebtedness of Leadmont.

This clearly meant that there was no way the scheme to be proposed by the judicial management could be approved by the requisite majority of creditors. The judicial manager’s proposal would require 75% approval of the total value of creditors.

The Court invited Infra Segi to give Leadmont and Sierra Delima a chance to put forward the scheme before the creditors. However, Infra Segi insisted on proceeding with its setting aside and opposition. While the Court sympathised with Leadmont’s plight and its attempt to rehabilitate the project, the proposal was now an exercise in futility. More than 25% of the total value of creditors would vote against any scheme or proposal. The Court would not act in vain. The judicial management orders were set aside.

Comments

This High Court decision sets out a very useful framework in applying the test for judicial management order. As this issue did not arise here, it will require a further case to decide when a Court can exercise its overriding power to apply public interest to allow for judicial management.

Tactically, it will be critical for creditors to be aware of a pending judicial management application. They will then need to intervene in order to express their views. The Court’s observation in this case appeared to be that all unsecured and secured creditors (aside from the debenture holder with the right to appoint the receiver or R&M) did not have a right to object itself to the judicial management application, and could only express their view on the choice of the judicial manager.

The Court has already observed that there are only four statutory circumstances for the discharge or setting aside of a judicial management orders. It may be difficult to set aside judicial management orders.

For applicants filing a judicial management application, it is then also critical to take note of two points. First, the important duty to make full and frank disclosure of all material facts. It is better to err on the side of caution and disclose more facts. The second point would be that it maybe critical to already have some sort of buy-in or support by major creditors. If certain creditors hold a veto block of more than 25% of the debts, and they continue to oppose the judicial management, then any judicial management application and proposal is bound to fail.

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