Judicial Management Case Study – The Rise and Fall of Photon Bhd

The Malaysia Insolvency Conference 2018 will be held this Thursday 22 November 2018. I am organising the case study session where it will feature a hypothetical judicial management case study. It is still not too late to sign up for the conference.

There is a strong lineup of speakers: The Honourable Judicial Commissioner Puan Wong Chee Lin, Melisa Tai of Adnan Sundra & Low, and Koo Yin Soon of Shearn Delamore & Co. The two speakers will take on the role of opposing counsel for and against a judicial management application. The Judicial Commissioner will then hear arguments, pose questions and then decide on the application. The counsel have already prepared their skeletal submissions and filed it before the Judicial Commissioner.

As a sneak preview, here are the background facts for this case study of the fictional Photon Bhd and how the company applies for judicial management. Will the judicial management application succeed? Will Photon Bhd rise again?

The Rise and Fall of Photon Bhd

Part A.            The Origins of Photon Bhd

Photon Bhd (Photon) is an unlisted public company. It was incorporated in Malaysia in 2015 arising from a 60:40 joint venture between the Malaysia and Indonesia governments. It has a paid-up capital of RM50 million.

Photon was meant to roll out an ambitious ASEAN car project, and heavily invested into research and development (“R&D”) of an electric car. Its aims were to eventually compete against the likes of Tesla, and the other Japanese and European electric car models.

Part B.            Photon Bhd’s Debts

Over the years, Photon has accumulated substantial debt. Due to the austerity measures by the Malaysian and Indonesian governments at that time, the governments, through their government-linked entities, had only contributed the working capital of the RM50 million. Photon had then raised more of its capital by taking on debt.

Photon had aggressively invested into its R&D and had a long-term 10-year plan for 2015-2025. Photon has reported annual losses. As at 30 September 2018, Photon’s total liabilities amounted to more than RM1.5 billion. Photon has more than 2,000 employees of which 70% are Malaysians, 20% Indonesians and the remaining 10% were from overseas. A key aim of Photon was to build up local expertise in the electric car industry and hence the heavy recruitment of Malaysian employees.

The first category of liabilities was RM500 million owing to secured creditors, via a syndicated term loan by 6 financial institutions (“Syndicated Lenders”). The syndicated term loan was secured by a debenture conferring a fixed and floating charge over all of Photon’s assets. The debenture would allow the Syndicated Lenders to appoint a receiver and manager over Photon’s assets. The estimate is that the value of the Syndicated Lenders’ security is RM350 million.

The second category of liabilities were RM500 million owed to bondholders under a bond issue carried out by Photon in early 2016.

The third category of liabilities were RM500 million owed to the remaining unsecured creditors, being essential suppliers and contractors.

On 1 June 2018, Photon successfully launched a prototype electric car that showed a lot of promise. The global car market was impressed by the electric car engine technology that Photon had developed. Photon started aggressively taking orders for the launch of their first line of electric cars.

Part C.            Photon’s Financial Distress

Thereafter, Photon continued to experience very tight cashflow problems. It had stopped paying its suppliers and contractors.

There was an upcoming RM25 million coupon payment due to the bondholders.

Photon had also unsuccessfully negotiated with the Syndicated Lenders on further restructuring of the RM500 million syndicated term loan.

Photon had attempted to convince the Syndicated Lenders that Photon was close to securing a round of fresh equity injection from a major China automobile company. The Syndicated Lenders had now called an event of default. Some of the suppliers had started to file legal action and some of the suppliers were close to obtaining Court judgments against Photon and statutory demands for winding up have been issued.

Photon has now decided to apply for a judicial management order. Photon proposed to appoint Mr Alan Tan, an insolvency practitioner, as judicial manager. Prior to filing the judicial management application, Photon had attempted to reach out to all its creditors to inform them that Photon’s management was willing to work with the proposed judicial manager, Mr Alan Tan, in order to continue securing the investment from the China automobile company.

The Syndicated Lenders however rejected this proposal and rejected Photon’s candidate for judicial manager. The Syndicated Lenders felt that Mr Alan Tan was too close with the existing Photon management, having acted as the financial adviser in some of the past restructuring attempts. The Syndicated Lenders were concerned that the ballooning debts of Photon was a result of mismanagement and leakages in awarding inflated contracts to related-party suppliers and contractors. The Syndicated Lenders want to appoint their own candidate as receiver and manager over Photon.

Part D.            Court Proceedings: Judicial Management Application

On 1 November 2018, Photon filed the judicial management application on a certificate of urgency. Having filed the judicial management application, Photon then served a copy of the application on the Syndicated Lenders (pursuant to section 408(b)(ii) of the Companies Act 2016).

There is an urgent exchange of affidavits between Photon and the Syndicated Lenders. Photon’s creditors also file the Notices of Intention to Appear under Form 10 in order to appear at the judicial management hearing.

It was a common position between all the parties that Photon was unable to pay its debts (within section 404(a) of the CA 2016). Photon had also produced a liquidation analysis to show the liquidation return if Photon was wound up, and where the bondholders and the other unsecured creditors would essentially only recover close to zero in winding up.

The key contention was that the Syndicated Lenders were exercising their veto right under section 409 of the CA 2016. This section states that the Court shall dismiss an application for a judicial management order if it is satisfied that, essentially, a receiver or receiver and manager referred to in section 408(1)(b)(ii) has been or will be appointed. The Syndicated Lenders confirmed that they intended to appoint receivers and managers over Photon’s assets and had a different candidate aside from Mr Alan Tan.

Photon’s position was that the making of the judicial management order would meet the purposes under section 405(b)(i): survival of the company, and section 405(b)(ii), as there would be a likely scheme of arrangement to be proposed by the judicial manager.

Photon’s position was that the veto under section 409 would be subject to the overriding public interest exception in section 405(5): nothing shall preclude a Court from making a judicial management order and appointing judicial manager if the Court considers the public interest so requires.

Based on the Notices of Intention to Appear (Form 10), all the bondholders are in support of the judicial management application and are in support of Mr Alan Tan’s appointment. Another RM375 million worth of the unsecured creditors, being the key suppliers and contractors, are also in support of the judicial management application and are in support of Mr Alan Tan’s candidacy. The bondholders and other unsecured creditors take the common position that the appointment of receivers and managers would only benefit the Syndicated Lenders as assets will be sold to merely pay back the secured debts.

However, the Syndicated Lenders point out that that the RM375 million in value of the suppliers and contractors are the same parties where the Syndicated Lenders say had been awarded inflated contracts and were related-party contracts.

Counsel for Photon and counsel for the Syndicated Lenders will now make their arguments on whether the judicial management application should be allowed. In particular, the argument is whether there is public interest under section 405(5) that allows the Court to make the judicial management order.

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