Case Update: Court of Appeal on Staying the Dismissal of Judicial Management Application

The Court of Appeal in the Wellcom Communications case has decided on certain significant issues relating to a judicial management application (see the grounds of judgment dated 13 February 2019). This is Malaysia’s first appellate decision relating to judicial management.

In summary, upon the filing of a judicial management application, an automatic moratorium applies. This will stay all legal proceedings from continuing or from being commenced against the applicant company. The Court of Appeal has held that once the judicial management application is dismissed, there cannot be a grant of any stay order to stay the dismissal of the application in order to revive the moratorium effect.

Background Facts

The two applicant companies, Wellcom Communications and Rangkaian Minang, had applied for a judicial management order. The application was opposed by CIMB Bank, which was a secured creditor and debenture holder of both the companies.

The effect of applying for the judicial management order is that under section 410 of the Companies Act 2016 (CA 2016), there would essentially be, among others, a stay of all legal proceedings against the two companies. This moratorium under section 410 would last until either the making of the judicial management order or the dismissal of the application.

The High Court had dismissed the judicial management applications. The companies applied for a stay of the order itself which refused the judicial management order.  In effect, the companies wanted to revive the effect of section 410 pending the companies’ appeal against the dismissal of the applications. The High Court granted such a stay.

The Court of Appeal now heard the appeal specifically on the High Court’s making of such a stay order.

Findings

The Court of Appeal allowed the appeal and overturned the stay order. The Court briefly touched on the balancing act of the judicial management regime in allowing the rescue of a near insolvent or insolvent company and that of the creditors’ interests.

It was held that there was an abuse of process of court. Once an originating process was dismissed, the court could not grant a stay to keep the originating process alive.

Commentary

This decision itself was easily decided in terms of the narrow legal issue of whether there could be a stay of a dismissal of an originating process. However, I set out some observations on a number of comments made by the Court of Appeal. I also observe that generally, these could be seen as remarks by the Court (i.e. obiter dicta) as these remarks do not necessarily go towards the considerations for overturning the stay order of the High Court.

#1: Must Consider Strict Proof and Evidence

At [9] of the decision, the Court of Appeal observed that there may be very drastic effects of making a judicial management order in relation to an insolvent company. Such an insolvent company may have no prospect of recovering money or assets within a reasonable time. Hence, from the date of the application to the court and from the date of the judicial management order, the court must consider strict proof and evidence. The court cannot merely rely on surmise and conjecture. This ensures that creditors are not defrauded by sympathy evoking stories of insolvency companies.

The Court of Appeal did not elaborate on what is necessary to meet this threshold of strict proof and evidence. Presumably, this is a suggestion that when the applicant makes a judicial management application, sufficient evidence must be placed before the Court to satisfy the Court of the requirements under sections 404 and 405 of the CA 2016. Essentially, that the company is or will be unable to pay its debts, there can be a chance of rehabilitation, or that the interests of creditors would be better served than winding up.

#2: Expeditious Hearing of the Application

At the same [9] of the decision, the Court of Appeal also advised that the court must justly, economically and expeditiously dispose of the application and any appeal process.

This is understandable and is a welcomed approach. The mere filing of the judicial management application triggers the automatic moratorium under section 410. This moratorium lasts until the disposal of the application and with no time limit. Hence, the courts should expeditiously hear and decide on the application. The company is already in nearly insolvent or is insolvent. So time is of the essence if there is to be a chance of rehabilitating the company and also protecting creditors’ interests.

#3: Element of Bona Fide: Creditors’ Views

Finally, at [15] of the decision, the Court of Appeal commented that a judicial management application should not in the first instance be entertained if the element of bona fide is not reflected in the application. The Court suggested that one patent bona fide approach by an applicant is to write to all the concerned parties to obtain their views before the application is filed itself and also disclose to the court the creditors’ view.

My view is that the judicial management regime under the CA 2016 does not require the applicant to seek any creditors’ views before the filing of the judicial management application. The sections in the CA 2016 envisage that the application is first filed in court and the moratorium applies. Only then will notice be given to creditors under section 408 by way of, among others, advertising in newspapers.

The rationale for this is that time is of the essence. The company requires immediate stability from creditors’ legal proceedings. Alerting creditors before hand and having to obtain all the creditors’ views may allow creditors to immediately take out, or accelerate, execution or winding up proceedings.

Nonetheless, the applicant would be making the judicial management application ex parte. So, there is still the obligation to make full and frank disclosure to the Court. Commonly, the applicant would disclose the existence of all material litigation and demands that have been made against the company in question.

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