Top 5 Restructuring & Insolvency Cases in Malaysia for 2020

We continue the Top 5 cases series with the top five restructuring & insolvency cases in Malaysia for the year 2020. You can also read the 2019 edition. This year’s cases range from restraining orders, judicial management and voluntary arrangement in bankruptcy.

#1: Mansion Properties – Federal Court Rules that the Restraining Order Can be Applied Ex Parte

(Federal Court decision in Mansion Properties Sdn Bhd v Sham Chin Yen and others with grounds of judgment dated 24 November 2020)

Judges: Rohana Yusuf PCA, Azahar Mohamed CJM, and Mohd Zawawi Salleh FCJ (writing the grounds of judgment)

Why is this case important?

I wrote a case update on this decision earlier. This case is significant for two issues.

First, the Federal Court ruled that a restraining order in a scheme of arrangement can be obtained ex parte. The Court of Appeal in this decision had seemingly ruled that the applicant company had to first serve the restraining order application on its creditors.

Giving prior notice inevitably resulted in many of these creditors appearing and opposing the making of the initial restraining order. The company would be delayed in obtaining the crucial breathing space.

This Federal Court decision now makes clear that it is consistent with the legislative intent to allow for an ex parte urgent restraining order.

Second, there is one ancillary effect of this decision. This case appears to endorse the point that an applicant must meet the four pre-conditions in section 368(2) of the CA 2016 from the very start. There cannot be an initial three-month restraining order without having first met the four pre-conditions. This Federal Court seems to tacitly acknowledge the need for these requirements at [50] of the grounds of judgment. See my earlier commentary on the need to meet these four pre-conditions.

Therefore, the company will face the hurdle of obtaining some support from its creditors. In particular, the company would need more than 50% in value of the proposed scheme creditors to support the nomination of a director (see section 368(2)(d) of the CA 2016). As a remedy for this difficulty, the proposed Companies Amendment Bill will allow for an initial 60-day moratorium.

#2: Biaxis and Sin Soon Hock  – High Court Imposes Difficult Pre-conditions for Grant of a Judicial Management Order

(High Court decisions in Re Biaxis (M) Sdn Bhd [2020] MLJU 1188 and Sin Soon Hock Sdn Bhd [2020] MLJU 1242)

Judge: Wong Hok Chong JC

Why is this case important?

I wrote a case update on the Biaxis decision earlier while Sin Soon Hock is a decision following the same theme.

Both the decisions were by the same Judicial Commissioner and he had dismissed the applications for a judicial management order.

Both decisions set out very stringent requirements for the filing of a judicial management application. The Court required a detailed statement of proposal and an almost full-fledged restructuring proposal at the time of filing the application.

Arguably, this Malaysian approach goes against the grain of judicial management principles in Singapore as well as the administration case law from the UK (from which judicial management is inspired from).

Judicial management and administration focuses on the speed of allowing the distressed company to enjoy moratorium protection and to have the court-appointed insolvency practitioner to take charge. The requirements from Biaxis and Sin Soon Hock mean that a lot of time and money will be spent with a potential judicial manager candidate. This is for a proposal or expert report to be produced to the court.

#3: Sulaiman & Taye – High Court Reboots Fraudulent Trading in Winding Up

(Tetuan Sulaiman & Taye v Wong Poh Kun & Anor [2020] MLJU 1070 with grounds of judgment dated 8 July 2020)

Judge: Ong Chee Kwan JC

Why is this case important?

I wrote a case update on this decision earlier.

This is a decision concerning fraudulent trading liability against directors of a wound up company. All of the Malaysian decisions up to this point had imposed personal liability on the delinquent directors and the directors had to pay directly to the aggrieved creditor who filed the action.

One of the significant points from this decision is as follows. Once the company is wound up, unless there are good reasons, any payments by the delinquent person ought to be paid to the liquidator as contribution to the company’s assets. This ensures an equitable distribution of assets to all the creditors. There will not be a preference of one creditor over others.

Therefore, this demotivates any creditor from trying to seek personal recovery for fraudulent trading against the directors. Any recovery would be paid to the liquidator for all the creditors to enjoy.

When the court makes an order under the fraudulent trading section, the court may order the delinquent to be personally liable not only for the debts or liabilities owed to the creditor who brought the action, but for all or any of the company’s debts or other liabilities. Under such circumstances, it may be more appropriate that the payments be made to the company and not to the aggrieved creditor.

Finally, it is desirable that a fraudulent trading application should involve the liquidator of the company if the company is wound up at that time of the application. Under the fraudulent trading section, the liquidator may give evidence or call witnesses himself at the hearing.

#4: Lim Cheng Pow – High Court Decides on First Voluntary Arrangement for Personal Bankruptcy

(Lim Cheng Pow v Maybank Investment Bank Berhad & Anor [2020] MLJU 1514 and with grounds of judgment dated 12 May 2020)

Judge: Nadzarin bin Wok Nordin JC

Why is this case important?

This is the first decision concerning the voluntary arrangement provisions for personal bankruptcy. Voluntary arrangement is like a corporate rescue or restructuring mechanism. But it is for individuals and under the Insolvency Act 1967. I touched on voluntary arrangement and other bankruptcy changes in my earlier article.

In this case, Tan Sri Dato’ Lim Cheng Pow (Debtor) owed well in excess of RM100 million to Maybank Investment and Maybank. The banks had initiated bankruptcy proceedings against  the Debtor.

The Debtor obtained an ex parte voluntary arrangement interim order. This gave the Debtor an interim moratorium of 90 days. No bankruptcy petition and no legal proceedings can be proceeded with against the Debtor except with permission of the court. The banks applied to intervene and to set aside the interim order.

First, the Court emphasised that there was a duty of full and frank disclosure when applying for the ex parte interim order. The Court found that the Debtor had some lack of bona fides. The Debtor had failed to make full disclosure. In particular, section 2D(2)(a) of the Insolvency Act 1967 states that the Court must be satisfied that “no previous application has been filed by the debtor“. This would extend to include any previous application of a similar nature, like a debtor’s petition for restructuring his debts.

Second, there must be meticulous compliance with the procedural requirements and timelines for the voluntary arrangement. This is in light of the interim order only lasting for 90 days and there cannot be an extension.

Third, the Court applied, by analogy, similar corporate principles from the scheme of arrangement of companies. The Court could at the preliminary stage assess whether the proposed scheme under the voluntary arrangement was reasonable and fair or not. The Court assessed the proposed scheme in this case, and found it to be inherently flawed, defective and misguided.

#5: First Omni – High Court Refers to the Gibbs Rule on No Restructuring of a Foreign Law Debt

(RHB Bank Berhad v First Omni Sdn Bhd & Anor [2020] MLJU 676 with grounds of judgment dated 30 April 2020)

Judge: Wong Siong Tung JC

Why is this case important?

This may be the first known Malaysian decision to apply what is known as the rule in Gibbs. This rule is named after the English Court of Appeal case of Antony Gibbs & Sons v LA Societe Industrielle Et Commerciale Dex Metraux (1890) 25 QBD 399.

The effect of the rule in Gibbs is that a discharge or compromise of any debt under foreign law is only effective as a discharge of the debt in England if, and only if, it is a discharge under the law applicable under the contract. Hence, a foreign composition or a scheme of arrangement is not regarded as effective unless it operates as a discharge according to the law of the debt. The exception is where a creditor submits to the foreign proceeding.

In this case, RHB Bank had a claim for outstanding amounts under banking facilities with the 1st Defendant, and with a claim under a corporate guarantee provided by the 2nd Defendant. The corporate guarantee had Malaysia law as the governing law.

The 2nd Defendant had successfully carried out a scheme of arrangement in Singapore. RHB Bank appeared to have participated in that Singapore scheme of arrangement. RHB Bank had filed a proof of debt in the scheme of arrangement. However, the scheme manager had rejected the proof of debt. The scheme of arrangement was sanctioned by the Singapore Court.

Eventually, RHB Bank sued the 2nd Defendant in Malaysia for the guaranteed sum under the banking facilities. The 2nd Defendant filed an application for preliminary determination of certain issues in order to dispose of the suit.

We only focus on one of the key issues. Whether the Singapore scheme of arrangement as sanctioned by the Singapore Court discharged the 2nd Defendant’s obligations and liabilities under the corporate guarantee.

The Court proceeded to find that since the law of contract for the corporate guarantee is Malaysia law, the liabilities and debts under the corporate guarantee cannot be discharged by a foreign law. In this case, the law of Singapore through the Singapore scheme of arrangement.

The Court cited a series of English cases, including Antony Gibbs & Sons, National Bank of Greece and Athens v Metlin [1957] 3 All ER 608, and Global Distressed Alpha Fund 1 Limited Partnership v PT Bakrie Investindo [2011] 2 BCLC 275.

Ultimately however, the Court held that the issues within the preliminary determination application were not suitable for determination without the full trial of the action. Therefore, the Court dismissed the application.

This issue on the rules in Gibbs and also whether RHB Bank would be treated as having submitted to the Singapore scheme of arrangement jurisdiction may be more fully determined at the trial of the action.

Some jurisdictions have criticised the rule in Gibbs and have attempted to distinguish and depart from the rule. Strict adherence to the rule in Gibbs would not assist cross-border debt restructuring.

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