The High Court in the case of Re Sentoria Bina Sdn Bhd (grounds of judgment dated 9 July 2021) dealt with scheme of arrangement issues. First, that a restraining order could extend to the corporate guarantor of the applicant’s company. Second, the case dealt with the principles for sanction of a scheme of arrangement.
Summary of Decision and Significance
Decision by: Anand Ponnudurai JC
The Applicant was Sentoria Bina Sdn Bhd (Sentoria Bina), a wholly-owned subsidiary of the public listed Sentoria Group Berhad (SGB).
The Sentoria Group experienced cash flow difficulties and this led to Sentoria Bina applying for a debt restructuring through a scheme of arrangement.
In November 2020, Sentoria Bina (being the sole applicant company before the Court) obtained an ex parte restraining order to stay legal proceedings. The restraining order was also extended to the corporate guarantor of Sentoria Bina’s debts, namely SGB.
Some of the scheme creditors filed applications to challenge Sentoria Bina’s restraining order being extended to SGB, the corporate guarantor. These applications were still pending before the Court by the time the sanction application was eventually heard.
At the court convened meeting of the creditors, more than 90% in value of the scheme creditors voted in favour of the scheme.
The Court granted the order to sanction the scheme. The Court usefully set out that the commercial aspect of a proposed scheme should be left to the scheme creditors. The scheme creditors are in a much better position to evaluate their own commercial interests and make the necessary business judgment.
On the issue of the restraining order extending to the guarantor company, the Court found that SGB was an integral component of the scheme. The proposed scheme would not be workable without SGB.
This decision is significant in emphasising the Court’s role to not second guess the commercial decisions made by the creditors. The Court also was flexible considering the commercial reality of this case. The scheme could only work if the guarantor company also enjoyed moratorium protection through a wide restraining order.
Sentoria Bina is the construction arm of the Sentoria Group of companies. Sentoria Bina has been the main contractor for the Sentoria Group’s resort development projects and other civil and building work.
The Sentoria Group ran into cash flow difficulties. The onset of the Covid-19 pandemic also contributed to its financial challenges.
Sentoria Bina needed a debt restructuring and applied to the Court for leave to hold meeting of creditors as part of a scheme of arrangement. Sentoria Bina also applied for a restraining order.
On 12 November 2020, the Court granted the ex parte restraining order to Sentoria Bina on the following terms. The terms extended the restraining order to the guarantor of some of Sentoria Bina’s debts, namely SGB:
“A Restraining Order pursuant to Section 368(1) of the Act to forthwith restrain and stay all and/or further and/or future proceedings in any action or proceedings against SBSB and/or its assets and/or its guarantor(s) guaranteeing the performance of SBSB’s obligations under any documents or security documents …” (emphasis added)
On 31 December 2020, Sentoria Bina issued its explanatory statement ahead of the scheme meeting scheduled for 29 January 2021. This explanatory statement set out the proposal for the proposed scheme of arrangement.
Prior to the scheme meeting, several scheme creditors approached Sentoria Bina to amend the amount due to them. Upon verification, Sentoria Bina amended the amounts due to some of the scheme creditors. The total amount of scheme debts was approximately RM110 million.
On 29 January 2021, Sentoria Bina held a virtual meeting with its scheme creditors for voting on the proposed scheme of arrangement. The court-appointed director as part of the restraining order, Dato’ Jimmy Chan, chaired the scheme meeting.
The total value of the debts of the scheme creditors attending the scheme meeting was more than RM97 million. 93.04% of the value of these scheme creditors voted in favour of the proposed scheme. 6.96% in value voted against.
At the scheme meeting, some of the other scheme creditors had for the first time raised queries on the debt due to them. Sentoria Bina was not able to verify them on the day itself but subsequently undertook a verification exercise. Sentoria Bina was agreeable to make further amendments to include additional debts.
Sentoria Bina exhibited an addendum in the court papers and where the total scheme debts had increased to just over RM111 million. Sentoria Bina updated the Court that the increase in the debt did not affect the outcome of the voting at the scheme meeting. The percentage of those against the scheme was still only 7.45% in value.
After the scheme meeting, Sentoria Bina applied to the Court to sanction the scheme as approved by the scheme creditors at the scheme meeting.
On the other hand, there were four different scheme creditors who intervened in the court proceedings. They challenged the scheme proceedings. In summary, their challenges were:
- To set aside the restraining order or for leave to proceed with a suit that was pending a summary judgment decision.
- To set aside the restraining order in relation to it being extended to SGB, the guarantor.
- Clarification or challenges in order to increase the creditors’ debts admitted in the scheme.
- General challenge to the sanction of the scheme on the ground that the scheme was speculative.
The Court wanted to first determine whether it should sanction the scheme of arrangement.
Compliance with Requirements of Section 366 of the CA 2016
First, the Court was satisfied that all the requirements in terms of advertisement and service were fulfilled. The Court was also satisfied that the classification of creditors was correct. There was only one single class of unsecured trade creditors that share similar legal rights. None of the interveners had challenged or raised any issues on the classification of creditors.
Whether an Intelligent and Reasonable Person Would Approve the Scheme
Second, the Court had to assess if the proposed scheme was a scheme that an intelligent and reasonable person would approve. Or, whether the scheme speculative as contended by some of the interveners. The Court agreed that an intelligent and reasonable person would approve because:
- Some of the interveners are not opposing the scheme. They are merely requesting that their debt be varied/increased.
- The proposed scheme does not entail any reduction in the scheme debts. Merely an extension of time to pay the debts in full over 6 years.
- There was BDO’s opinion (as the financial advisor of the scheme) that creditors are only expected to recover 11.5% of the sums in a liquidation of Sentoria Bina.
- There is also the impact on any house buyers who bought affordable homes being constructed by Sentoria Bina and SGB.
Therefore, the proposed scheme certainly seemed more viable than any liquidation.
The Court could not conclude that the proposed scheme was speculative. The financial aspects of the scheme were proposed with the guidance and advice of BDO and Ernst & Young. The proposed scheme was also formulated on their advice and that they too have taken the view that the scheme is more viable to Sentoria Bina and the creditors as opposed to liquidation.
Should Not Second Guess Creditors’ Commercial Decisions
Third, and significantly, 93% in value of the scheme creditors overwhelmingly supported the scheme. The Court should not second guess the commercial decisions of the scheme creditors (see Re Axa Asia Pacific Holdings Ltd  VSC 4, Re BRL Hardy Ltd (2003) 45 ACSR 397, Re Sonondyne International Ltd  15 ACSR 494, and Transmile Group Bhd  9 CLJ 1071).
The Court held that the commercial aspect of the proposed scheme of arrangement should be left to the scheme creditors. The scheme creditors are in a much better position to evaluate their own commercial interest and make the necessary business judgment whether to accept or reject the proposed scheme.
Whether Restraining Order Extended to the Guarantor-Holding Company
Fourth, the Court dealt with the challenge that the restraining order should not restrain proceedings against guarantors. When first making the restraining order, the Court was aware that the restraining order would also extend to SGB, the guarantor and holding company.
The financial position of Sentoria Bina and SGB were closely intertwined. It was SGB’s financial difficulties that caused SGB to make little payment of the amounts it owed Sentoria Bina. Further, through the proposed scheme, Sentoria Group would settle the total scheme debts of Sentoria Bina.
In this case, the restraining order was not in relation to guarantors who were independent of Sentoria Bina or guarantors who were not involved in the proposed scheme.
On the contrary, SGB was an integral component of the scheme to the extent that the proposed scheme would not be workable without SGB. If the restraining order was not granted in relation to SGB as guarantor, the continued proceedings or actions by the creditors against SGB would have been detrimental or even fatal to the proposed scheme as a whole. The Court also noted that 71.86% in value of the total scheme creditors had also stated their support of the granting of the restraining order.
The interveners raised the objection based on the wording of section 368(6)(b) of the CA 2016:
“(6) An order made by the Court under subsection (1) shall not have the effect of restraining: –…(b) further proceedings in any action or proceeding against any person including the guarantor of the company but does not include the company that had applied for the restraining order.” (emphasis added)
The Court found that the operative words of “shall not have the effect of restraining” does not prevent the Court from granting an order expressly or specifically to restrain proceedings against guarantors.
The interveners had only cited cases where the restraining order was granted to the applicant companies in those cases. The guarantors then attempted to rely on such a restraining order to contend that proceedings against them as guarantors ought to also be restrained.
On the other hand, if an applicant company expressly and specifically seeks for the restraining order to be applicable to a guarantor, and if the applicant can justify it on the particular facts of the case, the Court did not see section 368(6)(b) of the CA 2016 as prohibiting the issuance of such an RO specifically extending to a guarantor.
Under scheme law, the Applicant can advance a scheme of arrangement that not only discharges or varies the Applicant’s debts and liabilities but also, the liabilities of the Applicant’s guarantors (see Daewoo Singapore  4 SLR 35, and applied in Re Khondker Yarad Ahmed  3 CLJ 637 and Ipmuda Berhad v Bujang Buyong  18 MLRH 273).
Here, the scheme creditors voted for the proposed scheme that would also grant a moratorium against any claims against SGB as guarantor. With SGB also being one of the sources of funds to settle the scheme debts, it made sense to the proposed scheme if the scheme creditors were prevented from commencing proceedings against SGB as guarantor.
Therefore, in light of all the above, the Court made the sanction order to approve the scheme.
I make four comments.
First, this decision on the sanction of the scheme is welcomed. As a matter of scheme of arrangement law, the Court should not second guess the commercial decisions made by the scheme creditors.
Second, on the breadth of the restraining order extending to a guarantor company, the Court took a very commercially sensible approach. The guarantor company was a critical and integral component of the proposed scheme. More so here, where the Court was already at the sanctioning stage. With the scheme about to be sanctioned, the scheme would also modify the creditors’ claims against the guarantor company.
Third, there may be an opposing legal argument on the Court’s interpretation of the restraining order and its application to a guarantor.
There is the argument that Parliament did indeed want to prevent the restraining order from extending to protecting a guarantor company.
The current section 368(6)(b) of the CA 2016 is adopted from the previous section 176(10F) and (10G) of the Companies Act 1965 (CA 1965).
(10F) An order made by the Court under subsection (10) shall not have the effect of restraining further proceedings in any action or proceeding against any person other than the company that had applied for the restraining order.
(10G) For the purpose of subsection (10F), the term “any person” includes a guarantor of the company.
These subsections (10F) and (10G) were specifically introduced under the Companies (Amendment) Bill 2000. The Explanatory Statement of this Bill stated that: Clause 13 of the Bill seeks to amend section 176 to ensure that a restraining order issued under subsection (10) shall not extend to any person, including a guarantor, other than the applicant company.
The Hansard records for 25 April 2000 was for the Second Reading of the Companies (Amendment) Bill 2000. Hansard suggests that the inclusion of these provisions was a result of restraining orders having been granted and applying to guarantors or to other parties. These provisions were to prevent this from happening:
Pada masa negara mengalami kegawatan ekonomi, syarikat-syarikat yang turut mengalami masalah kewangan telah membuat permohonan kepada mahkamah di bawah Seksyen 176(10) untuk mendapat perintah perlidungan atau restraining order bagi menghalang apa-apa tindakan atau prosiding selanjutnya terhadap syarikat berkenaan. Diperhatikan sebilangan daripada perintah yang telah dikeluarkan telah meliputi penjamin atau pihak-pihak lain selain daripada syarikat pemohon. Ia temyata bercanggah dengan Seksyen 176(10) yang mana hanya membenarkan perintah sedemikian dibuat untuk menghalang sesuatu tindakan atau prosiding daripada diambil terhadap syarikat pemohon sahaja. Berikutan daripada itu, bon-bon yang dijamin pembayarannya tidak akan memperolehi keyakinan pelabur-pelabur seperti mana yang dihasratkan.
Oleh yang demikian, adalah dicadangkan dimasukkan peruntukan baru Subseksyen (10f) dan (10g) untuk menjelaskan bahawa perintah yang dikeluarkan oleh mahkamah di bawah Seksyen 176(10) tidak meliputi atau merangkumi penjamin atau pihak lain selain daripada syarikat pemohon atau bagi pihak syarikat yang terbabit sahaja. Cadangan ini terkandung dalam Fasal 13 Rang Undang-undang.
Nonetheless, one workaround to this restriction would have been to include that guarantor company itself as an applicant company in a proposed scheme of arrangement.
Fourth, the upcoming amendments to the CA 2016 will specifically address this restriction on the breadth of the restraining order. There will be new provisions to expressly allow a restraining order to extend to a subsidiary, holding company or ultimate holding company. This is under the new proposed section 368A.
Echoing Anand Ponnudurai JC’s reasoning, the proposed section 368A extended restraining order will require that the related company “plays a necessary and integral role” in the proposed scheme of arrangement and that the proposed scheme “will be frustrated” if the actions are taken against the related company.