Our guest writer, Nathalie Ker, writes on the top 5 restructuring and insolvency cases in 2021.
We continue the Top 5 cases series with the top five restructuring and insolvency cases in Malaysia for the year 2021. You can also read last year’s 2020 edition.
This year’s cases cover schemes of arrangement, judicial management and winding up.
#1: Top Builders Decision – Principles on Leave Under the Restraining Order and Proof of Debt in a Scheme
Grounds by: Ong Chee Kwan JC
(Top Builders Capital Bhd and Others [2021] 10 MLJ 327 and grounds of judgment dated 30 April 2021; sanction decision dated 2 December 2021)
Why is this case important?
The High Court decision went into detail in clarifying important principles on assessing the proof of debt for the creditors’ votes in a scheme of arrangement and on obtaining leave to proceed under a restraining order.
For the proof of debt, the High Court advocated for a single approach to determine the value of the debt for purposes of voting at the creditors’ meeting as well as for distribution under the scheme.
In relation to applications for leave to proceed despite a restraining order being in place, the Court set out the following principles:
- Leave will only be granted in ‘exceptional circumstances’.
- The circumstance or combination of circumstances must be of sufficient weight to overcome the strong imperative to have the claims dealt with under the machinery of the scheme of arrangement.
- The fact that the applicant’s claim may have a ‘real prospect of success’ alone cannot constitute ‘special circumstances’.
- The contention that the legal proceedings if permitted to proceed would finalise the quantum of the applicant’s claim cannot constitute ‘special circumstances’.
- Leave will likely be granted where the legal proceedings do not impede the achievement of the scheme.
- The Court has to balance the harm to the applicant if leave is not granted against the harm to the general body of creditors.
On 2 December 2021, the High Court granted sanction of the scheme after a heavily opposed hearing. There were many issues raised including discounting of the votes of related party creditors, the conduct of the virtual creditors’ meeting and the scheme creditors being able to inspect the proofs of debt of other scheme creditors. We will need to wait for the grounds of judgment to see the reasoning of the Judicial Commissioner in deciding to sanction the scheme. The grounds will have a great impact on future schemes.
#2: AirAsia X Decision – Interplay between Schemes of Arrangement and Aviation Law
Grounds by: Ong Chee Kwan JC
(AirAsia X Berhad v BOC Aviation Ltd [2021] 10 MLJ 942 and grounds of judgment dated 19 February 2021)
Why is this case important?
Judicial Commissioner Ong Chee Kwan set out in detail the different stages of a scheme of arrangement. This weould be mainly the ‘Convening Stage’, the ‘Meeting Stage’ and the ‘Sanction Stage’. The Judicial Commissioner explained the ‘Negotiation Phase’ where the applicant would negotiate with the scheme creditors before the scheme meeting.
The Judicial Commissioner further confirmed that the test for classification is based on legal rights.
This was also the first time that a court had provided a detailed analysis of certain provisions under the Convention on the International Interests in Mobile Equipment (“the Convention”) and the Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment (“the Protocol”), in particular, Article XI(10) of the Protocol. See the earlier update on this aspect.
The Court found that a scheme of arrangement is an ‘insolvency-related event” under Article XI(10) of the Protocol.
On 16 December 2021, the Court granted sanction of the AirAsia X scheme.
#3: Scomi Group Decision – PLCs Cannot Apply for Judicial Management
Grounds by: Nadzarin bin Wok Nordin JC
(Re Scomi Group Bhd [2021] 10 CLJ 975; [2021] MLJU 2173 and grounds of judgment dated 4 October 2021)
Why is this case important?
This is the first time that the Court had interpreted section 403(b) of the Companies Act 2016 where companies that are “subject to the Capital Markets and Services Act 2007” are excluded from the judicial management regime. The earlier case update is here.
The public listed Scomi Group Bhd (Scomi) filed an application for judicial management on 14 April 2021. Scomi argued that section 403(b) should refer to only “companies licensed and regulated under the CMSA” or to only “companies that are involved in activities or markets in the capital market or which are intermediaries in the capital market”.
The Court rejected this argument, holding that section 403(b) applies to all companies whose shares are quoted on a stock market of a stock exchange and that Scomi as a listed company cannot avail itself of the judicial management provisions.
On 7 October 2021, Scomi appealed to the Court of Appeal. On 16 December 2021, the Court of Appeal granted Scomi’s application under section 44 of the Courts of Judicature Act 1964 for an order to restrain any legal proceedings against Scomi pending disposal of the appeal. This effectively revived the blanket moratorium at the appeal stage.
#4: Sunrise Megaway Decision – Courts Will Be Slow to Second Guess Liquidator’s Decision on Proof of Debt
Grounds by: Kamaludin Md Said JCA
(Sunrise Megaway Sdn Bhd (In Liquidation) v Kathryn Ma Wai Fong [2021] 3 MLJ 602 and grounds of judgment dated 18 March 2021)
Why is this case important?
The Court of Appeal set out the position that the Courts will be slow to interfere with the decision of the liquidator where the liquidator exercises his professional judgment in admitting or rejecting a proof of debt. The earlier case update is here.
The Court of Appeal reversed the finding of the High Court and held as follows:
- It is not for the Court to determine how the liquidator’s investigation is to be carried out. The Court can only interfere if the liquidator had failed to carry out investigations or his conduct was so unreasonable and absurd that no reasonable person would so act or the liquidator has acted in bad faith.
- Generally, a liquidator is only bound to take extraordinary steps to scrutinise a proof of debt on the basis that it could be a false claim in cases where he has reason to be suspicious about its genuineness or legal validity (citing the Singapore Court of Appeal case of Fustar Chemicals Ltd (Hong Kong) v Liquidator of Fustar Chemicals Pte Ltd [2009] 4 SLR 458).
- The Court should be slow to interfere with any act or decision of the Liquidator in discharging his role in a company liquidation particularly in matters involving the admission or rejection of proofs of debt that involve commercial considerations. The Court can only interfere in exceptional circumstances when the liquidator has acted in utter unreasonableness.
#5: PRPC Utilities Decision – Lower Threshold to Injunct Winding Up Petition Where There is An Arbitration Clause
Grounds by: Wan Muhammad Amin bin Wan Yahya JC
(See grounds of judgment dated 1 December 2021)
Why is this case important?
A Fortuna injunction is a type of injunction to restrain a purported creditor from filing a winding up petition against the debtor company.
The High Court decided on the proper test for the grant of a Fortuna injunction where the purported debt for winding up is subject to an arbitration agreement. The debtor-applicant needs to only establish the lower threshold of a prima facie dispute that the debt fell within the arbitration clause. This is a lower threshold than the usual test for the Fortuna injunction where the applicant has to show a bona fide and substantial dispute as to the debt.
The issue at stake was whether arbitration proceedings have an impact on the general principles that govern a Fortuna injunction. This is because parties had agreed contractually for their dispute to be determined via arbitration.
The Court held that winding up proceedings are not subject to or caught by an arbitration agreement. Thus, the arbitral proceeding in of itself does not prohibit a party from presenting and proceeding with a winding up petition.
However, the arbitration proceeding has an impact on the general principles that govern a Fortuna injunction where the applicant would merely have to show a prima facie dispute under the arbitration clause. Parties should be held to their agreement that disputes are to be arbitrated. Any weakness of a case should be a matter for the arbitral tribunal, rather than the Court, to decide.
The Court relied on the High Court case of Awangsa Bina Sdn Bhd v. Mayland Avenue Sdn Bhd High Court Malaya, Kuala Lumpur [2019] 1 LNS 590, the English Court of Appeal case of Salford Estates (No.2) Ltd v. Altomart Ltd [2014] EWCA Civ 1575, the Hong Kong Court of First Instance case of Lasmos Limited v. Southwest Pacific Bauxite (HK) Limited [2018] HKCFI 426 and the Singapore High Court case of Bdg v. Bdh [2016] 5 SLR 977.
Nathalie Ker is a restructuring and insolvency lawyer with Lim Chee Wee Partnership. She has acted in a range of matters involving schemes of arrangement, judicial management and winding up.