Firing Up and Cooling Off the Restraining Order in Schemes of Arrangement

The Companies (Amendment) Act 2024 came into force on 1 April 2024. With the amendments, we see a strengthening of the restructuring and corporate rescue laws of Malaysia.

Among the different corporate rescue tools, schemes of arrangement had already been the most-used mechanism in Malaysia. The scheme of arrangement allowed for the Court to grant moratorium protection known as the restraining order.

Here, I analyse the changes and challenges relating to the restraining order arising from the new amendments to the Companies Act 2016 (CA 2016).

The Three Phases of the Restraining Order (RO)

The RO can now be divided into three distinct phases:

  1. Phase 1: An automatic moratorium applies the moment the Court application for an RO is filed.
  2. Phase 2: The Court then decides whether to grant the initial RO for up to three months.
  3. Phase 3: The Court decides whether to extend the initial RO for up to an additional nine months.

I analyse each phase in turn.

Phase 1: Automatic Moratorium

Phase 1 triggers an automatic moratorium upon a Court application for an RO is filed – see section 368(1A) of the CA 2016.

The scheme company itself, or any member or any creditor of the company, can file the RO application.

The effect of an automatic moratorium upon the filing of an RO application is similar to the automatic moratorium upon the filing of a judicial management application – see section 410 of the CA 2016.

The scheme of arrangement automatic moratorium only lasts for a maximum period of two months from the date of filing or until the application is decided by the Court.

Therefore, the Court filing system will need a method to ensure that an RO application can be heard before the Judge within the two-month period. If not, the automatic moratorium would lapse.

There are no requirements or materials required as part of the filing of the application for an RO. On the one hand, this allows for urgent Court filing and triggers immediate protection. On the other hand, there may only be a very bare application. The concern is whether this may allow for frivolous filing of applications to trigger the automatic moratorium.

Phase 2: Initial RO for Three Months

Within the two months of filing and at the RO hearing, the Court will decide whether to grant the RO for a period of not more than three months – see section 368(1) of the CA 2016.

With the amendments to the CA 2016, there is now a clear decoupling between the initial RO for three months (under section 368(1) of the CA 2016) and the extension of the RO for up to another nine months (under section 368(2) of the CA 2016).

In particular, only the extension of the RO requires four pre-conditions to be met. I elaborate further on the extension pre-conditions in the section below.

What then are the requirements for making the initial RO?

My view is that the language in the current section 368(1) reverts the restraining order provision closer to the original section 176(10) of the Companies Act 1965. This is the original section 176(10) prior to the amendment in the Companies (Amendment) (No. 2) Act 1998 which had added section 176(10A) to the Companies Act 1965 with the four pre-conditions.

Under the original section 176(10), the High Court in Re Kuala Lumpur Industries Bhd [1990] 2 MLJ 180 decided that the requirements for a restraining order are:

  1. There must be a proposed scheme with sufficient particulars to enable the Court to assess that it is feasible and merits due consideration by the creditors when eventually placed before them. It is not necessary that there should be a scheme in a complete form of being presented to the creditors.
  2. Further, the Court must be satisfied that there is a bona fide application for leave for the scheme meetings. In Re Kuala Lumpur Industries, the bona fides was demonstrated through a memorandum of understanding signed with the white knight group and that financial advisers had been engaged to draw up the proposed scheme.

Phase 3: The Extension to the RO

The four pre-conditions now explicitly apply only for the extension of the initial RO – see section 368(2)(a) to (d) of the CA 2016.

The four pre-conditions are:

  1. There must be a proposed scheme between the company and at least 50% in value of the company’s creditors.
  2. The RO is necessary to enable the company and its creditors to formalise the proposed scheme.
  3. The company must file in Court a statement of affairs made up to within three days of the filing of the RO application.
  4. The Court approves the creditor-nominated director being the person nominated by at least 50% in value of the scheme creditors.

Often, the fourth pre-condition is the hardest to satisfy. The fourth pre-condition needs buy-in from a substantial value of scheme creditors.

By pegging the four pre-conditions only to the extension of the RO, the scheme company will have the approximate two-month automatic moratorium period and the three-month initial RO period to win enough support for the fourth pre-condition to extend the RO.

Calculating the Cooling-Off Period for the RO

There is now a cooling-off period when granting an RO – see section 368(3B) of the CA 2016.

The cooling-off period aims to prevent repetitive and repeat filings of the RO. Repeat filings of the RO would extend the effective period of moratorium protection well beyond 12 months.

In my analysis below, I only deal with the situation of repetitive filings of the RO. I have not considered the other more complicated scenarios and combinations where there is a cooling-off after any order for super priority rescue financing (i.e. section 368B of the CA 2016), cross-class cramdown (i.e. section 368D of the CA 2016), pre-packaged scheme of arrangement (i.e. section 369C of the CA 2016), or the related company (i.e. section 368A of the CA 2016).

In the situation of repeat filings of the RO application, the cooling-off provision in section 368(3B) has two effects:

  1. One scenario is where the cooling-off only prevents a repeat filing of the RO if the initial RO had been granted for three months, but the Court then does not extend the RO. There cannot then be an immediate second RO due to the cooling-off. See an extreme example of 6 repetitive restraining orders in the Gula Perak Berhad case, and in which the Court found to be an “abuse of process of the highest order.”
  2. However, if the first RO subsists for the full 12 months, then there is no cooling-off to prevent a second RO filing.

I demonstrate the above points with the timeline below of a first RO filing and a second RO filing. The critical language in section 368(3B) is that “[n]o restraining order under this section shall be granted to a company if an order had been granted to the company under subsection (1) … within the preceding period of twelve months” (emphasis in bold).

As seen in the timeline above, the critical trigger for the 12-month cooling-off period is the grant of the RO under section 368(1) i.e. the grant of the initial RO. The grant of the initial RO starts the cooling-off countdown from 1 January 2024 (using the illustration above).

Let us take the first scenario. At the extension stage on 1 April 2024, the Court may or may not grant an extension to the initial RO. If the Court does not grant the extension of the RO, the scheme company remains within the 12-month cooling-off period.

Strictly speaking, there should not be a second RO filing for the rest of 2024. This is justifable since the scheme company has not been able to meet the pre-conditions for an extension of the RO. In particular, it is likely that the scheme company could not garner enough scheme creditors’ support to meet the fourth pre-condition in section 368(2)(d) of the CA 2016.

I mention there should not be a second RO filing. But in reality, there is nothing to stop the filing of a second RO application which then triggers the automatic moratorium. However, the automatic moratorium will only last for a short period of up to two months. When the Court hears the second RO filing, and if it is within the cooling-off period, the Court will not grant the second RO. It then appears to be an abuse of court process to file the second RO application during the clear cooling-off period.

Next, let us look at the second scenario. We assume that the first RO is extended to last the full 3 months + 9 months i.e. until 31 December 2024.

When the first RO expires, it is entirely possible to immediately file a second RO application. This triggers the automatic moratorium, and the second RO will be outside the cooling-off period (i.e the cooling-off expires on 31 December 2024). In 2025, the Court can grant the second initial RO.

With this calibrated cooling-off period, I welcome the ability for the Court to consider granting further RO protection through consecutive RO applications. It fits the statutory purpose of the RO of continuing to offer protection to a deserving scheme company. The grant of the second or further RO would then be within the discretion of the Court to weigh up all disclosures and progress of the proposed scheme.

The Width of the Moratorium and RO

Finally, in terms of the protection offered under an RO, we now see a detailed listing of the types of actions and proceedings restrained by the automatic moratorium and the RO e.g. the restraint is such that there can be no resolution passed for winding up, no appointment of a receiver or receiver and manager, no steps taken to enforce any security, no proceedings to be commenced, etc – see sections 368(1A) and 368(3A).

My view is that the widening of the language of the types of acts restrained by the RO means that the RO does not merely restrain Court and other legal proceedings against the company. Arguably, the effect of the RO now restrains contractual rights and contractual steps to be taken against the company. That is the likely interpretation when reading section 368 and its examples of restraining contractual remedies such as the enforcement of security, repossession of goods, re-entry, or forfeiture under any lease.


Undoubtedly, the width and depth of the RO have been expanded and a scheme company can obtain urgent protection.

On the other hand, there remains the potential for abuse in filing frivolous RO applications to delay and stall legal proceedings. As I had analysed above, the cooling-off period has a calibrated approach of restraining only certain types of repetitive filing of a RO application.

This makes sense since the mere second or repeat filing of a RO application per se does not mean that there is an abuse of process.

A case in point is Sapura Energy Bhd & Ors v Martin Bencher (Malaysia) Sdn Bhd [2024] 3 CLJ 159 (grounds of judgment 12 January 2024). The case involved a first RO lasting for 12 months and the Court granting a second RO. The Court agreed that the expiration of the first RO after its 12-month duration does not prohibit the possibility of making a fresh application.

The Court recognised the underlying intent of the Legislature which leans towards ensuring the survival of the company in challenging times, while also safeguarding creditors’ interests. The expiration of the first RO did not signify an absolute end but rather provided an opportunity for reassessment based on new circumstances and requirements.

Hence, the Court can remain vigilant in considering RO applications even under this new regime. The Court can safeguard against any abuse of court process but at the same time, offering a chance for a distressed company to have the breathing space to restructure.


Leave a Reply

Your email address will not be published. Required fields are marked *