The High Court has recently granted Sapura Energy Bhd and its 22 subsidiaries (“Sapura Entities”) a fresh order to hold court-convened meetings with creditors within a period of three months. A restraining order was also granted for the same period. By now, the Sapura Entities would have been granted 3 restraining orders which stretches out to a total period of 15 months. This is a significant decision as it appears that companies can now enjoy a restraining order which essentially exceeds the maximum period allowed for under section 368(2) of the Companies Act 2016 (“CA 2016”), i.e. 3 + 9 months.
 
Summary
 
On 1 March 2022, the Sapura Entities filed an Originating Summons under section 366 of the CA 2016, seeking among others, leave to convene meetings of the creditors of the Sapura Entities for the purposes of considering, and if thought fit, approving with or without modification, the proposed schemes of arrangement and compromises between each of the Sapura Entities and their respective scheme creditors, and also a restraining order (“the 1^st OS”). On 10 March 2022, the High Court allowed the 1^st OS. As a result of that, the Sapura Entities were given leave to convene their respective creditors meetings and also a restraining order for a period of 3 months (“the 1^st RO”). The 1^st RO would have expired on 10 June 2022.
 
Before the expiry of the 1^st RO, an application was made to extend the 1^st RO. On 8 June 2022, the High Court granted an extension of 9 months, hence extending the 1^st RO to 10 March 2023 (“the 2^nd RO”). By this extension, the Sapura Entities would have enjoyed the maximum period for a restraining order allowed under section 368(2) of the CA 2016 which reads as follows:
 
“(2) The Court may grant a restraining order under subsection (1) to a company for a period of not more than three months and the Court may on the application of the company, extend this period for not more than nine months if-…” [Emphasis added]
 
Before the expiry of the 2^nd RO, the Sapura Entities filed a fresh Originating Summons, seeking essentially the same orders as those sought under the 1^st OS (“the 2^nd OS”). On 8 March 2023, the High Court allowed the 2^nd OS which included a restraining order for a period of 3 months (“the 3^rd RO”). With that, the Sapura Entities had been given a restraining order totalling 15 months.
 
Arguments by the Sapura Entities in support of the 2^nd OS
 
In support of the 2^nd OS, the Sapura Entities argued that there is no prohibition under the CA 2016 against a fresh application being filed for leave to convene a creditors meeting and there is similarly, no prohibition against the granting of a fresh restraining order under the 2^nd OS. The Sapura Entities referred to and relied on, among others, the following authorities:
 

 
The Sapura Entities further argued that they were unable to pursue the 1^st OS as by section 368(2) of the CA 2016, a restraining order cannot be extended beyond 12 months. Yet, a restraining order is required to allow continued negotiations with their main Financial Institution Creditors as mediated by the Corporate Debt Restructuring Committee (“CDRC”) without the distraction of litigation.
 
Significance of the High Court decision
 
Before this decision, it was assumed that a restraining order under section 368(2) of the CA 2016 cannot extend beyond 12 months (3 + 9 months). In this case, the granting of the 2^nd OS and the 3^rd RO have effectively resulted in the Sapura Entities obtaining a restraining order for more than one year (i.e. 15 months).
 
In the “Review of the Companies Act 1965 – Final Report by the Corporate Law Reform Committee”, the Corporate Law Reform Committee (“CLRC”) noted that section 176 of the Companies Act 1965 (“CA 1965”) which is substantially in pari materia to the current section 368 of the CA 2016, had been used as a delaying mechanism to frustrate the enforcement of judgment debts by creditors; it was the CLRC’s recommendation that the maximum duration of a restraining order should be limited to one year and there should not be any further extension even if the company fails to come up with a viable reorganisation plan. This is to prevent abuse by companies who only apply for a restraining order without having in place a viable and workable restructuring plan.
 
It is to be further noted that section 176 of the CA 1965 did not specify a time limit of 1 year for restraining orders. In this regard, section 176(10A) of the CA 1965 provided as follows:
 
“(10A) The Court may grant a restraining order under subsection (10) to a company for a period of not more than ninety days or such longer period as the Court may for good reason allow if and only if-…” [Emphasis added]
 
In order to overcome the abuse of schemes of arrangement as a tool to prevent creditors from enforcing their legal rights against a debtor company, the CLRC recommended that “the period of the moratorium should be limited to one year only”. As a result of that, section 368(2) of the CA 2016 now provides that the maximum period of a restraining order is limited to 12 months (3 +9 months).
 
This recent decision by the High Court seems to have put to rest the question of whether a fresh application for leave to convene a creditors meeting under section 366 of the CA 2016 can be made if the proposed scheme put forth in an earlier application for leave has not been voted on and/or sanctioned, as well as the question of whether a restraining order under section 368(2) of the CA 2016 can go beyond 12 months.
 
To prevent section 368(2) of CA 2016 being rendered nugatory, it is suggested that a high threshold test should be adopted when deciding whether a second or subsequent originating summons that results in the total duration of a restraining order exceeding the 12-month period set out in section 368(2) should be allowed. In particular, a second or subsequent originating summons should only be allowed when the applicant is able to satisfy the Court that there is already in place a viable and workable restructuring plan or that there are bona fide negotiations with its key scheme creditors to agree upon a scheme of arrangement.
 
A news report of this case can be accessed here.
 
Alert by Janice Ooi (Partner) of the Restructuring and Insolvency Practice of Skrine.