High Court: Detailed statement of proposal not required for application for judicial management order

Key Contacts:
Kok-Chee-Keong-web.jpg Janice-Ooi.jpg
Claudia Cheah Janice Ooi

The High Court on 25 May 2022, allowed the judicial management order applications (“JM Applications”) filed by three wholly-owned subsidiaries of Jerasia Capital Berhad (“JCB”), namely Jerasia Apparel Sdn Bhd (“JASB”), Jerasia Fashion Sdn Bhd and Canteran Apparel Sdn Bhd (“CASB”) (collectively the “Applicants”).
The High Court allowed the JM Applications despite the same being opposed by two substantial unsecured creditors of the Applicants. While the High Court acknowledged that the proposed three-pronged plan put forward in the JM Applications appeared to be incomplete / lacking in certain particulars, the High Court was also of the view that it is premature to deal with the plan in detail at this stage, as the same can be improved/completed once the Judicial Manager has been appointed.
Claudia Cheah (Partner) and Janice Ooi (Senior Associate) of the Restructuring and Insolvency Practice of Skrine represented the Applicants.
Background facts
Each of the JM Applications is part of the broader debt restructuring plan of JCB, a public limited liability company listed on the Main Market of Bursa Malaysia Securities Berhad (“Bursa”), and its group of companies. JCB itself was classified as a PN 17 issuer on 28 January 2022 after having triggered Paragraph 8.04 and Paragraph 2.1(a) of Bursa’s Practice Note 17. In this regard, JCB’s shareholders’ equity on a consolidated basis is 25% or less of its share capital (excluding treasury shares) and such shareholders’ equity is less than RM40,000,00.00. JCB intends to place the Applicants under judicial management, where the Applicants together with JCB will then undertake a proposed three-pronged plan which entails the following:
  1. Disposal of assets by JASB and CASB;

  2. Capital raising exercise through rights issue and/or private placement by JCB; and

  3. Business diversification by JCB by venturing into the glove manufacturing industry. 
The JM Applications were opposed by two substantial unsecured creditors on among others, the grounds that:
  1. the proposed three-pronged plan is not viable as the proposed business diversification by JCB was already made known a few years ago and yet, the proposed diversification had not materialised;

  2. the position assessment report exhibited by the Applicants merely states the estimated recovery rate for the unsecured creditors in the event of liquidation, without stating the estimated recovery rate in the event the JM Applications are allowed;

  3. the Applicants failed to also set out the amount expected to be raised from the capital raising exercise;

  4. the Applicants are hopelessly insolvent; and

  5. in view of the objection of the two unsecured creditors whose combined debt exceeds more than 25% of the total debts owing by the relevant Applicant, the judicial management exercise will be futile as the Applicants would not be able to secure the required creditors’ approval on their proposal. 
In response, the Applicants argued among others, that the JM Applications are a genuine attempt on the part of the Applicants as well as JCB to rehabilitate themselves. In this regard, JCB had taken various steps vis-à-vis the proposed business diversification, and to liquidate the assets of JASB and CASB. Based on the documents available, the Applicants have satisfied the requirements for a judicial management order to be made. The Applicants further argued that a detailed statement of proposal is not required at this stage. A comprehensive statement of proposal would be prepared and tabled by the Judicial Manager in due course, and the creditors can then vote on the same.
Decision of the High Court
The High Court was of the view that there is a possibility that the Applicants can be rehabilitated, and, on that basis, the JM Applications were granted. The High Court was cognisant of the fact that it is normal for a proposed plan to be lacking details at the application stage and the JM Applications should not be denied on this ground.
The High Court decision is consistent with an earlier decision of the same court in Federal Power Sdn Bhd v Dara Consultant Sdn Bhd [2022] 7 MLJ 563 (“Federal Power”) where the High Court allowed an application for judicial management order despite the opposition by an intervener on, among others, the grounds that it was not supported by any expert opinion and that no concrete plans had been proposed. In allowing the judicial management application in Federal Power, the High Court held that “the actual recovery plan is to be properly and comprehensively prepared by the proposed judicial manager upon obtaining the judicial management order.”
The High Court decision in this case and the case of Federal Power are interesting as it appears to be a departure from the High Court’s earlier decision in Re Biaxis [2022] 7 MLJ 443 (“Re Biaxis”), which sets out stringent requirements for the filing of a judicial management application. In this regard, the High Court in Re Biaxis held that the applicant and/or the nominated judicial manager should demonstrate that they have used their best efforts to, inter alia, get the proposal as close as possible to its final form. This suggests that the draft statement of proposal has to be substantive even at the application stage.
Following the decision in Re Biaxis, it has been a common practice for judicial management applicants to have ready a detailed draft statement of proposal at the time of filing of the application or at least for the proposed judicial manager candidate to affirm an affidavit in support of the application. This is even though there is no such requirement under the Companies Act 2016, as acknowledged by the High Court in Federal Power. With this recent decision as well as the decision in Federal Power, it will be interesting to see if the Courts will adopt a more lenient approach in deciding whether or not to allow a judicial management application despite the absence of a detailed/comprehensive draft proposal.
Claudia Cheah (Partner) and Janice Ooi (Senior Associate) of the Restructuring and Insolvency Practice of Skrine represented the Applicants.

This alert contains general information only. It does not constitute legal advice nor an expression of legal opinion and should not be relied upon as such. For further information, kindly contact skrine@skrine.com.