In the recent case of MDSA Resources Sdn Bhd v Adrian Sia Koon Leng [2023] 3 CLJ 191 the Court of Appeal upheld the High Court decision in, among others, dismissing the Appellant’s application for sanction of a scheme of arrangement made pursuant to section 366(4) of the Companies Act 2016 (“CA 2016”).
 
Background Facts
 
The Appellant, MDSA Resources Sdn Bhd (“MRSB”), a company owned by Hatten MS Pte Ltd Singapore (“Hatten”) and is involved in property development. MDSA fell into financial distress and in order to stave off its creditors, had filed an application under section 366 of the CA 2016 for leave to convene a creditors meeting (“creditors’ meeting”) for the purposes of considering and if thought fit, approving with or without amendments, a proposed scheme of arrangement (“Proposed Scheme”).
 
The Proposed Scheme involved a single class of unsecured creditors, comprising creditors claiming for liquidated ascertained damages, creditors under a guaranteed rental return scheme (“GRRS”), trade creditors (collectively the “Third-Party Creditors”) as well as creditors related to the Hatten group of companies (“Hatten Group Creditors”). The total debt attributed to both the Third-Party Creditors and the Hatten Group Creditors was RM374,189,278.00 (“Scheme Debt”). In terms of percentage, the Third-Party Creditors and the Hatten Group Creditors (collectively the “Scheme Creditors”) held 26.2% and 73.8% of the Scheme Debt respectively.
 
The salient terms of the Proposed Scheme are as follows:

Only 88% of the total value of the Scheme Creditors attended and voted at the creditors’ meeting. 90.4% of the Scheme Creditors who attended and voted at the creditors’ meeting, did so in favour of the Proposed Scheme. The Appellant then sought sanction from the High Court and the same was opposed by the respondent, a GRRS creditor of the Appellan t. The application for sanction was dismissed by the High Court on various grounds. Importantly, the High Court was of the view that the grouping of the Third-Party Creditors together with the Hatten Group Creditors into a single class of Scheme Creditors is unfair. This is because the Hatten Group Creditors would of course support the Proposed Scheme. MRSB appealed against the High Court’s decision.
 
Arguments by the Appellant
 
Some of the arguments raised by the Appellant before the Court of Appeal are as follows:

Arguments by the Respondent
 
The Respondent’s main argument is premised on the classification of the Scheme Creditors. In this regard, the Respondent argued that the Proposed Scheme is unfair as the Scheme Creditors which comprises creditors with divergent interests had been grouped together. The composition of the Scheme Creditors was for the benefit of the dominant party, namely the Hatten group of companies.
 
Findings by the Court of Appeal
 
The Court of Appeal was of the view that just because the Proposed Scheme was agreed by 90.4% (in value) of the Scheme Creditors who attended and voted at the creditors’ meeting, that alone is no reason for the High Court to sanction the Proposed Scheme. In this regard, the High Court will act as a final safeguard in respect of the approval of a scheme of arrangement.
 
Whether the composition of the Scheme Creditors is unfair
 
In terms of the composition of the Scheme Creditors, the Court of Appeal was of the view that it is unfair for the reasons set out below.
 
The Court of Appeal was of the view that the learned High Court Judge was correct in finding that what is important is to ensure that those who attended the creditors’ meeting were a fair representative of the class of creditors. Here, the Scheme Creditors are related or mostly related to MRSB and so it would be much easier for MRSB to obtain the approval of 75% in value of the Scheme Creditors. The Court of Appeal took cognisance of the fact that there were 636 Third-Party Creditors with the value of only RM98,104,585.17 while the Hatten Group Creditors was merely made up of 19 creditors with a combined value of RM276,084,693.78.
 
The Court of Appeal was also cognisant of the diverging interests between the Third-Party Creditors and the Hatten Group Creditors. In this regard, Third-Party Creditors will be keen to safeguard their interests including their rights to achieve maximum recovery of debts owed to them compared to the Hatten Group Creditors. On the other hand, the Hatten Group Creditors which comprised of (i) the ultimate holding company of MRSB; (ii) holding company of MRSB; (iii) subsidiaries of MRSB; (iv) directors of MRSB; and (v) related parties with common directors of MRSB, would certainly favour the approval of the Proposed Scheme.
 
Due to the sheer number¹ of the Hatten Group Creditors, they would therefore be in a position to vote in favour of the Proposed Scheme. No meaningful and worthy attempt could be mounted to defeat the Proposed Scheme even if others, especially the Third-Party Creditors, had wanted to challenge the same.
 
Pertinently, the Court of Appeal referred to the Singapore Court of Appeal case of The Royal Bank of Scotland NV v TT International Ltd [2021] 2 SLR 213 where it was held as follows:
 
“[155] Taken together the authorities say with one voice that it is the norm for the votes of related party creditors to be discounted in light of their special interests to support a proposed scheme by virtue of their relationship to the company.
…

 [158] In our view, the votes of wholly-owned subsidiaries should be discounted to zero. Wholly owned subsidiaries are entirely controlled by their parent company, ie, the Respondent in this case. Indeed, we view the Respondent’s wholly-owned subsidiaries as extensions of the Respondent itself.”
 
Ultimately, the Court of Appeal was of the view that the composition of the Scheme Creditors comprising the Third-Party Creditors and the Hatten Group Creditors in a single class is unfair, uneven and downright lopsided.
 
Whether there was non-disclosure of information by MRSB
 
The Court of Appeal referred to section 369(1)(a) of the CA 2016 which required every notice summoning the creditors’ meeting to be accompanied with a statement explaining the effect of the compromise or arrangement and in particular, stating any material interests of the directors, whether as directors or as members or as creditors of the company or otherwise, and the effect of the compromise or arrangement so far as it is different from the effect on the similar interest of other persons, and agreed with the learned High Court Judge that there had been material non-disclosure of information on the part of MRSB. The Court of Appeal was of the view that the absence of information as to when the debts owing to the Hatten Group Creditors were incurred and the circumstances upon which they were incurred amounted to material non-disclosure of the information needed.
 
Whether the Proposed Scheme is reasonable
 
The Court of Appeal was of the view that the Proposed Scheme is not reasonable based on the reasons set out below.
 
Firstly, the Proposed Scheme requires RM167.4 million of debts owing to the Scheme Creditors by MRSB to be waived without any indication as to how this amount is arrived at. As a result of this, the Third-Party Creditors will no longer be able to claim their debt in full.
 
Secondly, there was no explanation given as to how MRSB would be able to inject funds amounting to RM64.2 million into the SPV. The Court of Appeal expressed its doubts as to whether MRSB would be able to dispose of its assets in the prevailing tumultuous market condition so as to allow it to then inject funds into the SPV.
 
Thirdly, in respect of the sale of the earmarked properties which is to take place between three and five years, the Court of Appeal was of the view that it would be dependent on the market conditions, and such uncertainty would be a justified concern for the Third-Party Creditors.
 
Fourthly, the earmarked properties are currently charged to a foreign entity, Haitong International Financial Products (Singapore) Pte Ltd. Settlement must be made with this foreign entity before the earmarked property can be released to the SPV. This itself is another uncertainty.
 
Finally, the Court of Appeal also took cognisance of the fact that the total liabilities of MRSB had exceeded its total assets.
 
Analysis
 
It appears that Court of Appeal has not taken into consideration an earlier High Court decision in Transmile Group Bhd & Anor v Malaysian Trustee Bhd & Ors [2012] MLJU 130 (which was subsequently upheld by the Court of Appeal) where the High Court in following the case of UDL Holdings Limited [2002] 1 HKC 172 (which was referred to by the Court of Appeal in the present case), was of the view that the unsecured creditors were correctly placed in a single class of creditors in so far as their legal rights are concerned, even though some of the unsecured creditors consist of shareholders of the applicant company. In this regard, the High Court in Transmile Group Bhd & Anor v Malaysian Trustee Bhd & Ors [2012] MLJU 130 held as follows:
 
“[46] However in the Re UDL case (supra) it was further held that the mere fact that a group of shareholders stands to receive a benefit under the scheme by virtue of occupying some other position vis a vis the company, such as the status of a creditor, does not warrant their being treated for voting purposes as a class separate from the those who do not occupy that additional position. Lord Millet at p. 182 of the case referred to and cited a passage from the case of Re Jax Marine Pty Ltd [1967] 1 MSWR 145:
 
...The fact that this group have an additional interest from the ordinary creditors does not, however, appear to me to go to the length of making their rights so dissimilar from those of the ordinary creditors as to make it impossible for them to consult together... The existence of this motive or personal interest does not, in my view, preclude the Smithson group from membership of the class of ordinary unsecured creditors...”
 
It is also pertinent to note that in the case of Top Builders Capital Bhd & Ors v Seng Long Construction & Engineering Sdn Bhd & Ors [2022] MLJU 1, the High Court was of the view that the mere fact that intercompany creditors and related company creditors may have a separate and/or ‘special interests’ to see the continuity of the applicant company and its group of companies as a going concern, without more, cannot be a reason to have their votes disregarded. It appears that this case too was not considered by the Court of Appeal.
 
The Court of Appeal in this case has also analysed the merits of the Proposed Scheme extensively before agreeing with the High Court that the Proposed Scheme is not reasonable. By doing so, it could be argued that the Court of Appeal has usurped the views of 90.4% of the Scheme Creditors who attended and voted at the creditors’ meeting, on what is essentially a commercial decision. In this regard, it has been held in various cases² that the commercial aspect of the proposed scheme of arrangement should be left to the scheme creditors as they are in a much better position to evaluate their own commercial interest and make the necessary business judgments whether to accept or reject a proposed scheme of arrangement.
 
Given the different views taken by the Court of Appeal in this case, compared to that taken in its earlier decision in Malaysian Trustees Bhd v Transmile Group Bhd & Ors [2012] 3 MLJ 679, vis-à-vis the issue of classification of scheme creditors, a decision by the Federal Court would certainly be welcomed.
 
Case commentary by Janice Ooi (Partner) of the Restructuring and Insolvency Practice of Skrine
 
 

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