High Court: Public Listed Companies Cannot Apply for Judicial Management under the Companies Act 2016

Introduction
 
On 14 April 2021, Scomi Group Berhad (SGB) filed an application for a judicial management order (“JM Order”) in the High Court under KLHC OS No. WA-28JM-07-042021. SGB’s application afforded the High Court its first opportunity to consider whether a public listed company was precluded from applying for a JM Order. On 4 October 2021, the High Court ultimately determined that a public listed company is indeed one that is subject to the Capital Markets and Services Act 2007 (“CMSA”), and is therefore precluded from applying for a JM Order under section 403(b) of the Companies Act 2016 (“CA”).
 
The High Court further held that the right to veto granted to secured creditors pursuant to Section 409 of the CA was a right available to all secured creditors irrespective of their rights under the security.
 
A JM Order places a financially distressed company under the control of a court-appointed judicial manager. The judicial manager has to then present a statement of proposal to the company’s creditors to consider for the purpose of restructuring the company’s debts.  The benefit of filing for a judicial management application is that the mere filing in itself triggers an automatic moratorium which prohibits legal proceedings from being commenced or continued against the company, until the said application is heard and disposed of. In the event the JM Order is granted, another moratorium will be in place for as long as the JM Order is still subsisting.
 
Facts
 
SGB is a global service provider in the oil & gas and transport solutions industries. Its shares are listed on the Main Market of Bursa Malaysia. SGB has been classified as a financially distressed company since December 2019 and faced threats of being delisted since then. It has also been reported that SGB had suffered a net loss of RM10.96 million for the six months ended December 2020 without generating any revenue.
 
In April 2021, SGB filed an application for a JM Order at the High Court. Soon thereafter, three of SGB’s creditors, See Song & Sons Sdn Bhd (“SSSSB”), Malayan Banking Berhad (“MBB”) and SBI Spectrum Sdn Bhd (“SBI”), gave notice of their respective intentions to oppose the said application premised on various grounds. 
 
Prior to hearing parties on the merits of the proceedings, the High Court directed that parties address the Court on the following threshold issues.
 
1st Threshold Issue: Are Public Listed Creditors Eligible to Apply for a JM Order
 
The 1st threshold issue that had to be crossed by SGB was whether, as a public listed company, it was eligible to apply for a JM Order. In this respect, Section 403(b) CA provides that:
 
This Subdivision shall not apply to-
 
(a)   a company which is a licensed institution or an operator of a designated payment system regulated under the laws enforced by the Central Bank of Malaysia; and
 
(b)   a company which is subject to the Capital Markets and Services Act 2007.”
 
In asserting that SGB was precluded from applying for a JM Order, the creditors argued that public listed companies are subject to the provisions of the CMSA and as such, SGB would fall under section 403(b) of the CA. In addressing this, the creditors went through the various provisions of the CMSA that applies to public listed companies and which public listed companies are required to comply with.  
 
One of the creditors, SSSSB, further drew support from the Companies Commission of Malaysia’s Consultation Document on the proposed amendments to the Companies Act 2016 which expressly stated that “the benefit of judicial management is not available to companies which are regulated under CMSA 2007 including listed companies. The proposed amendment would assist all companies facing financial difficulties including listed companies an avenue to rehabilitate their situations through judicial management.”
 
On the other hand, SGB attempted to persuade the High Court that a purposive approach should be taken in interpreting Section 403(b) of the CA. In advocating this approach, SGB contended that Section 403(b) of the CA should be construed only to preclude companies that are regulated under the CMSA, which, in SGB’s view, did not include public listed companies.
 
2nd Threshold Issue: Is the Right to Veto Available to All Secured Creditors
 
The 2nd threshold issue which SGB had to cross was whether its application for a JM Order could be vetoed by the three creditors, all of whom were secured creditors. This was in respect of Section 409(b) of the CA which provides that:
 
Subject to subsection 405(5), the Court shall dismiss an application for a judicial management order if it is satisfied that-
 
(a)    a receiver or receiver and manager referred to in subparagraph 408(1)(b)(ii) has been or will be appointed; or
 
(b)   the making of the order is opposed by a secured creditor.
 
In attempting to limit the right of veto, SGB again advocated for a purposive interpretation to be adopted, asserting that Section 409(b) of the CA must be read together with Section 408(1)(b)(ii) of the CA which provides that:
 
(1) When an application for a judicial management order is made to the Court, the applicant shall cause the notice of the application-
     (a)    to be advertised in one widely circulated newspaper in Malaysia in the national language and one widely circulated newspaper in Malaysia in the English language; and
      (b)   to be given-
             (i)     to the company, in a case where a creditor is the applicant; and
           (ii)    to any person who has appointed or is or may be entitled to appoint a receiver or receiver and manager of the whole, or substantially the whole of a company's property under the terms of any debentures of a company.
 
Adopting this approach, SGB contended that the mere fact that an application for a JM Order is opposed by a secured creditor is insufficient. The secured creditor must also be one who “has appointed or is or may be entitled to appoint a receiver or receiver and manager of the whole, or substantially the whole of a company's property under the terms of any debentures of a company”. According to SGB, the opposing creditors did not fall under such category and therefore had no right of veto over SGB’s application.
 
In addressing this argument, SGB’s creditors asserted that the plain and obvious reading of Section 409(b) of the CA, which was recently amended pursuant to the Companies (Amendment) Act 2019 clearly provided for the right of veto to be available to all secured creditors irrespective of their rights under the security. SSSSB in particular drew the Court’s attention to Rule 13 of the Companies (Corporate Rescue Mechanism) Rules 2018 which drew a clear distinction between a person who is entitled to appoint a receiver or receiver and manager under Section 408(1)(b)(ii) of the CA, and a secured creditor under Section 409(b) of the CA. The interpretation advocated by SGB of the relevant provisions would have conflated the two categories of person(s) into one, when they were clearly meant to be distinct pursuant to the Companies (Corporate Rescue Mechanism) Rules 2018.
 
Lastly, SGB’s creditors, in reliance on the Singapore case of Re Bintan Lagoon Resort Ltd [2005] 4 SLR (R) 336, also highlighted that SGB’s mere status as a public listed company was irrelevant in itself to overcome the right to veto as it did not constitute a public interest exception.
 
The High Court’s Decision
 
On 4 October 2021, the High Court released its brief Grounds of Judgment in respect of the two threshold issues above.
 
1st Threshold Issue: Are Public Listed Creditors Eligible to Apply for a JM Order
 
On the 1st threshold issue, the High Court was of the view that section 403(b) of the CA applies to all companies whose shares are quoted on the stock market of a stock exchange. Therefore, SGB as a listed company was one that was subject to the CMSA and could not avail itself of a JM Order.
 
The High Court started by examining the provisions of the CMSA and concluded that they apply to public listed companies. First, the High Court noted that the preamble to the CMSA states that the CMSA is an Act “to regulate and to provide for matters relating to the activities, markets and intermediaries in the capital markets, and for matters consequential and incidental thereto.”
 
Secondly, the High Court also referred to the meanings of the words “capital markets”, “corporation”, “listed corporation”, “securities”, “stock market” and “listed” as defined in the CMSA which seem to suggest that the CMSA applies to public listed companies.
 
Thirdly, the High Court took cognisance of the fact that Part VII of the CMSA reads  “Provisions Applicable to Listed Corporations”, and that various provisions of the CMSA apply specifically to public listed companies, for example, sections 174 to 182 as well as sections 317 to 321.

Lastly, having examined the provisions of the CMSA, the High Court was also of the view that a purposive approach should not be adopted in interpreting section 403(b) of the CA as the words in section 403(b) of the Companies Act 2016 are clear to its meaning”. In this regard, the High Court agreed with SGB’s creditors that the High Court cannot adopt a purposive approach to read words into section 403(b) of the CA which were in the High Court’s view, plain, clear and unambiguous. On that basis, the High Court concluded that section 403(b) of the CA applies to public listed companies.
 
2nd Threshold Issue:  Is the Right to Veto Available to All Secured Creditors
 
As for the 2nd threshold issue, the High Court was of the view that subsections 409(a) and 409(b) of the CA are to be read disjunctively so that the mere satisfaction of either subsection would be sufficient for a secured creditor to be conferred with the right to veto an application for a JM Order. In this regard, the High Court was cognisant of the fact that the word ‘and’ which was previously used between the said subsections has since been replaced by the word ‘or’ since 15 January 2020 pursuant to the Companies (Amendment) Act 2019. In particular, the High Court agreed with SSSB’s counsel that there is an established principle of statutory interpretation that where Parliament includes a particular term in on part of a statute but omits it in another part of the same, it must be presumed that Parliament acted intentionally in doing so.
 
The High Court further decided that both MBB and SSSSB are secured creditors of SGB. In respect of SSSSB, the High Court was of the view that the non-registration of the charge documents by SSSSB does not affect the validity of the charge as the duty to register the charge rests with SGB. In any event, the High Court was cognisant that SGB had registered another similar charge in favour of SSSSB and as such, “it would be improper for the Applicant [SGB] to now come to this Court to argue that the said Charge in favour of SSSB has not been registered”.
 
Accordingly, as SGB’s application was opposed by its secured creditors, the High Court held that the said application must be dismissed pursuant to section 409(b) of the CA.
 
Conclusion
 
In delivering the above decision, the High Court of Malaya had, for the first time, determined that public listed companies are precluded from applying for a JM Order. Previously, there was ambiguity as to the effect of section 403 of the CA, which is peculiar to Malaysia. The High Court’s decision therefore provides some level of certainty that, unless there is a further amendment to the CA, public listed companies are precluded from applying for a JM Order.
 
Notwithstanding the above, it was reported last week that another public listed company, Dolomite Corp Bhd, had applied for a JM Order. It would be interesting to see whether the High Court hearing that matter will follow the precedent set here or whether it would choose to depart from the same, thereby requiring the issue to be resolved by our appellate Courts.
 
Nimalan Devaraja (Partner) and Janice Ooi (Senior Associate) of Skrine appeared as counsel for SSSSB in this case.
 

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