Judicial Management of Judicial Management

Geraldine Goon examines the first reported decision in Malaysia on judicial management.

The Malaysian High Court recently delivered the very first grounds of judgement in relation to judicial management in Leadmont Development Sdn Bhd v Infra Segi Sdn Bhd & Another Case [2018] 10 CLJ 412. The provisions on judicial management which were introduced in Malaysia under the Companies Act 2016 (“Act”) came into force on 1 March 2018.
Of import in this pioneering decision are the following points. First, the High Court retains its inherent jurisdiction to set aside a judicial management order (“JMO”) on the application of a creditor, ex debito justitiae (on account of justice) despite the lack of an express power to do so in the Act. Secondly, the basis for setting aside the JMO was not one prescribed in the Act. The JMO was set aside on the basis that there was sufficient evidence that the scheme would not receive 75% in value of creditors’ approval.
Leadmont Development Sdn Bhd (“Leadmont”) was a developer and the applicant for a JMO. Infra Segi Sdn Bhd (“Infra Segi”) had been Leadmont’s main contractor on a stalled project (the Selayang StarCity Project) and was also a secured creditor of Leadmont.
The project was carried out on land owned by Leadmont’s subsidiary Sierra Delima Sdn Bhd (“Sierra Delima”). Sierra Delima had also obtained a JMO in separate proceedings. As Infra Segi had intervened to set aside that JMO as well, both proceedings were considered together.
Leadmont had obtained the JMO on an ex parte basis. Infra Segi sought to set aside the JMO on two bases. First, that there had been a material non-disclosure of facts and second, that Leadmont had acted on a mala fides basis. However, the JMO was not set aside on either of these two grounds.
In coming to its decision to set aside the JMO, the High Court considered the background and purpose of judicial management, as introduced by the Act. The High Court then shed some light on the requirements of section 405(1) of the Act which sets out the conditions under which the High Court may issue a JMO.
Section 405(1)(a) of the Act requires a Court to be “satisfied” that a company is or will be unable to pay its debts. The High Court was of the view that the meaning of the word “satisfied” in section 405(1)(a) indicated that a higher level of persuasion was necessary as compared to the lower threshold for the term “consider” in section 405(1)(b) of the Act. In coming to this determination, Judicial Commissioner Wong Chee Lin was persuaded by the judgment of Hoffman J (as His Lordship then was) in Re Harris Simons Construction Ltd [1989] BCLC 202.
The High Court then considered Section 405(1)(b)(i) of the Act and the meaning of the phrase “going concern”. The definition of “going concern” was consistent in both “Words & Phrases” (Vol.2) (2nd Ed) and International Standard on Auditing (ISA) 570 and was accepted to mean “will continue its operations for the foreseeable future”.
To determine whether the making of a JMO will enable the company to continue as a “going concern”, the High Court considered whether the making of the order would be a more advantageous realisation of the company’s assets as opposed to a winding up, as prescribed by Section 405(1)(b)(iii) of the Act.
Finally, the High Court pointed to Section 405(5)(a) of the Act which gives the courts wide powers to issue a JMO if the “Court considers the public interest so requires”. What constitutes “public interest” is to be determined on a case by case basis.
The High Court then briefly dealt with the different rights of different types of creditors. A secured creditor who has appointed, or is entitled to appoint, a receiver or receiver and manager of the company’s property is entitled to be given notice of the application for a JMO and to oppose an application for a JMO.
All creditors other than a secured creditor are not entitled to be given notice. They are also limited to opposition to the nomination of the judicial manager and not to the making of the JMO.
The High Court then considered the only four scenarios (at this point in the development of the law) where a JMO can be discharged, namely:
(i)      if the judicial manager’s proposal is not approved by 75% of the total value of creditors whose claims have been accepted by the judicial manager (section 421(5));
(ii)     if the purpose of the judicial management has been successfully achieved (sections 424(1) and 424(2)(a));
(iii)    if the purpose of the judicial management is incapable of achievement (sections 424(1) and 424(2)(a)); or
(iv)    if the company’s affairs, business and property are being managed by the judicial manager in a manner which is unfairly prejudicial to the interest of its creditors or members, or if a particular act or omission by the judicial manager is or would be so prejudicial to them (sections 425(1)(a) and 425(3)(d)).
However, the High Court was of the view that there is no provision in the Act or the Companies (Corporate Rescue Mechanism) Rules 2018 (“Rules”) which allows for the setting aside of a JMO by a creditor. In coming to this conclusion, the High Court considered and stressed that the English position is dissimilar to the Malaysian position. The English legislation provides an express provision for the setting aside of an administration order which is absent from the Act.
The ancillary argument that Order 42 rule 13, Order 32 rule 6 and/or Order 92 rule 4 of the Rules of Court 2012 (“ROC”) all allow for the setting aside of the JMO was rejected by the High Court on the basis of procedural differences in the applicability of the ROC provisions.
The High Court was of the view that it derived power to set aside a JMO from its inherent jurisdiction.
For example, a setting aside could be granted where the ex parte JMO had been made without full and frank disclosure of the material facts, or if it had been obtained mala fides. The High Court relied on Selvam Holdings (Malaysia) Sdn Bhd v Grant Kenyon & Eckhardt Sdn Bhd; BSN Commercial Bank Malaysia Bhd & Ors (Interveners) [2000] 3 CLJ 16 where it had been held that “in exceptional cases, the Court has inherent power to set aside an order where the justice of the case requires the Court to intervene and correct an earlier order that contains a serious defect and there is a need to have it set aside”.
The High Court reasoned that at an ex parte hearing, only the applicant will be heard, and this imposes a duty on the applicant to provide the High Court with full and frank disclosure. This principle was applied to a JMO application even though the High Court recognised that there could be instances where a JMO may not be an ex parte application.
In this case, although the High Court found that Leadmont could have disclosed more information during the application for the JMO, the facts that had been disclosed were sufficient to allow Leadmont to avoid the setting aside of the JMO.
Interestingly, the High Court then took on an inquisitorial role in coming up with its own reason to set aside the JMO.
The Learned Judicial Commissioner had been informed that the value of Infra Segi’s debt in Leadmont was approximately 26% of the total indebtedness. More importantly, counsel for Leadmont had admitted that if the Sierra Delima scheme failed, the Leadmont scheme would also fail. Sierra Delima’s indebtedness to Infra Segi together with six other creditors who had stated their objections to the JMO amounted to 46.9% of the total value of Sierra Delima’s creditors. As such, Infra Segi seemed to be in a position to ensure that both schemes would not succeed due to the value of its claims.
The High Court therefore concluded that the scheme to be proposed by the judicial manager of Leadmont would not be approved by the requisite majority of creditors pursuant to section 432(2) of the Act and set aside the JMO.
The High Court took a cue from the Singaporean decision of The Royal Bank of Scotland NV (formerly known as ABN Amro Bank NV) and others v TT International Ltd and another appeal [2012] SGCA 9. Essentially, if there is “no realistic prospect” of the requisite approval being achieved, the High Court should not act in vain.
Some considerations and queries arise out of the determinations of the Learned Judicial Commissioner in Leadmont.
First, the question of the right to vote and the status of the creditor is key to determining the locus standi of the creditor. Rule 31 of the Rules divides creditors into four types, namely:
(i)      An unsecured creditor who would prove the entirety of his debt and be allowed to vote on the whole value of his unsecured debt;
(ii)     A secured creditor who chooses to maintain his security and is therefore not allowed to vote;
(iii)    A secured creditor who surrenders his entire security will be entitled to vote in the creditors’ meeting on the whole value of his debt which has become unsecured; or
(iv)    A partly secured creditor who maintains his security and only proves his debt to the value of the balance after deducting the security.
This issue is important for the following reason. Based on the decision above, only a secured creditor is entitled to oppose an application for a JMO. However, a secured creditor will not be able to rely on its secured debt for the purposes of voting at the creditors’ meeting to approve a scheme. In such event, the votes which the secured creditor will be able to exercise at the meeting are limited to the amount of the unsecured debt, if any, held by it. This issue will be especially important to a secured creditor who is facing a JMO or the prospect of a JMO and has to consider how it can strategically utilise the debt owed to it.
Secondly, Leadmont did not address the decision of the Singapore High Court in Re Genesis Technologies International (S) Pte Ltd [1994] 3 SLR 390 on Section 227B(3)(c) of the Singapore Companies Act 1967 which is identical to Section 407(3) of the Act. In Re Genesis Technologies, the Court dismissed an application for a JMO even though only unsecured creditors had objected to the application. It remains to be seen whether the Malaysian courts will be persuaded by this case in future.
Finally, the High Court had essentially predetermined the fate of the schemes of both Sierra Delima and Leadmont before the companies had an opportunity to present the scheme to their respective creditors and address any concerns. The success of Leadmont’s scheme was dependent on the success of Sierra Delima’s scheme. A total of seven creditors (including Infra Segi) had banded together to achieve 38.7% in value of Sierra Delima’s creditors. If Sierra Delima had had a chance to present its scheme to its creditors and address the creditors’ concerns, it may have had a chance to turn the tide. Some of the creditors who initially opposed the JMO could subsequently have been convinced. Success in Sierra Delima’s scheme may have allowed Leadmont’s scheme to also succeed.
The Malaysian High Court has previously considered this issue in RHB Bank Berhad v Gula Perak Berhad; Town Hang Securities Co Limited (Applicant) [2013] 1 LNS 1409 (“Town Hang Securities”) which led to a similar outcome in relation to an application to convene a creditors’ meeting under section 176 of the Companies Act 1965 (now repealed). If there is no realistic prospect of success due to a lack of approval of the majority of shareholders, the court may refuse to grant leave to convene a meeting of the creditors. However, in Town Hang Securities, a substantial 61.9% in value of the creditors did not support the scheme leading Yaacob Haji Md Sam J to conclude that the statutory requisite 75% in value of approval would not be obtained.  
However, the Singaporean High Court in Re Attilan Group Ltd [2017] SGHC 283 appears to set a higher standard for refusing leave to call a meeting in relation to a scheme of arrangement. In this case, the applicant’s contention that it had garnered support from 76% in value of its creditors was challenged by another creditor on grounds that some of those debts could be subject to significant discounts. Aedit Abdullah J said that the question of discounting was a matter to be considered by the chairman at the creditors’ meeting or by the Court when sanction is sought. In the opinion of the Learned Judge, it would be premature to refuse leave to call a meeting “unless the issue is one which would so clearly result in the scheme’s failure that it will be futile to call the meeting” and the applicant and the scheme managers ought to be given the opportunity to reconsider the scheme right up to the voting by the creditors unless there is “incontrovertible evidence” that the threshold of 75% will not be met.
In any event, there is no requirement within the Act to show that the scheme would have be approved by 75% of the total value of creditors in order to maintain a JMO.
Although the legal interpretation of the meaning of words and threshold test are both useful for those navigating their way around the new judicial management provisions, it is the derivation of power to set aside a JMO and the reasons for doing so that are key considerations. We understand that no appeal was filed against the decision and it remains to be seen whether the precedents set by this case will be followed in future.