No Second Bite at the Cherry

Nathalie Ker explains the Court of Appeal’s reasons in disallowing a stay of a “No Order” in an application for judicial management.
 
Since the coming into force of the new corporate rescue mechanisms in the Companies Act 2016 last year (“Act”), the High Court has seen a fair number of judicial management applications made by companies in distress. Section 404 of the Act provides an avenue for the appointment of a judicial manager where the company or its creditor considers that the company is or will be unable to pay its debts and there is a reasonable probability of rehabilitating the company. Once a judicial management application has been made, section 410 of the Act provides for a moratorium over legal proceedings against the company, including winding up proceedings and steps to enforce any security.
 
In the case of CIMB Islamic Bank Berhad v Wellcom Communications (NS) Sdn Bhd and Rangkaian Minang (NS) Sdn Bhd [2019] MLJU 148 (“CIMB v Wellcom”), the Court of Appeal considered whether a stay of an order dismissing a judicial management application could be granted.
 
BACKGROUND FACTS
 
The first respondent was a company in the business of telecommunication services, whereas the second respondent was a state-backed company which ran a one-stop centre for telecommunication services. The respondents had charged their assets under certain debentures to the appellant, CIMB Islamic Bank Berhad (“CIMB”). The respondents subsequently defaulted on the related facility agreements.
 
Prior to the respondents’ application for a judicial management order, CIMB had appointed Receivers over certain charged assets of the first respondent and Receivers and Managers (“R&M”) over the second respondent. However, just two days after the appointment of the R&M and the Receivers, the respondents filed an application for an injunction to suspend the exercise of powers by the R&M and the Receivers. The injunction was subsequently set aside.
 
A day after the setting aside of the injunction, the respondents filed an application for the respondents to be placed under judicial management. The application was dismissed by the High Court. The respondents appealed to the Court of Appeal against the dismissal, and applied to the High Court for a stay of the order dismissing the application. The stay was allowed by the High Court, thus reviving the moratorium which had arisen under section 410 of the Act upon the filing of the judicial management application.
 
The appellant appealed against the granting of the stay order, arguing that there could be no such stay of a ‘no order’.
 
THE JUDGMENT OF THE COURT OF APPEAL
 
On CIMB’s appeal against the stay, the respondents argued that the Court of Appeal’s decision in Ong Koh Hou @ Won Kok Fong v DA Land Sdn Bhd & Ors [2018] MLJU 778 (“DA Land”) was authority for the proposition that there could be a stay of an order dismissing an originating process. The Court of Appeal was not convinced of this argument and held that DA Land relates to stay applications made pursuant to section 44 of the Courts of Judicature Act 1964, which provides for interim orders by the Court of Appeal, and that such a stay of a ‘no order’ was unprecedented.
 
CIMB argued that there had been an abuse of process by the respondents in their application for a stay of the ‘no order’. It submitted that a balance was necessary given the draconian effects of section 410 of the Act, where despite the company admitting that it is unable to pay its debts, the directors of the company could continue to run the business of the company. Further, it was argued that any stay of the dismissal of the judicial management application fell outside the scope of the judicial management provisions in the Act and would result in an abuse of the judicial management process, as this would render the company immune from its creditors for an extended period. CIMB stated that the High Court, in dismissing the application for judicial management, brought the matter to an end. Thus, the Court was functus officio and did not have the power to make any interim order, including an order to stay the dismissal of a ‘no order’.
 
The Court of Appeal in allowing the appeal agreed that there had been an abuse of process in jurisprudential terms, and that the ingenuity of the respondents in obtaining the stay gave the respondents a “second bite at the cherry” to revive the interim protection under section 410 of the Act.
 
The Mischief of the Company Itself
 
The learned judge, Hamid Sultan, JCA, observed that the judicial management provisions in the Act do not “safeguard as of right” the mischief of the company itself, in that the company could file the judicial management application with the sole intention of freezing the claims of creditors, at least until the disposal of the judicial management order.
 
The Court of Appeal held that the High Court, by granting the order for stay, was entertaining the mischief without realising the impact that this would have on the creditors. Further, the Court commented that the effect of making a judicial management order in relation to an insolvent company which may have no prospect of recovering money or assets within a reasonable time may be drastic.
 
The Application Must be Bona Fide
 
The learned Judge of the Court of Appeal stated that the Court’s consideration of an application for judicial management “must be based on strict proof and evidence, and not merely surmise and conjecture to ensure that creditors are not defrauded by sympathy evoking stories of insolvent companies”. Additionally, the Court must also justly, economically and expeditiously dispose of the application as well as any appeal process, considering the effect of the provisions against creditors.
 
In relation to the moratorium regime under section 404 of the Act, the Court stated that any application should not be entertained if no element of bona fide was reflected in the application. The learned Judge of the Court of Appeal suggested that one way to demonstrate bona fides would be to write to all parties concerned to obtain their views before the application is filed, and then to disclose the views of the creditors to the Court.
 
CONCLUSION
 
The Court of Appeal’s decision in CIMB v Wellcom has further clarified the judicial management provisions of the Act. In highlighting the mischief inherent in the protection provided by the provisions of the Act to a company making an application for judicial management, the Court has also set down the factors to be considered when such an application is made. Thus, applicants must show proper proof and evidence that there is a reasonable probability of rehabilitating the company. However, due to the fact that the moratorium applies upon the filing of the application for judicial management, it is up to the Courts to ensure that applications which are not bona fide are disposed of quickly and efficiently.