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LATEST DEVELOPMENT FOR JUDICIAL MANAGEMENT IN MALAYSIA

By:

Harneshpal Karamjit Singh (Co-Managing Partner) [harnesh@luibhullar.com]



INTRODUCTION

Judicial Management came into force in Malaysia on 01.03.2018, as a corporate rescue mechanism offering protection to ailing companies. Judicial Management derives its force of law from the following:


(a) Part III (Management of Company) Division 8 (Corporate Rescue Mechanism) Subdivision 2 (Judicial Management) Sections 403-430 of the Companies Act 2016; and


(b) Part III (Judicial Management) Sections 8-37 of the Companies (Corporate Rescue Mechanism) Rules 2018.


The Judicial Management mechanism is to instate a moratorium on legal proceedings against the company and afford a court appointed judicial manager the opportunity to make a proposal to the creditors for the settlement of debts and / or survival of the company.


In the recent High Court decisions of In Re: Sin Soon Hock Sdn Bhd [2020] 1 LNS 976 (“Sin Soon Hock”) and In Re Biaxis (M) Sdn Bhd [2020] 1 LNS 1289 (“Biaxis”), both delivered by Wong Hok Chong J, the High Court articulated in detail, the Judicial Management regime in Malaysia.


Sin Soon Hock concerned a judicial management order on Grant Venture Sdn Bhd (“Grant Venture”) by Sin Soon Hock Sdn Bhd, the creditor of Grant Venture. Biaxis concerned Biaxis (M) Sdn Bhd’s application for a judicial management order.

JUDICIAL MANAGEMENT


Applicant’s Consideration

A company (such as Biaxis (M) Sdn Bhd in Biaxis) or its creditor (such as Sin Soon Hock Sdn Bhd in Sin Soon Hock) can make an application for a company to be placed under Judicial Management. Essentially, only the company or its creditor can apply for a judicial management order.


An Applicant must consider the following before filing a Judicial Management application:


(i) The Company is or will be unable to pay its debts (“Insolvency”) [Section 404(a) of the Companies Act 2016];


(ii) There is a reasonable probability of rehabilitating the company or of preserving all or part of its business as a going concern (“Survival”) or that otherwise the interests of creditors would be better served than by resorting to a winding up (“Better Realisation”) [Section 404(b) of the Companies Act 2016].


It must be noted that the Applicant need only consider the Insolvency, Survival and Better Realization of the Company (“Applicant’s degree of assurance”). This indicates a low threshold of persuasion.


The filing of a Judicial Management application triggers an automatic moratorium on legal proceedings on the company [Section 410(c) of the Companies Act 2016].


Court’s Consideration

The Court must consider the following before making a judicial management order:


(i) The Court is satisfied that the company is or will be unable to pay its debts (“Insolvency”) [Section 405(1)(a) of the Companies Act 2016]; and


(ii) The Court considers that the making of the order would be likely to achieve one or more of the following purposes:


1. The survival of the company, or the whole or part of its undertaking as a going concern (“Survival”) [Section 405(1)(b)(i) of the Companies Act 2016];


2. The approval under Section 366 of the Companies Act 2016 of a compromise or arrangement between the company and any such persons as are mentioned in that section (“Scheme”) [Section 405(1)(b)(ii) of the Companies Act 2016];


3. A more advantageous realisation of the company's assets would be effected than on a winding up (“Better Realisation”) [Section 405(1)(b)(iii) of the Companies Act 2016].


It must be noted that the Court must be satisfied of the Insolvency of the Company (“Company’s degree of assurance”). This indicates a high threshold of persuasion. Appropriately, it should be pertinent for the Court to be satisfied that the company is or will be unable to pay its debts, whereby the definition of ‘inability to pay debts’ can be found in Section 466 of the Companies Act 2016.


Additionally, the Court must also be satisfied that the Judicial Management application and its proposal is bona fide. The Court should not concern itself with how the creditors might vote as such conduct is the prerogative of the creditors.


It is pertinent to state that the application must be heard within sixty (60) days of filing the application [Rule 9 of the Companies (Corporate Rescue Mechanism) Rules 2018] but there is no timeframe for the delivery of the decision.


Once a judicial management order is made, a judicial manager is appointed [Section 405(3) of the Companies Act 2016] and such order is valid for six (6) months [Section 406(1) of the Companies Act 2016]. The moratorium on the company maintains throughout the judicial management order period [Section 411(4) of the Companies Act 2016]. A judicial manager of a company shall be an insolvency practitioner, who is not the auditor of the company [Section 407(1) of the Companies Act 2016].


Creditor’s Consideration

The judicial manager shall within sixty (60) days of the judicial management order, provide a proposal to the creditors [Section 420(1) of the Companies Act 2016]. It is for the creditors to either approve or reject the said proposal. Seventy-five per cent (75%) of the total value of creditors are required to approve the said proposal and such proposal binds all creditors of the company [Section 421(2) and Section 421(3) of the Companies Act 2016]. If the creditors do not approve the said proposal, the judicial management order may be set aside [Section 421(5)(a) of the Companies Act 2016]. If the proposal is approved, the judicial manager shall execute the proposal within six (6) months of the judicial management order [Section 423(1) of the Companies Act 2016].


Role of Nominated Judicial Manager

The High Court in both Sin Soon Hock and Biaxis held that a Judicial Management application should be supported by the nominated judicial manager for the following reasons:


(i) The nominated judicial manager is the mastermind behind the proposal and plays a key role throughout the judicial management process;


(ii) The nominated judicial manager has the expertise to consider whether the proposal will achieve Survival and / or Better Realisation;


(iii) The nominated judicial manager is able to provide an objective view, being a professional without any vested interest in the applicant or the company; and


(iv) For as much as it is the applicant's application for a judicial management order, it is also his application albeit indirectly to be appointed judicial manager.


The nominated judicial manager ought to affirm an Affidavit to support the Judicial Management application and an expert report prepared by the said nominated judicial manager ought to be exhibited with the said Affidavit. Accordingly, the Court will be reliant on the guidance and expertise of the nominated judicial manager.


The requirement of an Affidavit and an expert report to be exhibited is likely based on the Court’s firm belief that a proposal would have been formulated much earlier in the Judicial Management process i.e., at the preparation stage of the application (likely before the filing of the application) and that the Applicant would not be able to have come up with a proposal and consider the Survival and Better Realization of the Company without the advice of the nominated judicial manager.


CORE GUIDING PRINCIPLES OF JUDICIAL MANAGEMENT

From the outset, the High Court in both Sin Soon Hock and Biaxis held that the quality and quantity of evidence from the Applicant and nominated judicial manager would depend on the identity of the Applicant. It can be assumed that if the company itself is the Applicant, then the access to information would be limited.


As such, the Court held that the Applicant and / or the nominated judicial manager should demonstrate the following:


(i) That the Application and Proposal is bona fide;


(ii) That the best efforts had been put to verify all the relevant information especially financial information; to get the proposal to its final form; secure commitment of parties who will provide money to the proposal; and identify any pending issues;


(iii) Explain the rationale of the proposal and its likely achievement;


(iv) Full and frank disclosure of material risk that may lead the creditors ending up in a less advantageous position; all previous applications and their respective outcomes; and any other relevant matters.


The Applicant should state that there is a reasonable probability of achieving the goals of Judicial Management and the nominated judicial manager should state that the proposal is likely to achieve the goals of Judicial Management.


The High Court held that the core guiding principles were fair and measured as follows:


(i) There is an automatic moratorium upon filing of a Judicial Management application;


(ii) There is real risk of mala fide applications to take advantage of the automatic moratorium;


(iii) Unsecured creditors are prohibited from opposing the application (although such position is now contrary to the Court of Appeal decision involving Million Westlink Sdn Bhd in Court of Appeal Civil Appeal No. B-02(IM)-1590-08/2019 and High Court decision of Goldpage Assets Sdn Bhd v Unique Mix Sdn Bhd [2020] 1 LNS 18);


(iv) With only sixty (60) days to put the final proposal to the creditors, the proposal is expected to be at an advanced stage;


(v) The proposal put to the creditors should be essentially the same as that assessed by the court; and


(vi) The creditors, when voting, are resting on the assurance that the court has assessed the veracity of the proposal and considers it likely to achieve Survival and/or Better Realisation or, where there is a Scheme, to achieve the Scheme.


POSITION OF SECURED CREDITORS

The High Court in Biaxis noted that the position of secured creditors is supreme. Once a secured creditor opposes the Judicial Management application, the Court is mandated to dismiss the said application [Section 409(b) of the Companies Act 2016].


PUBLIC INTEREST EXCEPTION

Notwithstanding that a secured creditor is able to oppose and mandatorily the judicial management application is dismissed, the Court shall consider the public interest element in making a judicial management order [Section 405(5)(a) of the Companies Act 2016].


The Court explicitly noted that loss of employment and uncompleted contracts do not fall within the meaning of public interest. The Court was also of the opinion that public interest is to be interpreted restrictively and applied in most exceptional of circumstances.


The Court in Biaxis gave an example of the public interest exception as follows:

“As our nation, and indeed the world, struggles to contain the COVID-19 pandemic, if a company who alone possesses the vaccine for the virus makes an application for a judicial management order, the court may in such exceptional circumstances consider that public interest requires that the judicial management order be made.”


OUTCOME IN SIN SOON HOCK AND BIAXIS

In Sin Soon Hock, the Court was not satisfied that the Company was insolvent. There was also no proposal before the Court and the Applicant made no reference whatsoever to Survival and / or Better Realization. The Application was not made bona fide. The Court also took note that the Applicant did not obtain the advice of the nominated judicial manager, who accordingly did not affirm an Affidavit to support the application.


In Biaxis, the application was being opposed by a secured creditor (Maybank) and as the Court found no public interest as alleged by the Applicant, the application should be dismissed. However, the Court did further note that the nominated judicial manager did not affirm an Affidavit to support the application. There was no tangible proposal put forth by the Applicant.


Appropriately, the application was dismissed in both Sin Soon Hock and Biaxis.

CONCLUSION

It would now follow that it is pertinent to a Judicial Management application that the nominated judicial manager would play a pivotal role in the making of a judicial management order.


A nominated judicial manager is now expected to affirm an Affidavit to support the Judicial Management application as the Court would be guided by the expertise of the nominated judicial manager.


This may pose a problem as a majority in value of the creditors would be able to nominate a judicial manager that is different from the Applicant’s nominated judicial manager [Section 407(3)(a) of the Companies Act 2016]. The Court itself may refuse the nominated judicial manager and appoint someone else as judicial manager [Section 407(2) of the Companies Act 2016].


Furthermore, the Applicant and the nominated judicial manager ought to have at hand a near-complete proposal at the time the Judicial Management application is made as the nominated judicial manager only has sixty (60) days after the making of a judicial management order to put the proposal before the creditors.


Another problem would occur here whereby a nominated judicial manager would not be able to have total control of the affairs, business and property of the company until the nominated judicial manager is so appointed. Accordingly, it would be onerous for the nominated judicial manager and in turn the Applicant to have a near-complete proposal be flashed in a Judicial Management application. Not to mention, the Applicant, usually the ailing company, would need to fork out immense time and money on a nominated judicial manager to come up with a near-completed proposal.


Lastly, it would seem that there is a high threshold for the public interest exception to come into play in a Judicial Management application as the Court has ruled out loss of employment and uncompleted contracts as public interest exceptions and included the much-awaited COVID-19 vaccine possession as falling within the public interest exception.


In a nutshell, the High Court decisions of Sin Soon Hock and Biaxis would seem to suggest that Judicial Management is likely to be a toothless tiger, a much-curtailed corporate rescue mechanism.


Image by analogicus from Pixabay

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