Updated: Jan 19, 2021
Judicial management is a newly introduced corporate rescue mechanism under the CA 2016. It is a strong weapon for a company to resist any form of claim against the company and a benevolent provision for creditors to appoint a judicial manager to protect their interest in a company which may not be able to pay and/or satisfy their obligations.
Judicial management allows a party to apply to court for a judicial management order (“JMO”) to place the management of the company in the hands of a qualified independent person which is an insolvency practitioner known as a judicial manager, which such judicial manager will be appointed by the Court, is an officer of the Court, and once approved by the creditors and sanctioned by the court, the restructuring plan prepared by the judicial manager will be implemented.
Generally, the process of a judicial management is complicated. Thus, the statutory period for a moratorium against legal proceedings and enforcement of a creditor’s security is 6 months. The moratorium may be further extended by a period of 6 months subject to an application to court and obtaining the requisite approval from creditors. The moratorium gives breathing room for the company and allows it to focus its efforts and resources on rehabilitating itself to turn around its business without any interference from the creditors.
Judicial management is a good option if the distressed company has realisable assets, an identified source of future or is able to get investors (i.e. white knights) to inject capital into the company for the purpose of rehabilitating the company. However, if the company is hopelessly insolvent and has no hope of rehabilitating, an application for a JMO is not advisable as it will be difficult to prove the raison d’etre i.e. the rehabilitation of the company.
Non-application of Judicial Management
The mechanism and requirement for judicial management is likely catered for bigger companies but is does not apply to a company which is subject to the Capital Markets and Services Act 2007 (“CMSA”) and under Bank Negara’s purview. There is debate whether a company covered under the CMSA includes public listed companies or not as the statutory wordings governing a CVA expressly prohibits public companies but the same is not found in the relevant provisions regarding judicial management.
There is a train of thought inclined towards interpreting that a company that provides capital market products and services (corporate finance advisory or stockbroking) are excluded from the application of judicial management. The provisions of the CA 2016 regarding judicial management are mostly adopted from Singapore. Across the causeway, public listed companies are able to undergo judicial management, see Swiber Holdings Limited. Nevertheless, it remains to be seen whether a public listed company is able to avail itself to judicial management in Malaysia.
When and why apply for a JMO
The applicant may apply for a JMO if the applicant considers that the company is unable to pay its debts and there is a reasonable probability of rehabilitating the company or preserving all or part of its business as a going concern or that otherwise the interests of creditors would be better served than by resorting to a winding up.
Winding up is currently a no-go route because of the recent Companies (Exemption) Order 2020 (“Order”) which was gazetted on 23 April 2020, applies till 31 December 2020. The Order provides that a company shall be deemed to be unable to pay its debts if the company neglects any notice of demand by any creditor to pay its debt within a period of 6 months after the notice of demand is served on him.
It takes time to get a winding up order even if the notice of demand period is 21 days assuming there are no adjournments in the court. Creditors also have to rank evenly with other creditors of their class and the CA 2016 provides a priority list of unsecured debts. Furthermore, it may not be a dollar-for-dollar return to the creditors which makes the winding up route unattractive. Lastly, a creditor (a trade supplier) will not be eager to wind up a debtor company (their customer) as they are commercially interdependent on each other in their respective commercial ecosystem.
Lastly, in the mid-80s and 1997, when Malaysia was in a financial crisis and there was widespread economic meltdown similar to the present situation, banks are more cautious and reluctant to liquidate their debtors. This is compounded with the fact that the relevant ministry and regulator comes in to advice the banks to not pull the plug easily because it would cause a collapse in the economy and a domino effect. This make Judicial Management a more viable option as its aim is to rehabilitate a company to an optimistic recovery to achieve the same levels of revenue
Process of obtaining a JMO
An application for a JMO can be made by any stakeholder but in most cases, creditors ( including contingent or prospective) or shareholders file most of the applications. An application for a JMO is made to court by way of originating summons with a supporting affidavit to nominate a judicial manager (an insolvency practitioner). A judicial manager shall be entitled to receive salary or remuneration as is determined inter alia by agreement between the judicial manager and the company or creditors.
When an application for a JMO is made to the court, it must be advertised in a widely circulated newspaper. This is to give sufficient notice to parties dealing with the company especially the creditors of the company to notify the company's attempt to obtain a JMO. At the hearing, the court may either grant a Judicial Management Order, adjourn the hearing or dismiss the application.
The court will exercise its discretion to grant the JMO once the court is satisfied that the company is or will be unable to pay its debts and considers that the making of the JMO would be likely to achieve any of the criteria specified in S.405(1)(b) of the CA 2016 i.e. the survival of the company.
Even if the court is not satisfied that the making of the JMO would be likely to achieve any of the criteria set out in S.405(1)(b) of the CA 2016, the CA 2016 has the effect of vesting in the court an overriding power to make a JMO if it considers the public interest so requires. The exercise of this overriding power remains to be seen to the date of this article and to the best knowledge of the writer.
After a JMO granted, the Judicial Manager shall have 60 days or such longer period as the court may allow for him to submit his proposal to all the creditors and members of the company.
Once a JMO has been made, the board is divested of its powers and therefore it will cease to manage the company which will then be under the control of the judicial manager.
Factors the court may consider in granting a JMO
A JMO is essentially an ex parte order (with respect to the interests of one side only) as at the hearing, the court only hears the applicant. Therefore, the applicant has to be really convincing. It is settled law that in an ex parte application, the applicant has a duty to make full and frank disclosure of all material facts to the court and not conceal any material facts detrimental to his application because at the time of application the court has only the documents produced by the applicant to guide it in its decision-making.
In PECD Bhd & Anor v AmTrustee Bhd, the High Court set aside an ex parte order for leave to convene creditors’ meeting and to restrain all legal proceedings for non-disclosure of material facts. On appeal, the Court of Appeal upheld the decision of the High Court.
See Court of Appeal case of CIMB Islamic Bank Bhd v Wellcom Communications (NS) Sdn Bhd
This moratorium regime related to section 404 of CA 2016 should not in the first instance be entertained if the element of bona fide is not reflected in the application. One patent bona fide approach by applicant … is to write to all the concerned parties to obtain their views before the application is filed itself and also disclose to the court the creditors view.
Another fact the court will consider in granting a JMO is that whether the judicial manager’s restructuring proposal has a likelihood to be approved by the required 75% majority of the creditors in value. In the High Court case of Leadmont Development Sdn Bhd v Infra Segi Sdn Bhd, the respondent and six sub-contractors exhibited letters to confirm that they are opposed to the JMO and wish to have it set aside as well. The High Court took into account the total value of the respondent and the six nominated sub-contractors amounted to 46.9% of the total value of creditors.
This clearly means that there is no way the scheme to be proposed by the judicial manager could be approved by the requisite majority of creditors. Although the High Court judge sympathised with the applicant’s plight in its attempt to rehabilitate the company, the court will not act in vain as the restructuring proposal is an exercise in futility, as more than 25% of the total value of creditors will vote against any scheme, and the applicant will not achieve the requisite majority of creditors.
The Singapore Court of Appeal case of Royal Bank of Scotland NV v TT International Ltd held as follows:
It should be borne in mind that where there is no realistic prospect of a scheme receiving the requisite approval, the court should not act in vain in granting the application for meetings to be convened … This is something that the applicant’s solicitors and the proposed scheme manager should take into account prior to making an application for leave to convene a scheme creditor’s meeting. A failure to make a conscientious assessment of the likely prospects of scheme approval may result in adverse costs orders.
See Court of Appeal case of CIMB Islamic Bank Bhd v Wellcom Communications (NS) Sdn Bhd
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 indeed may be very drastic. Thus, the court’s consideration at all stages, that is to say from the date the application is filed and from the date of the order, if any is given, must be based on strict proof and evidence and not merely surmise and conjecture to ensure creditors are not defrauded by sympathy evoking stories of insolvent companies.
How fast can a JMO be obtained?
As mentioned earlier, timing and efficiency is vital in a distress situation. An application for a JMO offers a company a buffer against legal action so timing is important. To reiterate the earlier article, a company should consider the below before applying for a JMO:
whether is it restricted by the provisions of the CA 2016 to utilise a JMO
if not restricted, what is the expected timeline of a judicial management exercise
how much does the entire exercise cost
chances of obtaining court approval
does the company have a lot of potential or existing litigation against it to need a moratorium
As applying for a JMO is a court process, the timing cannot be quantified as it depends on the expeditiousness of the hearing and whether there is any adjournment by the court.
Comparison with other rescue mechanisms
A judicial management can morph into a scheme of arrangement which is a formal reorganisation as provided for in S.405 and S.366 CA 2016 to allow a distressed company to pivot into a more viable position. This is provided the distressed company qualifies certain statutory prerequisites.
Advantages of obtaining a JMO
Automatic moratorium against all legal proceedings and enforcement of security by creditors for a period of 6 months which may be further extended to another 6 months
the company’s business and property are managed by the judicial manager in the place of existing management. Creditors may have ease of mind if the distressed company is helmed by an independent insolvency practitioner if creditors see the potential and scalability of the distressed company’s business but not in the ability of the board
creditor committee may be formed to monitor the progress of the restructuring proposal by the judicial manager under S.422 CA 2016
creditors can hold a judicial manager accountable if the judicial manager acts unfairly prejudicial to the interests of its creditors under S.425 CA 2016
judicial manager has duty to be fair, transparent and report wrongdoings
prevent shareholders from losing their entire investment in the company
security of tenure for employees
unpaid creditors able to recover some, if not all of their debts
Disadvantages of applying for a JMO
1. Costs will be higher than a CVA and a SOA because of court intervention and services of a judicial manager
2. Lack of privacy, S.408 CA 2016 requires the applicant to advertise the notice of application in a widely circulated newspaper. This may result in adverse publicity. See 2.1.
2.1 Swiber Holdings Limited and its subsidiary, Swiber Offshore Construction Pte Ltd shocked investors when they have taken out applications to place themselves under judicial management and interim judicial management respectively when oil prices slumped. An advertisement of judicial management implies that a company is facing financial issues.
3. a company has to give notice that a company is under JMO i.e. every invoice, order for goods or services, business letter or order and every official website of the company
4. a judicial manager can investigate into a company’s affairs to determine the financial position of the company by virtue of S.429 CA 2016, see below:
4.1 the company’s statement of affairs required to be submitted to the judicial manager and apart from that, they can compel people with an order of court to uncover wrongdoings if the debtor company has been mismanaged by anybody.
4.2 are there any inter-company or related party transactions, and if yes, are they dealt with arm’s length and bona fide
4.3 See Singapore’s Hin Leong Trading Pte Ltd, (“HLT”) where the judicial manager (PricewaterhouseCoopers) unearthed information about HLT’s oil stock and financial position, and HLT “grossly overstated” the value of its assets according to a preliminary report.
5. Recent reported cases regarding judicial management shows that an application for a JMO has been stifled by creditors intervening and objecting on the appointment of a judicial manager or the filing for a JMO.
6. A JMO does not safeguard as of right the mischief of the company itself, filing the application to freeze the claim of creditors, etc. for at least a short period until the disposal of JMO
How to convince creditors to support or initiate an application for a JMO
It is unlikely a financially distressed company will succeed in an application for a JMO if it does not get the secured creditors' buy-in.
If there is a trust deficit, the creditors themselves may appoint the Judicial Manager. The distressed company can convince the creditors (secured creditors i.e. banks) to choose the Judicial Manager themselves and usually it will be someone who has a reputation with the banks.
If secured creditors appoint a judicial manager Mr. A to be the judicial manager, and the company nominate Mr. B to be judicial manager, it is likely that the choice of creditors' appointment prevails over the company's. This supplements the argument that it is more beneficial for creditors to appoint the judicial manager.
When a secured creditor looks at the proposal, as long as their security is not in any way in jeopardy, they are likely to be willing to look into the proposal whether it is workable or not to assess its strength and credibility. However, if the liability of the distressed company has exceeded that of the charged asset secured to the bank then it is very unlikely that the lenders will go along with any plan where any further credit is to be extended to the financially distressed company.
On the other hand, if the security is impaired into such a manner that enforcing it makes no sense, creditors might be willing to go along with the JMO application.
Lastly, dissatisfied creditors may apply to the court for an appropriate order if the company's affairs are managed in a manner that is unfair or prejudicial to the creditors.
Key takeaways for Judicial Management
A distressed company that is contemplating to apply for a JMO, is suggested to do the following in the preliminary:
See the financial statements showing the company’s financial position, including statements of profit or loss and other comprehensive income, cash flow, value of its assets and liabilities, financial forecast of its identified source of future revenue or pipelines in revenue.
Seek advice from a qualified insolvency practitioner for advice on debt and financial restructuring on how to stop the bleeding and ensure the company has sufficient liquidity to operate during the judicial management. This same qualified insolvency practitioner is suggested to be judicial manager although bearing in mind the company’s creditors are entitled to choose the judicial manager. Contact secured creditors especially major ones to seek their consent and approval on the judicial management of the company.
It is advised to start the conversation with creditors as early as possible to notify them of and to get their buy-in of the prospective judicial management scheme. Distressed companies should put forward genuine and valid reasons to convince creditors that applying for a JMO is not a dilatory tactic to frustrate creditors.
Otherwise, it would be a waste of resources and time to embark on an exercise to only have it stifled by disgruntled creditors and the distressed company will be back to square one. It would also be prudent to devise a contingency plan should a judicial management exercise be unsuccessful.
Distressed companies contemplating to apply for a JMO should do it as soon as possible and not at the eleventh hour as it would be easier to convince the court to grant a JMO that the application is bona fide.
It is recommended for distressed companies to examine their business resilience during this pandemic if they face the possibility of insolvency.
As pointed out in Saving Companies: Part 1, if there is no chance of a distressed company rehabilitating from this pandemic, distressed companies and creditors should discuss about an exit strategy to mitigate losses or an endgame such as liquidation or acquired because a judicial management exercise is not meant to exist indefinitely and there must be a light at the end of the tunnel.
Hopefully during the July sitting, the legislature may clarify whether a public listed company can avail itself to judicial management. The collapse of a public listed company results in a domino effect in an ecosystem as some public listed companies are inter-related, see Berjaya and Genting Group.
Some conglomerates have already announced staff and pay cuts, closure of some operational assets and business premises to tighten their wallets. Nevertheless, having another card to play such as judicial management broadens a distressed company’s strategic options when trying to stem the tide of this financial tsunami where even oil barrels drop to a negative price.
This article does not and is not intended to constitute as legal advice. This article represents the views of the writer alone. Information in this article may not constitute the most up-to-date information. Specific professional advice should be sought regarding your specific circumstances.