Saving Companies: Part 2

Updated: Jan 19, 2021

Judicial Management

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