[Member] Corporate Rescue Mechanism: Scheme of Arrangement

Corporate rescue procedures provide an alternative to the immediate liquidation of the ailing company, seeking to provide companies in financial difficulty with a period of respite in which compromises and rescue arrangements can be made.

Companies facing financial difficulties have been given certain options under the Companies Act 2016 (‘CA’) to address issues of financial distress by applying to the court to sanction certain rescue and rehabilitation attempts.

Among the three mechanisms that have been provided is the scheme of arrangement.

What is a Scheme of Arrangement?

A scheme of arrangement is a structured proposal by the company to re-negotiate or reschedule its debts and other contractual agreements it has with its creditors. It is useful in cases where a company is in financial difficulty. It can be used to facilitate debt restructuring.

Law and Procedure

S366(1) CA allows a company, creditor or members of the company, liquidator and judicial manager to apply for statutory scheme of arrangement. Such an application to the court can be made by originating summons under Order 88 Rule 2 Rules of Court 2012.

The application is generally made ex-parte as shown in Re Foursea Construction (M) Sdn Bhd whereby the court held that an application must be dealt with an opportunity given to the creditors on record to make their representation and not ex parte as by doing, so great injustice is caused to the creditors.

How Does the Court Exercises its Discretion?

In Re Buildmat (Australia) Ltd, the court refused to make an order to approve the proposal as it was against public policy to approve any scheme to be undertaken by a company that is incapable of paying its debts in full. The court was not only concerned for the interest of the creditors but also its duty to uphold the commercial morality of the country.

In Sri Hartamas Development Sdn Bhd v MBF Finance Bhd, the court set aside the ex parte order to call meetings of creditors and members on the grounds that the interests of the unsecured creditors were not adequately safeguarded and that it was against public policy to sanction a scheme of arrangement where the company was hopelessly insolvent.

Who May Apply?

S366(1) CA allows a company, creditor or members of the company, liquidator and judicial manager if the company is under judicial management to apply for statutory scheme of arrangement.

Court-convened Meetings

The meetings of different classes of creditors or members will be convened once order granted by the court and the manner in which the meetings are to be summoned.

As per s366(2) CA, the meeting may be adjourned if the resolution for adjournment is approved by 75% of the total value of creditors. S366(3) CA states that the scheme of arrangement is binding on creditors, members, the company or the liquidator if it is agreed by a majority of 75% of the total value of creditors or members.

The notice summoning the meeting must be in accordance to s369 CA. When it is sent to a creditor or a member, it shall be accompanied by a statement explaining the effect of the compromise or arrangement over their material interest as mentioned in s369(1) CA.

The applicant may then apply to the court once the court convene meeting has approved of the proposed scheme for the approval of the compromise or arrangement. The court may grant its approval to the compromise or arrangement subject to such alterations or conditions as it deems just by virtues of s366(4) CA.

According to Sri Hartamas Development Sdn Bhd v MBF Finance Bhd, s366(4) gives the court discretion not only to order a creditor’s meeting but also to refuse to make an order for such meeting.

When Does the Arrangement Take Effect?

Under s366(5) CA, the compromise or arrangement will take effect on the date of the lodgement of a copy of the court order to the Registrar or any earlier date as ordered by the court. According to s366(6) CA, this order must also be annexed to every copy of the company’s constitution or every copy of instrument issued that constitute or define the constitution of the company. It should be noted that as per s366(7) CA, the court may exempt a company from complying with the requirements as laid down in 366(6) or determine the period during which the company shall comply with the requirements.

Court Approval

Once approved by the court, the terms of the compromise or arrangement will be binding on all the creditors or class of creditors, the members or class of members, the company and the liquidator and contributories (if the company is being wound up).