Corporate Rescue Mechanisms in Malaysia: Part 1 - What is a Judicial Management Order?

Introduction

Judicial Management (JM) is a court-supervised corporate rescue mechanism introduced in Malaysia under the Companies Act 2016 (“CA 2016”) and governed under Companies (Corporate Rescue Mechanism) Rules 2018.

In brief, JM involves a court-appointed liquidator whose main duty and function is to rehabilitate and rescue a financial distressed company by devising a restructuring scheme or statement of proposal for the approval of the company’s creditors. If rehabilitation is not possible, then the appointment of a Judicial Manager is aimed at ensuring that the creditors are able to obtain a better return on their debts than going through liquidation.
 

Brief Characteristics

The Judicial Manager

The Judicial Manager must be a licensed liquidator or insolvency practitioner (who is not an auditor of the company in question). Once appointed by order of Court, the Judicial Manager is empowered to manage the affairs of the company in question, usually with the main aim of rescuing or rehabilitating its businesses.  

Upon their appointment, the Judicial Manager will exercise their authority to come up with a restructuring scheme or statement of proposal for the approval of the company’s creditors. This scheme or proposal would usually involve repayment plan to creditors in tranches, sale of part of the company, fund injections, strategic merger or acquisition etc. Where the rescue of the company is not viable, then the Judicial Manager is tasked with ensuring a more advantageous realisation of the assets of the company for the interest of its creditors.

The Statutory Moratorium

One of the main features of a JMO is the moratorium which is put in place to protect the company from litigation during the duration of the application and the JMO. The moratorium is designed to prevent third parties (such as creditors of the company) from commencing or continuing any legal suits, proceedings and execution proceedings against the company without the prior leave or permission of the Court. This extends to winding up proceedings (including the advertisement and gazettement of the winding up petition), all legal suits against the company and the enforcement of any security against the company.

This blanket freeze on all legal proceedings against the company protects the company from having to expend its very limited resources to defend against multiple legal proceedings. Instead, this allows the company’s resources to be utilised towards reviving the company’s business or, at the very least, allows more of the already dwindling assets of the company to be realised by the Judicial Manager for the company’s creditors.

An automatic interim moratorium is triggered as soon as the application for JM is filed in Court and lasts until the JM application is either allowed or dismissed by the Court. If the application is dismissed, then the interim moratorium will be lifted and the company will once again be unprotected from all legal proceedings and quasi-legal proceedings such as arbitration instituted against it. However, if the JM application is allowed and a Judicial Manager is appointed, then a permanent moratorium will be triggered from the appointment of the Judicial Manager and will last throughout the duration of the JMO. Such permanent moratorium shall remain in force for a period of six (6) months starting from the date of the granting of a JMO and might be further extended for an additional six-month period upon the Judicial Manager’s application to court for an extension of the JMO.

Interestingly, in the case of Syed Ibrahim & Co v Trans Fame Offshore Sdn Bhd, the learned Court granted a second JMO to Trans Fame after the expiry of the first JMO after 12 months upon a fresh application for Judicial Management filed by the Judicial Manager. This decision suggests that a company may be placed under JM for more than the statutory time-period of 12 months provided a fresh application is made. Doing so will also trigger the moratorium afresh. This position seems to bypass the principle that a JMO should last no longer than 12 months.

For a more in-depth discussion on the scope of the moratoriums in the context of a JMO, see our previous article, “The Statutory Moratorium under the Judicial Management Scheme”.

Conclusion

JMO in certain situation may be the hail mary for financially distressed companies as it provides the necessary breathing space for the said company to restructure and/or rehabilitate in aim to revive its business with the assistance of an independent and qualified insolvency practitioner. In our next article, we will explore on the necessary steps and/or requirements in applying for a JMO.