Corporate Rescue Mechanisms in Malaysia: Part 2 - What is a Judicial Management Order?
by Sean Tan Yang Wei & Valerie Seaw Ja Hui (Pupil) ~ 17 February 2023
Contributed by
Sean Tan Yang Wei (Principal Associate)
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Valerie Seaw Ja Hui (Pupil)
Email: valerie@thomasphilip.net
See Part 1 of our series for an introduction to what a Judicial Management Order entails
A Judicial Management Order (“JMO”) must be obtained from Court and in order to do so, there are several factors and requirements which need to be met in order to be successful in the application. This article will focus on the factors considered by the Court when evaluating a JMO application.
Is the Company Precluded from Applying for a JMO?
First and foremost, one must ascertain whether the target company of a JMO is eligible to be placed under judicial management. The Companies Act 2016 (“CA 2016”) prohibits certain types of companies from being placed under judicial management, namely:
- A company which is a licenced institution, or an operator of a designated payment system regulated under the laws enforced by the Central Bank of Malaysia [s 403(a) CA 2016];
- A company subject to the Capital Markets and Services Act 2007 [s 403(b) CA 2016]; and
- A company already in liquidation [s 405(6) CA 2016].
Such companies are not allowed to be placed under judicial management and any application would be dismissed by the Court. The recent High Court decision of Re Scomi Group Bhd [2022] 7 MLJ 620 held that s 403(b) CA 2016 applies to all companies whose shares are quoted on a stock market of a stock exchange. However, this provision may be subject to an amendment in the near future [1].
The Secured Creditor’s Veto
It should also be noted that secured creditors who are entitled to appoint receivers or receivers and managers over the whole or part of the company’s assets (usually debenture holders) have the power to veto or scupper any application for judicial management. This is provided for under s 409 (read together with s 408(1)(b)(ii) CA 2016) which states that the Court shall dismiss a JMO application if the same is opposed by a debenture holder[2].
Unsecured creditors on the other hand enjoy no such veto power. They are however entitled to intervene[3] and raise their opposition at such proceedings for the consideration of the Court.
Who Can File the Application for a JMO?
Under the CA 2016, an application for a JMO can be filed by the following parties:
- members or shareholder of the company in the name of company;
- directors of the company; or
- a creditor or several creditors of the company (including contingent and prospective creditors).
Contingent Creditor – a creditor to whom a debt may be owed to by the company upon the occurrence of an event
Prospective Creditor – a creditor whose debt has been proven but is not immediately payable
While all parties above are allowed to file an application for a JMO, it ought to be noted that there are slightly different requirements that must be met by each type of applicant. For instance, resolutions would have to be passed before shareholders or the directors of the company file an application for a JMO. A creditor’s application on the other hand does not require majority support from the creditors of the company.
Other than the different requirements, an applicant should be mindful of the quality and quantity of supporting evidence expected from them. For instance, higher quality and/or more evidence would be expected when the applicant is the company itself, than if it were a creditor whose access to information would be comparatively limited (Re Biaxis (M) Sdn Bhd [2022] 7 MLJ 443).
Factors Considered When Allowing or Disallowing an Application for a JMO
If the preconditions above are satisfied, the Court would consider the tests set out under s 405 of the CA 2016. s 405(1) CA 2016, which sets out 2 main limbs, namely:
(a) the Court is satisfied that the company is or will be unable to pay its debts (“1st Limb”); and
(b) the Court considers that the making of the order would be likely to achieve one or more of the following purposes:
- the survival of the company, or the whole or part of its undertaking as a going concern;
- the approval under s 366 of a compromise or arrangement between the company and any such persons as are mentioned in that section;
- a more advantageous realisation of the company’s assets would be effected that on a winding up.
(“2nd Limb”)
1st Limb: “Is or will be unable to pay its debt”
The First Limb revolves around the company’s ability to service its debts. The party who is seeking a JMO must provide cogent evidence that can satisfactorily prove that the company is or will be unable to pay its debts.
The Court will not only assess the overall liabilities of the company against its assets but will also consider whether the company has enough cash in hand to pay its debts as and when they become due. If a company is unable to pay its creditors (or debt) on time, the Court will presume that the company is unable to pay its debts and is therefore considered commercially insolvent. This test is also widely known as the “commercial or cash flow insolvency test”.
2nd Limb: the Statutory Purposes
If the Court is satisfied that the company in question is or will be unable to pay its debts, the Court will then move to consider whether the making of a JMO would achieve one or more of the purposes set out under Section 405(1)(b) of the Companies Act 2016, namely:
- The survival of the company, or the whole or part of its undertaking as a going concern.
- The approval under s 366 of a compromise or arrangement between the company and any such persons as are mentioned in that section; or
- A more advantageous realisation of the company’s assets would be effected than on a winding up.
Here, the Court will examine the evidence presented to determine if there is a real prospect that the one or more of the stated purposes is achievable if an order for JM is made. Mere assertions that the purposes of the JM could be met, such as the likelihood of financing or rehabilitation, without the same being backed by proper evidence would be insufficient[4].
The Court of Appeal in CIMB Islamic Bank Bhd v Wellcom Communications (NS) Sdn Bhd & Anor [2019] 4 CLJ 1 also stated that, “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”.
The Courts have also held that the filing of an affidavit of the judicial manager candidate, while not mandatory, would be useful to support such applications as the Court would be better equipped to assess and examine the viability of the proposal to rescue the company or to achieve the statutory purposes[5].
Conclusion
It is necessary to understand the requirements of a JMO application to better understand and evaluate the prospects of success. However, the law governing the judicial management mechanism in Malaysia is still developing and is expected to receive further amendments from Parliament in the near future.
Stay tuned for the next part of this series where we will delve into the effects of a JMO on the company in question.