Corporate Rescue Mechanisms in Malaysia: Part 3 – The Effect of Judicial Management Order (JMO)

In this article, we will explore the post-grant events following a Judicial Management Order (JMO) and delve into the roles and responsibilities of the Judicial Manager during the effective period of the JMO. Read Part 1 & Part 2 of our series for an Introduction to a JMO and How to Apply for a JMO.

The Effect of a JMO

Sections 410 and 411 of the Companies Act 2016 (“CA 2016”) provides that once a Judicial Management Order (JMO) is allowed: (1) no winding-up resolutions or orders, dismissal of winding-up applications, (2) no proceedings or execution without court permission, and (3) no share transfers or member status changes without court approval etc. These provisions aim to provide a protective framework during the period of judicial management, preserving the company's status quo and preventing legal actions that could further disrupt its affairs.

Apart from the above, a major effect of the JMO is the change of the company’s ‘shipmaster’ or ‘commander’. Prior to the JMO, the directors held full control over business operations and management. However, once the JMO is in force, the directors of the company become functus officio, and the control of the company’s affairs, business and properties will be vested in the Judicial Manager.[1] The Judicial Manager is responsible for exercising and performing all powers and duties imposed on the directors by the CA 2016 or by the company’s constitution, while the directors no longer hold such authority.[2]

As an example, in Ganda Selat Sdn Bhd v MPDT Capital Bhd [2022] 10 MLJ 776, the court deemed a Joint Venture Agreement entered into by the directors during the JMO period null and void as the directors lacked legal capacity to bind the company while under the administration of the Judicial Manager.

The Role and Duties of a Judicial Manager Upon Obtaining the JMO

The duties of a Judicial Manager are well laid out in the Companies Act 2016 (“CA 2016”) and/or common law. Among others, some of the said duties are summarised as below:

• Section 414:
  the Judicial Manager shall take into his custody or under his control all the affairs, business and the property to which the company is or appears to be entitled.
• Section 420:
  Judicial Manager is obligated to formulate a restructuring proposal, within 60 days of the JMO or any longer period which the court deems fit and allowed. The said proposal shall be subsequently sent to the Registrar of the Companies, all creditors of the company and all members of the company and be published in one widely circulated newspaper in the national language and in the English Language.
• Section 421:
  Following from the submission of such a proposal, the Judicial Manager must convene creditors’ meeting to vote on the said proposal of the Judicial Manager. The proposal is deemed approved if the same receives support from 75% of the total value of creditors whose claims have been accepted by the judicial manager, present and voting at the meeting either in person or by proxy. From thereon, such proposal shall be binding on all creditors of the company regardless.[3]
  
  However, the CA 2016 does not provide specific guidelines on how such meeting must be conducted and the number of such meetings can be called. In such cases, it may be advisable for the Judicial Manager to seek for the court’s direction and/or order by an application if necessary i.e. when the Judicial Manager decides to convene such meeting by virtual means or other technology.[4]
• Section 423:
  Upon the approval of the proposal and the sanction of the Court, all affairs, business and property of the company shall be managed by the Judicial Manager in accordance with the approved statement of proposal.
  
  If any substantial revision of an approved proposal is to be made, such a revised proposal must be sent to the creditors, and members of the company and the approval of the same must be retaken. 

Duration & Extension of the JMO

In cases where the Judicial Manager is unable to fulfil their duties within the stipulated 6-month period of the JMO[5], the Judicial Manager can apply to the court for an extension of up to 6 months. This application must be made 30 days prior to the expiry of the existing JMO[6] and is subject to the conditions outlined in Sections 404 and 405 (as discussed in Part 2).

Historically, extensions of the JMO have been granted when deemed necessary, especially if it is needed to provide the Judicial Manager with sufficient time to prepare the Statement of Proposal, allow creditors to submit their Proof of Debt, and afford creditors ample time to consider the proposal[7]. It serves as a practical approach to accommodate the complexities of the judicial management process and to promote fair and informed decision-making.

What if the Judicial Manager Breaches Their Duties?

The Judicial Manager wields significant authority and control over the company, albeit with court supervision. However, this extensive power also poses a risk of potential abuse, leading to unfair prejudice against the company’s creditors and/or members of the company.

Examples of breaches of duties by the Judicial Manager may include failing to implement the approved Statement of Proposal, unreasonably rejecting Proof of Debt, or managing the company in a way that prejudices the interests of creditors or members representing at least 25% of claims.

In such cases, a creditor and/or member of the company may apply to the court for an order on the ground of unfair prejudice[8], seeking the reliefs stated pursuant to Section 425 of the CA 2016, namely: to regulate the future management of the company’s affairs, business and property, require the Judicial Manager to refrain from doing or continuing an act or an omission complained of; require the summon of the creditors meeting to consider such matters and/or discharge the JMO and make such consequential provision as the Court thinks fit.

Additionally, if a transfer or payment is made with the intention to give such creditors a preference over other creditors, a creditor or member can apply to the court to void or nullify such transactions.[9]

Conclusion

To sum it up, when a JMO is granted, significant changes will affect the company and everyone involved. The Judicial Manager takes charge and calls the shots ahead of the directors. Strict compliance with the CA 2016 is crucial for the successful execution of the JMO and the company's rehabilitation. However, if the Judicial Manager fails to fulfil their duties or breaches their obligations, affected parties have the right to seek relief from the court.

It's all about finding that sweet spot—giving the Judicial Manager enough power to fulfil their role while keeping them accountable. Transparency and fairness are the names of the game throughout this corporate rescue journey.