Rights Of Creditors In A Scheme Of Arrangement

INTRODUCTION

A scheme of arrangement (“SOA”) is essentially a repayment plan and/or arrangement proposed and presented by a finally distressed company to its creditors with the main objective to restructure its debts and keep the company as going concern. As such, given the poor financial status of such company and the objective stated above, a SOA often involves a proposal to settle its debts for a lesser amount that what is due to the creditors. 

In order to approve an SOA, a company must first obtain the leave of court to hold a creditors’ meeting wherein the company will have to satisfy certain statutory requirements under Section 366 of the Companies Act 2016.  Upon obtaining leave, the proposed SOA will be presented to the targeted creditors during the Creditors’ Meeting (“Scheme Creditors”). The Scheme Creditors must then vote to approve or reject the proposed SOA within their classes. In the event the SOA is approved by a majority of 75% of the total value of the creditors or class of creditors present and voting (either in person or by proxy at the meeting), the company can then apply for a court order to sanction the proposed SOA (the “Sanction Stage”). Once sanctioned, such company is required to lodge an office copy of the court order which sanctioned the proposed SOA, to the Registrar. Upon being so lodged, the SOA is binding on all scheme creditors. 

However, the fact that company is usually in control of the terms of putting forward the proposed SOA, creditors are often placed in a passive position and left in a bind over what to do next. This article aims to discuss the rights of the creditors if an SOA is proposed as well as the steps creditors can take if they find themselves part of an SOA. 

RIGHT TO BE INCLUDED AS A SCHEME CREDITOR

The first question to be determined that whether the creditor is included in the proposed SOA as a scheme creditor as this is directly affects whether the creditor can attend and vote at the Creditors’ Meeting to approve or reject the proposed SOA. A creditor could sometimes find themselves excluded from a proposed SOA if (i) the company made a mistake by failing to take the creditor into account or (ii) if the creditor is intentionally being excluded from the proposed scheme. 

To rectify this, the creditor can either: 

• Get the Company to Rectify the Issue By Filing a Proof of Debt – in many cases, the company would usually implement a mechanism to adjudicate and determine the validity of such proofs of debt in order to verify the position of creditors as well as the value of debts owed by admitting or rejecting the proof of debt as well as amending the quantum of debts owed by the company to its creditors; or
• File an Action in Court for an Order to Be Added as a Scheme Creditor – an aggrieved creditor can always make an application to court to be added as scheme creditor under the SOA. 

RIGHT TO BE PROPERLY CLASSIFIED IN A PROPER CLASS

The creditors will be deemed as properly classified if the classification was decided based on the different legal rights these creditors possess. The test of proper classification of creditors is stated in the Federal Court Case of Francis Augustine Pereira v Dataran Mantin Sdn Bhd & Ors and other appeals which provides that: 

“A class of creditors is determined by their common interest, such interest separating them from other creditors with whom they are unable to consult together in respect of that common interests.” 

An example is that the secured creditors (such as banks and Hire Purchase creditor) shall not be classified in the same group as the unsecured creditors due to their distinct common interest which render both groups unable to consult together. 

If a creditor finds that the creditors have not been properly classified, the aggrieved creditor can always raise this to court, either by filing an application to set aside the order convening the Creditors’ Meeting. Alternatively, the aggrieved creditor can also make its objections at the sanction stage, as the court has the discretion to decline the sanction of a scheme and discount and/or disregard certain votes of creditors have not been properly classified. 

RIGHT TO REQUEST FOR INSPECTION OF PROOF OF DEBTS AND OTHER INFORMATION RELEVANT TO VOTING RIGHTS

It is apparent that the quantum and/or debts has a significant impact on the outcome of the Creditors’ Meeting. What if there are questionable debts claimed by the company? Can the creditors request an inspection the proof of debt in order to determine the genuine of debt? 

Despite that the fact that the CA 2016 is silent on such question, the case of Top Builders Capital Bhd & Ors v Seng Long Construction & Engineering (“Top Builders”) held that creditors do have the right to examine the proof of debts submitted by other scheme creditors. The Court in Top Builders applied the principle set out in The Royal Bank of Scotland NV (formerly known as ABN Amro Bank NV) and others v TT International ltd and another appeal that a scheme creditor is entitled to examine the proof of debts submitted by other scheme creditors in respect of a proposed scheme, as long as the information sought was relevant to his voting rights. The court further stated that a scheme creditor can apply to the court for a disclosure order to have the Proof of Debts to be disclosed and inspected, provided that the applying scheme creditor must prove to by producing prima facie evidence of impropriety in the admission or rejection of the PODS failing which renders the rejection of such access. 

RIGHT TO BRING OWN ACTION AGAINST THE COMPANY

As set out above, an aggrieved creditor may intervene and voice its objections to the proposed SOA at the Sanction Stage. 

Alternatively, a scheme creditor may also bring its own proceedings against the company at any time before the SOA is sanctioned by the court, subject to obtaining leave from court to do so (if there is a restraining order under Section 368 of the Companies Act 2016 in place). To do so, the creditor would need to show, among others, that there are special and exceptional circumstances that justify its action against the company and that its claim should be treated differently from other claims against the company. An example of “exceptional circumstances” is when the disputed part of the creditors’ claim will have a significant impact on the approval of the proposed scheme and such claim ought to be adjudicated before the voting of the proposed scheme.

It should be noted however that if the creditor fails to bring its action before the proposed SOA is sanctioned, the sanctioned SOA will be binding on all creditors, including those who objected to the SOA. 

RIGHTS IF THE SANCTIONED SOA IS BREACHED BY THE COMPANY

If the company fails to comply with the terms set out in the SOA which has already been sanctioned by Court, creditors of the company who had been aggrieved may request the company to remedy such default of terms within a limited period (subject to the terms and/or clauses of the effected SOA), failing which the creditors would no longer be bound by the scheme. 

It is worth noting that the Companies Commission of Malaysia (“SSM”) proposed that an amendment be made to the Companies Act 2016 to include additional provisions to govern breaches of a sanctioned SOA by the company, such as giving the court powers to reverse or modify the act of the company or give such direction or order as the court thinks fit to rectify the act, omission or decision of the company. However, these proposed amendments which would bring additional safeguards for creditors, have yet to be tabled and passed by Parliament. 

CONCLUSION

Although there are several safeguards in place to protect the interest of creditors, it is important that creditors act fast once a dispute or grievance arises. As such, it is crucial for the creditors to understand their rights when faced with an SOA so that they can make informed decision on what steps to take.