The Companies (Amendment) Bill 2023 - Upcoming Amendments to the Scheme of Arrangements Regime

On 10.10.2023, the Companies (Amendment) Bill 2023 was tabled for its first reading in the Dewan Rakyat. The long-awaited bill contains amendments to corporate rescue and restructuring laws which have been anticipated since 2019 as well as new measures to improve the reporting of beneficial ownership of shares which were announced by the Federal Government in its Midterm Review of the 12th Malaysia Plan[1]. Here are some of the highlights of the proposed amendments to the existing scheme of arrangement regime: 

Changes to the Restraining Order Mechanism

1. A restraining order of 3 months can now be granted by the Court under the amended Section 368(1) without the restrictions imposed by the Section 368(2) (which under the amendments only apply when an extension to the initial restraining order is sought). A new Section 368(1A) also introduces an automatic restraining order from the date of filing of the application until the application is decided by Court or until the lapse of two months. These amendments bring the scheme of arrangements regime in line with the judicial management regime which also features an automatic moratorium upon the filing of the application. 
2. The new Sections 368(1A) and 368(3A) also provide additional protections to the distressed company from its secured creditors as it clarifies types of proceedings restrained - which now includes steps to enforce security over any property, repossession of goods under any chattels leasing agreement, hire purchase or retention of title agreement, as well as the enforcement of any right of re-entry or forfeiture under a lease except with the leave of Court. 
3. A new Section 368A also introduces an avenue for a related company to apply for a restraining order after an initial restraining order has been made. To do this, the related company must satisfy the Court that, among others, the related company plays a necessary and integral role in the proposed scheme of the main subject company and that the proposed scheme would be frustrated if the related company is not protected. This appears to give statutory force to some of the principles laid out in the High Court decision of Sentoria Bina Sdn Bhd v Impak Kejora Sdn Bhd [2] wherein the protection of restraining order was extended to the related company which is the company guarantor of the financially distressed company upon the application of the financially distressed company. However, there does not appear to be statutory protection for individual guarantors or the directors of the company. 
4. To offset the potency of the new restraining order regime, the bill also introduces a new restriction under Section 368(3B) which prevents a company from obtaining a restraining order if a previous restraining order had been obtained by the company or its related company within the past 12 months. The explanatory notes to the new section indicate that the restriction is meant to prevent abuse of process as companies can no longer make applications for consecutive restraining orders if their proposed schemes fail to pass. 
5. A new Section 368C is also being added to allow the Court to restrain distressed companies from disposing shares, rights, and properties other than in the ordinary course of business whilst a restraining order is in force. However, such order is only made if applied for by a creditor of a subject company or related company whilst a restraining order is in force. This appears to conflict with the existing Section 368(7) which makes it an offence if the company disposes or acquires any property other than in the ordinary course of business without the leave of court while a restraining order is in force. It is somewhat unclear whether the offence under Section 368(7) would only apply once an order under Section 368C is made.

Changes to the Meeting, Voting and Sanction Process

6. The new Section 366(2A) introduces a new requirement that the scheme meeting be chaired by an appointed insolvency practitioner or the person elected by the majority in value of the creditors. 
7. Section 368C introduces cram-down powers which essentially allows the Court to force through a scheme even if there are dissenting classes of creditors, subject to certain conditions. The Court can make such a cram-down order if at least 75% of the total value of creditors have already voted in favour of the scheme and if the Court is satisfied that the scheme does not discriminate unfairly between the classes of creditors. While this erodes the bargaining power of creditors in minority classes, these provisions would ensure that companies and their creditors are not unreasonably held to stalemates.
8. A new Section 369A grants power to the Court to order a revote. The Court may order this at the sanction stage and may also give directions as to how the meeting and voting is to be conducted. 
9. The bill also introduces several new provisions to govern proofs of debt in a scheme setting. Section 369B would make the filing of proof of debts mandatory where the Court orders a meeting to be summoned under Section 366(1). The Court order would also encompass the manner in which a creditor is to file the proof of debt as well as the time limit for such filing. The new Section 369B(2) also states that a creditor who fails to file the proof of debt as directed by the Court would not be allowed to vote at the creditors’ meeting. Creditors who have filed proof of debt are also generally allowed to inspect the proof of debts of other creditors (Section 369B(6)). Creditors are also entitled to object to a request by another creditor to inspect the whole or any part of the creditor’s proof of debt (Section 369B(8)(C)). The section also provides for the adjudication process for such proofs of debt (Section 369B(7) to (13)). 
10. A new Section 369C allows the Court to approve or sanction a scheme without the need for a creditors’ meeting. However, this power would only be exercised if the company has complied with comprehensive and stringent disclosures made in a statement under Section 369C(3)(a) and (6), and if the Court is satisfied that the scheme would be approved if a creditors’ meeting was called.
11. Under a new Section 369D, the Court will also be given powers to review the actions of a company which is the subject of an approved scheme. The Court will be empowered to clarify any terms of the approved scheme and if the Court is satisfied that the company has committed an act or omission that results in a breach of the approved scheme, the Court may make orders to confirm, reverse or modify the act or omission by the company. 

Other New Features

12. Section 367 is being amended to include additional powers of the Court when it comes to the appointment of an insolvency practitioner to assess the viability of a scheme or restructuring plan. The amendments also allow the Court to specify the person or party by whom the remuneration for the said insolvency practitioner shall be paid. 
13. Another notable addition to the scheme of arrangements regime is the introduction of super-priority of rescue financing under the new Section 368B. On an application to Court, the Court may order that a debt arising from any rescue financing as part of a scheme of arrangement (per the conditions under Section 368B(8)) be ranked in priority over all other preferential debts specified under Section 527(1)(b) to (f) and all other unsecured creditors in the event the company is wound up.