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The Path to Judicial Management in Malaysia is Paved with Obstacles: Lessons from Singapore and the United Kingdom
Published online by Cambridge University Press: 14 February 2024
Abstract
In embracing corporate rescue, Malaysia introduced Judicial Management (JM) into its company law framework on 1 March 2018. The mechanism was modelled on Singapore's Judicial Management, which itself was based on the United Kingdom (UK) Administration Procedure. Despite its laudable objective of facilitating the rescue of financially distressed companies, the path to JM is paved with obstacles. This article identifies some of these obstacles and examines the issues that give rise to them. At the same time, the article proposes legislative reforms, drawing on comparative laws in Singapore and the UK. For the purposes of this article, three obstacles are examined: first, the power of a secured creditor or debenture holder to veto the JM application; second, the stringent and prohibitive burden imposed on an applicant company caused by the judicial interpretation, at times conflicting, of the provisions governing the application of a JM order; and third, the higher threshold imposed by legislative requirements on creditors’ meeting to approve the JM proposal. These obstacles are encountered at three stages of a JM application: first, at the initial stage of the application; second, in considering the merits of the JM; and third, when the creditors vote to approve the application.
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- Copyright © The Author(s), 2024. Published by Cambridge University Press on behalf of the National University of Singapore
Footnotes
The comments of anonymous reviewers received on an earlier version of this article are greatly appreciated.
References
1 On the transition from the liquidation culture under the CA 1965 to a corporate rescue culture under the CA 2016, see generally Chen, Thim Wai, Azmi, Ruzita & Rahman, Rohana Abdul, ‘Paradigm shift from a liquidation culture to a corporate rescue culture in Malaysia: A legal review’ (2020) 29(2) International Insolvency Review 181CrossRefGoogle Scholar.
2 ibid 186–187, 189. The rationale for this significant change was that the onset of winding-up on the mere filing of a winding-up petition – which, however, may not necessarily result in the court granting a winding-up order – would be in conflict with the objectives of the corporate rescue mechanisms. The earlier law would also be harsh on the debtor company, as its bank would be obliged to freeze its bank account due to the deemed position on commencement of winding-up after the filing of a winding-up petition, presenting another obstacle to its restructuring.
3 The delay in the date of implementation of JM was due to the late availability of the CCRMR 2018 in 2018, see CCM's Guidelines for Corporate Rescue Mechanism under Division 8 Part III of the Companies Act 2016 (5 Dec 2018).
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10 It received the Royal Assent on 28 September 2019 and was gazetted on 9 October 2019.
11 CD No 10 (n 5) 23–26.
12 The JM, alongside the CVA, is found in Division 8 in Part III of the CA 2016 under the title ‘Corporate Rescue Mechanism’.
13 Companies Commission of Malaysia, Consultative Document on the Proposed Companies (Amendment) Bill 2020 (28 Jul 2020) <https://www.ssm.com.my/Pages/Legal_Framework/Document/Consultative%20Document%20%26Companies%20(Amendment)%20Bill%202020%20(280720).pdf> accessed 28 Sep 2020. Please note that the proposed Companies (Amendment) Bill has been introduced into the Malaysian Parliament as the Companies (Amendment) Bill 2023. This Bill was passed by the Dewan Rakyat (House of Representatives) on 28 Nov 2023. It will be presented to the Dewan Negara (Senate) and, if passed, will be presented for Royal Assent and enacted into law.
14 Under CA 2016, s 403, JM is not available to a company which is a licensed institution or an operator of a designated payment system regulated by the Central Bank of Malaysia. In addition, the rescue mechanism is not accessible by a company which is subject to the Capital Markets and Services Act 2007, which would include public listed companies – see Re Scomi Group Bhd (2021) 10 CLJ 975, 986.
15 CA 2016, ss 404 and 405(1).
16 CA 2016, s 410.
17 ibid.
18 ibid ss 411(1)(a) and 4(b). Contrast that with the interim moratorium in CA 2016, s 410.
19 Sulaiman, Aiman Nariman Mohd & Othman, Effendy, Malaysia Company Law: Principles and Practices (2nd edn, Commerce Clearing House (Malaysia) Sdn Bhd 2018) 895Google Scholar.
20 The pre-amended section 409 required that both conditions must be satisfied before the veto power is validly exercised. With the amendments, the section has been brought in line with the similar provision in Singapore's SJM, except that its second condition does not refer to a secured creditor but a person who has appointed, or is entitled to appoint, such a receiver and manager.
21 CA 2016, s 409(a).
22 ibid s 409(b).
23 ibid ss 409 and 405(5).
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25 ibid.
26 Mohd Sulaiman & Othman (n 19) 923.
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28 Top Builders Capital Bhd & Ors v Seng Long Construction & Engineering Sdn Bhd & Ors (2022) MLJU 1 para 104.
29 CA 2016, s 524. This section, setting out the rights of secured creditors in a liquidation process, codifies the common law position operating under the CA 1965. It was introduced based on the recommendations of the CLRC during its review of the CA 1965. See Corporate Law Reform Committee for the Companies Commission of Malaysia, ‘A Consultative Document on Company Liquidation – Reforms and Restatement of the Law’ (CD No 4) 66–69. <https://www.ssm.com.my/Pages/Publication/CLRC/Consultation_Documents/cd4%20(1).pdf> accessed 11 Jan 2018.
30 Amended by Bankruptcy (Amendment) Act 2017 (Act A1534) (effective 6 Oct 2017) <https://themalaysianlawyer.com/wp-content/uploads/2017/05/bankruptcy-amendment-act-2017.pdf> accessed 10 Nov 2023.
31 Lian Keow Sdn Bhd (in liq) v Overseas Credit Finance (M) Sdn Bhd (1988) 2 MLJ 449, 453; Asia Commercial Finance (M) Bhd v JB Precision Moulding Industries Sdn Bhd (in liq) (1996) 2 MLJ 1, 7–9. The provisions relating to winding-up are generally the same for both the CA 1965 and the CA 2016, see Mohd Sulaiman & Othman (n 19) 936. Accordingly, the observations of the courts on the definition of ‘secured creditor’ in the CA 1965 are equally applicable to the CA 2016.
32 Chen, Azmi & Abdul Rahman, ‘Paradigm shift’ (n 1) 184.
33 ibid. A proceeding to foreclose on the land would involve the lender making an application to the court to obtain an order to auction the land.
34 ibid.
35 Shanthy Rachagan, Janine Pascoe & Anil Joshi, Principles of Company Law in Malaysia (Malayan Law Journal 2002) 293. The property includes book debts, stock in trade, raw materials, and goods in process of the borrower, see Goode, Sir Roy, Legal Problems of Credit and Security (3rd edn, Sweet & Maxwell 2003) 122–128Google Scholar.
36 ibid 294–295.
37 Goode (n 35) 119. See also Chen, Azmi & Abdul Rahman, ‘Paradigm shift’ (n 1) 184.
38 While section 352 spells out the requirement of charges, section 353 lists the types of charges requiring registration. Both sections replicate the registration requirement in section 108 of the CA 1965.
39 See section 353 for the full list of charges.
40 Jack Yow Pit Pin, ‘Corporate Voluntary Arrangements’, in Rabindra S Nathan (ed), Law and Practice of Corporate Insolvency in Malaysia (Thomson Reuters Asia Sdn Bhd 2019) 16.
41 Phileoallied Bank (M) Bhd v Bupinder Singh a/l Avatar Singh (2002) 2 MLJ 513, 530.
42 Rabindra S Nathan, ‘The Path to Corporate Rescue Reform in Malaysia’, in Look Chan Ho (ed), Asia-Pacific Restructuring Review 2022 (Global Restructuring Review 2021) 70 <https://www.shearndelamore.com/publication/2022/GRR_Asia-Pacific_Restructuring_2022.pdf> accessed 16 Aug 2022.
43 Re Biaxis (M) Sdn Bhd (2022) 7 MLJ 443; Per: Wellcom Communications (NS) Sdn Bhd dan satu lagi (2019) 9 MLJ 510; Re Scomi Group Bhd (2022) 7 MLJ 620; Han Yeow Ming & Ors v Yu Chan Trading Sdn Bhd (in receivership) (Malayan Banking Bhd, secured creditor) (2022) MLJU 596.
44 (2022) 7 MLJ 443, 451.
45 CD No 10 (n 5) 41.
46 Elizabeth Boros, ‘How Does the Division of Between the Board and the General Meeting Operate?’ (2010) 31 Adelaide Law Review 169, 170.
47 CA 2016, s 75(1)(a).
48 Frank Wooldridge, ‘France and Germany: defences to takeover bids’ (2003) 24(4) Company Lawyer 121, 121.
49 Andrew Hicks & Walter Woon, The Companies Act of Singapore – An Annotation (Butterworth & Co (Asia) Pte Ltd 1989) 468.
50 Report of the Review Committee on Insolvency Law and Practice (Cmnd 8558, 1982) para 503.
51 Choong & Rajah (n 6) 10.
52 CD No 10 (n 5) para 3.1.
53 Goode (n 24) 269. A whole chapter (ch 9) of the Cork Report (n 50) was devoted to the discussion of receivership and floating charge.
54 Cork Report (n 50) paras 495–496.
55 Belcher, Alice, Corporate Rescue: A Conceptual Approach to Insolvency Law (Sweet & Maxwell Limited 1997) 91.Google Scholar See also Parry, Rebecca, Corporate Rescue (Sweet & Maxwell Limited 2008) 10Google Scholar.
56 Fletcher, Ian M, Higham, John & Trower, William, The Law and Practice of Corporate Administrations (Butterworth & Co (Publishers) Ltd 1994) 16Google Scholar.
57 The UKEA 2002 entered into force on 15 September 2003. Section 250 of the UKEA 2002 prohibits administrative receivership, albeit with some exceptions. The term ‘administrative receivership’ was first introduced in the UK Insolvency Act 1985, which was repealed by the UKIA 1986. The term remained in use and is defined in section 29(2) of the UKIA 1986 as a receiver or manager of the whole, or substantially the whole, of a company's property, appointed by the company's debenture holder with a floating charge. According to Kristin van Zwieten, Goode on Principles of Corporate Insolvency Law (5th student edn, Thomson Reuters 2019) 404, there are three categories of receivers in the UK, namely administrative receivers, receivers of income, and other types of receivers, including those appointed by court or receivers under a debenture with a floating charge that does not cover all, or substantially all, of the company's property.
58 Hicks & Woon (n 49) 468.
59 Leadmont Development Sdn Bhd v Infra Segi Sdn Bhd and another suit (2019) 8 MLJ 473, 484.
60 Hicks & Woon (n 49) 468–469.
61 Tracey Evans Chan, ‘The Public Interest in Judicial Management’ (2013) Singapore Journal of Legal Studies 278, 298.
62 (1989) 1 SLR(R) 121.
63 ibid 127.
64 (2005) 4 SLR(R) 336.
65 ibid 343.
66 ibid 342.
67 (2022) 7 MLJ 443.
68 ibid 451.
69 ibid.
70 Tan Cheng Han (ed), Walter Woon on Company Law (revised 3rd edn, The Thompson Corporation Pte Ltd 2009) 678. See also Radhakrishna, Gita, Insolvency Law – Bankruptcy and Companies Winding-Up (The Malaysian Current Law Journal Sdn Bhd 2020) 224Google Scholar.
71 Singapore ILRC Report 2013 (n 8).
72 Report of the Committee to Strengthen Singapore as an International Centre for Debt Restructuring (20 Apr 2016) <https://www.mlaw.gov.sg/files/news/public-consultations/2016/04/Final%20DR%20Report.pdf> accessed 10 Nov 2023.
73 ibid paras 2.14–2.15.
74 Singapore ILRC Report 2013 (n 8) 82. The Committee added that the Scheme of Arrangement, a mechanism not designed specifically for corporate rescue, yielded a better record of success in the rehabilitation of financially troubled companies.
75 ibid 85. Other reasons for the low uptake of SJM were also given in the Report.
76 ibid
77 ibid 86. The two cases refer to Re Cosmotron Electronics (Singapore) Pte Ltd (1989) 1 SLR(R) 121 (n 62), and Re Bintan Lagoon Resort Ltd (2005) 4 SLR(R) 336 (n 64).
78 Singapore ILRC Report 2013 (n 8) 86.
79 Choong & Rajah (n 6) 108–109.
80 Singapore ILRC Report 2013 (n 8) 57, 90.
81 ibid The Committee noted that in the UK, the UKEA 2002 provided that a debenture holder could not appoint a receiver or R&M, thus effecting a removal of the veto power in the UKAP.
82 ibid 91.
83 The SIRDA 2018 represents an omnibus insolvency Act, with the insolvency provisions migrating from the SCA. Accordingly, the SIRDA 2018 consolidates both personal and corporate insolvency laws, including those relating to restructuring, into a single piece of legislation.
84 Woon, Walter (ed), Woon's Corporations Law – 2019 Desk Edition (LexisNexis 2019) 995Google Scholar.
85 Secretary of State for Trade and Industry, ‘Productivity and Enterprise: Insolvency – A Second Chance’ (White Paper, Cm 5234, Jul 2001) paras 2.1–2.2 <https://webarchive.nationalarchives.gov.uk/+/http:/www.insolvency.gov.uk/cwp/cm5234.pdf> accessed 1 Mar 2020. See also Finch, Vanessa, ‘The Recasting of Insolvency Law’ (2005) 68(5) The Modern Law Review 713, 716CrossRefGoogle Scholar.
86 Armour, John, Hsu, Audrey & Walters, Adrian, ‘Corporate Insolvency in the United Kingdom: The Impact of the Enterprise Act 2002’ (2008) 5(2) European Company and Financial Law Review 148, 154CrossRefGoogle Scholar.
87 White Paper (n 85) paras 2.3–2.5.
88 ibid Foreword.
89 ibid para 2.18.
90 See generally Armour, Hsu & Walters (n 86). As a result of the partial abolition of administrative receivership, secured creditors holding floating charges may only appoint R&M to enforce their rights in certain financial transactions as specified in the UKIA 1986, which are considered exceptions to the said abolition. For a discussion of the exceptions, notably project financing and the scope of the exception, see Joe Bannister & Joel Nesbitt, ‘Step-in rights: theory in practice’ (Recovery, Autumn 2008) 22, 23.
91 Armour, Hsu & Walters (n 86) 155, 160, 162.
92 The CCM is also known as Suruhanjaya Syarikat Malaysia (SSM).
93 CDCAB 2020 (n 13).
94 ibid 5.
95 ibid 8. For the six reasons, see Singapore ILRC Report 2013 (n 71) 84–88.
96 Consultative Document on the Proposed Companies (Amendment) Bill 2020 (n 13) 8.
97 ibid 8, 31, 85. See CA 2016, s 403, which was the subject of a public listed company being excluded from applying for JM in Re Scomi Group Bhd (2021) 10 CLJ 975, 985–986.
98 See the cases listed in n 43.
99 See Re Biaxis (M) Sdn Bhd (2022) 7 MLJ 443.
100 Singapore ILRC Report 2013 (n 71) 85–86.
101 For a discussion on the nebulous nature of ‘public interest’, see Thim Wai Chen, Ruzita Azmi & Rohana Abdul Rahman, ‘Rehabilitation of abandoned housing projects in peninsular Malaysia: reaching out to rescue mechanisms in the companies act 2016’ (2022) 14 Journal of Property, Planning and Environmental Law 61, 69–72.
102 CDCAB 2020 (n 13) 11. For proposed reforms on super priority rescue financing in Singapore, see Singapore ILRC Report 2013 (n 71) 112.
103 Mohd Sulaiman & Othman (n 19) 923.
104 CD No 10 (n 5) 39–41.
105 ibid 41 para 2.29.
106 Report of the Select Committee on the Companies (Amendment) Bill (Bill No 9/86) <https://sprs.parl.gov.sg/selectcommittee/selectcommittee/download?id=273&type=report> accessed 28 Aug 2022.
107 ibid A14 para 3.2. Generally, the debenture instrument would provide for the floating charge over the assets of the debtor company to be automatically converted or crystallised into a fixed charge upon the appointment of a receiver or R&M, see Goode (n 35).
108 For a discussion on the use of illustrations appended to a statutory provision, see Chen, Azmi & Abdul Rahman, ‘Rehabilitation’ (n 101).
109 CD No 10 (n 5) 20 para 1.2.
110 (2021) MLJU 915.
111 ibid paras 58–62.
112 Singh, Avtar & Kaur, Harpreet, Introduction to the Interpretation of Statutes (3rd edn, LexisNexis Butterworths Wadhwa Nagpur 2009) 102Google Scholar.
113 Alif Mustadzar bin Ahmad lwn Pendakwa Raya (2022) MLJU 464, para 25–29.
114 Public Prosecutor v Teo Heng Chye (1989) 3 MLJ 205, 209–210.
115 Re Chong Wooi Sing and Toh Yuh Teng v R (1989) FCA 66.
116 (1916) 1 MC 165.
117 CCRMR 2018 (n 3) rule 9.
118 ibid rule 2. The Rules of Court 2012 are a set of procedures governing the civil litigation process in Malaysia.
119 (2020) 7 AMR 482.
120 ibid 486.
121 ibid 486–487.
122 ibid.
123 ibid 487.
124 (2022) 7 MLJ 443.
125 ibid 454.
126 ibid 445, 450.
127 (2022) 7 MLJ 563.
128 ibid 569.
129 ibid 570.
130 ibid. See also a decision by the same judge in Goldpage Assets Sdn Bhd v Gan Kam Seng & Ors (2021) 9 MLJ 618, 630–631.
131 Fletcher, Ian M, Higham, John & Trower, William, Corporate Administrations and Rescue Procedures (LexisNexis UK 2004) 16–17Google Scholar. See also Bailey, Edward & Groves, Hugo, Corporate Insolvency: Law and Practice (3rd edn, LexisNexis Butterworths 2007) 361Google Scholar; Finch., Vanessa Corporate Insolvency Law: Perspectives and Principles (2nd edn, Cambridge University Press 2009) 370CrossRefGoogle Scholar. Rule 2.2 was substituted under the UK Insolvency (Amendment) Rules 2003.
132 Re Kuala Lumpur Industries Bhd (1990) 2 MLJ 180, 182.
133 Goldpage Assets Sdn Bhd v Unique Mix Sdn Bhd (2020) MLJU 723 paras 22–38.
134 ibid paras 39–40. As has been mentioned, the Rules of Court 2012 are a set of procedures governing the civil litigation process in Malaysia.
135 Twin Unitrade Sdn Bhd v TSK Hardware Sdn Bhd (2020) MLJU 2326 para 27; Vision Development Concept Sdn Bhd v Low Sheh Ling (2020) MLJU 2387 para 37; Monday-Off Development Sdn Bhd v Bumimetro Construction Sdn Bhd & Ors (2021) MLJU 915 para 42; Best Re (L) Ltd v Chubb Samaggi Insurance Public Co Ltd (2021) MLJU 310 paras 3 and 5.
136 (2019) MLJU 1721.
137 Aiman Nariman Mohd Sulaiman & Effendy Othman, Malaysia Company Law: Principles and Practices (3rd edn, Commerce Clearing House (Malaysia) Sdn Bhd 2021) 1160.
138 ibid.
139 CA 2016, s 407(3).
140 Woon (n 84) 997. However, it was observed by the authors that based on similar provisions in the Singapore statute, GP Selvam J in Re Genesis Technologies International (S) Pte Ltd (1994) 2 SLR(R) 298 permitted objections from the unsecured creditors to oppose the SJM application.
141 CCRMR 2018, rule 13.
142 CD No 10 (n 5) 40–41.
143 (2019) 8 MLJ 473.
144 ibid 496. The ‘exercise in futility’ principle was held applicable in the hearing of a JM application by Nadzarin Wok Nordin J in Taimex Engineering Sdn Bhd v Intelzen Sdn Bhd (2022) MLJU 1278 paras 16–17.
145 The Royal Bank of Scotland NV (formerly known as ABN Amro Bank NV) and others v TT International Ltd and another appeal (2012) 2 SLR 213, 236; Pathfinder Strategic Credit LP and another v Empire Capital Resources Pte Ltd and another appeal (2019) 2 SLR 77, 90.
146 Sri Hartamas Development Sdn Bhd v MBf Finance Bhd (1990) 2 MLJ 31; Twenty First Century Oils Sdn Bhd v Bank of Commerce (M) Bhd & Ors (No 2) (1993) 2 MLJ 353; Exogenus Factor Sdn Bhd v HG Metal Manufacturing Limited (2012) MLJU 251.
147 (2016) SGHC 210.
148 (2019) 3 SLR 979.
149 Pacific Andes (n 147) para 70; Re IM Skaugen (n 148) 1009.
150 Nathan (n 9) 534.
151 (2007) 8 MLJ 122.
152 ibid 129. This approach has been followed in Baneng Holdings Bhd & Ors v CIMB Bank Bhd (2013) MLJU 269 para 17.
153 Nathan (n 9) 534.
154 Thim Wai Chen, Ruzita Azmi & Rohana Abdul-Rahman, “Whither the Schemes of Arrangement in Malaysia with the arrival of the corporate rescue mechanisms?” (2020) 46 Commonwealth Law Bulletin 537, 554
155 Pathfinder Strategic Credit LP and another v Empire Capital Resources Pte Ltd and another appeal (2019) 2 SLR 77, 90.
156 CA 2016, s 405(1)(b).
157 ibid s 409; CCRMR 2018 rules 13–14.
158 CA 2016, s 407(3).
159 Nathan (n 9) 536.
160 Tracey Evans Chan, ‘Arrangements and Judicial Management’, in Tan Cheng Han (ed), Walter Woon on Company Law (revised 3rd edn, The Thomson Corporation Pte Ltd 2009) 683.
161 (2007) BCC 214 para 3.
162 ibid para 5.
163 Muir Hunter, ‘The Nature and Functions of a Rescue Culture’ [1999] Journal of Business Law 491, 504.
164 Fletcher, Higham & Trower (n 131) 354. See also Andrew Pickin, ‘Distributions and payments by administrators’ (2003) 16 Insolvency Intelligence 22.
165 Milman, David & Durrant, Chris, Corporate Insolvency: Law and Practice (3rd edn, Sweet and Maxwell Limited 1999) 35Google Scholar. As noted by the authors, the report referred to in rule 2.2 of the UKIR 1986, although not mandatory, has caused IPs to come up with detailed reports, to the extent that the Vice Chancellor, Sir Donald Nicholls, had to issue a Practice Note (Administration Order Applications: Independent Reports [1994] BCLC 347), stating that such reports should not be detailed. Subsequently, rule 2.2 was removed from the UKIR 1986.
166 Fletcher, Higham & Trower (n 131) 21, where the rule 2.12(1) is reproduced.
167 (1992) BCLC 555.
168 ibid 560.
169 ibid.
170 (1998) 1 BCLC 292.
171 ibid 297.
172 (1991) BCC 446, 453.
173 ibid 451–453.
174 (1989) BCLC 734, 739.
175 ibid 742.
176 CA 2016, s 420(1). It was observed in Monday-Off Development Sdn Bhd v Bumimetro Construction Sdn Bhd & Ors (2021) MLJU 915 para 46 that the proposal submitted in support of the hearing of a JM application ‘is merely a preliminary draft scheme of proposal which can be fine-tuned, amended and/or altered in the finalised Statement of Proposal’, to be prepared after the JM order is granted.
177 CA 2016, s 421(3).
178 CD No 10 (n 5) paras 2.1, 2.4, 2.16, 2.21.
179 SCA, s 227N(2); SIRDA 2018, s 108(3).
180 UKIR 1986, rule 2.28(1); UK Insolvency Rules 2016, rule 15.34(1).
181 Woon (n 84) 1014.
182 SCA, s 210(3).
183 CA 1965, s 176(3). However, under CA 2016, s 366(3), the headcount test for SOA is not required.
184 Payne, Jennifer, Schemes of Arrangement-Theory, Structure and Operation (Cambridge University Press 2014) 64CrossRefGoogle Scholar.
185 CD No 10 (n 5) 35.
186 Cork Report (n 50) 102 para 429(c).
187 Campbell, Andrew, ‘Company rescue: the legal response to the potential rescue of insolvent companies’ (1994) 5(1) International Company and Commercial Law Review 16, 23Google Scholar.
188 See generally Chen, Azmi & Abdul Rahman, ‘Paradigm shift’ (n 1).