Introduction: The Covid-19 Concern

Business owners are in a state of shock and dilemma ever since the World Health Organization declared the Coronavirus disease (“COVID-19”) a pandemic on 11th March 2020. To make matters worse, there has been a permanent closure and standstill to their business due to the Movement Control Order (“MCO”) by the Malaysian Government from 18th March 2020 and two (2) extensions thereafter to contain the spread of the virus.

All this has increased the grave concern and anxiety of the business owner as to how to revive their businesses post COVID-19 to generate income to ensure their continued survival and existence.

What will be paramount on their mind will be to find ways and means to ward off possible legal actions due to breach of contract and focus their minds on more pressing issues in immediately rehabilitating their ailing companies once again.

The Judicial Management Story

Judicial Management (“JM”) which came into force in Malaysia on 1st March 2018 is a corporate rescue management that will provide solace to the business owner during the current and post COVID-19 period, to seek the aid of the Court to save their ailing company from the threat of Winding-Up, if there be legal proceedings commenced for any breach of contract.

It is for this reason, that JM is sometimes regarded an alternative to the Winding- Up of an ailing company that is to become insolvent and which is a huge relief to the business owner.

JM affords a Moratorium of six (6) months to the said company of the business owner with a possibility to extend a further six (6) months and bars any legal action without the leave of the court including enforcement proceedings by secured creditors.

A formal application will have to be filed in Court, whereby the Court will then place the ailing company in the hands of a qualified insolvency practitioner known as a Judicial Manager.

The Judicial Manager, who is an officer under the supervision and accountability of the Court, will have to prepare a Scheme of Restructuring plan for the ailing company which shall be presented for the sanction/approval of 75% in value of the total creditors whose claims have been accepted by the Judicial Manager, to oversee its implementation.

The Jurisprudence Of Judicial Management: Companies Act 2016

The Law on JM is governed by the Companies Act 2016 (“CA”) under Part III Division 8 Subdivision 2 Section 403 to Section 430 under the heading JM.

The salient sections can be summarized as follows:-

• Section 404: The application may be made by the company or its creditors.

• Section 404: Two matters need to be shown to the Court:-

1. The company is or will be unable to pay its debts; AND
2. There is reasonable probability of rehabilitating the ailing company
all or part of its business and convince the Court that the interest of the creditors will be better served by JM rather than Winding-Up.

• Section 406: A Judicial Management Order (“JMO”) shall remain in force for a period of six (6) months from the making of the order, unless the JMO is otherwise discharged, but the court may, on the application of a judicial manager, extend this period for another six (6) months subject to such terms as the Court may impose.

• Section 407: The judicial manager appointed shall be an insolvency practitioner, who is not the auditor of the company.

• Section 408: The application for a JM must be:-

1. Advertised in a widely circulated Malay language AND English language newspaper in Malaysia; and
2. To be given:-
1. To the company (where the application is by a creditor); and
2. To any person who has been appointed OR to person who is entitled to appoint a Receiver & Manager (“R&M”).

• Section 409: The Court shall dismiss a JMO application if:-

1. a R&M has been or will be appointed; or
2. the making of the order is opposed by a secured creditor.

• Section 411: This section deals with the effect of a JMO and explicitly states that upon the making of a JMO:-

1. Any receiver and manager shall vacate office: AND
2. Any application for the winding-up of the company shall be dismissed.

• Section 414: Touches on the general powers of the judicial manager who shall:-

1. Do all such things as may be necessary for the management of the affairs, business and property of the company; AND
2. Do all such things as the court may order.

The Jurisprudence Of Judicial Management: Companies (Corporate Rescue Mechanism) Rules 2018

The Companies (Corporate Rescue Mechanism) Rules 2018 (“CCRMR”) is indeed most helpful on the procedures to follow for a JMO application which can be found in Part III Rule 8 to Rule 37 under the heading JM.

• Rule 8(1): A company or its creditor, shall file an application for JMO via Originating Summons (under Section 404 of the CA) in Form 6 (of the First Schedule) together with an Affidavit in Support in Form 7.

• Rule 10(1): A creditor who files a JMO application shall serve the application and the Affidavit in Support on the company within five (5) days from date of filing.

• Rule 10(2): The Application for JMO and Affidavit in Support shall be served:-

1. to the secretary, director or other officer of the company at the registered address; or
2. if no secretary, director or other office is found, then leave it at the registered address; or
3. with any member of the company as the Court directs.

• Rule 11(1): The application for JMO shall be advertised (in accordance with Section 408(1)(a) of the CA) in Form 9 not less than fourteen (14) days before the Hearing.

• Rule 11(2): If advertisement is not complied with, the Court may:-

1. dismiss the application for JMO; or
2. (b) fix a new Hearing date.

• Rule 12: Upon written request and payment of RM1 per page of the application for JMO by any creditor or member of the company, the applicant shall furnish the copies of the application and Affidavit in Support to the creditor or member of the company within 48 hours of the request.

• Rule 13(1) and Rule 13(2): The following persons who intend to appear at the Hearing to oppose the JMO application shall serve a Notice of Intention to Appear on the applicant or his solicitor:

1. any person appointed or is entitled to appoint a R&M; or
2. any secured creditor.

• Rule 13(3): The Notice of Intention to Appear shall:-

1. be made in Form 10; and
2. be served, personally or by post, not later than 12pm before the date of the Hearing.

• Rule 13(4): Any person failing to comply with Rule 13(1), shall not be allowed to appear at the Hearing, without leave of Court.

• Rule 14(1): The Applicant shall prepare a list in Form 11 of those intending to appear at the Hearing.

• Rule 15(1): Any person who opposes the JMO application shall file an Affidavit in Opposition which shall be served on the Applicant for the JMO not later than seven (7) days from the Hearing.

• Rule 15(2): Any affidavit in reply to the Affidavit in Opposition shall be filed within three (3) days from the date of receipt of the Affidavit in Opposition.

• Rule 16: The Court may substitute the applicant with any other person, who is entitled to make the application for JMO and an Order to Substitute is to be made in Form 12.

• Rule 17(1): A JMO shall be in Form 13.

• Rule 17(2): The Applicant shall inform the judicial manager of the JMO in Form 14 within 2 days from the date of JMO.

• Rule 17(3): The judicial manager shall within five (5) days from being informed of the JMO:-

1. publish a notice of the JMO in Form 15 (in accordance to Section 418(1)(b) of the CA); and
2. send a copy of the JMO and the notice in paragraph (a) above to the Registrar.

• Rule 17(4): The judicial manager shall send a copy of the JMO to the company either personally or by post, addressed to the company secretary at the registered address.

The Landmark Decision For Judicial Management

Leadmont Development Sdn Bhd v Infra Segi Sdn Bhd & Another Case ¹ (“Leadmont”) is the first and leading decision concerning judicial management under Part III Division 8 Subdivision 2 Section 403 to Section 430 of the CA.

Brief Facts:-

1. The case involved Infra Segi Sdn Bhd (“the Respondent”) applying to set aside the JMO obtained on 14th June 2018 by Leadmont Development Sdn Bhd (“the Applicant”).
2. The Applicant is the developer of Selayang Star City project, which was stalled due to non-payment to the main contractor and nominated sub- contractors.
3. It was never in dispute that the Applicant was unable to pay its debts. The Respondent being the main contractor of the said project was a secured creditor.
4. The Applicant’s rehabilitation was largely dependent on the said project’s completion and its ability to secure a foreign currency loan from SSG Capital Management (Hong Kong) Limited (“SSG”) and proposed advances from Augment Prosperity Sdn Bhd (“Augment”) to the project’s landowner Sierra Delima Sdn Bhd (“Sierra”), the subsidiary of the Applicant.
5. At the JMO Hearing, it was informed that Sierra and SSG had entered into advance negotiations, with the Central Bank of Malaysia approving the said foreign currency loan, the proposed funds to complete the said project. Further, it was presented that there was an estimated cash inflow from Sierra to the Applicant which would be used to pay its debts and complete the said project.
6. The Respondent filed an application to set-aside the JMO order after it was served the said order on the grounds that there has been material non- disclosure of facts and that the Applicant had acted mala fides.

The Decision:-

1. The Court allowed the Respondent’s intervention in the JMO under the inherent jurisdiction of the Court. The Court was mindful that the Respondent was a secured creditor who had interest and the Applicant had no objections.
2. The Court disagreed with the Respondent that there was a breach of the rules of natural justice despite the Respondent not having knowledge of the JMO application. The Applicant had discharged its statutory duty to advertise and serve the JMO application under Section 408(1) of the CA.
3. The Court disagreed with the Respondent that the JMO was obtained mala fides and that there was a material non-disclosure of the facts.
4. The Court set-aside the JMO on the basis that as at the cut-off date of 26th June 2018, the Respondent’s claim made up 38.7% of the total value of creditors. Six further nominated sub-contractors opposed the JMO via exhibited letter, adding to a total value of creditors to 46.9%. The Court was informed that the Respondent’s debt in the Applicant would amount to about 26% of the Applicant’s total debt.
5. Pursuant to Section 421 of the CA, the Judicial Manager is required to put forward a proposal and obtain approval of 75% of the total value of creditors. The Court asked if the Respondent would allow the Judicial Manager to put forward a proposal for approval, but the Respondent was adamant to proceed with the scheme.
6. The Court was of the opinion that there was no way the scheme to be proposed by the judicial manager could be approved by the requisite majority of creditors and as such the exercise the said proposal would be futile. The Court then set-aside the JMO.

Why The Decision Of Leadmont Is Challengeable In Law?

It is the respectful views of the Authors that the decision in Leadmont is subject to challenge in law and for the following reasons appended below:-

Time Period Afforded under Section 420 and Section 421 of the CA

Section 420(1) of the CA states that after the JMO is ordered, the judicial manager shall, within sixty (60) days or a longer period as ordered by the Court, send a statement of his proposal to all creditors of the company and lay a copy of the statement before a meeting of the company's creditors summoned for the period of not less than fourteen days' notice.

Section 421(4) of the CA states the judicial manager shall report the result of the meeting to the Court and Section 421(5)(a) of the CA states that the Court may discharge the JMO if at the meeting, there was no approval of the judicial manager's proposal.

Here lies the incorrect decision of Leadmont as the Court did not afford the judicial manager the minimum mandated time of sixty (60) days as expressly provided by statute to propose a statement of proposal to the creditors and win over their approval.

In Leadmont, within a mere twelve (12) day time frame beginning with 14th June 2018 with the grant of the JMO and ending with the cutoff date of 26th June 2018, the Court set-aside the JMO using its inherent jurisdiction.

Furthermore, the Court did not consider whether the Respondent being a secured creditor, would have had the right to vote at the Creditors’ Meeting, to approve a statement of proposal, and shall be entitled to vote in a Creditors’ Meeting only in respect of the balance of its debt after deducting the value of its security, in accordance with the provisions of the CCRMR.

It is the respectful view of the Authors that the Honorable Judge did nothing more that to circumvent the provisions of Section 420(1) of the CA and thereby predetermined the fate of the Applicant.

The Setting Aside of a JMO under the Court’s inherent jurisdiction

It is an indisputable fact that there are no provisions under Part III Division 8 Subdivision 2 Section 403 to Section 430 of the CA for the setting aside of the JMO.

Being mindful of this fact, the Court in Leadmont set-aside the JMO under its inherent jurisdiction.

The Authors with respect, view this as a serious flaw of the Leadmont case as the CA provisions on JM does not empower a setting-aside of the JMO.

On the contrary, the CA spells out the four (4) grounds for the discharge of the JMO.

The first ground has been discussed above under the heading “Time Period Afforded under Section 420 and Section 421 of the CA”.

The second and third grounds are contained in Section 424(1) and Section 424(2)(a) of the CA. The judicial manager is to make a JMO discharge application to Court if it appears to the judicialmanager that the purpose of the JMO either has been achieved or is incapable of achievement. In such circumstances, the Court may discharge the JMO. In the Leadmont case, it is regretted that the Court did not consider the views of the judicial manager.

The fourth ground is by way of Section 425(1) and Section 425(3)(b) of the CA whereby a creditor or a member of the company may apply and seek the discharge of the JMO on the ground that the judicial manager was managing the company’s affairs, business and property in a manner unfairly prejudicial to the interests of its creditors or members or any actual or proposed act or omission of the judicial manager is or would be so prejudicial. There was no issue in the Leadmont case of the judicial manager acting in a manner prejudicial to the creditors.

It is important to note that our Court of Appeal has recognized that there lies a difference between a Discharge and a Setting-Aside as can be seen from the decision of Middy Industries Sdn Bhd & Ors v Agensi-Marley (M) Sdn Bhd ² (“Middy”) where the Court held as follows:

“Proper procedure must be followed. The first step is for the appellants to make an application to the court to discharge, revoke or set aside the said ex parte order once the order is served on them.”

The Judges in Middy were mindful that the Appellants have to elect the proper procedure. However, the JM provisions in the CA do not afford such an election. There are only provisions for the discharge of a JMO.

The law as applicable for a Discharge and a Setting-Aside involve different considerations of law to satisfy. It is here that the Judge in Leadmont failed to appreciate the distinction by setting-aside the JMO using the Court’s inherent jurisdiction.

Additionally, the Federal Court in R Rama Chandran v The Industrial Court of Malaysia & Anor3 (“Rama Chandran”) said as follows on the inherent jurisdiction of the Court:

“…the inherent powers of the Court as provided under O. 92 r. 4 of the High Court Rules 1980 must not only be exercised subject to other express provision of the Rule but it must also not be in conflict with the intention of the legislature to be found within the Rules or other substantive legislations.”

Once again applying the rationale of the Rama Chandran case, the intention of the legislature is explicit, in that there is no provision to set-aside a JMO but only a discharge based on the four (4) conditions as explained above. Accordingly, the Judge was not empowered and clearly erred in law when exercising the Courts inherent jurisdiction to set-aside the JMO, and which setting-aside was not the intention of the legislature when formulating the JMO provisions.

It is trite law, that it is not the function of the courts to re-write legislative provisions but to apply the said provisions as intended by parliament.

A Sneak Peek Across The Straits Of Tebrau For Singapore’s Position On Judicial Management

In Singapore, JM is covered under Part VIIIA Section 227AA to Section 227X of the Companies Act 2006 (“CA 2006”). Essentially, the position inMalaysia is similar to that in Singapore.

The power of the Court to make a JMO and appoint a judicial manager is under Section 227B of the CA 2006 which is in pari materia to Section 405 of the Malaysian CA.

The Court must be satisfied that the company is or is likely to become unable to pay its debts; and it considers that the making of the order would be likely be to achieve one or more of the following purposes:

1. the survival of the company, or the whole or part of its undertaking as a going concern;
2. the approval under Section 210 or 211I of a compromise or arrangement between the company and any such persons as are mentioned in that section;
3. a more advantageous realization of the company’s assets would be effected than on a winding up.

The test that the Courts would apply was set in Deutsche Bank AG v Asia Pulp & Paper Co Ltd ⁴ where the Courts will consider under Section 227B whether there is real prospect of achieving one of the purposes.

In Malaysia, in the Leadmont decision, the Court was of the opinion that the word ‘satisfied’ indicated a higher threshold of persuasion but did not refer to the Singaporean position. It would be interesting to see, moving on, whether the Malaysian Courts would pay homage to the “real prospect” test formulated by the Singaporean Courts.

Furthermore, under Section 227B(10)(a), the Court can make a JMO and appoint a judicial manager if it considers the public interest so requires. This is pari materia to Section 405(5)(a) of the CA.

In Re Bintan Lagoon Resorts Ltd ⁵, it was held that the Court ought to make a JMO even if doing so is unlikely to achieve any purposes under Section 227B. Essentially, the test for public interest is whether the refusal of the JMO results in a collapse of the company which in turn will have serious economic or social problems.

The Court in Leadmont did not consider Section 405(5)(a) in its full purpose and intent when it decided to set-aside the JMO using its inherent jurisdiction. Post COVID-19, many business owners’ companies will be facing the risk of collapse causing serious economic and social problems.

It will be interesting to see whether the Malaysian Courts will adopt the Singaporean “public interest” test when faced with a JMO application post COVID- 19.

Also, under Section 227B(10)(b) which is in pari materia with the Malaysia’s Section 405(5)(b), an interim judicial manager may be appointed to exercise such functions, powers and duties as the Court may specify pending the making of a JMO. The Report of the Select Committee on the Companies (Amendment) Bill No. 9/86 of Singapore stated that it is likely that such appointment may be based on situations where assets of the company may be at a great risk of dissipation and/or deterioration; and where the expeditious safeguarding of the interest of the company and its creditors are required.

The Malaysian Court has not put to test this provision, and it will be interesting to see how the Malaysian Courts will decide when it is faced with an application under Section 405(5)(b).

Another interesting case to note is the decision of Re Genesis Technologies International (S) Pte Ltd ⁶ (“Genesis”) whereby two unsecured creditors opposed the JMO application. It was argued in opposition that a JMO was only being sought for to dissipate the assets of the company. The Court dismissed the JMO stating that the Court should bemindful that JMO is not used as a tool of abuse by directors or shareholders of the ailing company to the detriment and interest of the creditors.

However, to contrast the decision of Genesis with the position in Malaysia under Section 407(3) of the CA, an unsecured creditor may only be heard in opposition to the nomination of the judicial manager and not the entire JMO application.

Conclusion: Solace Under Judicial Management Despite Leadmont

The Authors do appreciate that there are many unanswered questions and much reservations on the Leadmont verdict as delivered.

It must be borne in mind that there was no appeal to the Court of Appeal on the Leadmont decision, to put to test the said decision before a panel of three (3) judges to determine on whether the High-Court was correct or had erred in its decision.

Be that as it may the business owner can still seek solace of the JMO despite the decision in Leadmont, since it is only a High-Court decision which shall not be binding on another High-Court of co-ordinate jurisdiction.

This means that aside from the High-Court Judge who decided the Leadmont case, all other High-Court Judges hearing JM matters herein after, will be free to depart, distinguish and disagree with the Judge in Leadmont until there is a higher binding authority by our Court of Appeal.

It is the respectful views of the authors that there is a serious flaw in the Leadmont decision as explained above, which warrants an appellate intervention to reverse that decision and to lay down the correct proposition of law on JM.

It is crucial for business owners to greatly consider the JMO cloak for their ailing companies post COVID-19. The time is right to use the corporate rescue weapon of JMO provided by the CA.

Citation:
¹ [2018] MLRHU 1114
² [2013] 3 MLRA 114
³ [1996] 1 MLRA 725
⁴ [2003] 2 SLR 320
⁵ [2005] 4 SLR 336
⁶ [1994] 3 SLR 390