In brief
- COVID-19 infections in Malaysia are on the rise as we begin a new year. Due to a lack of options, the Malaysian government has reinstated the Movement Control Order (MCO), which prohibits a number of industries from operating. The MCO will almost surely push the economy into reverse shortly after it emerges from recession, putting even greater strain on struggling businesses. We should expect to see more corporations use corporate restructuring tools like Judicial Management, Corporate Voluntary Arrangements, and Schemes of Arrangement to salvage their failing businesses as a matter of necessity in these difficult circumstances.
Q. So what is an overview of judicial management?
A. When a corporation becomes insolvent, Malaysia has historically resorted to liquidation or winding-up processes. The Companies Act 2016 (the Act) has incorporated several restructuring tools, including judicial management as an alternative to liquidations, into Malaysia’s insolvency environment.
Who can apply?
- A company, its directors, a creditor, including any “contingent or potential creditor,” or all or any of those parties, jointly or separately, may file a judicial management application under Section 405 of the Act.
Example: The court decided that the party claiming to be a creditor has standing to petition for judicial management in the matter of Spacious Glory Sdn Bhd v Coconut Three sdn Bhd [2020] MLJU 1188. The term ‘contingent or prospective creditor,’ according to the Court, refers to a situation in which the corporation may be exposed to a current responsibility based on the occurrence of a future event or at a future event. The term ‘creditor’ must refer to anyone who has a financial claim against the company. On the balance of probability, the applicant had established that he was a creditor.
What tests are required to be completed?
- The Court may make a judicial management order under S.405(1) of the Act if the court is satisfied that the company is or will be unable to pay its obligations when the court is satisfied that the company is or will be unable to pay its debts.
- Furthermore, the Court may consider that making the order would be likely to achieve at least one of the following goals: a) the company’s survival as a going concern, b) the approval of a scheme of arrangement between the company and any of the persons listed in S.366 of the Act, and c) a more advantageous realisation of the company’s assets than a winding up.
- However, there is an exception to the above test. S.405(5) of the Act gives the Court the authority to issue a judicial management order and appoint a judicial manager if it believes the “public interest” necessitates it, even if the applicant fails to meet the preceding criteria.
Example: In the matter of Spacious Glory Sdn Bhd v Coconut Three Sdn Bhd [2022] 7 MLJ 76, the court will now evaluate whether issuing the order is likely to achieve one or more of the objects listed in Section 405(1)(b) of the Companies Act 2016. The court next addressed the applicants’ argument that the respondent had allegedly failed to present a reasonable solution to the issues at hand, and that as a result, the respondent’s failure to hire an attorney to oppose the petition could not be dismissed. In this matter, the judgement of the Court of Appeal in the case of CIMB Islamic Bank Bhd v Wellcom Communication (NS) Sdn Bhd & Anor [2019] was used.