Judicial Management - The Case of CIMB Islamic v Wellcom Communications

by Lavinia Kumaraendran ~ 1 March 2019

Judicial Management - The Case of CIMB Islamic v Wellcom Communications

In the case of CIMB Islamic Bank Berhad v Wellcom Communications (NS) Sdn Bhd and Anor [2019].

This case concerns the applications of two companies (Wellcom Communications & Rangkaian Mining) for Judicial Management (i.e. a moratorium - a prohibition to stop anybody from filing any action as against the company for a period of 6 months and/or as the Court may order). At the High Court, the Judicial Commissioner originally dismissed their applications for Judicial Management.

The applicants (known as the “respondents” in this judgement) appealed against the decision of the High Court. The respondents also made an application to stay the order of the Judicial Commissioner which refused judicial management. The said application to stay the order was allowed. The appellants then appealed against the decision of the Judicial Commissioner to stay the said order. The Court of Appeal (”COA”) allowed the appeal and set aside the stay order granted by the High Court.

The COA based their decision on two grounds:

  1. The court was of the view that once an originating process is dismissed, the court could not grant a stay to keep the originating process alive.
  2. The stay granted in the High Court is an abuse of process of court on the reasoning that the moratorium related to section 404 of the Companies Act (CA) should not be entertained in the absence of the element of bona fide in the application – that is the respondent’s failure to write to all the concerned parties to obtain their views before the application was filed and to disclose to the court these views.

The first ground is fairly self-explanatory. The consequence of which granted the respondents a second bite at the cherry and gave them a statutory interim protection. Case law and precedent does not provide for the granting of a stay on an order when no order was made by the court in the first place – the respondent’s application for judicial management was dismissed outright.

The second ground of the COA provides for more contention and analysis. The court was of the view that if the stay order was granted pending the respondent’s appeal, the directors of the respondent were free to run the company as they see fit, unable to be sued and immune from its creditors and any legal proceedings under Section 410 CA.

The Public Interest Consideration

The consideration of public interest was not discussed in depth in the first ever decided case of Leadmont which discussed the law on Judicial Management and only considered to a limited extent in the case of Wellcom.

In Leadmont, it was held that what constitutes public interest pursuant to Section 404(5)(a) CA has to be decided on a case by case basis. The court in Leadmont found that although the respondent fulfilled all the necessary requirement and pre-requisites to qualify for judicial management, a judicial management order should still not be made if support of more than 75% of the secured creditors was not obtained at that stage. Such a decision could be said to be contrary to the public interest given that it sets a precedent for future cases where the support of the creditors would then become a requirement or prerequisite in order to successfully apply for judicial management. Certainly, if parliament had intended for such a pre-requisite to exist, they would have specified so alongside the other requirements laid out in Section 404 and 405.

In Wellcom, the element of public interest was not considered as the Appeal concerned only the grant of the stay in the High Court. The court only discussed how the granting of the stay would be contrary to the scope and objective of Judicial Management as allowing the stay of the order would effectively place the company in the hands of the directors instead of a judicial manager while maintaining the moratorium pending the appeal.

So the issue arises as to what happens pending an appeal against an application for judicial management. The moratorium is lifted thereby opening up the applicant to legal action. Such a scenario would render the appeal futile as the condition and assets of the company could be seriously compromised pending the appeal.

Although there have been no decided cases taking into consideration this element, it is to be noted that the COA in Wellcom did emphasize the importance of:-

  • strict proof and evidence to be considered from the date the application for judicial management is filed and from the date of the order and not merely conjectures. This is to ensure creditors are not defrauded.
  • having an application for judicial management and any appeal arising therefrom to be justly, economically and expeditiously disposed of.

Given that it is a fairly new area of law and there has not been a decided case on this area particularly taking in to account this issue of what happens when an application for judicial management is dismissed and the weight the Court gives to the element of public interest, it would be prudent that in that situation any appeal arising therefrom be heard expeditiously.