Schemes of Arrangement 101

by Jason Yong Kok Yew ~ 10 October 2020

Schemes of Arrangement 101


Contributed by

Jason Yong Kok Yew (Associate)

Tel: 603-6201 5678 / Fax: 603-6203 5678

Email: yky@thomasphilip.com.my

Website: www.thomasphilip.com.my

Companies with viable businesses may sometimes find themselves in financial trouble when they are burdened with large debts. In such situations, there are normally 3 ways it can play out: the company can be wound up, a receiver & manager can be appointed, or the company can go for a ‘scheme of arrangement’ for the restructuring of the companies. 

There are myriad differences between a company being wound up, a receiver & manager being appointed, and a scheme of arrangement.

One of the more overlooked distinctions between the three is that upon the Winding Up Order or the Notice of Appointment of Receiver or Receiver and Manager, control of the company’s affairs passes to either the liquidator or the receiver and manager, as applicable. However, the company can still propose a scheme of arrangement if it is not wound up and/or have a receiver and manager appointed. In such a scenario, the control and management of the company’s affairs is maintained with the company’s Board of Directors. 

Scheme of Arrangement

Under Section 366 of the Companies Act 2016, the Court may order for a meeting of the company to be convened for the purposes of proposing a ‘scheme of arrangement’ (“SOA”), which is essentially a plan for how the company is going to pay off its outstanding debts.

If more than 75% of the total value of the creditors (or class of creditors) or members (or class of members) present and voting agrees to the proposed SOA, and the Court approves of the same, then such an SOA shall be deemed binding on the company’s creditors, members, liquidator and contributories (where applicable), and the company itself.

The benefits of a restructuring process via an SOA under s.366 lies in the details. It may be difficult for a company to meet the threshold of 75% under s.366, but if it can be met, this means that up to 25% of the company’s creditors involved in the SOA have no choice but to comply with the SOA, and they will not be able to get their money back (whether by legal proceedings or otherwise) unless the SOA falls through. 

3-Step Process in Implementing SOA 

Stage 1: Application for Leave for Court Convened Meeting

Firstly, an applicant (i.e. the company’s creditor, member, liquidator or judicial manager, where applicable) will have to file an application in Court pursuant to s.366 for leave to summon a meeting of the company between its creditors and/or members. 

At the same time, the applicant may also apply for a restraining order pursuant to s.368 of the Companies Act 2016 (discussed below). 

During this stage, the Court will direct the manner in which the meeting or meetings are to be summoned. The Court has to ensure that those parties who would be affected by the proposed compromise or arrangement will be given a proper opportunity to be present and to vote.

Stage 2: Holding the Court Convened Meeting

Secondly, once the Court has granted the Order for the summoning of the meetings, the meetings of different classes of creditors and/or members will be held. At this stage, each meeting must approved the proposed SOA through a 75% majority of the total value of the creditors (or class of creditors) or members (or class of members) present and voting. 

The current regime for an SOA is slightly more relaxed as compared to under the Companies Act 1965. Under s.176 of the 1965 Act, a proposed SOA will have to be agreed upon by a 75% majority of the total value of the creditors (or class of creditors) or members (or class of members) and a 50% majority in the total number of them. The additional hurdle of having to obtain a 50% majority in the total number of creditors or members has since been removed by the coming into force of the Companies Act 2016. 

Stage 3: Applying for Court Sanction of the Scheme

Thirdly, once the meeting(s) have approved the proposed SOA, the applicant then has to file a further application into Court for the Court to sanction the proposed SOA.

At this stage, the Court will need to ensure that:

The meeting(s) have been summoned and held in accordance with its previous Order; 

  • The proposals for the SOA have been approved by the requisite majority; and
  • The view and interest of those who have not approved the proposals at the meeting(s) received impartial consideration.

Power of Court to Restrain Proceedings

During the period that a company has already proposed an SOA, the company would be in a very tenuous position as it would be very difficult for a barely-solvent company to get the 75% it needs. 

Therefore, to let the company have a fighting chance at rehabilitation, the Court has additional powers under s.368(1) of the Companies Act 2016, to stop all further proceedings in any action or proceeding against the company, unless the parties suing the company get leave specifically from the Court to proceed with their particular proceeding, subject to any terms as the Court may impose. 

The Court can grant such restraining orders for a period of not more than 3 months at a time. However, the Court may further extend this period for not more than 9 months if the company succeeds in showing the Court that:

There is a SOA in place between the company and its creditors or any class of creditors representing at least half of the value of all creditors;

The restraining order is necessary to enable the company and its creditors to formalise the SOA for the approval of the creditors or members of the company under s.366; 

The company must, at the same time it lodges an application for a restraining order, lodge a statement of particulars as to the affairs of the company, made up to a date not more than 3 days before the application is lodged; and

The company must nominate, and the Court must approve, one person nominated by a majority of the creditors in the application for the restraining order to act as a director (or if that person is not already a director, to appoint that person to act as a director).