In this article, Douglas Goh Peng Fong discusses whether a public listed company can apply for a judicial management order under Subdivision 2 of Division 8 (Corporate Rescue Mechanism) of Part III of the Companies Act 2016 (“CA”).
On 23 May 2022, the Court of Appeal (“COA”) in the case of Re Scomi Group Bhd affirmed the decision of the High Court1 that a public listed company cannot avail itself of the judicial management corporate rescue mechanism under the CA.
Judicial management is a type of corporate rescue mechanism that allows a financially distressed company or its directors or its creditors to apply for a judicial management order (“JM Order”) to place the management of the company in the hands of a judicial manager. The JM Order provides financially distressed companies an automatic moratorium from legal proceedings for six months2 (which can be extended for another six months) until the disposal of the judicial management application.
Scomi Group Berhad (“Scomi”) is a public company listed on the Main Market of Bursa Malaysia Securities Berhad (“Bursa Malaysia”). Scomi has been classified as a financially distressed Practice Note (PN 17) company since December 2019 after its shareholders’ equity spread went below 25% of its issued share capital and its equity dropped below RM40 million based on its financial results for the quarter ended 30 June 2019
On 14 April 2021, Scomi filed an application with the High Court pursuant to sections 404 and 405 of the CA to seek a JM Order to be placed under judicial management of a judicial manager. Scomi’s application was opposed by its creditors, namely, See Song & Sons Sdn Bhd, Malayan Banking Berhad as well as SBI Spectrum Sdn Bhd (which acted as an intervener in the proceeding) (“Creditors”).
The Creditors had argued that section 403(b) of the CA is clear in that the judicial management procedure was not applicable to Scomi as it was a company which was subject to the Capital Markets and Services Act 2007 (“CMSA”) and that where the secured creditors had objected to the application, the court shall dismiss the said application in accordance with section 409(b) of the CA.
The High Court had to decide on the following:
• whether Scomi, as a public listed company can apply for a JM Order by virtue of section 403(b) of the CA (“First Issue”); and
• whether the secured creditor(s) of Scomi who object the JM Order would disentitle Scomi from continuing with the application (“Second Issue”).
Pursuant to section 403 of the CA, judicial management shall not apply to:
“(a) a company which is a licensed institution or an operator of a designated payment system regulated under the laws enforced by the Central Bank of Malaysia; and
(b) a company which is subject to the Capital Markets and Services Act 2007”.
In respect of section 403(b) of the CA, Scomi argued that the High Court should apply a purposive approach in interpreting the same to only preclude companies that are licensed and regulated under the CMSA, and not all public listed companies. The Creditors argued to the contrary that section 403(b) of the CA is clear in that judicial management was not applicable to Scomi as it was a company which was subject to the CMSA (by virtue of Scomi being a public listed company which is required to comply with various provisions of the CMSA).
In addition, one of the Creditors, See Song & Sons Sdn Bhd, referred the High Court to the Companies Commission of Malaysia’s (“CCM”) Consultative Document on the proposed Companies (Amendment) Bill 20205 , which states that:
“the benefit of judicial management is not available to companies which are regulated under [the CMSA] including listed companies. The proposed amendment would assist all companies facing financial difficulties including listed companies an avenue to rehabilitate their situations through judicial management.”
The Creditors argued that judicial management is not available to companies under the CMSA including listed companies like Scomi.
In determining the First Issue, the High Court examined the provisions under the CMSA. The High Court cited provisions in the CMSA which govern “listed corporations” and the duties imposed on them under the CMSA, such as section 317A which is on the prohibited conduct of a director or officer of a listed corporation and section 320A on false or misleading financial statements of a listed corporation. Other provisions of the CMSA cited by the High Court, such as those relating to offences for market trading, market rigging and insider trading, are all applicable to listed corporations. A “listed corporation” is defined under the CMSA to mean “a corporation whose securities or any class of its securities have gained admission to be quoted on a stock market of a stock exchange”.
Thus, upon reading the CMSA as a whole, the High Court concluded that “any body corporate formed or incorporated or existing within or outside of Malaysia which will include any foreign company which is not a corporation sole, co-operative society or trade union whose shares are quoted on a stock market, will be governed by the CMSA” [emphasis ours]. This includes Scomi, a public company that is listed on Bursa Malaysia.
The High Court did not agree with Scomi’s contention that section 403(b) of the CA is general in nature or adopts a broad brush categorisation as opposed to section 403(a) of the Companies Act 2016 which, in the words of Scomi’s counsel, “seeks to carve out entities that are licensed and regulated by Bank Negara from judicial management”. The High Court stated that the words in section 403(b) of the Companies Act 2016 are clear to its meaning. Accordingly, a purposive approach cannot be adopted to interpret section 403(b) of the CA to only apply to companies that are “licensed and regulated under the CMSA”.
The High Court held that section 403(b) of the CA applies to all companies whose shares are quoted on a stock market of a stock exchange as is the case with Scomi, and that Scomi as a listed company under the CMSA cannot avail itself of the judicial management corporate rescue mechanism under the CA. Thus, public listed companies are precluded from applying for a JM Order under section 403(b) of the CA.
Pursuant to section 409 of the CA, the High Court shall dismiss an application for a JM order if it is satisfied that:
“(a) a receiver or receiver and manager referred to in subparagraph 408(1)(b)(ii) has been or will be appointed; or [emphasis ours] (b) the making of the order is opposed by a secured creditor.”
The High Court felt that it was pertinent to note that the word “or” which appears in section 409 of the CA was inserted by way of the Companies (Amendment) Act 20196 which came into force on 15 January 2020.
The usage of the words “secured creditor” in section 409(b) of the CA showed that Parliament had in its wisdom specifically and expressly included the term “secured creditor” to the said sub-section and thus confined the right to object to a judicial management application to only two categories of creditors which are (i) “a receiver or receiver and manager referred to in sub-para. 408(1)(b)(ii) (who) has been or will be appointed’’; and (ii) “a secured creditor”.
Malayan Banking Berhad and See Song & Sons Sdn Bhd were secured creditors of Scomi who had a right to veto the judicial management application by Scomi and as they had done so, Scomi was not entitled to obtain a JM Order pursuant to section 403(b) and section 409(b) of the CA.
The COA’s judgment
Scomi went on to appeal against the decision of the High Court. On 23 May 2022, the COA dismissed Scomi’s appeal with costs. At the time of writing, the written grounds of judgment of the COA have yet to be issued.
This case has provided the High Court with the opportunity to consider if a public listed company can apply for a JM Order under the CA. Following the COA’s decision, public listed companies are precluded from applying for a JM Order.
Notwithstanding this, it is worth highlighting that the CCM has, in its Consultative Document on the proposed Companies (Amendment) Bill 2020, proposed amendments to section 403(b) of the CA to extend the application of the judicial management framework to more categories of companies including public listed companies.
If the proposed amendments are passed, the decision that judicial management is not available for public listed companies will no longer be relevant as the proposed amendments to section 403(b) of the CA will not preclude public listed companies like Scomi (which are neither registered nor licensed under the CMSA) to apply for judicial management under the CA. The proposed amendments to section 403(b) are specific in that judicial management would not apply to, amongst others, a company “which is registered or approved under Part II, licensed under Part III, or recognised under Part VIII of the Capital Markets and Services Act 2007”.
For further information, please contact:
Datin Jeyanthini Kannaperan, Partner, Shearn Delamore & Co.
1. MLJU 2173.
2.Section 406(1), Companies Act 2016.
3.See Scomi’s announcement published on the website of Bursa Malaysia
5.See Companies Commission of Malaysia’s Consultative Document on the proposed Companies (Amendment) Bill 2020 https://www.ssm.com.my/Pages/Legal_Framework/Document/Consultative%20Document%20%26Companies%20(Amendment)%20Bill%202020%20(280720).pdf
7.See Scomi’s announcement published on the website of Bursa Malaysia https://www.bursamalaysia.com/market_information/announcements/company_announcement/announcement_details?ann_id=3260867
8.See Companies Commission of Malaysia’s Consultative Document on the proposed Companies (Amendment) Bill 2020 https://www.ssm.com.my/Pages/Legal_Framework/Document/Consultative%20Document%20%26Companies%20(Amendment)%20Bill%202020%20(280720).pdf