The Advantages of Section

ADVANTAGES OF S. 176, WHO BENEFITS AND CASELAWS. INTRODUCTION As a general outline, S. 176 of Companies Act 1965[1] deals with schemes of arrangement of companies facing financial difficulties or in the case of companies at the brink of winding-up. What is, “Schemes of Arrangement”, and how do these schemes assist or facilitate the companies during financial difficulties? To define in simple terms, “Schemes of Arrangement” refer to schemes that enable companies in financial difficulties to pay out to their creditors in full. Therefore, companies enter into schemes or arrangements with creditors to put into effect a compromise or a moratorium. What is a “moratorium?” A “moratorium” can be defined to 2 things :

1. A temporary prohibition on an activity;
2. From the legal aspect, it means an authorized delay of legal obligations or payment.[2]

Therefore, the term “moratorium” is used to show that a temporary deferment of payment by the companies in debt to their creditors is, legally allowed – by the leave of Court. A compromise scheme, however, is the type of scheme whereby the creditors agree to accept payment of less than the amount that is owed to them.[3] In other words, once the compromised amount is paid, the company is released from any further obligations or debt towards the creditors. In certain occasions, the creditors may also compromise to convert their debts into shares in the company.[4] Therefore, it is on the agreement of the companies and their creditors to determine which scheme or arrangement suits best for both parties. WHAT IS S. 176 COMPANIES ACT 1965? Now, focusing on the main issue, how does S. 176 of CA 1965 actually facilitates or assists companies which are facing financial difficulties, into entering schemes of arrangement? The answer would be because S. 176 acts as a mechanism, or as a tool which binds a formal compromise (companies may pay less than the amount owed to creditors upon agreement by both parties) or moratorium (suspension or delay or deferment of payment for a specified period of time to their creditors) between the participants as long as an agreement by the majority of the members have been achieved and, subject to approval by the court. In short, when a company and its creditors agree to enter a scheme of arrangement, S. 176 comes in to facilitate both parties by : Binding both parties once a majority vote is achieved and obtaining approval from the court to grant leave for the scheme of arrangement. S. 176 can also be read together with S. 178[5] and S. 180[6] as S. 178 sets out the orders that the court can make to put into effect a scheme for the reconstruction of any company or companies or the amalgamation of any 2 or more companies. As stated under S. 178(1) : “…Where an application is made to the Court … for the approval of a compromise or arrangement and it is shown to the Court that the compromise or arrangement had ben proposed, for the purpose of, or in connection with a scheme for reconstruction of any company or companies, or the amalgamation of any 2 or more companies … … the Court may, either by way of approving the compromise or arrangement or, by subsequent order provide for all or any the following matters …”[7] Therefore, what S. 178 provides is actually the requirements or the order the court may request in order to make the scheme or compromise to be effected. S. 180 on the other hand sets out the procedures that enable the transferee company to compulsory acquire the shares of a dissenting shareholder to a scheme or a contract that involves the transfer of all shares in a particular class in the transferor company to the transferee company.[8] WHO BENEFITS FROM S. 176 COMPANIES ACT 1965? In a nutshell, it can be said that the scheme of arrangement saves companies from bankruptcy by giving a chance to the companies to pay their debt to their creditors or debenture holders. Therefore, as clearly stated above, it’s clear to say that the companies facing financial difficulties should benefit most from S. 176 CA. This is because the main purpose of S. 176 CA is to restructure the financial affairs of a company which is heavily burdened with debts. Therefore, when S. 176 comes in as a saving provision for companies in debt, it eases both the company and their creditors. However, as much as the company may receive benefits from S. 176, there are circumstances where companies may misuse the provision for the own benefit. Therefore the law should provide a safeguard provision for the creditors as well. We must bear in mind that the main focus of S. 176 is to ease the burden of the companies who are truly in a financial crisis. The advantages at the end of the scheme of arrangement should be of that the companies are able to carry on their business ultimately as usual, and not release themselves from liability of paying the debts they owe to their creditors. S. 176 AND CASELAWS The law and its relation to the scheme of arrangement is governed by S. 176 CA. As stated earlier in the general rule, when a company is soon to go bankrupt or winding-up, S. 176 CA acts as a mechanism and as a tool to protect the company and assist them in paying their debt of to their creditors. S. 176 CA provides that a scheme of arrangement of either a compromise or a scheme may be put into effect and thus, helping both the company – to continue their business as usual – and to pay the creditors back – the money owed to them. How does the law apply or what are the instances where S. 176 CA were applied? First and foremost, when a company wishes to create a compromise or a scheme, the company itself – the member of the company or member of a class or the creditor – to make an application to the Court. For instance, in the landmark case of Re Foursea Construction (M) Sdn Bhd[9], the court held that and application of arrangement for ex-parte is not allowed as it must be in the form of both parties being present and active in order to avoid injustice especially towards the creditors. In other words, for an application of scheme of arrangement, the Court shall not grant the application if there is only one party that applies to the Court. It must be applied from both parties – the company and the Creditor. However, with every general rule, there is also an exception. In this case, a circumstance where the Court may allow an ex-parte application is when there is a sense of valid urgency that exists. The application of ex parte is seen in the case of PECD Bhd & Anor v Merino-Odd Sdn Bhd & Ors[10] where the applicants filed an ex-parte application, and the application is only for exceptional cases of ‘valid urgency’. Therefore, the applicants have a crucial duty to disclose all relevant materials including any information that may be unfavorable to the applicants’ themselves. The court will, strictly compel the applicants to comply this requirement. However, in this case, in order to obtain the ex-parte order, the applicants did not sufficiently identify all their supporting documents that need to be disclosed. As a result, the court held, since the rule of fair and frank disclosure should be practiced by the applicants in this case, the applicants’ failure to disclose the subject matter and decision of the previous court which did not favor them was actually against the principle of disclosure.[11] It was found and proven the applicants had acted mala fide and the judge set aside the ex-parte application and his restraining order under S. 176 of CA 1965.

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[1] S. 176 Companies Act 1965. [2] Dr Shanty Rachagan, Dr Janine Poscoe, Anil Joshi, “Concise Principles of Company Law in Malaysia”, p. 551. [3] www.lawteacher.net/saving-companies-which-face-financial-difficulties (accessed on 19th December 2014) [4] Dr Shanty Rachagan, Dr Janine Poscoe, Anil Joshi, “Concise Principles of Company Law in Malaysia”, p. 552. [5] S. 178 Companies Act 1965. [6] S. 180 Companies Act 1965. [7] S. 178(1) Companies Act 1965. [8] Dr Shanty Rachagan, Dr Janine Poscoe, Anil Joshi, “Concise Principles of Company Law in Malaysia”, p. 553. [9] [1998] 3 CLJ 135. [10] [2009] 3 CLJ 685. [11] www.lawteacher.net/the-law-of-scheme-and-arrangement (accessed on 19the December 2014)

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