Malaysian Company Law

Initially, when a company is in the condition of winding up, section 176 and 177

[1] would be helpful to overcome the financial difficulties that have been faced by the company. In another words, section 176 and 177 of the Companies Act 1965 will protect the company from liquidation. Therefore, certain rules and procedures need to comply with inorder to protect the company from the debts incurred. According to section 176(1) of the Act[2], where an application to the court should be made and the order should be granted for the arrangement of meeting that will be held between members and creditors.

Meanwhile, the order to convene an arrangement of meeting also could be done by originating summons according to Rules of Court 2012[3]. It was enunciated in the case of Re Kuala Lumpur Industries Ltd

[4] where, there is a requirement for the court to be satisfied whether there is or there would be a bona fide according to the application that has been made under section 176(1) of the Companies Act 1965. Furthermore, it is also not necessary that the proposal should originate from the company to the members and the creditors of the company since the proposal could originate from anybody. In furtherance of making an application under section 176 of the Companies Act 1965, it should be applied by the way of inter parte. It has been illustrated in the case of Re Foursea Construction (M) SdnBhd[5], that the ex parte will not be allowed and inter parte should take place. The purpose of inter parte is to avoid injustice that could be occurred towards the creditors of the company. Meanwhile, ex parte will only takes place when there is an exceptional rivalry occurs. For instance, in the case of PECD Bhd&Anor v Merino Odd SdnBhd&Ors[6], the ex parte application had been filed by the parties and inorder to make an ex parte application, the parties have the responsibility to disclose all the materials to the court. But, in the above case, the parties had failed to disclose the relevant subject matter to the court.

Thus, the court had to set aside the application. As a general rule, ex parte application will not be allowed, however, the court has the discretion to approve the ex parte application if the parties comply with the requirements where there should be “frank and fair” disclose of the materials to the court. Apart from that, the court also will grant an order to convene a meeting between the company, members and the creditors that has been stated under section 176(1) of the Companies Act 1965. Based on the case of Re Price Mitchell Pte Ltd[7], the court has come into a conclusion that the issue on public policy, commercial morality and the interest of creditors need to take into consideration. It was explained in the case of Sri Hartamas Development SdnBhd v MBF Finance Bhd[8], that the creditors meeting to be convened was set aside since the interests of the unsecured creditors were not properly safeguarded and company was also wind up which is again the public policy if the scheme is approved.

Meanwhilethe case of Re Buildmart (Australia) Ltd[9], also adopted the same principle taht has been stated in the case of Sri Hartamas Development Sdn Bhd. This is where, the Supreme Court of the New South Wales need to take into on account regarding the interests of the creditors and the commercial morality. The court strictly held that, it will not allow the creditors meeting as it is amount to encourage the public to involve in the commercial activities in a company which has been insolvent. However, on the other hand, if the order to convene the meeting had been ordered by the court, the explanatory statement should be sent to the directors and the debentures of the company with the notice of summoning according to the Companies Act 1965[10]. The directors of the company also should be provided with all the appropriate information. For a better illustration, in the case of Re Rankin and Blackmore[11], the court held that, the explanatory statements should contain the explanation about the scheme.

Besides that, in the case of Re Dorman Long & Co Ltd[12], the court came into the conclusion that, the members of the meeting should be guided with all the appropriate information in order for them to vote. According to section 176(3) of the Companies Act 1965, the schemes meeting that have ordered by the court should be agreed by the ¾ of the creditors that has been attended. Therefore, the scheme or the arrangement that has been proposed by the company will be binding if majority of ¾ creditors and the members attended the meeting. In addition the court may grant its approval if it thinks the conditions are fit it was stated in the section of 176(4)[13]. Once the proposal had been approved by the court, the scheme or the arrangement is binding on the members of the company, company, creditors of the company and the liquidator of the company. In addition,after the approvalhas been given by the court, all the terms and conditions of the arrangement or the compromise should be followed. It was well explained in the case of Nite Beauty Industries SdnBhd v Bayer (M) SdnBhd[14],that the approval that has been granted for the scheme of the arrangement by the court cannot be reopen or challenged as it is known as the final decision of the court. Furthermore, in order for the section 173(3) of the Companies Act 1965, to be effective, a copy of the order given by the court should be lodged to the Registrar[15] and after the order has been lodged by the Registrar, thenit is effective according to the law. After the lodgement of the order, it is also should be included in all the memorandum of the company that has been enunciated under section 176 of the Companies Act 1965[16]. Apart from that, according to section 176(7) of the Act[17], the court also can grant a stating that, it can exempt the company from following the requirements and also may ascertain the period of time in order for the company to comply with.

Besides that, if any scheme or the arrangement has been made even though it is not related to the reconstruction of the company, the directors of the company has a duty to inform their advocates and accountants of the company to report and forward the respective reports to the directors of the company. The accountants and the advocates also need to keep a copy in the registered office of the company so that, the shareholders and the creditors of the company could inspect it before the meeting[18]. Finally, if the company and the respective officer of the company fails to comply with section 176(6) and 176(8) of the Companies Act 1965 will guilty of an offence where they will liable two thousand ringgit. The company will face consequences when company default in complying section 176 (6) or (8) shall be guilty of an offence against this Act, the penalty is two thousand ringgit. An application can be made to the court to restrain the proceedings when a scheme or an arrangement is proposed for the court’s consideration under section 176(1) or section 176(3). According to the section 176 (10) of the Companies Act 1965 application to restrain the proceedings must be made before an order has been made or any resolution passed for the winding up of the company. According to the case of In Re Kuala Lumpur Industries Bhd[19]the court only consider whether it had jurisdiction to entertain an application pursuant to section 176 (10) although no application had been made under section 176 (1) to summon a meeting of creditors.

The court held that the policy of section 176 was not that the section 176 (10) application had to be tried to the section 176(1) application. It was the view court’s view that both applications may be brought independently. The time period of the court that can grant restraining order under subsection (10) is not more than ninety days or longer period if court thinks there is reasonable ground to allow. Section 176(10A) stated about the condition that applied to the applicant that can get longer period.It is clearly stated in the case of Pelangi Airways SdnBhd v MayBank Trustees Bhd[20] where the plaintiff company proposed a scheme to restructure the rights of its creditors. The company had obtained a restraining order by which it acquired immunity from further proceedings for one year. Maybank Trustees Bhd applied to have that restraining order set aside on the basis that the company had not complied with section 176 (10A)(c). The court upheld Maybank’s application to set aside the restraining order.

There are four condition where first was proposal for a scheme of compromise or arrangement between company and its creditors or any class of creditors representing at least one-half in value of all creditors. Second condition is restraining order must get the approval of the creditors or members.

Third condition is statement in prescribed form as to the affairs of the company must be made not more than three days before the application is lodged. Last condition is the approved person that nominated by the creditors in the application will act as a director if that person is not already a director that appointed before. The director that appointed by court under subsection (10A) have right of access at all reasonable time to the accountinganother records of the company it is clearly state in the subsection (10B). In the case of MetroplexBhd&Ors v Morgan Stanley Emerging Markets Inc&Ors; Rhb Sakura Merchant Bankers Bhd&Ors (Interveners)[21]fact of the case is the applicant after 25 months from the date of the restraining order, were still at initial stages of attempting to achieve a feasible scheme of compromise or arrangement between the company and its creditors; much less than 50 % (being only 21%) in value of the applicants scheme creditors has agreed to the proposed scheme; the draft scheme presented did not contain sufficient particulars for the scheme creditors to consider its viability, for instance, no valuable information on Putra Place which was a key asset of the applicant had been provided to the scheme creditors, thus evincing unreasonable delay on the part of the applicant; the applicants had sought an extension of three months to bring the proposed scheme of arrangement to fruition although it is improbable that approvals from the relevant authorities could be forthcoming in three months and the applicants had not factored into the schedule for convening a meeting, the requirement for seeking such approvals from the relevant authorities. Thus the court could only conclude that the applicants did not appear to have a genuine proposed scheme.

Court held that section 176 (10A) of the act not only provides that a restraining order may only be granted if there was a proposal for scheme of compromise which involved creditors representing at least one- half in value of all the creditors, but it also stipulates that a restraining order may only be extended for a longer period if and only if there is a good reason to do so. The word good reason had been construed by the court to mean: (i) a bona fide scheme of arrangement had been presented with sufficient details provided to enable the creditors to make informed decisions as to its feasibility and merits, (ii) the scheme of arrangement presented must not be such it was bound to fail and (iii) the interest of creditors which were the beneficiaries of the proposed arrangement was safeguarded. The existence of a good reason ought to be predicated upon the applicant bona fide conduct towards achieving a feasible detailed scheme of arrangement for presentation to the general body of creditors[22]. In the case of Re Kai PengBerhad[23] that follow above case, however observation of this case on Section 176 (10A) (a) does not require that 50% of its creditors approve of the proposed scheme of arrangement and that creditors approval was only relevant at the stage of the creditors meeting ordered under section 176(3) of Companies Act not at the stage of asking for an extension of restraining order under section 176(10A). All the applicant needed to show was that 50% of all its creditors. It is doubted whether it is a correct statement of the law. The court held further citing Re Sanda Industries Bhd&Ors[24] that under Section 176(10A)(d) of the act, it is for the court to approve the person nominated by the majority of the creditors to act as a director. Where a person is nominated, no restraining order may be granted if the court does not approve or appoint him to act as a director. So, if for whatever reason, no person is nominated by the creditors, there can be no one to approve or appoint, no one then is approved or appointed, and no restraining order may be granted. According to the section 176 (10C) of companies act 1965 any disposition of the property other than those made in ordinary course of business made after the restraining order shall be void unless the court otherwise order.

Where the company will liable under section (10D) where company shall guilty of offence and the penalty is imprisonment for five years or one million ringgit or both. In the other hand when a company and every officer default in complying to lodge an office copy of the order with the registrar and publish a notice of the order in a daily newspaper circulating generally throughout Malaysia shall be guilty of the offence under the section (10E) and the penalty is one hundred thousand ringgit. The order of restraining procedure will not affect any person other than the company. Any person is includes guarantor of the company[25].

[1]176 and 177 of the Companies Act 1965 [2]176(1) of the Companies Act 1965

[3] Order 88 r 2 of the Rules of Court 2012 [4]Re Kuala Lumpur Industries Ltd [1990] 2 MLJ 180

[5] Re Foursea Construction (M) SdnBhd[1998] 4 MLJ 99 [6]PECD Bhd&Anor v Merino – Odd SdnBhd&Ors[2009] MLJU 671

[7] Re Prince Mitchell Pte Ltd (1984) ACLC 524 [8]Hartamas Development SdnBhd v MBF Finance Bhd [1990] 2 MLJ 31 [9]Re Buildmart (Australia) Ltd (1983) 1 ACLC 919 [10]177(1)(a) of the Companies Act 1965 [11]Re Rankin and Blackmore (1950) SC 218 [12]Re Dorman Long & Co Ltd(1934)Ch 653 [13]176(4) of the Companies Act 1965 [14]Nite Beauty Industries SdnBhd v Bayer (M) SdnBhd[2000] 3 MLJ 314 [15]176(5) of the Companies Act 1965 [16]176(6) of the Companies Act 1965 [17]176(7) of the Companies Act 1965 [18]176(8)(a) & (b) of the Companies Act 1965 [19]In Re Kuala Lumpur Industries Bhd(1990) 2 MLJ 180 [20]Pelangi Airways SdnBhd v May bank Trustees Bhd (2001) 2 MLJ 237 [21]MetroplexBhd&Ors v Morgan Stanley Emerging Markets Inc&ors; Rhb Sakura Merchant Bankers Bhd&Ors (Interveners) (2005) 6 MLJ 487 [22]Section 176 of Companies Act , Civil Procedure Bench Book,(2009)https://www.kehakiman.gov.my/sites/default/files/document3/Buku Panduan/Bench Book 5.1.10 (2) 20Sivil (Latest)/Bench Book 5.1.10/14. SECTION 176 COMPANIES ACT.pdf (view on 20/12/2014) [23]Re Kai PengBerhad (2007) 8 MLJ 122 [24]Re Sanda Industries Bhd&Ors (1999) 1 AMR 892 [25]Section 176 (10F) & (10G) Companies Act 1965 (Act 125)

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