The Scheme of Arrangement under Section 176 of the Companies in Malaysia

Scheme of arrangement under S 176 of Companies Act had been a formal corporate rescue process in Malaysia before the outbreak of financial crisis of South East Asia in 1997.[1] Although the purpose of the provision had never be a corporate rescue mechanism,[2] Scheme of arrangement not only can be applied by the insolvent company as a last straw to clutch at in saving the company, but also by ordinary company for adjustment of members' or creditors' rights, reorganisation of the company’s share capital, and reconstruction or merger of a group of companies.[3] Many companies had sought Scheme of arrangement in saving the company from going into liquidation. Before the amendment in 1998, Some of the companies had just applied the restraining order under s176 merely to delay the repayment of the debt. This had constituted abuses of s176 and thus some amendments had been made. The amendment of section 176 was incorporated in the Companies (Amendment) Act (No.2) Act (A1043) 1998 with effect from 1 November 1998. The amendments retain all the existing provisions of section 176 but have added new provisions in the form of sections 176(10A) to 176(10E). S 176 had been constantly been criticised as having several deficiencies. Firstly, a company can applied for the restraining order in pursuant to s176(10) even without a proposed scheme of arrangement and meetings of creditors can be applied at a later stage. Time limit had not been provided in the provision when a proposed scheme has to be presented. Hence, debtor companies may misapplied the section solely to delay repayment period of the debt so that the company not be declared as insolvent. Secondly, the company existing management is allowed to be in-charged of company’s affairs and actively involve in structuring remedy to save the company from going into liquidation. This had being criticised as no equity because the existing management is the one who makes the company’s financial state become dire. The failure to maintain the company by the existing management cause them loss of confidence from shareholders and the interests of creditors may not be adequately protected.. Thirdly, period of protection is not specified under S176. Court generally grants a six-month period for the scheme and may grants further period to extend the protection for three or six months. Such inconsistent period affects the creditor’s interest as they hardly to recover the debts against the company. In practice, the courts appear to be reluctant in granting a moratorium if the proposed scheme is loosely constructed and if the company who applied for such order is “hopelessly insolvent”.[4] It is illustrated in Sri Hartamas Develepment Sdn. Bhd v MBF Finance,[5] where the court had refuse to grant the orders made by the applicant under Sections 176(1) and 176(10) due to that proposed scheme lacks provisions for enforcement and the company is hopelessly insolvent. The decision has been agreed by several Australian authorities like Re Buildmat (Australia) Ltd.[6] There is another important decision which has also denotes the defects of the pre-amendment of Section 176. In the case of Re Kuala Lumpur Industries Bhd and Others,[7] the applicant filed to set aside the restraining order of debtor company under section 176(10). Depart from two cases mentioned above, the Court granted the restraining order. Thus, much criticisms has been put forward regarding the decision of this case because based on the facts, the applicant debtor did not make an application under s176(10) and only made an application under s176(1). To give remedy in response to the criticisms made by public, the subsections (10A), (10B), (10C), (10D), and (10E) under the S 176(10) had been inserted. Such amendment sought to have a more transparent in application of restraining order and to overcome the defects had been mentioned before. After Re Kuala Lumpur Industries Bhd,[8] an amendment has been made to restrain the period of restraining order for not more than ninety days or such longer period as the Court any for good reason allow if and only if it is satisfied that there is a proposal for a scheme of compromise or arrangement between the company and its creditors or any class of creditors representing at least one-half in value of all the creditors.[9] Besides, debtor company must proved to the court that the applied restraining order is necessary for a scheme of arrangement be prepared. Moreover, the debtor company seeking a restraining order is required to lodge a statement of affairs made up to a date not more than three days before, together with section 176 application. Another amendment is that the debtor company must fully disclose to the creditors the proposed scheme of arrangement. Section 176(10C) provides that upon obtaining the restraining order, a debtor company is not longer be allowed to dispose its properties or to acquire any property other than in the ordinary course of business. Although the provision is amended for betterment as the probabilities of misusing the power granted under section 176 is reduced and an ailing company to ward off claims by obtaining a moratorium is also avoided, the amendment is not comprehensive to address some other defects in the provision. After the provision was being amended, but there is still an absence of an independent third party professional that would be able to determine whether creditors interest has been considered in the scheme .Although an independent director is required but his roles are not clearly stated and in fact he is not a qualified professional who entitled to form a convincing opinion.[10] The Corporate Law Reform Committee (CLRC) had made review and gives recommendation that certain modifications must be made to S 176, it can reverts to its pre-amendment form, where finality on the moratorium period had been emphasized, where any extension of moratorium period shall not allowed , and the moratorium period should only be applicable to creditors and not as against regulators.[11] Bibliography Textbook: 1. Shanty Rachagan, Janine Pascoe and Anil Joshi(2010). Concise Principles of Company Law in Malaysia (2nd edn LexisNexis, Petaling Jaya 2010), Chapter 21 2. Committee, C. L. (2007). A CONSULTATIVE DOCUMENT ON (1) REVIEWING THE CORPORATE INSOLVENCY REGIME - THE PROPOSAL FOR A CORPORATE. Kuala Lumpur: Companies Commission of Malaysia. Website: 1. Nor Azimah Hj. Abdul Aziz ADIL(ITM), L. A. (1997, March 30). Malaysian Institute of Accountants . Retrieved December 12, 2014, from https://frsic.my/new/1_resourcecenter_research_detail.asp?id=14 Cases: 1. Sri Hartamas Develepment Sdn. Bhd v MBF Finance[1990] 2 MLJ 31 2. Re Buildmat (Australia) Ltd (1983) 1 ACLC 919 3. Re Kuala Lumpur Industries Bhd and Others [1990] 2 MLJ 180 Statute: 1. Companies Act 1965

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[1] See also Aishah Bidin (2003) “ Review of the Corporate debt restructuring regime and insolvency law in Malaysia” Proceedings from Conference on Companies and Securities Law ,organized by Asia Business Forum, JW Merriot, Kuala Lumpur. [2] Section 176 (11) defines “arrangement” as a reorganisation of the share capital of a company by the consolidation of shares of different classes or by the division of shares into shares of different classes or by both these methods. [3] Corporate Law Reform Committee, 'A CONSULTATIVE DOCUMENT ON (1) REVIEWING THE CORPORATE INSOLVENCY REGIME - THE PROPOSAL FOR A CORPORATE REHABILITATION FRAMEWORK; (2) REVIEWING THE COMPANY RECEIVERSHIP PROCESS; AND (3) COMPANY CHARGES AND REGISTRATION PROCESS - IMPROVEMENTS TO THE PRESENT REGISTRATION SYSTEM' [August 2007] 14, 63 [4] Nor Azimah Hj. Abdul Aziz ADIL(ITM), LLM(Wales), Advocate & Solicitor (Kuala Lumpur High Court), Law lecturer, Accounting Dept. Faculty of Business Management, UKM, Bangi, '"Corporate Rescue - Malaysian Scenerio"' (Malaysian Institute of Accountants (MIA) 3/30/1997) <https://frsic.my/new/1_resourcecenter_research_detail.asp?id=14> accessed 17 December 2014 [5] [1990] 2 MLJ 31 [6] "...if the court were to approve the proposed scheme, it would be lending its support to the sending into the market place to trade of a company which was hopelessly insolvent and thus a danger to the business community": Re Buildmat (Australia) Ltd (1983) 1 ACLC 919 [7] [1990] 2 MLJ 180 [8] Ibid [9] Section 176(10A)(a) of Companies (Amendment) Act (No.2) Act (A1043) 1998 [10] Corporate Law Reform Committee, 'A CONSULTATIVE DOCUMENT ON (1) REVIEWING THE CORPORATE INSOLVENCY REGIME - THE PROPOSAL FOR A CORPORATE REHABILITATION FRAMEWORK; (2) REVIEWING THE COMPANY RECEIVERSHIP PROCESS; AND (3) COMPANY CHARGES AND REGISTRATION PROCESS - IMPROVEMENTS TO THE PRESENT REGISTRATION SYSTEM' [August 2007] 14, 70 [11] Corporate Law Reform Committee, 'A CONSULTATIVE DOCUMENT ON (1) REVIEWING THE CORPORATE INSOLVENCY REGIME - THE PROPOSAL FOR A CORPORATE REHABILITATION FRAMEWORK; (2) REVIEWING THE COMPANY RECEIVERSHIP PROCESS; AND (3) COMPANY CHARGES AND REGISTRATION PROCESS - IMPROVEMENTS TO THE PRESENT REGISTRATION SYSTEM' [August 2007] 14, 70

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