The court recently had the opportunity to deal with the concept of judicial management. Find out more what is judicial management is, and what it entails from the perspective of a company that is in dire need of a restructuring/ rehabilitation to prevent it from being wound up.
It is not uncommon to come upon a company that is under financial distress, due to the influence of internal and external factors. In order to assist companies in financial distress, the Companies Commission of Malaysia (‘CCM’) or Syarikat Suruhanjaya Malaysia (‘SSM’) has decided to enforce Division 8 Part III of the Companies Act (‘CA’) to help the companies rehabilitate. Currently, there are two methods of rehabilitation under CA, namely a corporate voluntary arrangement (‘CVA’) and judicial management (‘JM’). In this article, we will be briefly discussing the JM method.
What is judicial management?
JM is a method whereby an independent individual (‘judicial manager’) is appointed by the court to manage the affairs of the company who is under financial distress to prevent it from being wound up. Generally, a judicial manager is a qualified and independent person (usually an insolvency practitioner) and is appointed by the court to prepare a restructuring plan to assist the company. The restructuring plan must be approved by a majority of the creditors before the scheme can be put forward to the creditors (75% total value of creditors whose claims have been accepted by the judicial manager).
To know more about JM, let us dive into the case of Leadmont Development Sdn Bhd v Infra Segi Sdn Bhd and Another Appeal.
Brief facts of the case of Leadmont Development Sdn Bhd v Infra Segi Sdn Bhd and Another Appeal
Leadmont Development Sdn Bhd, a property developer developing a project known as Selayang StarCity Project, was unable to pay the main contractor and subcontractors for the work done, resulting in a complete halt to the project. To prevent the property developer from being wound up and to ensure that they are able to settle their debts, both the developer and the main contractor have separately applied for a judicial management order (‘order’) to carry out a proposed rehabilitation plan. This was however opposed by one of the secured creditors, Infra Segi Sdn Bhd (‘Infra Segi’) and also 6 nominated-subcontractors of the project, who applied to set aside both the order granted by the high court.
The court allowed Infra Segi’s application. Amongst others, the court cited that the order will not receive majority approval since Infra Segi and the nominated-subcontractors holds 46.9% of the total value of creditors. Infra Segi alone held 38.7% of the total value of creditors. Hence, the court held that it is a futile exercise by the developer in this case as any proposed scheme will not garner the requisite 75% approval of the total value of creditors.
The test for judicial management
Before the court will grant an order, there are two conditions that the court must be satisfied.
If the above requirement is satisfied, the court will then need to consider if the making of the order will achieve one or more of the following purpose:
- Whether if the company remains in operation, it can continue its operations for the foreseeable future;
- Whether the scheme will receive 75% approval of the total value of creditors as envisioned under section 466 of CA; and/or
- Whether the order will be better in terms of maximizing the funds available to the creditors as compared to winding up the company.
Only when both requirements are satisfied will the court consider granting an order to allow the company to rehabilitate itself.
The effects of a judicial management order
While the order is in effect:
- The company cannot be wound up;
- No receiver and manager is to be appointed;
- No legal proceedings can be commenced against the company or its property nor any steps can be taken to enforce security over company property unless consent is obtained from the judicial manager or leave is obtained from the court to do so; and
- No steps can be taken to transfer any share or alter any status of any member of the company unless consent is obtained from the judicial manager or leave is obtained from the court to do so.
Lastly, one will have to keep in mind that an order is only valid for 6 months. The judicial manager can extend the order for a further 6 months, subject to the terms and conditions imposed by the court. Once the expiration of the order, the protection afforded in accordance with section 411(4) will also lapse.
2. Section 407 (1), Companies Act 2016
3. Section 366 (2), Ibid
4.  MLJU 1320
5. Paragraph 102-103, Leadmont Development Sdn Bhd v Infra Segi Sdn Bhd and another appeal  MLJU 1320
6. Re Harris Simons Construction Ltd  BCLC 202
7. Section 405 (1)(a), Companies Act 2016
9. Section 405 (1)(b)(i), Companies Act 2016
10. Section 405 (1)(b)(ii), Ibid
11. Section 405 (1)(b)(iii), Ibid
12. Section 411 (4), Ibid
13. Section 406 (1), Companies Act 2016