Classifying Creditors – What Are The Type Of Creditors And Their Powers?

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We have shared what is a “scheme of arrangement” in our previous article. Today, we will talk about one particular party that is involved in the scheme, namely, creditors.

The types of creditors

  1. Secured Creditors
    Secured creditors are typically financial institutions and are usually the holder of a  lien/ charge over the borrower’s assets (movable/ immovable properties).

    If a borrower defaults payment, a secured creditor has a legal right to seize the borrower’s assets, sell them and pay off any remaining debts that are owed to them.
  2. Unsecured Creditors
    An unsecured creditor is an individual or institution that lends money without obtaining specified assets as collateral. The drawback of this category of individuals/ institution is that if a borrower defaults in making his payment, there will be hardly any recourse for them as whatever assets seized and sold will first be used to repay the debts that are owed to a secured creditor (unless a scheme of arrangement is agreed upon by the parties involved).

The powers of creditors under Section 366 of the Act1

  1. Adjourn the meeting to agree upon a scheme of arrangement to a later date2
    Can be done provided that the resolution for adjournment is approved by 75% of the total value of creditors or class of creditors or the members or class of members present and voting either in person or by proxy at the meeting.
  2. Agree upon a scheme of arrangement3
    Must be:
    1. Agreed by a majority of 75% of the total value of creditors or class of creditors or the members or class of members present and voting either in person or by proxy at the meeting or the adjourned meeting; and
    2. Approved by an order of the court.

    It must also be noted that:
    1. If there is more than one group involved in the discussion, the scheme must be agreed upon by all the groups separately by a majority of 75% before the scheme can be presented before the court; and
    2. The court can alter the scheme before approving it4.

    The scheme that is agreed upon is binding on all the creditors or class of creditors that are involved in the exercise, regardless of whether there are dissent voices within the ranks of the creditors or class of creditors5.

How do you lump the creditors into a class of its own?

An excerpt from the Federal Court case of Frabcus a/l Augustine Periera v Dataran Mantin Sdn Bhd & Ors and Other Appeals6 clearly sums up this issue:

“A class of creditors is determined by their common interest, such interest separating them from other creditors with whom they are unable to consult together in respect of that common interest. In Sovereign Life Assurance Co v Dodd, Bowen LJ formulated a test to determine which creditors fall into a separate class as follows — that a class ‘must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest’.”

What is meant is this, while the creditors generally can be broken down into two main groups (i.e. secured creditors and unsecured creditors), each umbrella can still be broken down into multiple sub-groups, determinable by their common interest and the fact that they are able to consult together with a view to achieving the common interest.

Will all creditors be called up and be included in the scheme?

No. In fact, the court noted in Jin Lin Wood Industries Sdn Bhd and Others v Mulpha International Bhd7 that not all creditors will be called up and to be included in the scheme as long as it is justifiable, as this would mean those unsecured creditors could potentially usurp the rights of a secured creditor i.e. they would be obtaining monies that should be paid to the secured creditors first before the remainder, if any, is being paid to an unsecured creditor8.


Have more question regarding creditors? Consult our lawyer today:


1. Previously section 176 of the Companies Act 1965.

2. Section 366 (2), Companies Act 2016.

3. Section 366 (3), Ibid.

4. Section 366 (4), Companies Act 2016.

5. Section 366 (3)(a), Ibid.

6. [2014] 6 MLJ 56.

7.  [2004] MLJU 497.

8. Jin Lin Wood Industries Sdn Bhd and Others v Mulpha International Bhd [2004] MLJU 497.