The Law In Relation To Scheme Of Arrangement In Malaysia

By / October 28, 2020

Need to seek advice regarding Scheme of Arrangement (SOA)?

What goes through your mind when the term (in relation to a company) “scheme of arrangement” or SOA is brought up? In this article, we will briefly share with you what is an SOA.

What Is A Scheme Of Arrangement?

A scheme of arrangement is an agreement entered between a company and its creditors/ shareholders/ members to implement various corporate exercises for the betterment of the company. For example, SOA can be used to1:

  1. Facilitate possible corporate exercise or transactions, such as the reorganization of its share capital, rights and liabilities of members, and transfer the assets of one company to another; or
  2. Transfers of all or a specified proportion of each shareholder’s securities to a bidder, cancellations of existing securities or issues of new securities to a bidder such as effecting a change of control/ merger or amalgamation of companies.

However, such a scheme must be approved by the required number of shareholders in a meeting and is sanctioned by the court before the SOA can be implemented by the company.

The Law In Relation To SOA

What is the first step?Obtain leave from the court to summon a meeting between the company and its members/ creditors2.
Who can apply3?
  1. The company itself;
  2. Any creditor/ member of the company;
  3. Liquidator (assuming the company is being wound up); or
  4. Judicial manager (assuming the company is under judicial management).
What happens during the meeting?
  1. An SOA will be presented by the company before the creditors/ class of creditors or members/ class of members of the company.
  2. The parties who are present will then vote as to whether they agree/ disagree with the SOA.
  3. The SOA must be agreed by a majority of 75% of the total value of the creditors/ class of creditors or members/ class of members of the company4.
What happens after the meeting (assuming that the SOA is agreed upon by the majority of parties involved)?
  1. The agreed SOA will be presented before the court.
  2. The court may then approve the SOA subject to any alterations to the SOA or conditions as the court thinks fit5.
  3. The approved SOA must then be lodged with the registrar before the SOA can come into effect6.
  4. The approved SOA must also be annexed to every copy of the constitution of the company issued after the approved SOA comes into effect7.
Who is it binding upon8?Everyone that has an interest in the company i.e.:

 

  1. All the creditors/ class of creditors;
  2. All the members of the company/ class of members of the company;
  3. The company itself; or
  4. The liquidator and the contributors (assuming the company is being wound up).
What else can the court do?The court can actually order that no further legal proceedings (restraining order) can be instituted against the company for a period of 3 months and an additional 9 months upon an application to extend by the company9, provided that10:

 

  1. The company has already proposed an SOA and the proposed SOA has been agreed upon by at least 50% of the total value of the creditors/ class of creditors of the company;
  2. The restraining order is necessary to formalize the SOA;
  3. The company has lodged an application for a restraining order with the court;
  4. The company has also lodged (together with the application for a restraining order) a statement of particulars as to the affairs of the company not more than 3 days old before the application for the restraining order is lodged; and
  5. In the application, the company must also nominate a person that is approved by the majority of the creditors to act as a director. This nomination must be approved by the court.

Pros Of A SOA

  1. Allows the company to be restructured (for the betterment of the company) with the consent of the majority of the parties that have an interest in the company.
  2. It provides a high degree of certainty as to the scheme, once sanctioned by the court, is binding to all members.
  3. It is a compromise between the members of the company and the company itself- allowing all parties (to a certain extent) to walk away with something in hand. This applies especially if the company is being wound up.
  4. Allowing companies to avoid consequences of entering insolvency/ allows companies to continue trading without having the fear of being threatened or harassed by its creditors.
  5. Prevents/ avoids negative publicity and loss of goodwill as compared to if the company were to be wound up and the winding-up is made public to the general population.

Need to seek advice regarding Scheme of Arrangement (SOA)?

1. M.A.Khan, Shareholder’s Protection under Scheme of Arrangement and Takeovers.

2. Section 366 (1), Companies Act 2016.

3. Section 366 (1)(a)-(d), Ibid.

4. Section 366 (2), Ibid.

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

6. Section 366 (5), Ibid.

7. Section 366 (6), Ibid.

8. Section 366 (3), Ibid.

9. Section 368(1), Ibid.

10. Section 368 (2)(a), Ibid.

Source of Image: Freepik

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