Judicial Management 101

Recently, the Division 8 Part III of the Companies Act (‘CA’) has come into force/ has been enforced by the Companies Commission of Malaysia (‘CCM’) or Syarikat Suruhanjaya Malaysia (‘SSM’) to assist companies that are facing financial difficulties. This is to ensure that companies have a lifeline to survive instead of heading straight down the road to winding up. 

Currently, there are two methods for achieving this purpose. Today, we will explore one of the rehabilitation methods, namely judicial management (‘JM’).

What is judicial management?

JM is a process where an individual is appointed by the court to manage a company (i.e. prepare a restructuring plan) that is potentially facing a winding up and prevent it from heading towards that direction. Such an individual is called a judicial manager as is usually an insolvency practitioner.

How can the court resort to JM? The recent case of Leadmont Development Sdn Bhd v Infra Segi Sdn Bhd and Another Appeal will expound more on it. 

Brief facts of the case

Leadmont Development Sdn Bhd is a property developer who was unable to pay the main contractor and subcontractors for the work done for a project known as Selayang StarCity 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 JM order (‘order’) to carry out a proposed rehabilitation plan. 

This was 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. Even though the court initially granted the order to Leadmont, the court decided to set aside the JMO as the court subsequently found out that the order will not receive a majority approval, as 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). It was further pointed out by the court that the order is futile as any proposed scheme will not garner the requisite 75% approval of the total value of creditors.

The test for granting a judicial management order

In order for the court to grant the order, the applicant must satisfy two conditions:

Firstly, the court must be convinced and not just persuaded that the company is or will be unable to pay its debt as defined under section 466 (1) of CA.

Secondly, the court will have to consider whether the order will achieve one or more of the purposes below:

1. If the company remains in operation, can it continue to operate for the foreseeable future?;
2. Can the proposed scheme in the order receive 75% approval of the total value of creditors as envisioned under section 466 of CA?; and/or
3. Whether it is better for the creditors (in monetary terms) to keep the company alive instead of winding it up?

The effects of a judicial management order

The order acts as a protection to the company. In this sense:

1. The company cannot be wound up;
2. No receiver and manager can be  appointed to the company;
3. 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 a judicial manager or leave is obtained from the court to do so; and
4. 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.

The order, if granted, is only valid for 6 months. It can be extended by another 6 months by the court (on the application of the judicial manager), subject to the terms and conditions imposed by the court. Once the order expires, the above protection will cease and the company can be subjected to legal proceedings and even winding up. A company that is applying for an order will have to bear in mind to utilize the time given to rehabilitate the company before it is beyond salvage. 

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