Requirements for Restraining Order in a Scheme of Arrangement

Hishamudin J in the recent (as of now still unreported) decision of PECD Bhd & Anor (Applicants) (No. 2) [2008] 1 LNS 324 examined the requirements for the grant of a restraining order under section 176(10A) of the Companies Act 1965 (“the Act”).

A restraining order is a far-reaching stay-like order applied for under section 176(10) of the Act when a company is undergoing a scheme of arrangement. The company or any member or creditor of the company may apply to the Court to restrain further proceedings in any action or proceeding against the company, except by leave of the Court. Such an order to restrain ‘any action or proceeding’ would not only extend to restraining legal suits or winding up petitions filed against the company, but also to any possible de-listing procedures taken by Bursa Malaysia. A restraining order is applied for on an ex parte basis so it is timely that the High Court has clarified the requirements that need to be satisfied at the initial application stage.

Section 176(10A) of the Act sets out that the Court may grant a restraining order for a period of not more than ninety days or such longer period as the Court may for good reason allow if and only if-

(a) 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;

(b) the restraining order is necessary to enable the company and its creditors to formalise the scheme of compromise or arrangement for the approval of the creditors or members pursuant to subsection (1);

(c) a statement in the prescribed form as to the affairs of the company made up to a date not more than three days before the application is lodged together with the application; and

(d) it approves the person nominated by a majority of the creditors in the application by the company under subsection (10) to act as a director or if that person is not already a director, notwithstanding the provisions of this Act or the memorandum and articles of the company, appoints the person to act as a director.

I will not delve too much into the facts of the case, but the issue to be determined in PECD Bhd was whether the stringent requirements of section 176(10A)(a) – (d) must be complied with even where the application for a restraining order did not exceed the period of 90 days. It boiled down to an interpretation of the phrase “…may grant a restraining order for a period of not more than ninety days or such longer period as the Court may for good reason allow if and only if.”

The Court held that “the four paragraphs apply to any application for a restraining order pursuant to subsections (10) and (10A) of section 176 of the Companies Act regardless of the length of the period of the restraining order applied for.”

Prior to this, the weight of the authorities (see Metroplex Bhd & Ors v Morgan Stanley Emerging Markets Inc & Ors [2005] 6 MLJ 487 and Re Kai Peng Bhd [2007] 8 CLJ 703) already supported this interpretation but they were all decided in the context of an extension of the restraining order past the 90-day period. There was also the seemingly-contrary High Court decisions in Jin Lin Wood Industries Sdn Bhd & Ors v Mulpha International Bhd (unreported) (2004) and Pelangi Airways Sdn Bhd v Mayban Trustees Bhd [2001] 2 MLJ 237, but Hishamudin J distinguished Pelangi Airways in this case.

This case is pending appeal I believe but I think that this is the correct interpretation of section 176(10A). There is firstly, the plain reading of the section, which Hishamudin J held that if it were intended that the requirements were to only apply for the period after 90 days, the draftsman would have drafted it differently.

Secondly, the background of the introduction of subsection 10A was the abuse of the restraining order provisions especially during the period of the last financial crisis. Restraining orders would be sought for long periods of time, and then further extended, with the debtor company enjoying a moratorium against their creditors and allowing the company to drag its feet in the implementation of the scheme of arrangement.

The need to comply with the requirements of section 176(10A) at the very initial application ensures that the creditors are not caught by surprise by the ex parte restraining order. The applicant company would have already sought most of their views and the creditor-nominated director would ensure that there is proper management of the assets of the company during the restraining order period. There would also be full disclosure of the financial information of the company at the very start.


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