“Making a composition or arrangement with creditors” and its effect on contracts

The Federal Court in the as-yet unreported grounds of judgment in the Desa Samudra v Bandar Teknik and others (Federal Court Civil Appeal No. 02-9-2011) involved the consideration of the effect of the grant of a restraining Order and whether it would trigger a termination clause under a PAM contract.

It is very common for contracts (and in this case, it was a PAM Contract) to include a termination clause which allows for termination of the contract upon a contracting party facing winding up or when there is a “making a composition or arrangement with his creditors”.

The Federal Court ruled that a grant of a restraining order under s.176(10) of a Companies Act does not fall within the meaning of “making a composition or arrangement with his creditors” (for the purposes of a PAM Contract but this could be generally applied as well to other contracts if an identical phrase is used). The fact that a first step had been taken in relation to a scheme of arrangement through the grant of a restraining order did not mean such a scheme of arrangement was in the “making.”

It seems that only when the scheme of arrangement is eventually approved by the Court, would there be a trigger of the phrase “making a composition or arrangement with his creditors”.

An applicant company would have gone to Court two times (the first to seek leave to convene the creditor meetings and the second is to file a Petition for Court approval) and so those circumstances alone do not appear to be sufficient to trigger the phrase. I had further elaborated on the law concerning schemes of arrangement in my earlier article.

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