Background and History to the Restraining Order

Under the scheme of arrangement framework, the Court can grant a restraining order under section 176(10) of the Companies Act 1965 (“Act”) to restrain further proceedings in any action against the company undertaking a proposed scheme. This allows the financially distressed company to have a moratorium and have breathing space from creditor action, while the company attempts to restructure or compromise its debts. Ordinarily, it would be the company itself which would apply for a restraining order but section 176(10) of the Act allows any member or creditor of the company to also make such an application. I had earlier written a general overview on the law of schemes of arrangement.

The restraining order would have to strike a balance between different interests. On the one hand, a moratorium may be beneficial to the overall pool of creditors in order to prevent the scramble by creditors to execute against the distressed company’s assets. The restraining order could therefore facilitate the orderly restructuring of the debts where there was a genuine and viable scheme proposal. On the other hand, a wide stay of legal proceedings could also be abused. A company could sit on a restraining order, without any viable scheme proposal, and frustrate the actions by the creditors.

The potential for the abuse of the restraining order may have led to the amendment to our Act in late 1998 to tighten up the use of restraining orders. Additional restrictions and creditor-protection provisions were built in through the introduction of sections 176(10A) – (10G) of the Act. Essentially, it limited the grant of each restraining order to prima facie not more than 90 days with certain mandatory requirements to be met. Further, once the restraining order was granted, there could not be the disposition of any property of the company outside the ordinary course of business.

A recent case highlighted a situation where there could be the repeated use of a restraining order. That might delay legal proceedings by creditors but it may also be a lifeline for an ailing company, if there was a viable scheme proposal.

The Repeated Use of a Restraining Order

In the unreported case of Dynawell Corporation (M) Sdn Bhd (in provisional liquidation) v Universal Trustee (M) Berhad (Seremban High Court Originating Summons NCVC-24M-63-06-2013) (see [2013] 1 LNS 1391), the High Court was made aware of multiple applications for a restraining order and made a finding that the application for a restraining order was mala fide. Dynawell can also be read together with the related High Court decision in RHB Bank Berhad v Gula Perak Berhad [2013] 1 LNS 1409. From a reading of both the cases, the brief facts appear to be as follows.

Gula Perak Berhad was listed on the stock exchange and in May 2010, it was classified as a PN17 company. It was eventually de-listed in May 2011. In turn, Dynawell is a wholly-owned subsidiary of Gula Perak Berhad and where its core asset is the Dynasty Hotel. Several secured lenders initiated legal proceedings against both Gula Perak and Dynawell, including foreclosure proceedings on the Dynasty Hotel. Winding up proceedings were also taken against Gula Perak and Dynawell and where both companies had Provisional Liquidators appointed over them.

During the course of these legal proceedings, there appeared to be at least 6 different applications filed in different Courts seeking for a restraining order on the basis of a proposed scheme of arrangement. Applications were filed in Kuala Lumpur, Shah Alam, Seremban and Taiping. There were different applicants, some may have been creditors or members of Gula Perak/Dynawell or in the Dynawell case, it was Dynawell itself. It was noted in the Dynawell judgment that the proposed schemes of arrangement applications had similar grounds and traits and where the averments in the affidavit in support were largely the same. Justice Zabariah Yusof remarked that this indicated that it originated from the same source or author.

Procedurally, an application for such a restraining order would ordinarily be taken out ex parte. This is because  only the Applicant would need to apply and need not necessarily add in any other party, or to add in any of the other creditors with pending legal proceedings for instance. Once the initial restraining order is granted ex parte, and this should only be for a limited time not exceeding 90 days, it will then have a universal effect in restraining all legal proceedings by all the creditors listed in the proposed scheme. The onus then shifts to the opposing creditors to intervene and to attempt to set aside the restraining order or to oppose the extension of the restraining order.

Hence, the two judgments show that the opposing creditors had to go to each of the different Courts to apply to set aside the restraining orders obtained by different parties. The restraining orders and the related legal proceedings also delayed the foreclosure and the winding up proceedings.

The history of the litigation then led to the High Court in Taiping and in Seremban making orders that any further application for a restraining order be made inter partes and for such an application to be advertised in 3 newspapers.

Justice Zabariah Yusof made the following critical remarks:

“In view of the circumstances and the time line of the ex parte Originating Summons in Enclosure 2 filed, clearly shows the mala fide intent of Dynawell to conceal the application from UTB and at the same time concealing the material and relevant facts from the court.

…

Section 176(1) of the Companies Act does not state that an RO application may be made ex parte. It merely states that a party may apply. However, given the chequered history of Dynawell, the propose (sic) scheme of arrangements and the ROs applications which have been explained above, this is a case of abuse of process of the highest order. I would be failing in my duty if I do not invoke my inherent jurisdiction to curb further abuse by Dynawell.”

Costs of the setting aside of the restraining order were then made personally against the director of Dynawell.

Conclusion

A restraining order is usually a useful and often crucial mechanism to achieve a viable restructuring. However, this case shows how the repeated use of a restraining order could amount to an abuse of process. The present provisions in the Act, and the impending amendments to the Act, will not address this potential for abuse. An application for a restraining order can continue to be taken out ex parte, and where an applicant may still attempt to bypass the mandatory protection laid in the section 176(10A) requirements. Any creditor or member of the company could potentially also apply for a restraining order, thereby resulting in multiple and parallel restraining orders. The protection against any abuse of process therefore rests on the vigilance of the Courts when hearing such ex parte applications.