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12 January 2021
The Federal Court's decision in the case of Mansion Properties Sdn Bhd v Sham Chin Yen,(1) regarding applications made by a company or its creditors under Section 368 of the Companies Act 2016 to restrain proceedings against the company under a proposed scheme of arrangement appears to be a welcome decision. It has provided clarity on the previously rather ambiguous procedure to be adopted when making such applications.
The appellant, Mansion Properties Sdn Bhd, the developer of a housing project known as D'Maison, failed to deliver vacant possession of the condominium units of D'Maison within the stipulated time. The respondents, purchasers of the condominium units, filed a claim against the appellant for liquidated ascertained damages in 2017.
The appellant filed an ex parte originating summons – an application without the presence of the respondents – pursuant to Section 368 of the Companies Act 2016. The court granted an ex parte order to convene a creditors' meeting and an order restraining proceedings from being brought against the appellant for 90 days (first order). The first order was then served on the respondents and other creditors. A creditors' meeting was subsequently convened where a proposed scheme was approved. The respondents then filed applications under this first originating summons seeking, among other things, to commence an action against the appellant and reject the proposed scheme.
The appellant then filed another ex parte originating summons pursuant to Section 366 of the Companies Act 2016 to seek the court's approval of the appellant's proposed scheme. The court granted the order sought (second order) and the respondents in turn filed applications seeking, among other things, to intervene in these second proceedings and set aside the second order.
The high court allowed the respondent's application to intervene in the second proceedings but dismissed all other motions, including the motion to set aside the first and second orders. The grounds for the high court's finding were that, among other things, the appellant had complied with all relevant legal provisions and the requisite steps in the Companies Act 2016 for the implementation of the proposed scheme.
When this case was before the Court of Appeal, the court overturned the high court's decision, deciding in the respondent's favour. The Court of Appeal held that there had been procedural non-compliance and abuse of court process by the appellant in making the applications. The Court of Appeal's decision was premised broadly on grounds including that the first originating summons was not served on the respondents and was heard ex parte. Further, the appellant had failed to disclose the material facts pertaining to the respondent's pending applications in the first application.
Leave was granted for an appeal to the Federal Court on a single question of application relating to the procedure for applications made under Sections 366 and 368 of the Companies Act 2016:
Whether an Order made pursuant to an application under section 366 and section 368 of the Companies Act 2016 subsequently served on the creditors is an abuse of the Court process which renders the entire Court scheme or entire Court-sanctioned scheme liable to be set aside.
Thus, the key issue to be decided by the Federal Court related to the specific finding by the Court of Appeal that the filing of the first application by way of an ex parte application, and the failure to serve this on the respondents, was an abuse of process which cannot be cured by the subsequent service of the ex parte order (ie, the first order).
The Federal Court held that as the main purpose of Section 368(1) of the Companies Act 2016 is to preserve the status quo and prevent efforts to develop and approve a scheme of arrangement from being thwarted by the dissipation of the company's assets, an ex parte application would be suitable. This is because there is a need for immediate action and speedy procedures under such an application. The Federal Court further held that where an ex parte order is granted under Section 368(1) of the Companies Act 2016, any affected creditors can apply to intervene and set aside the order.
Such practice has been held by the Federal Court to be standard and acceptable as Parliament did not include within Section 368 of the Companies Act 2016 any requirement for an inter parte application to be made, or for the application to be served on affected creditors prior to the hearing. In fact, according to the Federal Court's judgment, Parliament had already included safeguards to prevent any abuse of process within Section 368 of the Companies Act 2016 in Subsections (2) to (7).
Accordingly, the appellant's application for the first order on an ex parte basis without serving it on the respondents was not an abuse of process that would require the second order to be set aside.
The Federal Court has now cemented the procedure for an application to be made under Section 368 of the Companies Act 2016 which, prior to this judgment, was only a matter of common practice among legal practitioners. Due to the limitation in scope of the issue before the Federal Court in this case, it can only be assumed that a similar procedure applies towards an application made under Section 366 of the Companies Act 2016. This is particularly so since the two applications made under Sections 366 and 368 of the Companies Act 2016 are usually made together. Nevertheless, there may yet still be room for further judicial interpretation on applications concerning a scheme of arrangement.
For further information on this topic please contact Carissa How at Gan Partnership by telephone (+603 7931 7060) or email (firstname.lastname@example.org) The Gan Partnership website can be accessed at www.ganlaw.my.
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