The Companies (Amendment) Act 2024: Applicability of Judicial Management to Public Listed Companies

Introduction - Before Companies Act 2016. 

In the harsh reality of the business world, all sectors of the economy will be affected in an economic downturn including public listed companies (PLCs). The PLCs may find themselves burdened with spiraling financial obligations, unable to service the escalating debts and continue to be bogged in the financial mire. 

In order to survive, these highly geared PLCs would then have no choice but to seek protection in the form of corporate rescue by undergoing a restructuring process. 

Before the advent of the Companies Act 2016, the option that most PLCs had settled on is to apply ‘protection’ under section 176 of the Companies Act 1965 to restructure financial debts of the PLCs by a way of a scheme of arrangement which is court approved.

In gist: 

1. the PLC would apply to the court to call a meeting of its creditors 

2. the creditors would vote on the scheme presented by the PLC 

3. if the scheme is approved by its creditors that hold at least 75% of the amount owed, the PLC would apply to the court for approval 

4. the PLC could apply for a restraining order to prevent the creditors from taking actions against the PLC 

5. if the court approves the scheme, it becomes binding and is filed with the Registrar of Companies 

However, certain PLCs have misused the restraining order by prolonging the matter without any actual feasible scheme of arrangement. Apart from the potential abuse of the restraining order (although it is not automatically granted and has to be applied), section 176 permits the incumbent management that had caused the said PLCs to be financially distressed in the first place to continue in running the affairs of the PLCs. This may lead to the risks of asset dissipation and available funds being used for purposes not related to rehabilitation. 

Companies Act 2016 

The Companies Act 2016 came into effect on 31 January 2017, effectively replacing the Companies Act 1965. It modernizes and reforms the corporate law In Malaysia. One of the areas that have been made in the new Companies Act is on the ‘corporate insolvency’ part. New corporate rescue mechanisms have been introduced to rehabilitate financial distressed companies in an attempt to avoid liquidation of the companies. 

One of the rescue mechanisms introduced under the Companies Act 2016 is the judicial management provision as stated in Subdivision 2 (Judicial Management) of the said Act. A whole chapter is dedicated to the judicial management process, from sections 403 until 430. Section 404 of the Companies Act 2016 encapsulates the principle of judicial management succinctly: 

‘An application for an order that a company should be placed under a judicial management and for an appointment of a judicial manager may be made to the court  by the company or its creditor if the company or its creditor considers that- 

1. the company is or will be unable to pay its debts; and  

2. There is a reasonable probability of rehabilitating the company or of preserving all or part of its business as going concern or that otherwise the interests of creditors would be better served than by resorting to a winding up 

Recognizing the possibility of real abuse by companies who had been given the ‘protection’ under Section 176, Companies Act 1965,the judicial management provisions have addressed this by having a shorter restraining order (which is automatically granted) and the ability to appoint an independent party to manage the process rather than the same management that had caused the predicament to the companies in the first place. 

This corporate reform of judicial management has indeed given a lifeline to financial distressed companies in Malaysia. 

Key Amendments - Section 403

Although there have been many positive outcomes regarding the introduction of judicial management as a means to rehabilitate a company as opposed to winding it up, surprisingly section 403 of the Companies Act 2016 states that: This Subdivision shall not apply to: 

1. a company which is a licensed institution, or an operator of a designated payment system regulated under the laws enforced by the Central Bank of Malaysia; and 

2. a company which is subject to the Capital Markets and Services Act 2007. 

A case to this point is Re Scomi Group Bhd (2021) MLJU 2173 which went all the way to the court of appeal. In gist, the e-court of appeal had agreed with the High court that a public listed company such as Scomi Berhad is subjected to the Capital Markets and Services Act 2007 and therefore precluded from applying for a judicial management order. 

The Companies (Amendment) Act 2024: Judicial Management Strengthened

New Provision - Section 403

It was realized then that the amendments need to be made to the Companies Act 2016 to strengthen the corporate rescue tool of judicial management, aiming to make it easier for companies including public listed companies to apply for judicial management in time of need. 

The passing of the Companies (Amendment ) Act 2024 that came to force on 1st April 2024 has amended section 403 of the Companies Act 2016 to the effect that PLCs may now apply judicial management in an attempt to rehabilitate the PLCs when the PLCs are financially distressed, except for: 

1. a company which is a licensed institution and designated payment system operator under the purview of Bank Negara Malaysia; 

2. a company which is approved or registered under Part II, licensed or registered under Part III, approved under Part IIIA, or recognized under Part VIII of the Capital Markets and Services Act 2007; and 

3. a company which is approved as a central depository under Part II of the Securities Industry (Central Depositories) Act 1991. 

The above companies are certain institutions that are regulated by Bank Negara Malaysia and the Securities Commission such as financial institutions, insurance companies and asset management companies. These companies would not be able to apply for judicial management if the need arises even after the amendments to the Companies Act.

The Sarawak Cable saga 

Sarawak Cable Berhad (SCB) appears to be the first case of a PLC to be put under an interim judicial management order (at the point of writing this article). A bit of the background of the SCB saga, SCB was incorporated in 1998 and listed on the main market of Bursa Malaysia in 2010. Its main business is manufacturing cables and wires for various industries. 

SCB was served with an originating summons filed in the Kuala Lumpur High Court and an interim judicial manager was appointed 9 July 2024. SCB states that the said application was made by Messrs. Krish Maniam & Co for an alleged amount due of RM 345,908.00 for legal services rendered. Lim Sin Han Messrs. of Sin Han & Co has been appointed as the interim judicial manager as provided by section 414 of the Companies Act 2016 and set out in the Ninth Schedule of the Companies Act 2016. 

As a result of the appointment of the interim judicial manager, the powers of the directors and officers of SCB have ceased and instead the interim judicial manager would be the one responsible for SCB’s affairs. 

Amendments And Strengthened Measures

1. Wider Applicability

Most PLC’s could now apply for Judicial management when they are financially distressed.

2. Exceptions

Certain PLC’s regulated by Bank Negara Malaysia as Securities Commissioner such as financial institutions, insurance companies and asset management companies would not be able to apply  for Judicial management. 

Conclusion

With the advent of the amendments to the provisions related to the judicial management process to the Companies Act 2016, PLCs (with certain exceptions as enumerated above) could now be placed under judicial management and SCB is the first PLC to be placed under an interim judicial management (the hearing to place SCB under judicial management has been fixed on 22 January 2025).  

With the appointment of the interim judicial manager, the directors and officers of SCB would no longer have the authority over the running of the daily affairs of SCB, instead the interim judicial manager would have powers to do so. Another effect of the appointment of the interim judicial manager is that all legal actions initiated against SCB would now be put on hold pending the hearing of the judicial management hearing.  

These amendments to the judicial management provisions to the Companies Act 2016 are certainly a boon for a financially distressed PLC as it would assist in rehabilitating the PLC while protecting it from the creditors’ legal actions, preserving the PLC as a going concern and would be able maximize in realizing the assets of the PLC rather than winding up the PLC.