Section 366 and Section 368 of the Companies Act 2016 are statutory mechanism that provides relief for Companies to propose a compromise with its creditors and to strike a compromise in lieu of facing immediate doom of being wound up.

The rationale and purposive intent of this provision of law is two-pronged which is to either make a final last ditch proposal to save the company from liquidation and allow creditors to make their own informed decision on whether to accept such compromise. Commercial sensibility and commercial reality is the rule of the day, in evaluating whether to vote in favour or voting against any proposed scheme of arrangement, where the proverb ‘A Bird in the Hand is Worth Two in the Bush’ comes to mind.

The keys steps and procedure of any application pursuant to Section 366 and Section 368 Companies Act 2016 are as follows;

  • Proposed Scheme of Arrangement

The Company either on its own accord or via the appointment of a scheme advisor tasked to evaluate the company financial position and thereby formulate a proposal that would provide a proposal which would deal with the outstanding debts of the company.

  • Application to Court

Once there is a proposed scheme which is viable, then an Originating Summons is filed to court detailing the status of the company and attaching the current proposed scheme. The prayers to be sought are for a Court Convened Meeting to be called for the company to present the Scheme of Arrangement. It  may also be a necessity to apply for a restraining order pursuant to Section 368 Companies Act 368 to allow the Company to call for the Meeting of Creditor within Ninety (90) days.

  • Creditors or Class of Creditors

A scheme of arrangement can be applicable to all the company creditors or limited to a certain class of creditors of the company.

  • Restraining Order

A Restraining Order in the context of Section 368 Companies Act is an order granted by the court which “suspends” all legal proceeding against the company to preserve the status quo of any pending legal proceeding and for legal proceeding not to be commenced pending allowing the Company to call the Court Convened Meeting. During this interim period, it will also preserve the assets of the company as an opportunity should be provided to restructure and rehabilitate the company.

Without the granting of an Restraining Order, the strain of legal proceeding and the constant threat of winding up proceeding will likely eliminate any prospect of the presenting the scheme of arrangement for the consideration of the Creditors.

It is more necessary when it affects only a certain class of creditors and without such statutory protection to allow presentation of the scheme to the creditors then it would just ultimately lead to an exercise of futility if winding up actions are aggressively pursued against the company by the certain class of creditors

  • Court Convened Meeting

It is a statutory requirement for an explanatory statement to be sent out to creditors Twenty-One (21) days in advance which will contain the complete scheme of arrangement i.e the proposal for the creditor consideration, for the purpose of resolving the debt owed to the creditors.

This is where safeguards are placed to ensure fairness and balance between the Company and its Creditors whereby a Scheme of Arrangement requires of approval of 75% majority of creditors in value in attendance who vote in favour.

Hence the creditors who would have received the Explanatory Statement well in advance and would be well briefed on the proposed scheme and thereafter during the meeting are given the right to vote. So the acceptance of the scheme always is in the hands of creditors as the creditors are given the right to exercise their vote in favour or against.

  • Sanction

Once there is a successful Scheme of Arrangement thereafter the company shall apply for sanction of the proposed Scheme of Arrangement and the court is always vested with the right to make alteration or conditions it deems just.

Once sanction is obtained and the said order is registered with Companies Commission of Malaysia it would be binding on its scheme creditors.

In conclusion the frame work provided by Section 366 Companies Act 2016 provides an opportunity for the;

  • Company not to evade its debts owed but provides a fair proposal to restructure its debt for the ultimate consideration and approval by its creditors AND
  • Creditors to ultimately consider the proposed scheme of arrangement and obtain recovery of its debts or successfully winding up the Company but only recovering negligible amount of its debt.

Ultimately it is for the Company to formulate a viable and fair proposed scheme of arrangement but for the creditors to make the final decision.

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