The Law of Scheme of Arrangement; Section 176

When a company is wind up or going to be wind up, section 176 of Companies Act 1965 will be there to help the company from being chase by debts. It is like company to buy time to avoid coming up liquidation proceedings. In order to be protect under section 176, several procedures need to be comply.

Initially, when a company wants to used section 176, an application to the court must be made. It is laid down under section 176(1) which enquires the company itself, or the creditor, or the member to make an application to the court. Section 176 when to be applied must in way of inters partes. For instance, in the case of Re Foursea Construction (M) Sdn Bhd [1] , the court laid down the application of arrangement for ex parte is not allowed. It must be in form of inter partes to avoid injustice especially towards the creditors. The application of ex parte as in the case of PECD Bhd & Anor v Merino-Odd Sdn Bhd & ors [2] applicants filed an ex parte application, which in this case an ex parte application is only for exceptional cases of valid urgency, so the applicants have the duty to disclosure where there must be frank and fair disclosure of all relevant materials including any points that may unfavourable to the applicants themselves. The court will strictly comply of this requirement. However, in obtaining the ex parte order, they did not in their supporting affidavits sufficiently identify and draw attention to this key point of the scheme. As a result, the court held since the rule of fair and frank disclosure should be practiced by the applicants in this case regarding their application of the ex parte application, the failure to disclose the subject matter and decision of the previous court which was not favour to them, is actually against the principle of disclosure and in this case, it had been proven that the applicants had acted mala fide and the judge set aside his ex parte application and his restraining order under s. 176 of CA 1965. Though general rule ex parte is not allowed but it’s upon the discretionary of the judge if he may thinks it fits which usually the court will include several essential requirement as stated in this PECD Bhd & Anor v Merino-Odd Sdn Bhd & ors “duty to disclosure where there must be frank and fair disclosure of all relevant materials including any points that may unfavourable to the applicants themselves.”

The court then will order a meeting to be set out between the company and its members including creditors. Before that the court will usually look into three criteria as laid down in the case of Re Prince Mithcell Pte Ltd [3] which are Public Policy, Commercial Morality and The interest of creditors.

The duty of the director of the company is essential in the making of this arrangement, even before the application i.e. the proposed scheme. Section 176(8) provides the duties of director to instruct the accountants or advocate or both to make a report and to be send to the director. Section 176(8)(b) stated the said report shall be view by the shareholder or creditor at least seven days before of any meeting that had been ordered by the court. This report must also with explanatory statement as stated under section 177 which set out all the information of the scheme and any material facts about the directors and holders of the proposed arrangement. For instance in the case of Re Dorman Long & Co Ltd [4] ; this explanatory statement must contain all the relevant information and fair which then will guide the members of the meeting ordered by the court including creditors to vote. After this report had been viewed to the shareholders and creditors they can apply the application of proposed scheme to the court.

In the situation when the company need sometimes because of technical problems or others, section 176(2) can be apply. This section gives opportunity to the company to adjourn the meeting that ordered by the court provided that it is being approved by the members and creditors. Despite the application of adjournment, upon voting and the majority accept this arrangement applied under section 176(3) provided with consent and approval by the court shall be binding to all of them i.e. the shareholders, creditors and other members. According to the case of Nite Beauty Industries Sdn Bhd v Bayer (M) Sdn Bhd [5] , once the court gives approval, later cannot review or reopen the approved scheme of arrangement. Section 176(3) must be read together with section 176(5) where in this section, in completing the binding effect of section 176(3) a copy of the order must be lodge to the registrar [6] and upon that the order will take effect from the date of lodgement.

When the voting is settled, the court accepted and approved the arrangement; now under section 176(6) should and must be done which is to include the order made under section 176(3) in the memorandum of the company.

It is an offence for the company who does not comply with the requirement under this section in order to proposed scheme of arrangement especially section 176 (6) or section 176 (8). As result of it, penalty of two thousand ringgit will be impose on them.

After all the procedures under section 176 (1) until section176 (9) being fulfil, section 176(10) will come into effect. Overall, section 176(10) talks about restraining order. The court on the application of the members, creditors or the company may order a restraining order which is a restrain from any legal proceeding not more than ninety days [7] . However, a company may seek for adjournment of the restraining order more than ninety days provided with good reasons. Section 176(10A) does come with several reasons that have been accepted by the court [8] . For instance, in the case of Metroplex Bhd & Ors v. Morgan Stanley Emerging Markets Inc & Ors; RHB Sakura Merchant Bankers Bhd & Ors (Interveners) [9] , the court had construe the good reasons as in section 176(10A) means; a bona fide scheme of arrangement is presented, with sufficient details provided to the creditors to enable them to make informed decisions as to its feasibility and merits; next, the scheme of arrangement presented must be not such that it is bound to fail and lastly the interest of the creditors, that is, the beneficiaries under the proposed arrangement is safeguard.

This restraining order may not come into effect until it being lodge to the CCM. Section 176(10E) does provide with the requirements a company should take within seven days which are to lodge a copy of approve restraining order and an advertisement or notice to public. Not compliance with this section, the company will be liable for penalty of one hundred thousand ringgit.

Effect of restraining order

The general effect of this section 176 is that the company is free for a while from any proceeding due to the debts. But it is only for 90 days or may be further as it is upon discretions of the court. For instance in former case in 1886; Re Eldorado Union Store Co,

“A restraining order to prevent the execution by judgment creditors of process against the company can only be applied for after the presentation of the petition, and such petition can only be presented after four days’ notice” [10]

In our position in Malaysia, the restraining will come into effect after section 176 complies with. As an effect of that the court may under section 176(10) to grant restraining order to the said company. Additionally, the property of the company also will be safeguard during this restraining order as in section 176(10C). No compliance with this section, the person who is in default will be guilty under section 176(10D).

Another instances regarding the effect of restraining order can be seen in the case of Re Artistic Color Printing Co (1880) 14 Ch D 502;

“A creditor within the jurisdiction will be restrained from proceeding with an action beyond the territorial” [11]