Introduction To A Scheme Of Arrangement Under The Companies Act 2016

• Published date: 29 April 2022
• Subject Matter: Corporate/Commercial Law, Corporate and Company Law
• Law Firm: MahWengKwai & Associates
• Author: Hannah Patrick

A scheme of arrangement is essentially an agreement made between a financially distressed company and its creditors on a debt-restructuring exercise to aid the company in paying its debts. It is one of the corporate rescue mechanisms provided under the Companies Act 2016. This article aims to introduce the scheme of arrangement, the objectives to be achieved by this scheme and the stages involved.

What is a Scheme of Arrangement?

A scheme of arrangement is a court-sanctioned process governed by Sections 366 and 368 of the Companies Act 2016. Some of the objectives of a scheme of arrangement are:

1. To revive a financially distressed company as a going concern;
2. To avoid the prospect of liquidation and to restrain proceedings against an insolvent or a barely solvent company;
3. To secure the payments of the creditors' debts or secure better repayment arrangements.

The stages in a Scheme of Arrangement

Under the Companies Act 2016, there are 3 stages to be fulfilled before a scheme of arrangement is considered to be successful.

Stage 1: Convening of Meeting

The first stage is the convening stagewhere the company, creditor, member, liquidator (if the company is being wound up), or the judicial manager (if the company is under judicial management) makes an application to the court under Section 366(1) of the Companies Act 2016 to get an order to convene a meeting between the creditors and the members.

In this early stage, the court will identify and determine, amongst others, the formulation or composition of the classes of creditors.

There is also no automatic moratorium for creditors to commence legal proceedings against the company, unless the applicant applies for a restraining order at the convening stage itself.

Restraining Order

The restraining order here is an order to stop creditors from commencing proceedings to enforce their debts on the company. The relevant provision under the Companies Act 2016 is Section 368. In Mansion Properties Sdn Bhd v Sham Chin Yen & Ors [2021] 1 MLJ 527, the Federal Court stated that the purpose of Section 368(1) of the Companies Act 2016 is to preserve the status quo and to prevent efforts to develop and approve a scheme of arrangement from being thwarted by the dissipation of the company's assets.

The court will likely only allow the application for a restraining order if the following conditions are met:

1. There is a proposal for a scheme of arrangement;
2. A restraining order is necessary for the formalisation of the scheme of...