Related Company Creditors In Scheme Of Arrangement: Legally Entitled Creditors Or Scheming For Unrepresentative Voting?

Published date01 December 2022
Subject MatterCorporate/Commercial Law, Corporate and Company Law
Law FirmChooi & Company + Cheang & Ariff
AuthorMr Chai Yau Hei, Alexie Ng Ying Ching and Wong Shin Wern

A. Introduction

When a company falls into financial distress, one option may be to propose a compromise or restructure its debts via a scheme of arrangement with its creditors. The Companies Act 2016 provides for a statutory scheme of arrangement and the first hurdle for a company ('the scheme company') is to obtain the Court's leave to convene a meeting between the company and its creditors to consider a proposed scheme.1 After considering the proposed scheme, if the compromise or arrangement is agreed by a majority of 75% of the total value of the creditors or class of creditors present and voting either in person or by proxy at the meeting and sanctioned by Court, the scheme will be binding on all creditors or class of creditors under the scheme,2 including minority creditors which object.

The prevalence of intercompany financing between companies in a group corporate structure could, however, present some tricky issues to a scheme company trying to obtain the Court's sanction on a scheme of arrangement. Should related company creditors which may have special interests to promote a scheme (for example, by virtue of their relationship with the scheme company) be put in the same class as other unrelated creditors with no such special interests? If placed in the same class as other unrelated creditors, would there be a fair representation of this class of creditors? Should the votes of such related company creditors be disregarded or discounted for purposes of determining whether the statutory majority of 75% in value or class has been reached? And more importantly, how does the weight attributed to the votes of such creditors affect the Court's decision on whether or not to sanction a proposed scheme?

In this article, we discuss the Court's considerations when deciding on these issues, with a brief analysis on -

a. the recent High Court case of Top Builders Capital Bhd & Ors v Seng Long Construction & Engineering Sdn. Bhd. & Ors [2022] 8 MLJ 604 ("Top Builders"), and

b. the approach adopted in other Commonwealth jurisdictions when dealing with related party creditors, related company creditors and creditors with special interests.

B. Top Builders Capital Bhd & Ors v Seng Long Construction & Engineering Sdn. Bhd. & Ors [2022] 8 MLJ 604 ("Top Builders")

Classification of Creditors

The classification and discount of votes of related company creditors were discussed extensively in the recent High Court case of Top Builders.

In this case, the opposing creditors (which were non-related, unsecured creditors of the scheme company) argued that the statutory majority of 75% for the scheme had not been met, as the related company creditors of the Top Builders group of companies should form a separate class of creditors and/or their votes at the scheme meeting should be excluded or discounted.

Ong Chee Kwan JC held that intercompany creditors and/or related company creditors should be classified into the same class as non-related unsecured creditors, reasoning...

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