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:
- To revive a financially distressed company as a going concern;
- To avoid the prospect of liquidation and to restrain proceedings against an insolvent or a barely solvent company;
- 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.
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  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:
- There is a proposal for a scheme of arrangement;
- A restraining order is necessary for the formalisation of the scheme of arrangement for the creditors' or members' approval;
- The company's statement of affairs is lodged together with the application; and
- The court approves and appoints a person nominated by the majority of creditors to act as director despite the constitution of the company.
A restraining order, once successfully obtained, would last for only 3 months and may only be extended for a period of not more than 9 months. A notice of the order should also be published in a widely circulated newspaper, in order to notify creditors of the order.
After the court grants permission for the applicant to convene the meeting, the company will continue to engage with its creditors to negotiate the terms of the scheme before the meeting.
Stage 2: The Meeting
This is the court-approved meeting where proposals for the scheme are presented. Prior to the meeting, a notice of the meeting will have to be advertised and served pursuant to Sections 366 and 369 of the Companies Act 2016.
In this meeting, the proposed scheme must be approved by a majority of 75% of the total value of creditors present and voting, either in person or by proxy. The meeting may be adjourned if a resolution is passed by 75% of the total value of creditors or class of creditors or the members or class of members present and voting either in person or by proxy at the meeting.
Stage 3: The Court's Sanction
Once the 75% approval has been granted for the proposed scheme, the applicant will now make a second application to court to sanction the approved scheme of arrangement.
The court at this stage will scrutinise the scheme to ensure that the statute has been complied with. Some of the court's considerations are:
- Whether the class was fairly represented the meeting;
- Whether there was coercion of the minority by the majority to approve the scheme of arrangement;
- Whether the scheme was a fair scheme;
- Whether there is any 'blot' or defect in the scheme (see also Airasia X Bhd v BOC Aviation Ltd & Ors  10 MLJ 942).
The court may grant the sanction subject to additional conditions and alterations where it sees fit.
Once the sanction is granted, the scheme of arrangement will bind the company, its members, liquidators and contributories of all classes of creditors, including the minority creditors who may have opposed the scheme.
A copy of the sanction order shall be then lodged with the Companies Commission of Malaysia and annexed to every copy of the company's constitution issued after the order was made.
In the wake of a challenging economic climate, a financially distressed company may consider obtaining a court-sanctioned scheme of arrangement to tide things over until it once again becomes a going concern.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.