Automatic Moratoriums in Applications for Judicial Management Order

Introduction and Brief Facts

The Kuala Lumpur High Court recently dismissed an application for a judicial management order and in its decision introduced procedural safeguards to prevent the abuse of the judicial management process.

This case involved a creditor, Novabrite Lighting Sdn Bhd (“Novabrite“), seeking a judicial management order against a financially distressed company, Emrail Sdn Bhd (“Emrail“). Another player in the case was another creditor of Emrail, Balaranee Construction (“Balaranee“), which sought to intervene in the court proceedings and to seek leave of the High Court to continue with its separate winding-up petition against Emrail. 

It is important to note that this was the sixth application for a judicial management order against Emrail, with all six applications made over the span of four years and the third time where Novabrite itself was the applicant for such an order – the previous five applications for a judicial management order against Emrail were either withdrawn or dismissed by the Court but in the process Emrail enjoyed 1486 days or about four years in total of the automatic moratorium of legal proceedings against it while the previous five applications were pending.  

Balaranee contended that the multiple applications for a judicial management order against Emrail were an abuse of process filed to take unfair advantage of the automatic moratorium arising on a filing of an application for a judicial management order and a tactical point to prevent genuine creditors from initiating actions to recover their debts.

In a move to protect the integrity of the Court’s process, not only did the High Court dismiss this sixth application for a judicial management order against Emrail, but it further ordered that any further application for a judicial management order or any application for a restraining order under any proposed scheme of arrangement, whether filed by any third party or Emrail itself, shall not be filed except with leave of the Court and after full disclose of all relevant matters.

In this Update, we summarise the decision of the High Court and its key takeaways.

Failure to Meet the Statutory Preconditions

The High Court emphasised that in view of the draconian effect of an automatic moratorium and the intrusion this has on the rights of creditors and claimants alike, there should be strict compliance of the statutory pre-conditions for making an application for a judicial management order. 

In that regard, there was a requirement for Novabrite to nominate an insolvency practitioner, who is not the auditor of Emrail, to act as a judicial manager. While a person was proposed by Novabrite to act as a judicial manager, no evidence was led to show that he was a qualified insolvency practitioner for the purposes of the Malaysian Companies Act.

An additional pre-condition to be satisfied for a judicial management order is that the applicant considers there is a reasonable probability of rehabilitating the company in financial distress or that the interest of creditors would be better served by making the application than by resorting to a winding-up. The High Court noted that  ‘rehabilitating’ means a return to solvency where the company in distress will be able to carry on business in the future as a going concern. The High Court also proceeded to illustrate how this requirement can be met and recognised that an affidavit by the proposed judicial manager or a draft proposal of some sort, although not strictly required, would be of great assistance to help determine if there is a reasonable probability of rehabilitation or that the interest of creditors would be better served by making the application.

The application by Novabrite failed to satisfy the pre-conditions referred to above.

The Filing of the Sixth Application was an Abuse of the Court’s Process

The High Court emphasised that an application for a judicial management order must be made bona fide and this must be shown in the application itself and includes compliance with the pre-conditions for making the application.

The High Court was of the view that the dominant or pre-dominant purpose for the application made by Novabrite was to stave off legal proceedings, in particular, the winding up proceedings initiated by the creditor, Balaranee.

In that respect, the High Court observed that:-

• despite multiple judicial management applications filed, there had been no progress towards the rehabilitation of Emrail;
• there was a failure to make full and frank disclosure of all the material facts pertaining to Emrail including the requisite financial information to show how Emrail may be rehabilitated;
• there was no disclosure or explanation given on the previous successive judicial management applications including the reason as to why six judicial management applications were required; and
• there was a failure by Novabrite to adduce evidence of any proposal to rehabilitate Emrail in the previous two applications of Novabrite itself on Emrail. While the absence of a proposal is not fatal per se, the inclusion of a draft proposal would go to show the presence of bona fides. In this case, the absence of a draft proposal coupled with the surrounding circumstances did show a lack of bona fides and that the predominant purpose of the sixth application for judicial management was not the rehabilitation of Emrail.

Key Takeaways

1. An applicant of successive judicial management applications has a duty to explain

The High Court recognised that while certain circumstances may warrant the making of successive applications for judicial management, an explanation for the need for a fresh application and the failure of the previous application must be given with full disclosure, including on the progress made towards rehabilitating the company in financial distress.

2. The Court has the power to address an abuse of its process

The High Court, after examining the facts and having concluded there was an abuse of the process, invoked on its own motion its inherent jurisdiction to redress such abuse by striking out the sixth application for judicial management. The High Court also made the order as highlighted earlier on the requirement that any further application for judicial management or a restraining order be only filed with the leave of the Court.  

Conclusion

This decision of the Kuala Lumpur High Court, which is of persuasive authority to other High Courts, seeks to reign in the potential abuse of the automatic moratorium provisions in an endeavour to ensure that recourse to the provisions facilitating the rehabilitation of financially distressed companies are used bona fide.