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2021 MarsdenLR 928
HIGH COURT MALAYA KUALA LUMPUR
AIRASIA X BERHAD – Appellant
Versus
BOC AVIATION LIMITED & ORS – Respondent
[Originating Summons No: WA-24NCC-467-10/2020]
A scheme of arrangement under the Companies Act constitutes insolvency proceedings, requiring court supervision, and necessitating appropriate classification of creditors to ensure equitable treatment during the restructuring process.
Headnote:(A) Companies Act 2016 – Section 366 – Scheme of arrangement – Application for creditor meetings concerning proposed debt restructuring to prevent liquidation – The company's application is determined under insolvency-related considerations, requiring the Court's control over assets during the scheme; unanimous creditor classifying essential for court authority. (Paras 1, 9, 24, 338)
(B) Insolvency Principles – Definition of insolvency proceedings – A scheme of arrangement qualifies as an insolvency proceeding under the Cape Town Convention, requiring creditor consent for debt modification; the necessity of commercial judgment applies. (Paras 296-298, 300-306)
(C) Creditor Classification – Need for fair creditor classification to avoid gerrymandering, where distinct rights warrant separate classification; all creditors must be able to consult together concerning common interests. (Paras 318-328)
Facts of the case: This judgment addresses an application filed by AAX for creditor meetings to approve a restructuring scheme as it faced insolvency due to COVID-19 related losses. The scheme poses a 99.7% reduction of claims for vast creditor debts, requiring classification into secured and unsecured categories based on their rights and the nature of debts. (Paras 4, 9, 18)
Findings of Court: The scheme is deemed a legitimate arrangement under Section 366, classifying creditors appropriately based on their secured or unsecured positions, with determination of creditor rights crucial to the jurisdiction of the Court. (Paras 337-338)
Issues: The primary issues were whether the scheme constituted proper insolvency proceedings under the law, the legitimacy of creditor classifications, and whether creditors could be treated differently based on their rights and roles. (Paras 4, 337)
Ratio Decidendi: The Court ruled that the scheme's arrangement aligns with statutory requirements while ensuring fair consultation amongst creditors, thus emphasizing the need for careful classification to protect creditor rights during restructuring. (Paras 317, 337)
Result: The Court grants the application for creditor meetings to consider the scheme, ensuring that restructuring efforts are conducted in compliance with statutory obligations. (Paras 337-338)
Introduction
[1] This judgment deals with an application made under s 366(1) of the Companies Act 2016 ('the Act') for an order to hold meetings of the company's creditors to approve a scheme of arrangement proposed and to be presented by the company in order to avoid the prospect of a liquidation.
[2] Numerous written submissions were filed by the parties. These were further supplemented by long oral submissions by learned counsel which were conducted through remote platform spanning over 5 sessions. Many legal issues were raised for the Court's consideration and the Court wishes to record its appreciation to all learned counsel for their submissions and extensive research. Each of them has truly assisted me to better understand the issues and to be able to reach my judgment quicker.
Background Facts
[3] Airasia X Berhad ('AAX') is a prominent regional provider of long- haul air transportation services with 31 routes connecting Malaysia with various destinations and having, as of 31 December 2019, 2,364 employees. It is the main operating entity of the AAX Group, which comprises AAX and its 14 subsidiaries (11 of which are companies who have leased aircrafts ('Leasing Subsidiaries ')).
[4] As with all other airlines, AAX's business has significantly deteriorated with the outbreak of COVID-19 and the consequent closing of national borders in March 2020. On 30 July 2020, AAX triggered the prescribed criteria under Practice Note 17 ('PN17') of the Main Market Listing Requirements of Bursa and AAX's external auditors had issued an unmodified audit opinion which emphasized the material uncertainty relating to AAX's ability to continue as a going concern. As a consequence of these developments, it was anticipated that AAX would be unlikely to meet its obligations as they fall due and face liquidation.
[5] In consultation with its financial advisers, BDO Malaysia, AAX formed the view that it is necessary, in order to secure the survival of AAX, to restructure its obligations with its creditors. It wasdetermined that AAX could become viable if it could right-size its financial position and obtain a fresh injection of cash, whether via equity or debt.
[6] Consequently, AAX filed the present Originating Summons ('the OS') pursuant to s 366(1) of the Act, for the purposes of considering and, if thought fit, approving a scheme of arrangement ('the Scheme') between AAX and its creditors ('Scheme Creditors') as at 30 June 2020 ('Cut-Off Date').
[7] The Scheme, being part of a wider Proposed Debt Restructuring exercise, is the first part of the intended rehabilitation of AAX's financial position. If sanctioned but prior to the Scheme coming intoeffect:
a. a capital reduction and share consolidation exercise will be implemented;
b. AAX will seek to raise capital via a fresh subscription of shares, by way of a rights issue and new investor subscriptions.
This will be in place before the Scheme takes effect on the lodgement of the Court Order sanctioning the Scheme with the Registrar ofCompanies Malaysia under s 366(5) of the Act.
[8] The overarching objective is to avoid liquidation and to salvage the business of AAX. If successful, the intended rehabilitation will return AAX to a solvent going concern.
The Proposed Debt Restructuring
[9] Briefly, under the Scheme, the Scheme Creditors will share pari passu in a general pool of RM 200 million ('the General Pool'):
a. the Unsecured Scheme Creditors with unsecured debt will participate in the General Pool;
b. Scheme Creditors holding securities will realise such securities or after deducting the value of such securities, participate in the General Pool for their shortfall.
[10] According to AAX, the Scheme Creditors will stand to receive returns under the Scheme as opposed to an uncertain, lengthy and drawn-out liquidation.
[11] The proposed capital reduction will entail a 99.9% reduction of the issued share capital of AAX, and the proposed share consolidation will consolidate every 10
