Unsecured creditors must be treated equally under the pari passu rule unless expressly subordinated through mutual agreement; mere knowledge of a subordination clause does not establish binding precedence on unrelated creditors.

[1] This is an appeal against the decision of the High court on 22 December 2010 regarding a preliminary issue on the priority of the appellant as creditor of the second respondent ('TAS') where the learned judge answered thepreliminary issue in the negative to the effect that the appellant did not have any better right of priority to other unsecured creditors and that the appellant's debts must rank pari passu with the other unsecured scheme creditors.

Factual Background-Based On Agreed Facts

[2] The second respondent (TAS) was a wholly owned subsidiary of the first respondent ('TGB'). TGB was in the business of air cargo transportation services, including chartering space on aircrafts owned and maintained by TAS. TAS was insolvent.

[3] In carrying out its operation, TAS entered into various funding arrangements to finance its operations involving various creditors. All the creditors were unsecured creditors.

[4] The appellant ('MTB') was the trustee for the holders of medium terms notes ('MTN') issued by TAS in 2003. As a trustee, the appellant at all material times was an unsecured creditor of TAS. The individual notes holders were not creditors of TAS.

[5] The medium terms notes (MTN) were constituted by a trust deed dated 8 August 2003 executed between TAS and the appellant. By cl 10.1(cc) of the trust deed, TAS covenanted with the appellant (MTB) that TAS would 'ensure that all or any advances by any of the shareholders, its directors and/or related corporations or any permitted inter-company loan and advances made after the date of the Trust Deed are subordinated to TAS's liabilities under the CP/MTN Programme'. The amount outstanding at the material time was RM105m.

[6] The third to 14th respondents are bankers, that by a facility agreement dated 16 May 2003, granted an unsecured syndicated term loan of USD100m to Transmile Air (SPV) Ltd, a company incorporated in Labuan and a wholly owned subsidiary of the first respondent (TGB). TGB guaranteed the said term loan. Transmile Air on-lent the term loan monies to TAS in 2005. The on-lent loan was also unsecured. By an assignment dated 7 September 2010, Transmile Air assigned the debt owing by TAS to the individual bankers (the third to 14th respondents). As at 30 April 2010, the principal outstanding was USD66.9m.

[7] The 15th respondent was a company incorporated in Labuan and was a wholly-owned subsidiary of TGB (the first respondent). The 15th respondent issued convertible bonds in 2005. The bonds were constituted by a trust deed dated 17 May 2005. TGB guaranteed the convertible bonds.

[8] The 15th respondent then on-lent the bond proceeds to TAS in 2005, which were then used to acquire the 4 MD-11 aircraft and spares currently owned by TAS and had accordingly been used to increase the total assets of TAS. This loan was also unsecured. As at 30 April 2010 the total amount due from the 15th respondent to the convertible bonds holders was USD65.5m.

[9] The debts in question which were to be the subject matter of the proposed scheme of arrangement were the defaulted debts of TAS, which had all been guaranteed by TGB.

[10] The substantive action in this proceeding was brought by TGB and TAS under s 176 of the Companies Act 1965 with respect to a proposal to effect a scheme of arrangement between TGB and TAS and a group of creditors ('TAS scheme creditors'). The TAS scheme creditors comprised three groups of creditors; it was proposed by TGB and TAS that these three groups of creditors, be all treated as members of a single class of unsecured creditors for the purpose of voting at the requisite court-convened scheme-creditors meeting to be held in due course before the proposed scheme was implemented. This classification of a single class of unsecured creditors was however oppos