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2023 MarsdenLR 1758
FEDERAL COURT (PUTRAJAYA)
ABDUL RAHMAN SEBLI, CJ, ZABARIAH MOHD YUSOF, J, NORDIN HASSAN, J
MDSA Resources Sdn Bhd – Plaintiff
Versus
Adrian Sia Koon Leng – Defendant
RAYUAN SIVIL NO 02(i)-65-07/2022(M)
Lee Shih (with Nathalie Ker) (Lim Chee Wee Partnership) for the appellant.
YY Ho (with Nai Mei Kei) (YY Ho & Lee) for the respondent.
Classification of creditors in a scheme of arrangement must reflect legal rights, not subjective interests; related-party votes should not automatically be diminished. Disclosure of creditor interests should not impede sanction unless impropriety is proven.
Headnote:(A) Companies Act 2016 - Sections 366 and 369 - Scheme of arrangement - Appeal against the dismissal of an application for scheme sanction - Related-party creditors classified with third-party creditors deemed unreasonable and inequitable by lower courts - The sanction should not be denied based on subjective interests of creditors - Court must ensure statutory majority acts bona fide and fairly represents the creditor class - The statutory requirement for creditor classification was not satisfied by the courts below, leading to a substantial error. (Paras [25], [166])
(B) Classification of Creditors - Related party creditors cannot be automatically excluded from voting and should not be classified as a separate group solely based on relationships; fairness requires consideration of legal rights rather than subjective interests. (Paras [30]-[41])
(C) Disclosures - Adequacy of explanatory statement is required under section 369 but is not condition-precedent for sanction if no prima facie impropriety is shown - Adequate disclosures made by the applicant supported by financial statements. (Paras [98]-[130])
Findings of Court:
The appeal was allowed, allowing the application for sanction to proceed resulting in a fair scheme that aligns creditor interests effectively.
Issues: 1. Whether classification of related party creditors was fair? 2. Adequacy of disclosures in explanatory statements.
Ratio Decidendi: The court found that prior decisions conflated the issues of classification with sanctioning, denying the appellant due process - The findings failed to respect creditor rights and the statutory process for schemes.
Result: Appeal allowed with costs awarded.
[1]The appeal arises from the decision of the High Court (affirmed by the Court of Appeal) which dismissed the application by the appellant for sanction of a scheme of arrangement pursuant to section 366Companies Act 2016
[2]The appellant was granted leave to appeal to the Federal Court premised upon the following 10 questions of law which are categorised into the various 3 headings:
A.Related Creditors and Classification of Creditors
a)Whether the votes of related-party creditors are to be treated differently from the votes of other creditors in the same class in a scheme of arrangement.
b)If the answer to 1 is yes, whether the votes of related-party creditors in a scheme of arrangement should be discounted or not be counted altogether.
c)Whether the issue on proper classification of creditors should be determined at the Court leave stage (following the English Court of Appeal decision in Re Hawk Insurance Co Ltd [2001] 2 BCLC 480 and AirAsia X Bhd v BOC Aviation Ltd & Ors [2021] 10 MLJ 942Court scheme sanction stage (following the Hong Kong Court of Final Appeal case of Re UDL Holdings Ltd [2002] 1 HKC 172).
d)Whether the Court at the scheme sanction stage should be slow to depart from its earlier determination on the proper classification of creditors unless there are material changes in circumstances (following the English High Court decision of Re Lehman Brothers International (Europe) (in administration) [2018] EWHC 1980 (Ch)).
B.Explanatory Statement
e)Whether the challenge to the adequacy of disclosure in the explanatory statement issued under section 369(1)(a)Companies Act 2016Court approves the issuance of the explanatory statement or at the Court scheme sanction stage.
f)Where the Court finds inadequate disclosure in the explanatory statement at the scheme sanction stage, whether the Court can order, as a remedial measure, a re-issuance of the explanatory statement and re-voting at the meeting of creditors in a scheme of arrangement.
g)Whether the duty of disclosure in the explanatory statement would require the applicant company to objectively provide each creditor the genesis and extent of all the company’s debts (see the Singapore Court of Appeal decision in Wah Yuen Electrical Engineering Pte Ltd v Singapore Cables Manufacturers Pte Ltd [2003] SGCA 23, a decision cited by the Court below).
C.Sanction of Scheme of Arrangement
h)Whether the Court hearing the scheme sanction is bound by the principles set out in the Federal Court case of Pacific Forest Industries Sdn Bhd & Anor v Lin Wen-Chih & Anor [2009] 6 MLJ 303 such that the Court should only decide on any scheme of arrangement objections based on the pleadings and after hearing parties on those objections.
i)Whether the Court hearing the scheme sanction is entitled to apply Re Halley’s Departmental Store Ptd Ltd [1996] 2 SLR 70Court below, to ignore separate corporate personality in considering any connection or motives of the creditors.
j)Whether the Court hearing the scheme sanction should follow the principle that the Court ought not to embark on a dissection of the relative commercial merits of the scheme of arrangement (applying Transmile Group Bhd & Anor v Malaysian Trustee Bhd & Ors [2012] 9 CLJ 1071).
[3]In this judgment I will refer to the appellant as “MDSA Resources”.
BACKGROUND
[4]MDSA Resources is part of the Hatten Group of Companies involve in property development and related activities. It is a distress company facing 298 legal claims and demand, a substantive portion of it, were from property owners who had purchased properties from MDSA Resources under a scheme known as the “Guaranteed Rental Return Scheme” (GRSS). The claims by these property owners were in respect of MDSA Resources’ failure to pay rental on these properties as agreed under a leaseback arrangement. This is a buy-to let offer where the purchasers are assured of monthly rental over a period of time.
[5]In July 2020, MDSA Resources decided to restructure its debts and rehabilitate th
