THE UPDATE SCOOP (#7/2025)
“Pre-Packaged Scheme of Arrangement under New S.369C” | Company Law
By TAY & HELEN WONG – 21 July, 2025
In probably the first reported case on the newly enacted s.369C of the Companies Act 2016 (CA2016) of Malaysia on pre-packaged scheme of arrangement, the learned Judicial Commissioner (JC) in Re: Pestech International Berhad [2025] went through the provisions and laid down principles for future guidance. Prior to April 2024, there was only one type of corporate rescue mechanism which was the conventional scheme of arrangement under s.366 of the CA2016. Under this regime, there must be a creditors’ meeting convened pursuant to the permission granted by the court (the 1st convening stage) which was held to obtain the requisite approval of the scheme from the scheme creditors (the 2nd meeting stage) followed by the court’s sanction of the approved scheme (the 3rd sanction stage). With the introduction of s.369C, pre-packaged scheme(s) of arrangement sought to expedite the scheme process without the 1st convening stage or the 2nd meeting stage, leaving only the sanction to be obtained from the court.
In Pestech, a vote solicitation process was carried out to determine if the statutory threshold of a majority of 75% in value of the scheme creditors present and voting approving the scheme (Scheme of Arrangement) in principle was secured. 4 out of 6 scheme creditors (the Scheme Creditors) with 78% in value responded favourably. Thereafter, the applicant formally initiated its pre-packaged Scheme of Arrangement (the Pestech Pre-Pack).
Explanatory Statement of the Scheme of Arrangement were sent out to the Scheme Creditors together with the ballot forms for voting process. The result was 4 Scheme Creditors with 89% in value voted in favour whilst 1 Scheme Creditor with 11% voted against. Given the positive outcome, the applicant filed for sanction.
It was held that s.369C was merely a modification of s.366 process and the standards under s.366 would continue to apply with modifications. In his judgment, apart from the 4 requirements to sanction a pre-pack scheme as stated in the Singapore decision in DSG Asia Holdings Pte Ltd (i.e. disclosure, voting, bona fides and statutory pre-conditions), the test for sanction i.e. the Buckley test [set out in Re Noble Group Ltd (No. 2)] remained applicable as modified below:-
(a) there was sufficient disclosure in the ES in compliance with section 369C(3)(a) including, in particular, such information as is necessary to enable the creditors to make an informed decision whether to agree to the compromise or arrangement;
(b) there has been proper classification and the proper calculation of votes on the notional voting by ballot to ensure that had a meeting been summoned, the conditions in section 366(3) would have been satisfied;
(c) that the statutory pre-conditions in section 369(C)(3)(b) and (c) and have been satisfied;
(d) the class was fairly represented by the meeting, and whether the majority were coercing the minority in order to promote interests adverse to the class whom they purported to represent;
(e) whether the scheme is a fair scheme which a creditor could reasonably approve. Importantly it must be appreciated that the Court is not concerned to decide whether the scheme is the only fair scheme or even the ‘best’ scheme;
(f) that the proposed scheme is bona fide. This would include ensuring that excluded creditors or stakeholders with no economic interest in the pre-pack are not treated unfairly; and
(g) whether there is any ‘blot’ or defect in the scheme that would, for example, make it unlawful or in any other way inoperable.
Having considered the numerous tenets and applying to the facts, the applicant was held to have met all the necessary requirements for the Pestech Pre-Pack to be sanctioned. An order sanctioning the Scheme of Arrangement was granted.
As postscript, the learned JC set out numerous problems that may arise from the abuse of pre-packs in Malaysia based on the experiences in other countries such as UK, Singapore and the Chapter 11 regime in the US. He concluded with his view that further safeguards must be introduced including implementing directions similar to the Statement of Insolvency Practice SIP-16 in the UK.
For any query or to subscribe to our UPDATE SCOOP or quarterly published legal bulletin THE UPDATE, please e-mail your request to:
hhtay@thw.com.my or lawpractice@thw.com.my
Tags: [scheme of arrangement] [pre-packaged scheme] [court sanction] [classification of creditors] [s 366, 367 and 369C of the Companies Act 2016]