RESTRAINING ORDER : AN OVERVIEW

Introduction

A restraining order (RO), vested in Section 368 of the Companies Act 2016 (“CA”), provides a temporary reprieve from the commencement of any legal proceedings/actions  against a financially distressed company, while it restructures its’ business resources and debts obligations. 

In Mansion Properties Sdn Bhd v Sham Chin Yen & Ors, the CA did not expressly mention that an application for an RO must be made inter parte. Hence, there was nothing objectionable about filing an ex parte application. To prevent the effort of developing and approving  an SOA from being thwarted, applying for an RO is deemed necessary. Moreover, the time constraint faced by distressed companies requires decisions concerning the proposed scheme to be made as soon as possible. A company is vulnerable between the initial formulation of the scheme and the sanction of the court.

Generally, the purpose of filing an ex parte application is to ease applicant companies to seek urgent moratorium protections in due course.  Provided that the RO was applied in good faith, an ex parte application would not warrant it to be set aside  unless such  application  is  an abuse of process of the law and/or there is no special circumstances which are not in conjunction with the practice and procedure before the court. 

An action may amount to an abuse of the legal process when its legality is used in a manner that do not serve the underlying goal but rather to achieve other collateral purposes. 

In Dynawell (M) Sdn Bhd v Universal Trustee (M) Berhad (Proposed Intervener), Dynawell’s repetitive RO application has indicated that it originated from the same source or author, showing that it has been proposed with the knowledge and involvement of the directors to delay the foreclosure proceedings that commenced in November 2011. At the same time, Dynawell had failed to obtain leave from the winding-up court and had instead filed a separate ex parte application in the present court. 

There has been a blatant disregard of the provision by Dynawell when it had also failed to comply with the mandatory requirement provided in Section 176(1)(a) until (d) of the Companies Act 1965. The RO was then to be set aside due to Dynawell’s mala fide intent of concealing the material facts from the present court. 

Creditors are allowed to intervene and bring its own proceedings against the company at any time before the scheme is sanctioned by the court, whereby the creditors must be able to prove the existence of ‘exceptional circumstances.’

Creditors’ right to intervene is not absolute. Granting of leave depends on whether there is such special circumstances that can be demonstrated. To do so can be challenging, especially when the courts would be reluctant to accept the mere reason of “having the real possibility of success”. Aggrieved creditors must show that the circumstances are of sufficient weight to overcome the strong imperative to have the claims dealt with under the machinery of SOA. It necessitates a careful evaluation to ensure the claims made align with the overarching objective of the scheme.

The high court in Re Top Builders Capital Bhd & Ors ruled that monetary compensation may not likely grant the creditor the right to intervene, as it would impede the achievement of the scheme since companies need to consider paying off their debts while undergoing rehabilitation. Claiming for monetary relief would procedurally be rejected as it would defeat the whole purpose of an SOA. Ultimately, it shall be the court’s discretion in determining what may amount to ‘exceptional circumstances’ on a case-to-case basis.

The question of whether an RO can be easily set aside would depend on the ground reasoning rooted at the foot of the RO. If the RO is embedded on the basis of an ill-will intent to achieve a deceitful end, the RO can be set aside.

The purpose of filing for an RO is to aid the effort of formalizing an SOA for distressed companies with financial liabilities. Misusing it for personal gain is unjustified under the law and may warrant it to be set aside by courts.

By Rahayu Partnership, Malaysia
Law Firm Website: www.rahayupartnership.com