"What is clear is that the selection of creditors for the class composition cannot be arbitrary or capricious. If there is evidence of a calculated and dishonest move to remove or to place certain creditors in certain class with the purpose of ensuring that the class is constituted in such a way that certain creditors would not be able to vote or that their votes would be rendered ineffective, this will be considered as class manipulation or gerrymandering."
per Judicial Commissioner
This is a commentary on the
On
The Learned Judge agreed with the submissions from counsel for
Key points for the convening stage
- The principal jurisdiction question for the Court is the identification of the classes and to ensure that each class is properly constituted so that the meetings for each of the classes can be properly convened.
- The scheme company still bears the duty of absolute transparency and to unreservedly disclose all material information to assist the Court in determining the classification and the composition of the creditors, how the creditors' meeting(s) is to be concluded and to address any allegation of an abuse of process and or if the application is not made bona fide.
- The Court must always be mindful of the possibility of class manipulation. It is incumbent on a company to propose a scheme fairly and not to manipulate the constitution of classes to ensure apparent satisfaction of the statutory requirements.
Brief facts
In its Scheme Application, AAX proposed that its debts amounting to approximately
As part of this overall restructuring exercise, AAX also intends to carry out a proposed share capital reduction, proposed share consolidation and thereafter undertake a fundraising exercise to seek fresh injection to fund the operations.
At the commencement of the Scheme Application, AAX had originally placed all scheme creditors into one unsecured creditors class.
After
- 'Class A' creditors comprising 'creditors who are considered critical or essential and who may have secured and or other rights'; and
- 'Class B' creditors who are 'creditors who do not fall within Class A' ("First Revision").
Three weeks later and whilst the amendment proceedings were ongoing, AAX made further changes to the formulation, specifically that 'Class A' was described as 'creditors who are critical or essential to the business of AAX and are considered to have a common or unified interest in the continuation of AAX as a going concern, some of whom may be able to assert secured rights' ("Second Revision"). The changes are underlined.
After leave to amend was granted, AAX proposed again to change the classification to 'Class A' secured creditors and 'Class B' unsecured creditors ("Third Revision").
Decision of the
Classification of scheme creditors
Firstly, in answering whether the constituent of the class is a matter that ought to be determined by the Court at the convening stage or better left to after the proof of debts exercise or even the sanction stage, the
Secondly, the
- With respect to the lessors, His Lordship held that AAX "cannot treat the Lessors who had paid the 'security deposits' and 'maintenance reserves' as secured creditors and classified them under Class A creditors. They do not come within the definition of 'secured creditors' under s.2 of the Insolvency Act 1967".
- With respect to Airbus, whose contingent debt formed ľ of the total scheme debt, the
High Court held that the "cash deposits" consisting of "pre-delivery payments" treated as part payment toward the purchase price does not make Airbus a secured creditor. Further, any contingent liability towards Airbus is only claimable upon approval of the Scheme and subsequent termination of the purchase agreements. As such, there was no basis for AAX to treat Airbus as a secured creditor.
His Lordship also specifically concluded that it is not disputed that the
Thirdly, the
- After considering the submissions and expert reports submitted by the parties, whilst agreeing with the lessors that the
Cape Town Convention and the Aircraft Protocol apply to schemes of arrangements, the Court decided in this case that AAX does not require the consent of the lessors in respect of the 'cram-down' provision under the Scheme in the form of a 99.7% hair-cut of their claims. His Lordship's reason for this is that the Scheme provides for the termination of the lease agreements. - As for the rule in Gibbs, the Court agreed with the courts of
Singapore andAustralia that the Gibbs Rule does not operate to restrict the Court from entertaining and approving a scheme of arrangement which involves the discharge or modification of any contractual rights between the scheme company and its creditors even where the contracts are governed by English laws or other foreign laws.
The lessors also contended that even if they cannot be excluded from the Scheme, they ought at least to be placed in a separate class from Airbus since the amount of the debt said to be owed to Airbus would effectively deprive the lessors of having any meaningful weight in its votes on the Scheme since Airbus's vote alone would carry the resolution as its debt value would exceed more than 75% of the total Scheme Debts. On this issue, whilst the Court did not agree that Airbus should be placed in a separate class just because its claim alone exceeds 75% of the total claims in 'Class A', His Lordship held that the difference in the rights between Airbus and the Lessors under the Scheme is significant and warrants that the lessors be placed in a separate class from Airbus. The Court took into consideration the effect of the commercial evaluation of the fresh contracts that Airbus would very likely enter with AAX which would potentially significantly mitigate Airbus' losses arising from the termination of the agreements in comparison with the lessors' rights under the Scheme where the lessors would bear a 99.7% loss of their accrued debts even with fresh contracts entered with AAX to mitigate its losses of rentals in respect of the unexpired terms of the lease agreements.
Whether the Scheme is a 'compromise or arrangement' under s.366(1) of the Act
Whether the Applicant is so hopelessly insolvent that it is against public policy to sanction the Scheme
The Court acknowledged that while AAX's past performance records and financial position indicated that AAX is indeed hopelessly insolvent, His Lordship ultimately held that this "Courtought not make any commercial judgment on the viability or otherwise of the company post Scheme at this stage without the benefit of any independent or expert report." Similarly it was not for the Court to speculate as to whether AAX will or will not be able to raise the necessary funding.
Whether the Scheme is bona fide or an abuse of process
That said, His Lordship also found that the multiple changes in classification of creditors throughout the proceedings suggested "a determined effort to place certain creditors together into a single group regardless of the true legal position of the creditors as secured creditors or otherwise. The formulation of the classes appears to be no more than a matter of form than substance".
Comment
This decision extensively examines the court's jurisdiction and duties when considering an application under s.366(1) of the Malaysian Companies Act 2016 for an order that a meeting of the relevant classes of creditors be convened, also known as the 'Convening Stage'. This jurisdiction and duty are distinct from the 'Meeting Stage' of the classes of creditors and the 'Sanction Stage' of the proposed scheme of arrangement.
In a first of its kind ruling, the Malaysian court has ruled that AAX's proposed scheme of arrangement is an "insolvency-related event" for the purposes of the
Originally published
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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