5 November 2023, Kuala Lumpur, Malaysia – The Malaysian High Court has delivered a landmark judgement, refusing the application by the financially distressed KNM Group Berhad (KLSE:7164) and its subsidiary KNM Process Systems for an extension of their Restraining Order (RO) amidst ongoing restructuring proceedings. Presiding Judge, Her Honour Puan Liza Chan Sow Keng, ruled unequivocally that the proposed scheme was doomed to failure, pointing to a litany of legal infractions that necessitated the application’s dismissal.
In a period marked by upheaval for KNM Group Berhad, the firm’s market value plummeted to unprecedented lows under the leadership of Chairman Tunku Yaacob Khyra and CEO Ravindrasingham Balasingham. A coalition of shareholders, disenchanted with the board’s direction reminiscent of Tunku Yaacob’s historical corporate ventures, convened an Extraordinary General Meeting (EGM) to challenge the status quo and push for a board overhaul.
Despite the swirling controversy, Tunku Yaacob managed to maintain his chairmanship by a mere 2% margin in the EGM conducted on 16 October 2023. Yet, the legitimacy of this marginal victory has been cast into doubt amid accusations of electoral misconduct, with a contingent of shareholders presenting evidence of possible vote miscounting.
The court’s verdict was significantly influenced by the Federal Court’s pronouncements in the Mansion Properties case, which underscored the criticality of safeguarding minority creditors in any scheme of arrangement. The Honourable Judge highlighted the applicants’ non-compliance with the stipulations of Section 368 of the Companies Act 2016, notably the requirement to furnish up-to-date statements of affairs and to nominate directors impartially.
It was noted with disapproval that KNM Process Systems and its associated entities had failed to lodge a statement of particulars within the stipulated three-day window preceding the RO application. This procedural lapse was compounded by the fact that the Contingent Liabilities were dated as of 30 September 2022, thus falling outside the permissible timeframe.
The nomination of director Ho Soo Woon came under judicial scrutiny for its apparent lack of independence, given Ho’s predominant nomination by the applicant’s network of related companies. This was deemed a contravention of Section 368(2)(d) of the Companies Act, as the support garnered for Ho’s nomination did not meet the statutory majority, and the calculation of creditor support had excluded certain debts.
Moreover, the court castigated the proposed arrangement for its impracticality, observing that the debts KNM Process owed to specific creditors were so considerable that without their backing, the Revised Scheme could not possibly secure the necessary majority for passage.
The judgement also addressed the contentious issue of creditor classification, decreeing that a wholly-owned subsidiary or related entity should not be amalgamated into a single class with independent third-party creditors. This was a salient point, given that the bulk of the debts owed by KNM Process to its intercompany creditors in Class B2 pertained to entities under its own control, raising concerns over the potential for undue influence on the voting process.
The court’s refusal to grant the second extension for the RO was accompanied by an order for the respondents to be awarded costs. Concurrent applications (Enc 56 and 64) were approved with costs, while another (Enc 114) was declared academic and thus struck off, with costs apportioned as deemed fit. An ad interim Erinford injunction pending appeal was sanctioned until the forthcoming Case Management hearing on 14 November 2023.
The Explanatory Statement released by Tunku Yaacob and his cadre has drawn sharp criticism for its apparent incompetence, casting doubt on the board’s capability to steer an engineering and process equipment firm with due diligence. Without the protection of an RO, creditors might be forced to take the reins and initiate liquidation proceedings, potentially erasing any remaining value for the shareholders.
This ruling sets a significant benchmark for corporate restructuring within Malaysia, affirming the judiciary’s commitment to upholding the rights of minority creditors and insisting on the transparency, viability, and adherence to statutory requirements in such schemes. It sends a resounding message to the corporate world that the courts will meticulously examine restructuring efforts to ensure the equitable treatment of all parties involved.