Injunctions Against Companies Protected By Restraining Orders

Sections 366 and 368 of the Companies Act 2016

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In light of the economic turmoil caused by the Covid-19 pandemic and the various movement control order, companies had scrambled to seek refuge under the law to manage their businesses and financial affairs.

For companies which had reached the breaking point in respect of their financial health, a scheme of arrangement and a restraining order under Sections 366 and 368 of the Companies Act 2016 (CA) are attractive propositions. This is because this scheme would provide a valuable opportunity for the companies to get their financial affairs with its creditors in order. A restraining order acts a powerful moratorium against the world at large and restrains them from commencing and/or continuing any legal action against the company to facilitate the said scheme, unless prior leave from the court was obtained.

A restraining order under Section 368 of the CA may have a maximum lifespan of 9 months.

Whilst the restraining order does shield the companies from litigation, what happens when the said company abuses the said restraining order by, among others, acting in a mala fide manner by committing breaches of contract, tort or issuing frivolous winding up notices to other companies?

Recently, our Senior Partner, Datuk D.P. Naban and Senior Associate, Kenny Lam successfully acted for a client who have successfully obtained a fortuna injunction against a company which was under an effective restraining order under Section 368 of the CA 2016. This alert discusses the facts of this matter and the arguments raised by counsel.

The Facts

Company A had obtained a restraining order under Section 368 of the CA and whilst the restraining order was in force, Company A had issued a winding up notice against Company B (for whom our firm acted for) on the basis that Company B owed Company A substantial amount of money.

Company B disputed the claim in the winding up notice, and applied for leave to file a fortuna injunction against Company A and restrain Company A from taking steps to wind up Company B.

Company A resisted against the application for leave and contended that its winding up notice and/or proceedings ought to proceed because Company B owed them a substantial amount of monies and that these monies were crucial to ensure the viability of their scheme of arrangement to resuscitate the company.

Company B contended that the debt alleged by Company A was disputed for various reasons including the fact that the debt should be resolved in an arbitration in accordance with the arbitration agreement executed between both companies. Therefore, winding up proceedings is clearly not the correct forum to litigate the debt. As such, Company B ought to be allowed to defend itself against Company A’s attempts to wind up them but Company B could not do so as Company A was protected by a restraining order under Section 368 of the CA 2016.

After listening to both parties, the High Court allowed Company B’s application for leave to commence proceedings for a fortuna Injunction against Company A taking into consideration of the purposes of a restraining order to aid a scheme of arrangement as follows:

“The purposes of a restraining order … are:

1. to protect the assets of the company pending the possible adoption of the scheme;

2. to allow the scheme creditors to properly consider the scheme without extraneous considerations; and

3. to prevent the implementation of the scheme from being frustrated especially by legal suits.”

As Company B’s application for leave to commence fortuna injunction proceedings against Company A was in essence, a defensive action, it would not jeopardise Company A’s assets and frustrate Company A’s scheme. On this basis, leave was granted accordingly by the High Court.

As Company B’s application for leave to commence fortuna injunction proceedings against Company A was in essence, a defensive action, it would not jeopardise Company A’s assets and frustrate Company A’s scheme. On this basis, leave was granted accordingly by the High Court.

Conclusion

In most cases, it is difficult to obtain leave and/or challenge a restraining order granted under Section 368 of the CA as the High Court has a supervisory jurisdiction to ensure that once the restraining order is granted, it is not easily bypassed by any attempt to litigate against the applicant company and frustrate the company’s efforts to rescue itself through a scheme of arrangement.

However, this does not stop bona fide applicants from applying for leave to commence/continue proceedings against the company, especially when there are signs that the restraining orders were abused by the company.

Businesses are encouraged not to be deterred by a restraining order obtained by its debtors and seek legal advice to manage their debtors accordingly.

Authored by Kenny Lam Kian Yip, Senior Associate with the firm’s Intellectual Property and Commercial Disputes practice.

July 19, 2021