Section 366 of the Companies Act 2016 enables companies to propose compromises or arrangements with creditors or members. The scheme provides a statutory framework for restructuring that, once approved, binds all affected parties including dissenting creditors. Schemes serve multiple purposes including financial restructuring through debt reduction or conversion, corporate reorganizations involving mergers or demergers, and capital restructuring including share capital reduction. The scheme mechanism offers advantages including binding effect on all creditors once approved, court supervision providing fairness oversight, moratorium protection against creditor actions, and flexibility in restructuring terms.
The company applies to the High Court under Section 366(1) for an order directing meetings of creditors or members. The application must include the proposed scheme document, explanatory statement, and financial information. The court considers whether to order meetings based on arguable case for the scheme, proper classification of creditors, and adequacy of explanatory statement. If satisfied, the court issues directions for creditor meetings including procedures, notice requirements, and voting mechanisms. Creditor meetings are convened according to court directions. The company provides notice to affected creditors including the explanatory statement, financial information, and voting procedures. Approval requirements under Section 366(3) mandate majority in number representing at least 75% in value of creditors present and voting. Following creditor approval, the company applies for court sanction under Section 366(4). The court conducts a sanction hearing examining statutory compliance, proper creditor class meetings, requisite majority approval, and scheme fairness to affected parties.
Proper classification of creditors is fundamental to scheme validity. Creditors must be grouped into classes where members have sufficiently similar rights to make them capable of consulting together. Classification principles require creditors with similar rights in a liquidation scenario should be grouped together. Secured and unsecured creditors typically form separate classes. Substantial differences in creditor rights may require separate classes. Common creditor classes include secured creditors with first charge, secured creditors with subsequent charges, unsecured creditors including trade creditors and suppliers, and shareholders for capital restructuring.
Upon court order for meetings, Section 368 provides automatic moratorium preventing creditors from commencing or continuing legal proceedings against the company, enforcing judgments or executing against company property, and repossessing assets under security or retention of title. The moratorium remains in effect during the scheme process providing breathing space for restructuring negotiations. However, the moratorium does not affect secured creditor rights to appoint receivers or exercise security rights subject to court approval.
Schemes typically address debt treatment including principal reduction or haircuts, interest rate adjustments or forgiveness, payment deferrals and rescheduling, and debt-equity conversions. Payment mechanisms specify payment sources such as asset disposals, operating cash flows, or new financing, payment schedules with milestone dates, and security or guarantees for scheme obligations. Corporate governance provisions include monitoring mechanisms during implementation, restrictions on dividends, and information rights for creditor representatives. Conditions precedent may include regulatory approvals, third-party consents, and minimum creditor approval thresholds.
The statutory framework provides binding effect on all creditors including dissenters, court supervision ensuring fairness, moratorium protection during negotiations, and flexibility in restructuring terms. Strategic advantages include preservation of business operations, potential for higher recoveries than liquidation, maintenance of supplier and customer relationships, and retention of company's corporate existence. Scheme success requires engagement of restructuring advisors for commercial negotiations, legal counsel for court applications, and financial advisors for creditor analysis. Typical scheme timeline spans six to twelve months from application to implementation. Early informal discussions with major creditors help gauge support. Transparency regarding financial position builds credibility and realistic proposals enhance acceptance prospects.
Scheme of arrangement under Section 366 of the Companies Act 2016 provides Malaysian companies with a flexible, court-supervised mechanism to restructure obligations with creditors or members. This statutory process enables binding arrangements affecting all stakeholders while offering moratorium protection during implementation. Understanding the scheme process, approval requirements, and strategic applications enables companies to utilize this restructuring tool effectively.