MDSA RESOURCES SDN BHD v Adrian Sia Koon Leng (02(i)-65-07/2022(M))

The appellant was granted leave to appeal to the Federal Court premised upon the following 10 questions of law which are categorised into the various 3 headings: A. Related Creditors and Classification of Creditors a) Whether the votes of related-party creditors are to be treated differently from the votes of other creditors in the same class in a scheme of arrangement. b) If the answer to 1 is yes, whether the votes of related-party creditors in a scheme of arrangement should be discounted or not be counted altogether. c) Whether the issue on proper classification of creditors should be determined at the Court leave stage (following the English Court of Appeal decision in Re Hawk Insurance Co Ltd [2001] 2 BCLC 480 and AirAsia X Bhd 4 v BOC Aviation Ltd & Ors [2021] 10 MLJ 942) or only to be determined at the Court scheme sanction stage (following the Hong Kong Court of Final Appeal case of Re UDL Holdings Ltd [2002] 1 HKC 172). d) Whether the Court at the scheme sanction stage should be slow to depart from its earlier determination on the proper classification of creditors unless there are material changes in circumstances (following the English High Court decision of Re Lehman Brothers International (Europe) (in administration) [2018] EWHC 1980 (Ch)). B. Explanatory Statement e) Whether the challenge to the adequacy of disclosure in the explanatory statement issued under section 369(1)(a) of the Companies Act 2016 should be at the stage before the Court approves the issuance of the explanatory statement or at the Court scheme sanction stage. f) Where the Court finds inadequate disclosure in the explanatory statement at the scheme sanction stage, whether the Court can order, as a remedial measure, a re-issuance of the explanatory statement and re-voting at the meeting of creditors in a scheme of arrangement. g) Whether the duty of disclosure in the explanatory statement would require the applicant company to objectively provide each creditor the genesis and extent of all the company’s 5 debts (see the Singapore Court of Appeal decision in Wah Yuen Electrical Engineering Pte Ltd v Singapore Cables Manufacturers Pte Ltd [2003] SGCA 23, a decision cited by the Court below). C. Sanction of Scheme of Arrangement h) Whether the Court hearing the scheme sanction is bound by the principles set out in the Federal Court case of Pacific Forest Industries Sdn Bhd & Anor v Lin Wen-Chih & Anor [2009] 6 MLJ 303 such that the Court should only decide on any scheme of arrangement objections based on the pleadings and after hearing parties on those objections. i) Whether the Court hearing the scheme sanction is entitled to apply Re Halley’s Departmental Store Ptd Ltd [1996] 2 SLR 70, as was applied by the Court below, to ignore separate corporate personality in considering any connection or motives of the creditors. j) Whether the Court hearing the scheme sanction should follow the principle that the Court ought not to embark on a dissection of the relative commercial merits of the scheme of arrangement (applying Transmile Group Bhd & Anor v Malaysian Trustee Bhd & Ors [2012] 9 CLJ 1071).

In this judgment I will refer to the appellant as “MDSA Resources”. 6 BACKGROUND [4] MDSA Resources is part of the Hatten Group of Companies involve in property development and related activities. It is a distress company facing 298 legal claims and demand, a substantive portion of it, were from property owners who had purchased properties from MDSA Resources under a scheme known as the “Guaranteed Rental Return Scheme” (GRSS). The claims by these property owners were in respect of MDSA Resources’ failure to pay rental on these properties as agreed under a leaseback arrangement. This is a buy-to let offer where the purchasers are assured of monthly rental over a period of time.

In July 2020, MDSA Resources decided to restructure its debts and rehabilitate the company by entering into a proposed scheme of arrangement with its creditors under section 366(1) of the CA 2016 (“Proposed Scheme”).

The Proposed Scheme consist of MDSA Resources’ unsecured creditors holding more than RM 374 million of debts. The Scheme Creditors in the Proposed Scheme consist of only one class of creditors, namely, third-party creditors of MDSA Resources’ (“Third Party Scheme Creditors”) and the Hatten Group Scheme Creditors also known as related party creditors. They all have the same legal rights against MDSA Resources.

The respondent, Adrian Sia Koon Leng is one of the Third-Party Scheme Creditors with a debt of RM117,205.74, which is approximately 0.03% of the total scheme debt of RM 374 million. He is a purchaser of one of the apartments within Hatten City Phase 1 under the GRRS. 7

On 1.7.2020, MDSA Resources filed an Originating Summons in the High Court for leave to convene a creditors’ meeting in relation to a proposed scheme of arrangement with its Scheme Creditors under section 366(1) of the CA 2016 and for a restraining order under section 368(1) of the same. The respondent opposed the application allegedly due to lack of information disclosed by MDSA Resources.

Despite such objections by the respondent, the High Court granted leave for the convening of a scheme meeting of the creditors of MDSA Resources within two months and for a restraining order for two months.

An order was given by the High Court that MDSA Resources be at liberty to issue the finalised Explanatory Statement (ES) to the creditors pursuant to section 369 CA 2016. The respondent had again opposed and objected to the application at this stage.

On 2.12.2020 and 3.12.2020, the Notice of the Scheme Meeting and the ES were sent to the Scheme Creditors. In the ES, the main terms of the scheme were presented to the creditors which include the following: a) A total of RM167.4 million will be waived by the Scheme Creditors. The balance RM206.6 million will be transferred and vested in Resolve Resources Sdn Bhd, a special purpose vehicle (SPV). b) MDSA Resources will be released and discharged from all claims and liabilities. c) Earmarked properties of an approximate value of RM142.2 million transferred to the SPV. 8 d) MDSA Resources will inject further assets up to RM64.4 million into the SPV. e) The earmarked properties may be sold in 3 to 5 years. The proceeds will be channelled to the SPV to be distributed. f) A recovery rate of 70% if MDSA Resources is to go under the proposed scheme, and a recovery rate of 44.9% if MDSA Resources is to go under liquidation.

On 13.1.2021, MDSA Resources held the Scheme Meeting virtually.

90.4% in value of the Scheme Creditors (amounting to RM283,882,044.00 of the debts of the Proposed Scheme) present and voting, voted in favour of the Proposed Scheme. [13] On 18.1.2021, MDSA Resources filed the Sanction Application in the High Court to sanction the Proposed Scheme, which was dismissed and subsequently affirmed by the Court of Appeal. PROCEEDINGS IN THE HIGH COURT [14] The learned High Court Judge found that the scheme of arrangement as reflected in the ES is unfair and unequitable. The crux of the High Court’s decision is outlined as follows: a. The Hatten Group Scheme Creditors should not have been categorised together with the Third-Party Scheme Creditors; 9 b. the 3 to 5 years recovery period set out in the Proposed Scheme was unrealistic in the current economic conditions; and c. there is no evidence to show that the SPV has experience in dealing with large amounts of assets and debts. [15] With regards to the classification of the creditors for the purpose of the Scheme Meeting, the High Court held that the Hatten Group Creditors had considerable influence and played a significant role in securing the majority 75% favouring the scheme. [16] In answering whether the statutory “majority of 75% of the total value of creditors… present” under section 366(3) CA 2016 was reached in a transparent and equitable manner and “fairly represents the class in question” (namely in this present case, the “unsecured creditors”), the High Court relied on the Singaporean Court of Appeal case, Wah Yuen Electrical Engineering Pte Ltd v Singapore Cables Manufacturers Pte Ltd [2003] 3 SLR(R) 629 at para [35] which ruled that, in exercising their discretion to approve a scheme, the Court should treat with reserve, related parties’ votes, as such votes may be motivated by personal or special interests to disregard the interests of the class and vote in a self-centred manner. The High Court also referred to the Hong Kong Court of Final Appeal decision in the case of UDL Argos Engineering & Heavy Industries Co Ltd v. Li Oi Lin [2002] 1 HKC 172 (which is also referred to as Re UDL Holdings & Ors in this judgment), where the Court may disregard or discount the votes of members who have personal or special interests in supporting the proposals that their views cannot be regarded 10 as fairly representative of the class in question (Paragraphs [52] to [56] of the High Court judgment). [17] Given the facts that Hatten Group Creditors are related parties creditors and the debts owed to them exceed the minimum 75%, it is crucial for MDSA Resources to explain to the Third Party Creditors the effect of the compromise or arrangement and stating, with particular reference to any material interests of the directors; whether as directors or as members or as creditors of the company or otherwise and the effect of the compromise or arrangement so far as it is different from the effect on the similar interests of other persons (Para [61] of the High Court Judgment). There was insufficiency of information in the Application for Sanction by MDSA Resources such as the ES, and the Account’s Report in respect of Hatten Group Creditors debts to the applicant (Para [63] of the High Court Judgment). [18] Ultimately, the High Court finds that the Proposed Scheme was unreasonable because:  The provision under the Proposed Scheme to waive and discharge all the debts owing by MDSA Resources to the Scheme Creditors was to the detriment and expense of the Third-Party Scheme Creditors (paragraph [71] of the High Court Judgment); and  as the Proposed Scheme involved the disposal of earmarked properties, the uncertainty in the property market conditions made the scheme undesirable and unreasonable (Paragraph [74] of the High Court Judgment). 11 PROCEEDINGS IN THE COURT OF APPEAL [19] The issues that arose for adjudication before the panel are:

Whether the composition of the Scheme Creditors was unfair;

(ii) whether there was non-disclosure of material needed; and

(iii) whether the scheme of arrangement was reasonable. [20] On 2.3.2022, the Court of Appeal dismissed MDSA Resources’ appeal and affirmed the learned High Court Judge’s decision premised on the following grounds: a) The composition of the class of creditors, comprising the Third-Party Creditors and the MDSA Resources’ creditors to constitute a single class of the scheme creditors, was unfair, uneven and downright lop-sided. They should not have been lumped together in a single group. The composition of the Scheme Creditors could not be regarded as fairly representative of the class in question. b) The Hatten Group Creditors which formed the dominant group, were all related to MDSA Resources as they comprised MDSA Resources' ultimate holding companies, subsidiaries, directors and related parties with common directors. The Hatten Group Creditors would obviously be in favour of the scheme of arrangement. On the other hand, the Third-Party Creditors, were not related to MDSA Resources and they had disparate and distinct interests from Hatten Group Creditors. The Third-Party Creditors 12 would obviously be keen to safeguard their interest, including preserving their right to recover maximum debts owed to them by MDSA Resources compared to MDSA Resources’ creditors. The MDSA Resources’ creditors outnumbered the Third-Party Creditors who, because of their relative number to the former, would not effectively be able to challenge the MDSA Resources’ creditors. The MDSA Resources’ creditors, because of their sheer number, would decisively be in a position to vote in favour of the scheme of arrangement. c) MDSA Resources failed to explain sufficiently the full effect of the arrangement and the difference in effect, to the Third-Party Creditors as against the other creditors. MDSA Resources had not been transparent about the circumstances giving rise to the related party debts. There was, therefore, a material non-disclosure of the information needed. d) The scheme of arrangement required RM167.4 million of debts to the scheme creditors by MDSA Resources to be waived. However, there was no indication in the books of MDSA Resources as to how this large amount was derived at. The Proposed Scheme also required that MDSA Resources shall be irrevocably, permanently, unconditionally, completely and absolutely released and discharged from all claims and liabilities to all the scheme creditors. The Third-Party Creditors, including the 13 respondent, would be left in a bind if the proposals above were accepted. They could no longer claim their money in full from MDSA Resources. e) Furthermore, the scheme of arrangement provided for the undertaking by MDSA Resources to inject assets of RM64.2 million but there was no explanation how this huge amount would be raised. There was no reason to disagree with the findings of fact by the High Court that the sanction for the scheme of arrangement should not be given as the same was unreasonable, unfair and not equitable. f) The panel of the Court of Appeal found that the High Court did not err in refusing the sanction, as such there was no reason to disturb the High Court's decision in disallowing to extend the Restraining Order. The latter must be contingent upon the former. As the application for sanction was rightly dismissed, the Restraining Order could not be sustained and be allowed to continue. Likewise, there was absolutely no reason for the High Court to allow RRSB’s application to intervene as the SPV, once the applications for sanction and approval of the scheme of arrangement were dismissed. PROCEEDINGS AT THE FEDERAL COURT [21] Dissatisfied with the decision of the Court of Appeal, the Appellant now appeal to the Federal Court premised upon the aforesaid questions of law. 14 [22] After hearing and giving due consideration to submissions, both oral and written, from both parties, and also the grounds of the High Court and Court of Appeal and the Records of Appeal, I am satisfied that there are merits in MDSA Resources’ appeal. It is my finding that the High Court and the Court of Appeal had erred. The following are my reasons in so deciding. The Mechanism and Requirement in a Scheme of Arrangement: [23] A scheme of arrangement is an agreement between a financially distressed company and its creditors to assist the company to fulfil its debts obligations. This scheme of arrangement operates by restructuring the debts of the company and varying the creditors’ debts, as opposed to immediate liquidation. It is one of a corporate rescue mechanism provided under sections 366 and 368 of the CA 2016 which involved a court sanctioned process. It involves a 3 stage process before a scheme of arrangement is considered to be successful, namely: a) The first stage – Convening stage: This is where the company, creditor, member, liquidator (if the company is being wound up), or the judicial manager (if the company is under judicial management) makes an application to the court under Section 366(1) of the CA 2016 for leave to convene a meeting between the creditors and the members (scheme meeting). This is the initial early stage where the court in granting leave will consider and determine, inter alia, the correct classification of creditors, and how the Scheme Creditors’ Meeting to be conducted. Any issue in relation to a possible need for separate meetings for different classes of creditors ought to be raised at the application hearing. The company is also 15 required to submit an outline of the scheme in the form of a draft ES which would adequately justify the court granting leave to convene a scheme meeting. Unless the applicant applies for a restraining order at the convening stage itself, there is no automatic moratorium for creditors to commence legal proceedings against the company, After the court grants permission for the applicant to convene the meeting, the applicant will continue to engage with its creditors to negotiate the terms of the scheme before the meeting. b) 2nd stage is the court-approved meeting: Prior to the court-approved meeting, a notice of the same will have to be advertised and served pursuant to Sections 366 and 369 of the CA 2016. In the court-approved meeting, proposals for the scheme are presented. In this meeting, the proposed scheme must be approved by a majority of 75% of the total value of creditors present and voting, either in person or by proxy. c) 3rd stage: The Court’s Sanction: Once the 75% approval has been granted for the proposed scheme, the applicant will then make a second application to court to sanction the approved scheme of arrangement. The 3rd stage is the stage where the court will scrutinise the scheme to ensure that the statutory provisions has been complied with, taking into account the following factors: 16 i) Whether the class was fairly represented at the meeting; ii) whether there was coercion of the minority by the majority to approve the scheme of arrangement; iii) whether the scheme was a fair scheme, one which an intelligent and honest man, being a member of the class concerned and acting in respect of his interest would reasonably approve; and iv) whether there is any ‘taint’ or defect in the scheme (See Re Sateras Resources (Malaysia) Bhd [2005] 6 CLJ 194; Re Noble Group Ltd [2018] EWHC 309 (Ch)). [24] Once satisfied that the statutory provisions have been complied with, the court may grant the sanction, subject to additional conditions and alterations where it sees fit. Upon sanction being granted by the Court, the scheme of arrangement will bind the company, its members, liquidators and contributories of all classes of creditors, including the minority creditors who may have opposed the scheme. Unanimous approval of the scheme is not a requirement for the sanction to be granted. A copy of the sanction order shall be lodged with the Companies Commission of Malaysia and annexed to every copy of the company’s constitution issued after the order was made. 17 DECISION AND ANALYSIS [25] What is of much concern, is the decisions of both the High Court and the Court of Appeal on the application of the law in relation to scheme of arrangement, to the facts of the present case. In addressing the leave questions posed, this judgment will answer those questions under the following issues/headings and the application of the law to the facts herein: a) Whether the creditors were rightly classified; b) the weight to be given to the votes of related party creditors; c) can the Court depart from its earlier decision in the initial stage on the classification of creditors; and d) whether the disclosure in the ES is adequate. A) Whether the creditors were rightly classified: [26] The Courts below held that the Hatten Group Creditors and the Third Party Scheme Creditors should not be classed together in a single class, as it does not provide a fair representation of the class of creditors. In this respect, it is crucial to determine whether the creditors were rightly classified. Essentially this will address leave Questions 1, 2 and 9. In the present case the Scheme Creditors consist of the following: i) The Hatten Group Scheme Creditors: - these are holding companies, subsidiaries and directors of MDSA Resources; and 18 ii) 3rd party scheme creditors of MDSA Resources: - these are creditors under the GRR arrangement and non - Hatten Group Trade Creditors. [27] These 2 group of Scheme Creditors are grouped into one single class of unsecured creditors in the Proposed Scheme. MDSA Resources’ stand is that, the 3rd Party Scheme Creditors and the Hatten Group Scheme Creditors all have the same legal rights against MDSA Resources, and hence they should be classified under the same class. The respondent, the High Court and the Court of Appeal have taken the position, that related party creditors, vis-à-vis the Hatten Group Scheme Creditors can never be classified and vote in the same class as other creditors, due to the considerable influence and significant role played by the Hatten Group of Creditors in securing the majority vote of 75% favouring the scheme. [28] As far as the CA 2016 is concerned, there is no definition of related party creditors in the scheme of arrangement provisions and neither is there any distinction between such creditor and creditors. Therefore, there is no statutory basis in the CA 2016 for a scheme of arrangement to split classification of a “related party creditors” from that of other creditors. This is unlike other jurisdictions’ corporate rehabilitation provisions which incorporate wordings to make a distinction between mere creditors and “related party creditors” (section 249 of the UK Insolvency Act 1986; sections 64(4) (d) and 65 of the Singapore Insolvency Restructuring and Dissolution Act 2018). \ [29] Although we have references in the CA 2016 as to when corporations are deemed to be related, associated or connected to one 19 another, but these references within the CA 2016 have never been incorporated into the scheme of arrangement provisions in the same, which can justify the statutory distinction between “creditors” and “related party creditors” in a scheme of arrangement (refer to sections 7, 8(5), 197, 59, 225, 228, 229 of the CA 2016). [30] Hence, in the absence of such express wordings in the CA 2016, this Court ought to exercise caution in upholding a finding by the Court of Appeal in the present case that unsecured creditors and related party creditors “to constitute a single class of the scheme creditors is unfair, uneven and downright lopsided” and the High Court judgment which held that related party creditors “should not even be allowed to vote.” [31] There is yet to be a Federal Court decision on the approach to be taken on the issue of classification of scheme creditors in a scheme of arrangement Our High Courts have 2 divergent approaches, which is either based on: a) interests; or b) legal rights against a company and not interest outside of legal rights. [32] The High Court case of Re Sateras Resources (Malaysia) Bhd, adopted the application of the first approach, when there was only one group of creditors (secured, unsecured and subsidiaries), the court refused to grant sanction. It was held to be manifestly unfair to group subsidiaries within the same class of creditors with petitioner’s unsecured creditors as there was divergence of interest and no community of interest. 20 [33] The second approach was taken by the recent High Court decision of Air Asia X Bhd v BOC Aviation Ltd & Ors [2021] 10 MLJ 92 which held that there is nothing to suggest that their rights as unsecured creditors are any different from other creditors in its class to warrant putting them in different class. [34] The English case of Sovereign Life Assurance Co v Dodd [1892] 2 QB 573 enunciated the test to determine which creditors fall into a separate class. It ruled that “a class must be confined to those persons whose rights are not so dissimilar as to make it impossible to consult together with a view to their common interest.” [35] Other jurisdiction like Hong Kong, through the decision of Lord Millet NPJ in the Court of Final Appeal in Re UDL Holdings & Ors [2002] I HKC 172, preferred to classify creditors based on legal rights of the creditors against the company, not based on interests outside of these legal rights. He explained that although the internal creditors in the proposed schemes of arrangement undoubtedly had special interest in promoting the schemes, this does not disqualify them from being treated as ordinary creditors. Lord Millet NPJ explained the test for classification of creditors in a scheme (page 180) as follows: “(3) The test is based on similarity or dissimilarity of legal rights against the company, not on similarity or dissimilarity of interests not derived from such legal rights. The fact that individuals may hold divergent views based on their private interests not derived from their legal rights against the company is not a ground for calling separate meetings.” 21 [36] The test in Sovereign Life Assurance Co v Dodd has been referred to, by this Court in Francis Augustine Pereira v Dataran Mantin Sdn Bhd & Ors and Other Appeals [2014] 6 MLJ 56 which ruled that: “A class of creditors is determined by their common interest, such interest separating them from other creditors with whom they are unable to consult together in respect of that common interests.” An illustration of “common interest” test is that unsecured creditors should not be classified with secured creditors like Banks with financing facilities and a charge over the company’s land because both parties have different interests as to whether the Scheme should be approved. [37] Our High Court in Transmile Group Berhad & Anor v Malaysian Trustee Bhd & Ors [2012] 9 CLJ 1071, adopted the test by the Hong Kong Court of Final Appeal in Re UDL Holdings and allowed the application for sanction of the scheme of arrangement in the case. It held that the possibility that the same creditors may procure an advantage from additional benefits does not, ipso facto, necessitate separate classification. In this case there were objections raised in relation to related corporations who were scheme creditors who voted in the scheme of arrangement and their votes were sought to be disregarded or discounted. It was held that the legal rights and benefits enjoyed by each of them as members within a class were the same, justifying the test that it was possible for them as class members to consult together with a view to their common interests. 22 [38] The learned Ong Chee Kwan JC in the case of Top Builders Capital Bhd & Ors v Seng Long Construction & Engineering Sdn Bhd & Ors [2022] 8 MLJ 604, dealt extensively with the issue of whether 3rd party creditors and related party unsecured creditors could be classified together in a scheme of arrangement and whether there should be discounting or disregarding of the related party creditors’ votes. His Lordship maintained his stand as in Air AsiaX, namely that all unsecured scheme creditors and the related company creditors should be classified into the same class as both have the same legal right of recourse against the appellants. There was nothing to suggest that the related company creditors’ rights are any different from other creditors in its class to warrant placing them in a different class. The determination of the classification is that both groups of creditors must have the same legal rights to claim payment of debts owed under the scheme. Even if the related company creditors had chosen to waive their entitlement to the adjudicated debts under the scheme for the benefit of the scheme companies, did not mean that their legal rights under the scheme were dissimilar to the legal rights of the other unsecured creditors. They should not be placed in separate classes of creditors, even though their personal or subjective interests in the scheme may differ, for example, the related company creditors had a subjective interests in ensuring the continuity of the business of the scheme companies, whereas the non-related creditors were only interested on recovering their debts owed to them by the scheme companies. [39] The Singapore Court of Appeal in Wah Yuen Electrical Engineering Pte Ltd v Singapore Cables Manufacturers Pte Ltd [2003] SGCA 23, after referring to the test classification in the decision of the Court of Final Appeal in Re UDL Holdings had confirmed that related 23 party creditors do not have to vote as separate class just because they are related party creditors. [40] Case law authorities from the United Kingdom, Hong Kong and Singapore hold a common stand, namely, the test for classification of creditors is based on similarity or dissimilarity of legal rights of the creditors against the company, although “special interests” of the creditors may affect the Court’s decision on whether to sanction the scheme. Where related company creditors are concerned, these commonwealth jurisdictions have classified creditors based on creditors’ strict legal rights rather than their subjective interests or benefits claimed from the proposed scheme. [41] Applying the principles of law from the various jurisdictions as aforesaid to the present case, the High Court and the Court of Appeal erroneously held that the Hatten Group of Scheme Creditors and the 3rd Party Scheme Creditors of MDSA Resources should not be classified together in one class. Case law authorities and the development of the law from the various jurisdictions on scheme of arrangement speak with one voice with regards to classification of creditors. [42] The focus of the respondent herein, the High Court and the Court of Appeal is on the “special or subjective interests” of the Third-Party Creditors, which is contrary to the decisions of the aforesaid case law authorities. In addition, the respondent applies the concepts of “rights” and “interests” interchangeably when it states that “it would be impossible for the Hatten Group creditors to consult with the unrelated third party creditors as their interests were not common and distinctly dissimilar…the Third-party Group especially the GRR creditors including 24 the Respondent are in a different position from the Hatten Group Creditors as the Respondent suffered an additional variation of rights not suffered by the Hatten Group Creditors such as to pay the service charges, advertising funds and sinking fund of the units leased under the GRR.” The respondent also states that “since the related unsecured creditors and the Third-Party Creditors have different rights and interest, they should have been separately classed.” [43] The respondent further relied on the judgment of Hildyard J in Re Lehman Brothers International Europe (in administration) [2018] EWHC 1980 (Ch) which states “the Court had declined to engage with the issue of classification of creditors until the final sanction hearing…” as authority for the proposition that the Court in the said case declined to engage with the classification of creditors as paperwork had been done at the leave stage and the administrators of the scheme had submitted that 4 scheme meetings would be held for each group of creditors.

Firstly, on the issue of classification of creditors, the authorities speak with one voice, i.e. that related party creditors who have similar legal rights against the company as other creditors, not based on interests. If they are all unsecured creditors, generally they should all be grouped within the same class; and

(ii) secondly, on the appropriate weight to be given to the votes, it is an exercise of discretion by the court at the sanction stage, to determine whether the class was fairly 38 represented. The “but for” test provides a useful guide to determine whether there were adverse interests of the related party creditors which had driven their votes. [70] With the 2 different stages which entails the court to determine, firstly, the classification of creditors and secondly, the appropriate weight to be given to the votes of the creditors, the High Court and the Court of Appeal in the present case had conflated both the 2 stages in determination of the classification and the appropriate weight to be accorded to the votes. In this respect, both the Courts had erred. The High Court held that the Hatten Group of Unsecured Creditors “cannot be regarded as fairly representative of the class in question” and therefore should be disregarded totally and that “the Hatten Group Creditors should not even be allowed to vote.” This decision was upheld by the Court of Appeal when it held that “the composition of this class of creditors, comprising the third party creditors and the Hatten Group Scheme Creditors to constitute a single class of the scheme creditors is unfair, uneven and downright lop-sided.” [71] These pronouncements by both of the Courts below, in conflating the determination of the classification of creditors and the determination on the weight to be accorded to the votes (in the present case, disregarding the votes), are contrary to established case laws from the various jurisdictions. Both Courts, had erred in their findings in conflating the 2 stages of determination. [72] Therefore, in answering Questions 1 and 2; at the sanction stage, ultimately the Court has a discretion to determine whether the related party creditors had interests which is adverse to the class as a whole 39 which were directly linked to their votes. There is no absolute rule whether to discount or disregard certain scheme creditors’ votes especially where they are related party creditors in a scheme of arrangement. It is better to adopt the flexible approach by applying discretionary factors depending on the facts of each case. This scheme framework which gives the court the discretion and flexibility to discount creditor’s votes at the sanction stage enables the Court to adequately consider issues of varying creditors’ interests (and not rights) without having to limit such considerations into the principles of classification. Question 1 is answered in the negative. Question 2 is irrelevant in view of the answer to Question

Question 9 is therefore answered in the negative. C) Can a Court depart from its earlier determination on classification of Creditors: [73] This will address Questions 3 and 4. [74] Any issue with regards to a possible need for a separate meetings for different classes of creditors ought to have been raised at the application hearing. In the present case, the High Court agreed with MDSA Resources at the initial application stage that there should be a single class of creditors, namely unsecured creditors, and that there should be a meeting of a single class of creditors. Thereafter, on 10.9.2020, the learned High Court Judge granted leave for the convening of the scheme meeting of creditors. 40 [75] On 23.11.2020 the learned High Court Judge made an order granting MDSA Resources the liberty to issue notice of the scheme meeting and approved the issuance of the ES. Again the learned High Court Judge agreed for a meeting of a single class of creditors (all are unsecured creditors). The respondent opposed this Order and argued for a different classification, which the learned High Court Judge overruled. [76] However, the learned High Court Judge subsequently departed from his earlier determination in the classification of creditors when rejecting the scheme sanction on 29.11.2020. The learned High Court Judge in his oral grounds held that the Hatten Group Scheme Creditors should not have been classified or categorised together with the Third Party Scheme Creditors. In the written grounds, the High Court emphasized that this is not a question of merely a wrong classification but also that “Hatten Group Scheme Creditors should not even be allowed to vote.” This decision of the High Court was affirmed by the Court of Appeal. [77] 2 issues arise as a result of both of the Courts’ decision below:

When is the correct stage to determine the classification of creditors, is it at the initial stage of leave or the 3rd stage of sanction; and

(ii) Can the Court depart from its earlier determination on the classification of creditors. C)(i) When is the correct stage to determine the classification of creditors [78] As far as case laws are concerned, there are 2 approaches adopted by the different jurisdictions on the appropriate stage of determination the classification of creditors, i.e: 41 i) at the initial stage of leave; and ii) at the 3rd stage of sanction. [79] The English, Singapore and the Malaysian Courts follow the 1st approach i.e. at the initial stage of leave. Whereas the Hong Kong Courts follow the 2nd approach. [80] In Re Hawke Insurance Co Ltd [2001] 2 BCLC 480 Chadwick J held that “Leaving the question of classification to the 3rd stage of sanction would mean that a “wrong decision” (on the classification) by the applicant at the onset will have led to a considerable waste of time and expense. This was unacceptable and this would lead to the court (at the 3rd stage) reviewing its earlier order made at the 1st stage.” As a result of Re Hawke Insurance, the Chancery Division of the English High Court issued The English High Court Practice Statement (Companies Scheme of Arrangement) [2002] 1 WLR 1345 (Ch) which codified the preferred English approach to enable issues concerning the composition of classes of creditors and the summoning of meetings to be identified and if appropriate resolve early in the proceedings. This makes it clear as to the court’s function at the convening stage to deal with any question of jurisdiction. [81] The Singapore Court of Appeal in The Royal Bank of Scotland considered The English High Court Practice Statement (Companies Scheme of Arrangement) and contrasting with the Hong Kong approach in Re UDL Holdings. The Singapore Courts follow the English High Court 42 Practice Statement for determination of classification of creditors at the 1st stage of leave. [82] As far as Malaysia is concerned, the High Court case of Air AsiaX follow the English approach which can be discerned at paragraphs 33, 39, 46 and 49 of the judgment. The High Court did not follow the Hong Kong approach in Re UDL Holdings, which leave the question of proper classification of creditors to the 3rd stage of sanction. Although the Hong Kong Court in Re UDL Holdings took note of Re Hawke Insurance and the English High Court Practice Statement (Companies Scheme of Arrangement), it refused to follow the English approach. The Hong Kong Court expressed its concern of having to determine at the first stage of leave that the “only alternative would be to require the initial application to be made inter partes”, with the risk of incurring costs of a contested hearing and possible appeals to attract sufficient support in any event. If the question is to be left to the third stage of sanction, the outcome of the meeting would be known and the question of classification would no longer be hypothetical and can be argued between the appropriate parties (Page 224). [83] I agree with the submission by the appellant which is consistent with Re Hawke Insurance and the English High Court Practice Statement (Companies Scheme of Arrangement); the correct approach to take, is to have the question of classification of creditors determined at the first stage of leave for the following reasons. [84] The question of proper classification of creditors goes towards jurisdiction of the Court to sanction a scheme, where, if the classes are not properly constituted, the court has no jurisdiction to sanction the 43 scheme. Therefore, it is pertinent that there be certainty in navigating the rights/interests distinction. Hence, if the class of creditors is not determined at the outset, the convening of the meetings of the creditors may be an exercise in futility if it were later determined that there was some error in classification. This can result in the Scheme Company having to restart the entire process again. VK Rajah JA in The Royal Bank of Scotland aptly put it in the proper context when he said that: “without a preliminary determination of the correct classification of creditors, how can it be known whether a scheme is likely to attract sufficient support and subsequently pass muster.” [85] VK Rajah JA in The Royal Bank of Scotland also addressed the concerns raised by the Hong Kong Court in Re UDL Holdings when he said that: “[62] Concerns about delays and contentious proceedings at an early stage may be somewhat overstated as the court has complete carriage over timelines and the conduct of the proceedings in our view, even if there is a need at this stage to hear potentially dissenting creditors, such a hearing could usually be conducted expeditiously and summarily. Having considered the relative advantageous of both approaches, we are inclined to prefer the approach in the Practice Statement which commends itself for the greater degree of certainty it injects into the process of passing a scheme.” [86] The Malaysian High Court in Air Asia X adopted the views expressed by VK Rajah JA in the Royal Bank of Scotland (at para 48 of the judgment). However, it was emphasized by the court, which I truly 44 agree, that the decisions taken by the Court as to the classification of the classes at the convening stage is not to be treated as final and the Court is not bound by this decision (see para 49 of the judgment). This will be address in detail in the later paragraphs to this judgment. [87] Further, as part of the flexibility of the Scheme of Arrangement as a debt restructuring mechanism, MDSA Resources, as a Scheme Company, is free to choose the group of creditors with whom it wishes to enter into a scheme of arrangement. (Refer to this Court decision in Francis a/l Augustine Pereira v Dataran Mantin Sdn Bhd & Ors and anor appeal). There can be a scheme of arrangement for one distinct class of creditors. The applicant company has a discretion not to compromise with all creditors, and “the mere exclusion of a certain creditor does not give rise to the imputation of mala fide or abuse of process” (para 46-51 of the judgment). [88] This freedom of choice given to the applicant company was also approved in Re Bluebrook Ltd and other Companies [2009] EWHC 2114 (Ch). The English Court of Appeal in Assets Ltd v Perseroan etc Garuda Indonesia [2001] EWCA Civ 1869 aptly described the position accurately. It was argued by the opposing creditor that, in allowing the scheme company to select the members of the class of creditors to be brought within the scheme, would enable the company to pick a class as would outvote an opposing creditor. The Court held that this argument ignores the commercial realities where the scheme company has to procure the approval of 75 % of the class and the Court said that: “But such an example to my mind ignores the commercial realities. No company proposing a scheme will want to leave out of the scheme creditors other than those with whom they 45 have reached agreement or those with whom agreement is impossible but who have to be paid in full if the company if the company is to survive. Nor will it want to put forward a scheme with an arbitrary selection of creditors to be bound by it when it has to procure not only the approval of 75% of the scheme creditors subject to the scheme but also the sanction of the court.” (Emphasis included) [89] Therefore, MDSA Resources has a discretion on which creditors to include or exclude from the Proposed Scheme. [90] To summarise, the correct approach to take, on the determination of classification of creditors is at the first stage of leave. C)(ii) Can the Court depart from its decision at the initial leave stage on classification of creditors. [91] Next we come to the issue of whether the Court can depart from its decision at the initial leave stage on classification of creditors. The development under English law is that when the Court determines the classification of creditors at the 1st stage of leave, the Court at the third stage should be slow to depart from its earlier determination. Malaysian High Court case of Top Builders have referred to this English law development. There is no Federal Court decision on this point. Our Singapore counterpart has not canvassed on this issue. [92] The English High Court in Re Apcoa Parking, has this to say with regards to departure from its earlier decision on the classification of creditors: 46 “[43] It is however, important to emphasize that the function of the court at the Convening Hearing is a limited one; and its decision, even on the question as to the composition of classes is not final, even though the court can be expected not to change its mind, of its own motion, at the third stage on matters it decided at the first stage (since to do so would tend to subvert the purpose of the revised practice) (Emphasis included) [93] Further in Re Lehman Brothers the English High Court emphasized the issue of legitimate expectation on the part of the applicant company: “whilst the court’s decision at that stage is not final, the applicant has a legitimate expectation that, unless circumstances materially alter or fresh considerations are put before it which the court accepts should be addressed, the court will not of its own motion change its mind.” (Emphasis included) [94] The English High Court decision in Re Stronghold Insurance Co Ltd [2019] 2 BCLC 11 at para 32 held that: “[32] … a decision at the first stage does not bind the court at the 3rd stage, though of course the court is unlikely to depart from a reasoned conclusion at an earlier stage without change of circumstance or very good reason.” (Emphasis included) [95] Our High Court in Top Builders adopted the approach by the English Courts in Re Apcoa Parking and Re Lehman Brothers, which I view as being the sound approach, namely the court should be slow to 47 depart from its earlier decision on classification of creditors made at the 1st stage of leave unless there is a change of circumstances or other fresh evidence placed before the court. This approach would complement the determination on the issue of classification being at the 1st stage. If this were not the case, it would subvert the practice of early determination and result in the tremendous waste of time and costs as identified in Re Hawke Insurance. [96] In the present case, the High Court had fully addressed its mind at the 1st leave stage on the proper classification for a single class of creditors as the creditors were all unsecured creditors who shared similar legal rights. The High Court at the 3rd stage of sanction ought not to have departed from its earlier determination on the classification of creditors, as there is nothing placed before the court of any change in circumstances or fresh evidence. [97] The answers to Questions 3 and 4 are both in the affirmative. D) Whether the disclosure in Explanatory Statement (ES) is adequate: [98] The question to be asked is, to what extent of disclosure necessary for the ES in relation to the creditors’ debts. This relates to the Questions of law in No. 5, 6 and 7. [99] These questions arise from the High Court findings which was affirmed by the COA of alleged non-disclosure in the sanction application and accompanying documents on the related party debts. The High Court held that there was no indication as to the nature of the debts owing to the Hatten Group Scheme creditors (being related party creditors). In 48 addition, there was no reason given for the increase in the total current liabilities or whether the increase was the increase in “trade and other payables” (para 65 of the High Court grounds). [100] However, it was submitted by MDSA Resources that this was only raised by the learned High Court Judge in his written grounds which was provided after the sanction hearing. This is rather odd in view of the fact that his Lordship had earlier granted an Order that MDSA Resources was at liberty to issue the ES which was before His Lordship together with the extension of the restraining order and leave to hold the scheme meeting. As a result of the said Order, the ES and the notice of the scheme meeting were then issued to the creditors which subsequently led the scheme meeting being held on 13.1.2021. Clearly, the High Court had addressed its mind on the adequacy of disclosure of the contents of the ES at that stage. [101] Despite the aforesaid, the HC chose to depart from its earlier decision and raising completely new issues of non-disclosure only in its grounds of judgment at the sanction stage. In affirming the judgment of the High Court, the Court of Appeal said that there was thus a “material non-disclosure” of the information needed in relation to the related party debts (Page 44 in enclosure 31). [102] As to what is the required content of the ES, one can discerned from section 369(1)(a) of the CA 2916 which provides: “(1) If a meeting is summoned under this Subdivision, every notice summoning the meeting-

which is sent to a creditor or member shall be accompanied with a statement explaining the effect of 49 the compromise or arrangement and in particular stating any material interests of the directors, whether as directors or as members or as creditors of the company or otherwise, and the effect of the compromise or arrangement so far as it is different from the effect on the similar interests of other persons.” (Emphasis included) [103] Essentially, section 369(1)(a) of CA 2016 states that, the ES must explain the effect of the scheme and in particular any material interests of the directors. In situation where there are material interests of the directors, and where the effect of the scheme is different in relation to these interests compared to similar interests of other persons, this should be disclosed in the ES. However, the said section is silent on disclosure in relation to debts of the scheme company. [104] In this regard, case laws like Wah Yuen, expressed its view that if it were a condition precedent that a company had to satisfy each creditor of the genesis and extent of all its debts before the scheme could be put to vote, the entire process would be cumbersome, and administratively inconvenient: “[18] Nevertheless, as much as we shared Singapore Cables’ concern over Wah Yuen’s lack of transparency over its related party debts, we were of the opinion that it was better dealt with when the bona fides of the related parties’ votes or the merits of the proposed scheme were assessed. If it were a condition precedent that a company had to satisfy each creditor of the genesis and extent of all of its debts before the scheme could be put to the vote, the entire process would be cumbersome 50 and administratively inconvenient, especially when the scheme might itself already provide for a procedure for the adjudication of claims for voting purposes (as it did in this case). Any remaining concerns, therefore, were better dealt with on a discretionary basis. [105] The above passage in Wah Yuen was also referred to by the Singapore Court of Appeal in The Royal Bank of Scotland when it dealt with the issue of whether scheme creditors are entitled to examine the proofs of debt submitted by other creditors in respect of a proposed scheme. The Court in The Royal Bank of Scotland held that, in principle, a creditor has no legal right to have access to proofs of debt of other creditors, except where his voting rights have been or are likely to be affected. This access to proofs of debts is only available to the creditor upon prima facie evidence of impropriety in the admission or rejection of such proofs of debt. [106] Top Builders dealt with this issue of disclosure in the ES, when certain creditors in a scheme of arrangement alleged that there was insufficient disclosure in the ES in relation to the details of the intercompany and related company creditors; debts filed in support of the sanction application in that this was inconsistent with the sums stated in the list of creditors attached to the ES. The learned JC found that the applicants had replied to the opposing creditors by way of letter, stating that intercompany creditors had filed their proofs of debt with the necessary ledgers to support their claims, where the figures matched the existing books and records. Referring to The Royal Bank of Scotland, the learned JC held as follows in relation to disclosures: 51 “In any case, it is not a precondition for the applicants to satisfy each creditor of the extent of its debts and liabilities owed by the applicants to other creditors unless the opposing creditors have shown some prima facie impropriety in the admission of these debts.” [107] Top Builders also dealt with the complaint that the financial records submitted in support of the sanction application did not reflect the value of the intercompany creditors and/or the related company creditors’ debts as stated in the list of creditors in the ES and that the audited financial statements of the applicants had not been finalised. Top Builders referred to the English High Court decision in Re Sunbird Business Services Ltd [2020] EWHC 3459 (Ch) and held at para 150 that the test was: “[150] …whether any defects that have been shown to exist in the scheme documentation would be likely to have made any difference to the particular scheme creditors affected by the scheme.” In other words, the crucial issue to decide is whether the omitted information would have changed any of the creditors’ views on the merits of the scheme. The Court in Top Builders held that: “[155] Notwithstanding the complaints raised on the inconsistencies between the financial records and the value of the intercompany and or related company debts as listed in the list of creditors in the ES. SESB has not demonstrated that any of the creditors who had voted on the schemes was 52 under “any serious misapprehension of the risks and rewards.” (Emphasis included) [108] Gleaning from the aforesaid authorities, the following principles can be distilled, on the extent of disclosure of information required in the ES:

The applicant company for the scheme is not required to provide the genesis and extent of all debts owed to each creditor, unless there is evidence of some prima facie impropriety in the admission of these debts. The terms of the ES should be sufficient to enable the Scheme Creditors to arrive at a commercial decision on a fully and properly informed basis.

(ii) Where there is any omission of information, the test is whether the omitted information would have changed any of the creditors’ views on the merits of the scheme. [109] In any event, even if the court finds that there is any omission of information which would have the effect of changing any of the creditors’ views on the merits of the scheme, authorities from the various commonwealth jurisdictions have shown that the court may order for remedial measures to be taken, like a re-issuance of the ES and re-voting of the creditors at a re-convened meeting. Although there are no Malaysian authorities on this specific point, the Courts in Singapore, UK and Hong Kong have dealt with this issue when they held that further meetings may be ordered by the Court as part of the remedial measures where the Court declines to sanction the scheme. 53 [110] Illustrations can be found in Re Century Sun International Ltd [2022] HKCF 1237, a decision of the Hong Kong Court of 1st instance which dealt with instances where the Court found that the ES was too brief and was lacking of the standard of disclosure required. The Court did not dismiss sanction outright, as the Court found that the scheme company had put forward the proposed scheme in good faith. Instead, the Court made an order for the scheme company to convene a further meeting after producing an adequate ES and addressing the issues and concerns which were identified by the Court and the opposing creditors, before ultimately sanctioning the scheme. The Court held that: “[3] The petition is unopposed before me today. I am satisfied that the concerns that I explain in my reported decision about the adequacy of the information provided to scheme directors in the original ES have been resolved. It is permissible for the court to direct a second scheme meeting and to sanction a scheme at a petition presented relying on the statutory majority achieved at the second scheme meeting.” [111] Similarly, in the English High Court case of Re Smith & Williamson Holdings Ltd [2020] EWHC 3931 (Ch), a members’ scheme of arrangement had been duly approved by the shareholders on 13.11.2019. Despite such approval, when the matter was before the Court on 30.6.2020, the Court issued directions for the convening of a further meeting because the terms of the scheme had changed drastically since the first court hearing to convene the meetings. After the second meeting had been convened and the necessary requirements had been met with, the court then sanctioned the scheme. 54 [112] The Singapore Court of Appeal in the case of The Royal Bank of Scotland held that the meetings convened had not been properly constituted. The Court set aside the sanction of the scheme of arrangement and ordered further meetings to be called for the same scheme to be put to a re-vote, subject to certain directions given by the Court in relation to voting rights of the creditors. The Court then subsequently sanctioned the scheme, with further alterations of the judgment (Para 178). [113] Given the aforesaid authorities, in situation where the Court finds that there had been inadequate disclosure or some material particulars which are clearly wanting in the ES, the Court is vested with the power to order further meetings of the creditors to be held with an amended ES to be circulated where necessary. [114] MDSA Resources had always maintained its financial disclosures to the High Court, as illustrated in its applications for a restraining order, where MDSA Resources had filed three Statements of Affairs dated 29.6.2020, 28.10.2020 and 17.1.2021. MDSA Resources had also disclosed its Audited Financial Statements for 2018 and 2019 in its Affidavit dated 7.8.2020. [115] Further disclosures were made by MDSA Resources of its Audited Financial Statements for 2018 and 2019, and its Unaudited Statement of Financial Position as at 30.6.2020 compared to the Audited Statement of Financial Position as at 30.6.2019 in the ES which was sent out to the Scheme Creditors. 55 [116] The total current liabilities did not show much change from the 30.6.3019 Unaudited Statement to the 30.6.2020 Audited Statement (RM361,127,853.00 vs RM333,452,617.00). In any event, the respondent had never questioned these amounts nor questioned the debt amounts. [117] Neither did the learned High Court Judge and the respondent raise the issue of an alleged non-disclosure by MDSA Resources in the sanction application and accompanying documents regarding the debts of the Hatten Group Scheme Creditors at any time during the proceedings. The learned High Court Judge only raised it in his written grounds of judgment, namely: a) “There was also no indication in the Unaudited Report up to June 2020 nor the Audited Report up to June 2019 as to the nature of the RM276,084,693.78 debts due to the 19 related parties to the Applicant.” b) “In this regard this Court observes a significant increase of RM27,674,236.00 from RM333,453,617.00 to RM361,127,853.00 in the Applicant’s Total Current Liabilities as shown in the Audited Account as at 30.6.2019 and the Unaudited Account as at 30.6.2020. There is no explanation as to why there was an increase or whether this increase was associated with the related parties’ claims.” c) “More specifically there was no reason attributed the increase in respect of “Trade and other payables" under "Current 56 liabilities” whereas of year ended 30 June 2018 the sum was RM190,108,926.00…As at end of June 2020 however the “Trade and other payables" had increased to RM277,527,829.00. This amounted to an increase of RM87.463,903.00.” [118] The respondent had accepted these figures and had never raised any challenge of non-disclosure. In fact, the respondent had relied on the figures as set out in MDSA Resources’ ES in his affidavits. [119) The Learned High Court Judge relied heavily on the analysis in the Singapore case of Wah Yuen, stating that there was a “significant increase” in the applicant’s total current liabilities. Wah Yuen was an authority that the Learned High Court Judge raised himself for the first time in his written Grounds of Judgment. [120] Wah Yuen is premised on different facts; the Singapore Court of Appeal held that the related party debts deserved “close scrutiny” because of the extent to which the quantum of these changed within a short period of time (see [14] and [34] of the judgment) The “dramatic increase” was specifically in relation to the debts of the directors, where this was a drastic 1208% increase from $161,188.00 to $2,109,390.00 from 1999 to 2000. [121] Compared to the present case, where the increase referred to by the learned High Court Judge at paragraph 65 of the written Grounds of Judgment is a small increase of RM27,674,236.00 (8%) in the total current liabilities from 2019 to 2020, bringing this from RM333,453,617.00 to RM361,127,853.00. The increase in “Trade and other payables” mentioned by the Learned High Court Judge was an increase of 46% in 2 57 years, from 2018 to 2020, i.e. from RM190,108,926.00 to RM277,527,829.00. This does not provide a ground to question the financial statements. [122] There was no query by the learned High Court Judge on the financial statements or figures in the ES throughout the proceedings. In fact, on 23.11.2020, the Learned High Court Judge had granted liberty to issue the ES where this was the final ES with the same figures. These findings of the High Court were then erroneously affirmed by the Court of Appeal when it held that based on section 369(1)(a) of the CA 2016, “explanation must also be given to show the difference in effect to the Third-party creditors as against the other creditors”. [123] If one is to refer to the requirements under section 369(1)(a) CA 2016, i.e. the phrase “to show the difference in effect to the Third-party creditors as against the other creditors”, this only applies to the material interests of directors. As far as the material interests of the directors, it had been set out in the ES. The English High Court case of Re Sunbird affirmed this point, where there was a challenge regarding the omission in the explanatory statement of interests of 4 scheme creditors who were the family of one of the directors. The English High Court referred to section 897 of the UK Companies Act 2006 which is similar to section 369(1)(a) of our CA 2016. The Court held that the omission “did not amount to a failure to make disclosure of the interests of the directors contrary to section 897 CA 2006, because the persons omitted from the table were not themselves directors.” [124] The respondent in his submissions alleges MDSA Resources failed to disclose Hatten Land Limited’s (being the Singapore-listed ultimate 58 holding company in the Hatten Group) responses to queries from the Singapore Exchange where Hatten Land Limited stated that: “Total debt owing to the scheme creditors under the proposed scheme of MDSA Resources is approximately RM322 million, out of which approximately 79% of the debt is owing to entities within the Group, which will be eliminated at consolidation”. The respondent interpreted this to mean that “the entire debt inclusive of outstanding sum due and owing to the Respondent and other non-Hatten related creditors shall be deemed as bad debts and to be written off.” [125] The elimination of debts of the Hatten Group entities for consolidation of the Group financial statements would not have been affected by the Proposed Scheme and would not have changed any of the creditors’ views on the scheme (applying the test in Re Apcoa and Re Lehman Brothers). At the MDSA Resources level, the debts would still be a liability. It is not a matter of pre-empting the approval of the Proposed Scheme which would always be subject to the approval by the Scheme Creditors and sanction by the Court. [126] The respondent further alleges that there was a “preconception among the Hatten Group Creditors that the scheme had to be voted in so as to eliminate [MDSA Resources’] debt”. This is a misinterpretation of the usage of the term “eliminate” in light of the accounting procedure outlined above. In any event, there would have to be the requisite statutory approval of the Proposed Scheme at the Scheme Meeting and subsequent approval of the Proposed Scheme by the Court. [127] Given the aforesaid, on the issue of non-disclosure by MDSA Resources, it is a non-starter. In any event, even assuming that there was 59 such an omission of this information (which was never proven), such information would not have changed any of the creditors’ views on the merits of the scheme. [128] Be that as it may, even if the Courts below were to find that there is any omission in the ES, the Court may make orders for the Scheme Meeting to be reconvened with an updated Explanatory Statement, especially where the scheme is bona fide. In the present case, nowhere did the Courts below made any findings that the scheme was not bona fide. [129] Applying the principles of the law to the facts of our present case, it is my considered view that there was sufficient disclosure in the ES in relation to the Proposed Scheme and disclosure of MDSA Resources’ financial circumstances and debts to the Scheme Creditors and to the Court. MDSA Resources is not required to provide the genesis and extent of all the debts owed to each creditor. Further, there is no evidence adduced by the respondent of any prima facie impropriety in the admission of the Hatten Group Scheme Creditors’ debts. [130] Going back to the Questions, in answering Question 5, the challenge to the adequacy of disclosure in the ES issued under section 369(1)(a) of the CA 2016 should be at the stage before the Court approves the issuance of the ES. For Question 6 the answer is a Yes. For Question 7 the answer is a No. Courts’ role in granting Sanction of the Scheme of Arrangement [131] Essentially, this area will address Questions 8 and 10. 60 [132] These questions arise from the findings of the Courts below where both the High Court and the Court of Appeal questioned the commercial viability of the scheme despite 90.4 % of the scheme creditors voted in favour of the Proposed Scheme. The Court of Appeal held that they found no reason to disagree with the “finding of fact” made by the High Court that the “scheme is “unreasonable, unfair and not equitable.” In this regard, both the Courts below had substituted their view with that of the view of 90.4 % of the Scheme Creditors who voted in favour of the Proposed Scheme. With due respect, both Courts erred in this area. [133] In addressing both Questions 8 and 10, it is important to look at the role of the Court at the sanction stage. In this respect, Buckley on Companies Act, 14th Edition, 1981 quoted the English High Court case of Re Apcoa Parking which held that: “In exercising its power of sanction the court will see, first, that the provisions of the statute have been complied with, second, that the class was fairly represented by those who attended the meeting and that the statutory majority were acting bona fide and are not coercing the minority in order to promote interests adverse to those of the class whom they purport to represent and thirdly, that the arrangement is such as an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve. The court does not sit merely to see that the majority are acting bona fide and thereupon to register the decision of the meeting, but, at the same time, the court will be slow to differ from the meeting, unless either the class has not been properly 61 consulted, or the meeting has not considered the matter with a view to the interests of the class which it is empowered to bind, or some blot is found in the scheme.” (Emphasis included) [134] The Court in Re Apcoa Parking further explained the courts’ role at the sanction stage: “[128] The court’s role is not to substitute its own assessment of what is reasonable for that of the creditors. They are much better judges of what is in the commercial interests of the class they represent than the court. Emphasis included [129] These authorities make clear that the court must give full weight to the decision of the creditors, acting in their capacity as members of the class in which they are voting. It is not sufficient for the court to determine that it would have reached the same decision as the creditors themselves reached. In the absence of some procedural or jurisdictional hurdle (or some blot on the face of the scheme itself), the court should only decline to sanction the scheme if an intelligent and honest member of the relevant class acting in respect of his interest could not reasonably have approved it.” (Emphasis included) [135] The Malaysian High Courts and the other Commonwealth jurisdictions weave a common thread in their stand that the Court should not substitute its own assessment of what is reasonable for that of the 62 creditors, as can be seen from decided cases in the subsequent paragraphs. [136] Our High Court in Transmile (paragraphs [103]-[104]) is such a case, where the opposing creditor wanted to withhold sanction on the ground that the scheme creditors would benefit more from a winding up of the scheme company rather than implementation of the scheme. After setting out an analysis of the cases of the Commonwealth jurisdictions in relation to the role of the courts at the sanction stage, Nallini J (as she then was) held that such a finding would be a commercial assessment of the relative merits of the scheme, and the Court is not to substitute its judgment on the affairs of business for the judgment of the scheme creditors. [137] The High Court case of TH Heavy Engineering Berhad & 3 Ors [2018] MLJU 466 and Ramli Ali J in Re Sateras Resources (Malaysia) Bhd also echoed the same principles as set out in Buckley on Companies Act, 14th Edition, 1981. [138] As far as Singapore is concerned, Judith Prakash J in the High Court case of Re Reliance National Asia Re Pte Ltd [2007] SGHC 206, held that the Court would be reluctant to substitute its own commercial judgment for that of the creditors as to the fairness and reasonableness of the scheme (paragraph 35 of the judgment). [139] The Supreme Court of Victoria in Re Axa Asia Pacific Holdings Ltd [2011] VSC 4, held in relation to the courts’ role in sanctioning the scheme of arrangement, that: 63 “[13] It is clear that the role of the court is supervisory, but that this does not involve the “second guessing” of the commercial judgment of the shareholders or to substitute its own commercial judgment. The nature of the jurisdiction was described by Emmet J in Re Central Pacific Minerals NL as follows: “[13] The jurisdiction of the Court in relation to an arrangement is supervisory, in the sense that the Court is concerned to be satisfied that there has been an absence of oppression and that the arrangement is one that is capable of being accepted. For example, the court will withhold its approval where a majority is shown to be acting in bad faith or where a majority’s acceptance is in the nature of a fraud on the minority. The Court will, of course, generally take the view that the shareholders are the best judges of whether an arrangement is to their commercial advantage and will be reluctant to make decisions contrary to the views of the security holders expressed at the meetings. The function of the Court does not extend to usurping the views of the relevant security holders.” [140] Contrary to this principle, the learned High Court Judge in his written grounds of judgment questioned several aspects of the commercial viability of the Proposed Scheme, despite 90.4 % of the Scheme Creditors voted in favour of the said Scheme. The learned High Court Judge set out, among others, the following main “unsatisfactory features” at [69] to 64 [83] of the judgment for finding that the Proposed Scheme was “unreasonable”:

The Proposed Scheme requires that RM167.4 million owing to the Scheme Creditors are to be waived in the books of MDSA Resources, however, “there was nevertheless nothing to indicate how such a large sum of RM167.4 million was derived”.

(ii) The waiver and release of all debts owed to the Scheme Creditors was done “merely to perpetuate the existence of MDSA Resources to the detriment of the Third Party Scheme Creditors in particular,” where these creditors “would no longer have an avenue against [MDSA Resources] if the Court sanctions the scheme”.

(iii) How the undertaking of RM64.2 million would be raised was not explained, and most of the assets of MDSA Resources consist of fixed assets which may have to be sold to raise that amount.

(iv) There are various eventualities to overcome with the earmarked properties such as the release of the charge on the properties by Haitong International Financial Products (Singapore) Pte Ltd, and the sale of the Earmarked Properties depending on property market conditions. [141] The Court of Appeal in turn affirmed the findings of the High Court above, and held that: 65

The Proposed Scheme “proposes huge MDS Resources’ debts to be largely written off with little benefit to the stakeholders, especially the Third-party creditors.”

(vi) The Third Party Scheme Creditors will be “left in a bind” if the Proposed Scheme is accepted, and that “they could no longer claim their money in full” from MDSA Resources.

(vii) “On top of that, the learned [High Court Judge] also found the total liabilities of [MDSA Resources] had exceeded its total assets”. [142] I will address these alleged “unsatisfactory features” of the proposed scheme. [143] On the issue that RM167.4 million owing to the Scheme Creditors are to be waived in the books of MDSA Resources; this waiver of debt has been explained in the ES where it states that the Third-party creditors will recover 70% of their debts (being RM68.6 million) and the Hatten Group Scheme Creditors will recover 50% of their debts (being RM138 million). The remainder amount amounting to RM167.4 million (i.e. RM374.2 million – (RM68.6 million + RM138) would be waived under the scheme of arrangement. This is part of the deal to be made by MDSA Resources with its creditors, where this is the compromise/haircut to be taken by the Scheme Creditors on their debts. The total debt of the Proposed Scheme is approximately RM374.2 million. [144] It is to be borne in mind that a scheme of arrangement necessarily involves a “compromise of debt” by the company’s creditors. A scheme 66 of arrangement is a rehabilitation process where creditors compromise in accepting less than the full amount in final satisfaction of their debts, rather than enforcing their full claim on the debts or winding up the company. [145] Similarly, in our case, the waiver, release and discharge of all debts owed to the Scheme Creditors is part of the restructuring of debt under the scheme of arrangement. It would not make commercial sense of entering into a scheme of arrangement where the Scheme Creditors, after agreeing to a compromise of their debt, could then continue to claim their money in full from MDSA Resources. [146] On the argument regarding the uncertainty in the sale of the earmarked properties, they are mere speculation, bare unsubstantiated averments and is devoid of merits. In any event, MDSA Resources had taken advice on the restructuring and prepared the ES with its financial advisors, KPMG who have taken the view that the scheme is more viable to MDSA Resources and the creditors, as opposed to liquidation. [147] The Court of Appeal further supported the so called High Court findings of fact that MDSA Resources’ total liabilities exceeded its total assets; this decision shows that both the Courts below misunderstood the purpose of a scheme of arrangement. A Scheme of Arrangement is for the restructuring of the financial affairs of a company heavily burdened with debt, and is usually resorted to when the company is insolvent but there is some possibility of avoiding liquidation. This Court in Primus (Malaysia) Sdn Bhd v Rin Kei Mei & Ors [2012] 1 CLJ 176, at [43], as 67 per Mohd Ghazali Yusoff FCJ explained the previous section 176 of the CA 1965: “The common use of such a scheme is the restructuring of the financial affairs of a company heavily burdened with debt. Section 176 is usually resorted to when the company is insolvent but there is some possibility of avoiding liquidation. Such a scheme may be able to save viable businesses resulting ultimately in a benefit to the creditors. Through such schemes, the company may be able to reach a compromise with creditors where the creditors agree to accept less than the amounts owed to them.” (Emphasis included) [148] In the present case, a total of only 294 out of the 1636 Third Party Scheme Creditors attended the Scheme Meeting. This amounts to just 38.6% of the total value of the Third Party Scheme Creditors’ debts, which effectively swayed the vote towards approval of the Proposed Scheme. [149] As far as the law and the historical development of scheme of arrangement it is Parliament’s intention that when scheme creditors absent themselves from the scheme meeting, it is taken to be a neutral or positive vote in favour of the proposed scheme. Non presence at the meeting of scheme creditors is no longer treated as a vote against the scheme, effectively lowering the approval threshold. (See Jennifer Payne (2014) ‘Schemes of Arrangement – Theory, Structure and Operation’ (1st edn.) Cambridge University Press, page 9). This wording of “present and voting” was adopted even under the original section 176 of the Companies Act 1965 and was retained in section 366 of the CA

68 [150] The Third Party Scheme Creditors who opted not to show up at the Scheme Meeting effectively allowed the affirmative votes by the majority. In the present case, it cannot be said that this is a lop-sided outcome but a natural result of the effect of the statutory provision that has been adopted in Malaysia and other jurisdictions for scheme of arrangement. [151] On the facts, on the issue whether the Proposed Scheme is reasonable and fair; a perusal of the main terms of the same which were set out in the ES shows that the Proposed Scheme is one that an honest and intelligent person would reasonably approve, as can be seen from the following:

The Scheme Creditors would take a total haircut of approximately RM167.4 million of the total debts owing to them. This would be waived in MDSA Resources’ books. The net debt amount of approximately RM206.6 million would be transferred and vested in the SPV; and

(ii) MDSA Resources would inject assets into the scheme as follows: a. Certain units in Elements Mall in Malacca of an approximate value of RM142.2 million (“earmarked properties”). These earmarked properties would be earmarked to the SPV to be sold. b. MDSA Resources would give an undertaking to inject further assets of up to RM64.4 million. 69

(iii) The SPV would be placed under Creditors’ Voluntary Liquidation (CVL) whereby the partners of KPMG will be appointed as liquidators of the SPV. This is to allow for a finite life of the existence, to ensure that the earmarked properties are disposed of by way of open tender or private treaty, and for the proceeds to be paid out to the Scheme Creditors (“proceeds”). After taking into account variables, the earmarked properties may be sold within three (3) to five (5) years;

(iv) The proceeds from the disposal of the earmarked properties would be used to pay the Third Party Scheme Creditors in priority to the Hatten Group Scheme Creditors. This would be a sum equivalent to a 70% recovery of their debts in the Proposed Scheme, i.e. RM68.6 million. Thus, the estimated disposal proceeds of the earmarked properties of RM142 million is more than 2 times the value of the Proposed Scheme pay-out. This gives the Third Party Scheme Creditors an incredibly large amount of security and buffer for payment under the Proposed Scheme.

The Hatten Group Scheme Creditors would only receive an anticipated 50% recovery of their debts in the Proposed Scheme.

(vi) In relation to the creditors under the GRR (“GRR Creditors”), the completed units would be returned immediately to the GRR Creditors upon the sanction of the Proposed Scheme. GRR Creditors would then be able to rent out or utilise these 70 units immediately upon the sanction of the Proposed Scheme, enabling them to derive some income and/or benefit from these units, pending recovery of monies under the Proposed Scheme.

(vii) Taking into account practical considerations that the earmarked properties may not be able to be sold effectively in the current economic conditions, it makes commercial sense to wait a few more years for the property market to recover so as to obtain the best possible outcome from the sale of the earmarked properties.

(viii) The Proposed Scheme ensures that the Hatten Group Scheme Creditors are not unduly penalised in the outcome, so that MDSA Resources is able to continue its business of operating the hotel, service residences and shopping malls for the collective benefit of all parties, including the Third Party Scheme Creditors. [152] In contrast to a liquidation scenario of MDSA Resources, all the Scheme Creditors would have a lower maximum recovery of only 44.9%. Should the Court hearing the Scheme Sanction based its decision on issues not raised nor addressed by parties. [153] This issue arises from the learned High Court Judge’s judgment which covered a vast majority of findings and authorities which were never addressed by the parties during the hearing or oral decision of the learned High Court Judge, where the parties were not accorded the opportunity to address these issues. 71 [154] The issue of the undertaking of MDSA Resources to inject further assets of RM64.2 million is one such instance. The respondent states that it was never explained as to how this amount would be raised by MDSA Resources. However, this issue was never raised by the respondent in any of his affidavits. In any event, the ES has set out that the Third Party Scheme Creditors will be paid first from the proceeds of sale of the earmarked properties where the estimated disposal proceeds are more than twice the proposed pay-out under the Scheme to the Third Party Scheme Creditors. [155] The respondent also raised in his submissions on the issue of the declaration of dividends by MDSA Resources; again this was never raised in the affidavit by the respondent, hence depriving MDSA Resources the opportunity to respond to this on affidavit. Be that as it may, this issue is irrelevant to the assessment of the merits of the Proposed Scheme by the Scheme Creditors. [156] The respondent also refers to an event whereby Hatten Group provided a response on 5.4.2022 to the Singapore Exchange’s query in relation to entering into a “Crypto Mining Facility and Support Services Agreement” with a new partner. The respondent alleges that MDSA Resources is “trying to siphon out the cash of the…company under the pretext of ‘a new business’”. This query and response occurred after the decisions of the High Court on 29.1.2021 and the Court of Appeal on 2.3.2022, and is therefore equally irrelevant. Again, this is not on affidavit and the allegation that MDSA Resources is “trying to siphon out the cash” is a bare allegation, devoid of merits and evidence. 72 [157] For the aforesaid allegations which were never raised in the affidavits of the respondent, MDSA Resources has been deprived of the opportunity to defend those allegations. On this issue this Court in Pacific Forest Industries Sdn Bhd & Anor v Lin Wen-Chih & Anor [2009] 6 MLJ 303 held that “it is dangerous and totally unadvisable” for the Court to consider any point without reliance on the pleadings or submissions by the counsel appearing before them. If the Judge thinks that there are points which are relevant to the case before him and was not raised by either party, the Judge has a duty to highlight that to the parties and give both parties an opportunity to further submit on those points. It has a detrimental effect as explained by this Court in para 17: “[17] The effect of a judge making a decision on an issue not based on the pleadings and without hearing the parties on that particular issue would be in breach of the latin maxim audi alteram partem, which literally means, to hear the other side, a basic principle of natural justice.” [158] A party cannot raise a new argument on appeal unless the Court is satisfied that it has before it all the facts bearing upon the new contention. [159] This Court has also emphasized this principle of natural justice, vis- à-vis, the right to be heard in Dato’ Tan Chin Who v Dato’ Yalumallai @ M.Ramalingam s/o V. Muthusamy [20116] 5 MLJ 590. The Federal Court held that, “whenever the Court proposes to consider a fresh issue which the court considers to be pertinent to the case before it, it should give the parties the right to make submissions on the proposed issue before arriving at its finding.” 73 [160] I take note that the principles in Pacific Forest were decided in the context of the matter was an adversarial process whether through trial or OS, nevertheless in a scheme of arrangement proceedings, it becomes more pertinent for the Court to give the scheme company a chance to address issues which the Court considers relevant before coming to a finding. In Re Hawke Insurance the English High Court granted leave at the 1st stage. The scheme passed the voting at the 2nd stage. At the third stage, none of the Scheme Creditors intervene in the court proceedings and there was no opposition. Nevertheless, Arden J at the sanction stage raised the Court’s objections that the creditors should not have been classified in a single class as well as other concerns. Arden J said that the Court could not sanction the scheme with those concerns but then adjourned the sanction hearing. This would allow the applicant’s counsel to further address the issue. [161] Thus the principle in Pacific Forest applies that the Court should only decide on any scheme of arrangement based on pleadings and after hearing parties on the objections. [162] The answer to Question 8 is in the affirmative. CONCLUSION [163] Given the aforesaid, to summarise, the answers to the Questions are as follows:  Question 1 the answer is a No.  Question 2 is irrelevant in view of the answer to Question 1.  Question 3 the answer is ‘at the leave stage”.  Question 4 the answer is a yes. 74  Question 5 the answer is: the adequacy of disclosure in the ES issued under section 369(1)(a) of the CA 2016 should be at the stage before the Court approves the issuance of the ES.  Question 6 the answer is a Yes.  Question 7 the answer is a No.  Question 8 the answer is a Yes.  Question 9 the answer is a No.  Question 10 the answer is a Yes. [164] It is not sufficient for the Court only to ascertain that the statutory conditions have been complied with, in approving a scheme of arrangement: the Court must go further than that. In going the distance, I am satisfied that the statutory majority which are to bind the dissentient minority have acted bona fide, they have not acted adversely to those whom they professed to represent, and, ultimately, the proposed scheme of arrangement is a fair one, which an intelligent and honest man being a member of the class concerned and acting in respect of his interest would reasonably approve. The Court must give full weight to the decision of the Scheme Creditors (in this case 90.4 % voted in favour of the Scheme), acting in their capacity as members of the class in which they are voting. The percentage reflects a desire on the part of an overwhelming majority in value and in number of the scheme creditors wanting the scheme. It is not for the court to determine that it would not have reached the same decision as the creditors themselves reached. [165] Given the aforesaid, in the absence of some procedural or jurisdictional hurdle or some taint on the face of the Proposed Scheme itself, I allow the application for sanction for the scheme of arrangement. 75 The High Court and the Court of Appeal had erred in dismissing the application for sanction. [166] I therefore allow the appeal of the appellant with costs. Zabariah Mohd Yusof Judge Federal Court of Malaysia Putrajaya Date: 4.7.2023 COUNSEL: Lee Shih together with Nathalie Ker for the Appellant (Messrs. Lim Chee Wee Partnership) Y. Y. Ho together with Nai Mei Kei for the Respondent (Messrs. Y. Y. Ho & Lee)