Lights On, Business On: Keeping Essential Supplies During Judicial Management

In the realm of corporate rehabilitation in Malaysia, judicial management plays a critical role in rehabilitating and preserving financially distressed companies, with the aim of restoring them as viable going concerns. This process allows companies to restructure their debts and operations, enabling them to continue business activities and generate income to navigate their temporary financial challenges.

A key factor in a company’s survival and recovery during judicial management is the uninterrupted supply of essential goods and services. However, this must be carefully balanced with the interests of essential suppliers, who may be hesitant to continue providing these supplies due to the company’s previous defaults or concerns regarding its ability to pay for the supplies.

Recognising this delicate balance, the Companies Act 2016 includes specific safeguards to ensure the continuation of supplies including water, electricity, gas and telecommunications to financially distressed companies, while addressing the legitimate concerns of suppliers. This interplay can be observed in s. 414(7)¹, which provides that:

(a) The supplier may make it a condition of the supply that the judicial manager personally guarantees the payment of any charges in respect of the supply provided after the judicial manager’s appointment.

(b) The supplier shall not make it a condition of the supply that any outstanding charges for the supplies provided to the company before the judicial management order are paid.

In Boulevard Plaza (2020)², the Court of Appeal examined provisions similar to s. 414 (7), save that they concern companies under receivership³. The Court of Appeal made references to the Corporate Law Reform Committee’s report, emphasising that the rationale behind these provisions is “to ensure that suppliers with monopolistic control to continue to provide supply to a company under receivership or judicial management as long as new debts incurred are paid”. While noting that equivalent provisions are present in other jurisdictions, including the United Kingdom⁴, Australia⁵, and New Zealand⁶, the Court of Appeal stressed the importance of adopting a purposive approach to interpret these provisions, and pointed out that the usage of the term “including” suggests that the provision is not limited to water, gas, electricity and telecommunication, but could be extended to encompass other public utilities.

Another significant provision introduced in 2024 is s. 430A⁷, which addresses insolvency-related clauses in contracts. Commonly, such clauses allow parties to terminate a contract if the other party becomes subject to insolvency proceedings. However, this new section seeks to protect the supply of essential goods and services when a company is under judicial management.

The “essential goods and services” defined in the Act include supply of water, electricity, gas, point of sales terminals, computer software and hardware, information, advice and technical assistance in connection with the use of information technology, data storage and processing, and website hosting⁸.

Under this provision, there is now a pre-condition imposed that any supplier of essential goods and services who wishes to exercise its rights to terminate a contract due to the fact the company is subject to insolvency proceedings, must now notify the company in writing at least 30 days in advance before exercising its rights pursuant to the insolvency-related clause⁹. This safeguard is consistent with the overarching goals of corporate rehabilitation in the Companies Act 2016, aiming to ensure that financially distressed companies can continue operations without the abrupt disruption of essential supplies.

Through provisions like s. 414(7) and s. 430A, the law strikes a careful balance between protecting the interests of essential suppliers and providing distressed companies with the necessary resources to stabilize. By safeguarding the flow of critical supplies and offering legal protections, the Companies Act 2016 helps create a conducive environment for recovery, ultimately promoting long-term corporate sustainability and benefiting both suppliers and companies in financial distress.

Authors: Calvin Hooi and Eleanor Kang

References:

1. Section 414 (7), Companies Act 2016 ↩︎
2. Boulevard Plaza Sdn Bhd v Gas District Cooling (Putrajaya) Sdn Bhd [2020] 7 CLJ 1 ↩︎
3. Section 392(6) and (7), Companies Act 2016 ↩︎
4. Section 233, Insolvency Act 1986 ↩︎
5. Section 600F, Corporations Act 2001 ↩︎
6. Section 40, Receiverships Act 1993 ↩︎
7. Section 430A, Companies Act 2016 ↩︎
8. Ninth A Schedule, Companies Act 2016 ↩︎
9. Section 430A(2), Companies Act 2016 ↩︎

The views and opinions attributable to the author(s) of this publication are not to be imputed to the firm, Shan Chambers. The contents of this publication are intended for purposes of general information and academic discussion only. It should not be construed as legal advice or legal opinion on any fact or circumstance.