Disputes Digest | Malaysia’s Cross-Class Cram Down: Can a Dissenting Creditor be placed in a Standalone Class?

Background

• KL Petrogas encountered financial difficulties following enforcement action by SA Puncak under financing facilities exceeding RM22 million. SA Puncak subsequently terminated the financing facilities and appointed Receivers and Managers over KL Petrogas pursuant to the debenture.[7]
• In separate proceedings (Suit 787), the High Court held that certain agreements relating to the pre-factoring facility were unenforceable and that the debenture was void to the extent it secured that facility. Accordingly, SA Puncak was treated as an unsecured creditor for KL Petrogas’s proposed restructuring. The decision remains subject to appeal.[8]
• Against this backdrop, KL Petrogas sought an order from the HC to convene meetings of its creditors for the purposes of considering and approving a scheme of arrangement.
• Under the initial proposed scheme (“Scheme 1”), all unsecured creditors were placed in a single class and would be repaid on a pari passu basis.
  • However, SA Puncak, holding approximately 29% of the unsecured debt, made clear that it intended to vote against Scheme 1.[9]
• To overcome this, KL Petrogas proposed a revised scheme (“Scheme 2”) by invoking the cross-class cram down regime under S.368D CA 2016, as illustrated below.
  • The strategy for Scheme 2 was straightforward: if Class A achieved the requisite 75% statutory majority, KL Petrogas could seek to invoke the cram down mechanism under S.368D CA 2016 to bind Class B notwithstanding SA Puncak’s dissent. The HC described this as an “audacious move”[10].

• The question before the HC was whether the proposed cross-class structure presented an obvious “roadblock” or abuse of process such that the HC should refuse to convene the creditor meetings.

HC Decision & Key Findings

The HC granted the convening order after considering comparative jurisprudence from the UK, US and Singapore. Central to the HC’s reasoning was the legislative purpose underlying S.368D CA 2016.[11] As the HC observed:

“…the very objective and purpose of the cram down legislation, to prevent a recalcitrant creditor from vetoing a beneficial scheme that is wanted by the other creditors”[12].

The HC’s reasoning can broadly be distilled as follows: –

(1) The 75% Statutory Threshold [13]

(2) The Applicable ‘Fairness’ Test

• Under a conventional scheme of arrangement[15], the Court generally applies the “limited rationality” test, i.e., whether an intelligent and honest creditor, acting in their own interest, could reasonably approve the scheme.
• However, the HC held that this test is not appropriate in the context of cross-class schemes[16]. Unlike a conventional scheme, a cross-class cram down necessarily involves a creditor class that has not approved the proposed scheme by the requisite statutory majority. As such, fairness cannot simply be assumed from creditor approval.
  • The HC further observed that the “limited rationality” test merely serves as a “cross-check” to an affirmative vote of the creditor class and therefore has no application where the Dissenting Class has not approved the scheme.
  • Instead, the HC held that the appropriate inquiry is whether the restructuring achieves a fair distribution of the benefits it generates among the affected creditor classes[17].
• Accordingly, the Court must consider (1) whether the restructuring benefits are fairly distributed among creditor classes and (2) whether the dissenting class is treated fairly and equitably.
• On the facts, the HC found no unfairness at the convening stage. Scheme 2 afforded identical treatment to both classes of unsecured creditors, with all creditors entitled to full repayment on a pari passu [18]

(3) Deliberate Class Composition is not, at the Convening Stage, an Automatic Abuse of Process (S.368 CA 2016)[19]

• SA Puncak argued that placing it into a separate class solely to facilitate a cram down amounted to a “capricious use” of S.368D CA 2016 and an abuse of process. The question before the HC was whether the proposed class composition constituted a “roadblock” or whether Scheme 2 was proposed in bad faith or otherwise amounted to an abuse of process such that the convening order should be refused.
• While recognising that such an argument may be correct under the conventional scheme framework, the HC held that the legal landscape had changed with S.368D CA 2016. At the convening stage, the HC observed that the purpose of the regime is to prevent, in appropriate cases, a dissenting creditor from exercising an unjustified veto over an otherwise beneficial restructuring.
  • In this regard, the HC held that it could “see no reason why a company may not take advantage of the cram down provisions to cram down a hostile creditor with a veto right in the appropriate case.”
• Nevertheless, the HC emphasised that this did not amount to a final determination that the proposed class composition was permissible. Whether the proposed class composition was ultimately bona fide and whether Scheme 2 satisfied the statutory safeguards under S.368D CA 2016 remained fact-sensitive questions to be determined at the sanction stage[20].

Key Takeaways

Conclusion

The decision provides early judicial guidance on Malaysia’s cross-class cram down regime, clarifying that the conventional “limited rationality” test does not apply in the S.368D context and that deliberate creditor class composition is not, by itself, impermissible at the convening stage. However, whether such restructuring is bona fide and whether the statutory safeguards are ultimately satisfied remain matters for determination at the sanction stage.

More broadly, the decision highlights the significance of S.368D in addressing the limitations of conventional schemes, where a single dissenting creditor holding a blocking position could prevent an otherwise viable restructuring from proceeding. By limiting such blocking power while preserving judicial oversight, the regime enables distressed companies to pursue genuine restructuring efforts consistent with the legislative objective of promoting corporate rescue.

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Disclaimer: The content of this article is intended for general informational purposes only and does not constitute formal legal advice. Please refer to the Grounds of Judgment in the Federal Court Civil Appeal No. 02(f)-9-03/2025(W).

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