Schemes of arrangement: High Court provides guidance on classification of creditors, valuation of disputed claims, the effect of side-deals, and proof of debt process
13 April 2026
The High Court decision in Tremendous Entertainment Holdings Berhad v MyCreative Ventures Sdn. Bhd. (WA-24NCC-511-09/2023) is a significant addition to Malaysian restructuring jurisprudence, addressing several foundational aspects of scheme of arrangement practice. While the dispute arose in the context of a relatively straightforward Redeemable Convertible Preference Shares (“RCPS”) restructuring, the judgment traverses broader issues of statutory majority, creditor classification, side deals, and the proof of debt process, with important implications for how schemes are structured and implemented.
This article provides an overview of the court’s decision.
Snapshot
Tremendous Entertainment Holdings Berhad (“Applicant”) convened a meeting of its creditors (“Scheme Meeting”) under section 366(1) of the Companies Act 2016 (“Act”) to propose a scheme of arrangement and compromise (“Proposed Scheme”).
The Proposed Scheme sought to compromise the rights of four different classes of holders of the Applicant’s RCPS, namely RCPS A, RCPS B, RCPS C, and RCPS D (“RCPS holders” or “Scheme Creditors”). Under the terms of the subscription agreements entered into between the RCPS holders and the Applicant, the Applicant was under an obligation to convert the RCPS into ordinary shares at maturity date. If the shares were not converted, the subscription agreements provide that the RCPS will be redeemed at 100% of the RCPS subscription price with an interest of 4% per annum. The Applicant could not fulfil its obligations and proposed replacing the existing RCPS A, B, C and D shares with new RCPS E shares.
MyCreative Ventures Sdn. Bhd. (“Respondent”) is a holder of RCPS C shares. Under the RCPS C subscription agreement, the Applicant had a “separate and independent obligation to immediately pay an amount equal to 100% of the Subscription Price of RCPS C” if the Applicant fails to redeem RCPS C. There is no similar obligation under the share subscription agreements for other classes of RCPS holders.
There was only a single class of creditor in the Proposed Scheme. The Respondent voted against the Proposed Scheme during the Scheme Meeting.
At the hearing of the application for court approval of the Proposed Scheme the Respondent raised issues relating to the computation of the votes at the Scheme Meeting, the improper classification of the Scheme Creditors, and the existence of undisclosed side-deals between the Applicant and other Scheme Creditors.
Judgment
Computation of votes
The first objection raised by the Respondent was whether the Applicant had obtained the votes of the statutory majority of creditors that support the Proposed Scheme during the Scheme Meeting. Under section 366(1) of the Act, the Applicant must demonstrate that the Proposed Scheme was agreed to by a majority of 75% of the Scheme Creditors at the Scheme Meeting.
The divergence between the Applicant's claimed 75.4% and the Respondent’s calculated 71.1% hinged entirely on the treatment of the Respondent itself and the quantum of the debt owed to it.
The Applicant had calculated the voting denominator based on the principal amount plus simple interest. Under this calculation, the Respondent's debt was valued at a lower figure, which inadvertently inflated the percentage of “Yes” votes by the other creditors relative to the total debt pool. The Respondent argued that, under the terms of the default agreement, it was entitled to 18% default interest which the Applicant excluded from the calculation. If included, the total value of the Respondent’s debt would have increased significantly and mathematically reduced the percentage of “Yes” votes given that the Respondent voted against the Proposed Scheme. The result would have fallen below the 75% threshold.
The court found firstly that the burden was on the Applicant to demonstrate that the statutory majority had been achieved, including substantiating the valuation of claims used in the voting analysis. The Applicant failed to adduce sufficient evidence to justify its lower valuation of the Respondent’s debt. The Respondent’s higher claim, which included the default interest, appeared to the court to be sustainable. The statutory threshold would not be met if the higher figure was adopted, and the court emphasised that it could not proceed on speculative or unproven assumptions in order to uphold the scheme. The court concluded that the Applicant had failed to establish that the statutory majority requirement was satisfied.
The Applicant also argued that if 18% default interest was applied to the Respondent, the same rate could be notionally applied to all creditors, thereby preserving the 75.4% ratio. The court held that there was no evidence that other Scheme Creditors were entitled to the same default interest. Thus, imposing a uniform 18% rate across all claims would distort, rather than reflect, the true liabilities.
Classification of creditors
The second issue concerned the Respondent’s wrongful classification of creditor.
The cornerstone of the court's analysis for classification of creditors was the affirmation of the “rights test” for classification, as opposed to the broader “interest test”. The court clarified that the correct legal standard is whether the creditors possess different contractual or legal rights against the company, rather than whether their economic interests might differ.
The court rejected the notion that creditors with different substantive rights against the debtor could validly vote in the same class simply because they share a common financial desire to see the company succeed. In this case, the Respondent argued that its rights under the RCPS C subscription agreement were fundamentally different from other creditors due to the inclusion of a “separate and independent obligation” clause.
The court agreed, stating that the Respondent’s position was not analogous to the other Scheme Creditors; the presence of the separate clause meant that their rights were distinct. Consequently, the court held that the Respondent and any other RCPS C holders with identical contractual terms should have been placed in a separate voting class, with a separate meeting convened for that distinct class.
The court rejected the argument that the failure to object to classification at the convening hearing constitutes a waiver of the right to challenge the scheme’s validity at the sanction stage. It held that the court lacks the jurisdiction to sanction a scheme if the creditors are not properly classified, regardless of whether the parties acknowledged the classification or voted in its favour.
Side deals
In considering if the Proposed Scheme should be approved, the court applied the Buckley test as set out by Buckley J in the English Court of Appeal decision of Re Tea Corporation Ltd [1904] 1 Ch 350. The test specifically addresses whether the scheme is one that an “intelligent and honest man” would reasonably approve, being a member of the class concerned and acting in relation to his interests. In the present matter, the court considered whether, under the second stage of the Buckley test which relates to the creditor meeting(s) during which votes are cast for or against the proposed scheme, “side deals” with selected creditors would amount to an attempt to coerce the minority Scheme Creditors by buying votes of certain creditors to cram down the minority.
The court examined two distinct allegations of side deals presented by the Respondent:
- The “Secret Special Deal”: The Respondent alleged that the Applicant proposed to pay one of the Scheme Creditors an amount of RM279,059.02, which exceeded the RCPS C amount of RM251,315.00 that the Applicant admitted was due; and
- The “Backdated Share Transfer”: The second allegation involved a “backdated share transfer”. This suggested that a creditor was being rewarded not just with a cash settlement, but with an equity position that was artificially dated to give it preferential value or status compared to the rest of the creditors.
At the core of the judgment is the court’s unequivocal stance that side deals are incompatible with the principle of insolvency and arrangement law, describing the practice as “perhaps the most egregious misconduct of any debtor and participating creditors in the scheme process”. The integrity of the voluntary arrangement mechanism relies entirely on the transparency of all material terms presented to the creditor body. Any attempt to secure approval for a scheme by secretly sweetening the deal for specific creditors undermines the very foundation of the collective decision-making process.
Ultimately, however, the court found insufficient proof to show that the “side deals” were in fact implemented.
Proof of debt process
On the issue of proof of debt, it should be noted that the Applicant’s scheme of arrangement was filed before the introduction of the statutory proof of debt process under the Companies (Amendment) Act 2024 (“Amendment Act”). In the absence of a statutory regime for proof of debt, the adjudication of creditor claims in scheme proceedings was largely a matter of practice. Courts and practitioners typically adopted, by analogy, the proof of debt mechanisms applicable in liquidation - both in terms of procedure and evidential standards. This included the submission of proofs, adjudication by the Chairperson (often a licensed insolvency practitioner), and the potential for appeals or challenges within the scheme process.
The central criticism levied by the court is the Applicant’s failure to conduct a comprehensive proof of debt exercise prior to the Scheme Meeting. Instead, the scheme documents contemplated a post-sanction process where the quantum of disputed debts would be determined later, often through an online portal or subsequent court application.
The court described this approach as “ill-conceived”. By leaving the determination of disputed debts for a later date, the Applicant effectively asked creditors to vote on a scheme based on a provisional valuation of their own claims (and others’) without a final, binding determination. The court emphasised that for voting purposes, a deferred process creates an absurdity. If the debts are not quantified before the vote, it will be insufficient to meet the rigorous burden of proving the statutory majority under section 366(3) of the Act when the quantum of debts admitted into the scheme is materially disputed.
The court also emphasised that the proof of debt process should be a “rough and ready” determination that is necessary to ensure that a vote on a proposed scheme is not unduly delayed by contentious and lengthy curial proceedings. Such determination does not however bar the creditor from going back to the court subsequently to seek determinative final adjudication of the same claim on its merits.
The court also made some observations on section 369B, a new provision introduced by way of the Amendment Act. Firstly, the court noted that the statutory timeline provided in section 369B(1) was impractical. The provision mandates that the notice summoning a scheme meeting must specify the period within which a proof of debt is to be filed (“section 369(1) Notice”). By convention, this notice period for meeting is 21 days. Further, the Companies Commission of Malaysia Guidelines dated 1 April 2024 for the “Adjudication of Proof of Debts under Section 369B” provides that the Chairperson shall complete the adjudication of the proofs of debt 28 days before the scheme meeting. This makes it impossible for a large number of claims to be adjudicated in this 21- or 28-day period. This would mean that the giving of the section 369(1) Notice would have to be given months before the date of the scheme meeting to allow the proof of debt process to complete. The court highlighted that a possible solution would be to commence the proof of debt process on a pro-forma basis, months in advance of the scheme meeting with the formal section 369(B) process commencing once the section 369(1) Notice is given.
The court also examined the limitation of the adjudication framework under section 369B(9) of the Act. The provision, in substance, confers a right of appeal from the Chairperson’s determination of claims to an Assessor. Notably, however, the statutory language does not go further to characterise the Assessor as an expert whose determination is final and binding, nor does it expressly exclude recourse to the courts.
In the absence of clear statutory finality, it remains open for dissatisfied creditors to mount a challenge before the High Court against the determination of either the Chairperson or the Assessor. Such challenges would then be subject to the ordinary appellate hierarchy - progressing, where pursued, to the Court of Appeal and ultimately, the Federal Court. The court considered that a scheme company could include as a term of the scheme making the decision of an “expert” adjudicator for voting purposes final and excluding appeals to the Courts for voting purposes.
Comment
Impact of the decision
The decision of the High Court offers several practical lessons that go to the heart of how schemes process should be structured and implemented.
First, on the computation of votes, scheme companies and restructuring advisors must take heed of the court’s emphasis that the burden lies squarely on the scheme proponent to prove that the statutory majority has been met. Attempts to “engineer” the voting outcome such as disregarding contractual interests or by artificially equalising interest rates across creditors to preserve a percentage are unlikely to be entertained, as the court will insist on a reflection of actual legal entitlements in determining the value of votes assigned to the scheme creditors.
Secondly, the decision reaffirms the strict application of the “rights test” in the classification of creditors. The court’s approach makes clear that classification turns on differences in legal rights, not on shared commercial interests. Importantly, misclassification is not a mere procedural irregularity but a jurisdictional defect. This means that the court lacks the power to sanction a scheme where the classes have not been properly constituted, regardless of whether creditors voted in favour or failed to object at the convening stage.
Thirdly, while the court ultimately did not find sufficient evidence to establish the alleged “side deals”, its observations on the issue are instructive. The grant of undisclosed benefits to selected creditors strikes at the core of the pari passu principle and undermines the legitimacy of the scheme process. The pari passu principle is a fundamental legal and financial concept meaning “equal footing” or “ranking equally”. In insolvency, it ensures all unsecured creditors are treated the same, sharing available assets proportionally (pro-rata) based on the size of their claims, rather than by the speed of their recovery. The court noted that even unproven allegations can introduce significant litigation risk and erode confidence in the process. As such, any differential treatment of creditors must be transparently disclosed and capable of justification.
Fourthly, and perhaps most significantly, the decision highlights the central importance of a proper proof of debt process prior to the scheme meeting. The court was critical of the Applicant’s attempt to defer the adjudication of disputed claims to a post-sanction stage, describing such an approach as “ill-conceived”. By doing so, the Applicant effectively invited creditors to vote based on provisional and potentially inaccurate valuations of claims. The court found that this undermined the statutory requirement to demonstrate that the requisite majority has been achieved. While the “rough and ready” approach to claim admission remains permissible for voting purposes, it has clear limits. It is intended to facilitate the voting process in the face of minor or non-material disputes, not to substitute for proper adjudication where significant claims are contested. In cases where the quantum of debt is material and disputed, a more rigorous adjudication process is required before the vote takes place.
Finally, the decision, when read alongside the introduction of section 369B under the Amendment Act, raises important practical considerations for future schemes. While the statutory proof of debt regime introduces a degree of structure, it also presents real timing and procedural challenges. The prescribed timelines for submission and adjudication of proofs may be difficult to reconcile with the realities of complex restructurings involving numerous or disputed claims. In addition, the absence of clear statutory finality in the adjudication process, particularly in light of the right of appeal to an Assessor and the potential for further recourse to the courts introduces a risk of protracted litigation that may delay or disrupt the scheme. It was thus helpful that the court has clarified that scheme companies may adopt practical solutions, such as commencing a proforma proof of debt process well in advance of the formal scheme notice, and incorporating provisions within the scheme to provide for final and binding expert determination for voting purposes.
Further considerations
A point that remains unresolved is the question of finality in the proof of debt process for the purpose of distribution, as the court’s analysis focused on the admissibility and valuation of claims for voting purposes, affirming the “rough and ready” approach. However, the judgment does not clearly address how, or whether, that provisional determination translates into finality for the purpose of distributions under the scheme.
This gives rise to a practical tension. On the one hand, the scheme process requires a degree of finality to enable timely distributions and commercial closure. On the other, the court’s endorsement of the “rough and ready” approach - coupled with its recognition that creditors retain the right to subsequently seek full adjudication on the merits - suggests that determinations made at the voting stage do not conclusively bind the parties.
The question then arises whether a scheme may, as a matter of drafting, introduce a mechanism that provides final and binding determination of claims for distribution purposes, for example through expert adjudication. While such provisions may enhance certainty and expedition, they are not without difficulty. In particular, they may be seen as subverting the parties’ pre-existing contractual choice of dispute resolution forum (e.g. arbitration clauses or agreed court jurisdictions), especially where the scheme purports to displace those rights in favour of a summary determination process.
At the same time, there is a competing and equally compelling consideration, that is, the need for finality within the scheme itself. A scheme cannot function effectively if distributions are indefinitely delayed pending the resolution of protracted disputes in external forums. Commercial reality demands that, at some point, the scheme company must be able to fix the quantum of claims and proceed with distributions, failing which the restructuring risks being undermined by uncertainty and delay.
This is unlikely to be the final word on the issue. As courts continue to grapple with the balance between individual creditor rights and the need for a speedy and final resolution of claims in restructurings, further judicial guidance can be expected on this subject.
A point that does not appear to have been directly addressed by the parties or in the judgment, but which warrants consideration, is whether the Proposed Scheme ought properly to have been structured as a shareholders’ scheme, rather than a creditors’ scheme.
RCPS holders, as preference shareholders, hold equity instruments with embedded contractual rights, including redemption rights, and are not strictly creditors unless and until those rights are exercised or has crystallised. It is only upon the occurrence of a redemption event - particularly where the company fails to redeem - that the obligation to repay the subscription price (with interest) may give rise to a debt claim, thereby placing the holder in the position of a creditor.
In the present case, the Proposed Scheme sought to vary or replace the existing RCPS structure, including the redemption rights, by introducing new RCPS E instruments. This raises the question whether the scheme was, in substance, altering shareholders’ rights, rather than compromising existing creditor claims. If so, there is an argument that the appropriate procedural vehicle may have been a members’ scheme, rather than a creditors’ scheme.
The position is further complicated by the fact that certain RCPS holders, such as the Respondent, may have had contingent or crystallised rights to payment, depending on whether the redemption obligation had been triggered and breached. This creates a potential hybrid or borderline scenario, where holders may simultaneously possess characteristics of both members and creditors. This remains an area where further judicial clarification would be helpful.
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