Scheme of arrangement: High Court refuses sanction despite requisite majority creditors’ approval due to “roadblock” in scheme

30 June 2026

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The High Court decision in KNM Group Bhd & Anor v Hitachi Zosen Corporation & Ors [2026] MLJU 1581 is a significant illustration of the limits of judicial intervention in corporate rescue exercises under section 366 of the Companies Act 2016. In this case, although the proposed schemes of arrangement had the requisite statutory approval from creditors and were supported by the principal financial creditors, the court ultimately refused sanction on the basis that the schemes had become commercially unworkable.

The decision is notable for its detailed consideration of the fourth limb of 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), namely whether there exists any “blot” or “roadblock” that would render the scheme ineffective or inoperable. It reinforces that the court’s role at the sanction stage extends beyond procedural compliance and creditor approval. Even where creditors overwhelmingly support a scheme, the court must still be satisfied that the scheme has a realistic prospect of implementation and is not merely speculative.

Our Partner Kwong Chiew Ee, Senior Associate Prabjit Dev Singh, and Associate Ong Eng Hong acted for two of the successful dissenting creditors in the matter.  

Snapshot

The applicants, KNM Group Berhad (“KNMG”) and KNM Process Systems Sdn Bhd (“KNMPS”), filed their third restructuring application under sections 366 and 368 of the Companies Act 2016. Earlier restructuring attempts had failed.

The latest restructuring involved three classes of creditors, namely secured creditors (Class A), unsecured creditors (Class B), and intercompany creditors (Class C). The proposed restructuring sought to achieve a full and final compromise of indebtedness calculated as at 30 June 2023. After accounting for double counting adjustments, the scheme debt amounted to approximately RM1.188 billion.

The principal source of funding for the schemes was the proposed sale of Deutsche KNM GmbH, an EU asset, to NGK Insulators Ltd (“NGK”) for €270 million under a sale, purchase, and transfer agreement dated 27 February 2025 (“Borsig Disposal”). According to the explanatory statement, the Borsig Disposal would generate approximately RM1.14 billion, representing around 96% of the scheme debt. The schemes contemplated a waterfall repayment structure funded primarily through the proceeds of the disposal.

Although the schemes had initially been presented as a managed sale process, the applicants subsequently revised the restructuring proposal to preserve the KNM Group. Nevertheless, the repayment mechanics remained fundamentally dependent on the completion of the Borsig Disposal. The court noted that there was no dispute that if the Borsig sale failed, the schemes themselves would fail.

The scheme meetings were held virtually on 11 August 2025, and the schemes obtained the statutory majority approval required under section 366(3). While several minority trade creditors opposed sanction, the principal majority financial creditors supported the schemes.

However, difficulties subsequently arose in relation to regulatory approvals. Bursa Malaysia rejected KNM’s regularisation plan on 3 October 2025. As a result, a condition precedent under the Borsig Disposal sale agreement requiring Bursa Malaysia’s approval of the regularisation plan could not be fulfilled. Under the explanatory statement and notices issued to creditors, completion of the condition precedents under the Borsig sale agreement was itself a condition precedent to the schemes taking effect.

The position deteriorated further when NGK formally withdrew from the transaction on 29 January 2026. Although the applicants sought to preserve their legal position by issuing a letter of demand against NGK and explored discussions with alternative purchasers, no binding agreements, letters of intent, or replacement funding arrangements had been secured.

Judgment

At the hearing of the sanction application, several minority creditors opposed the court granting sanction to the schemes notwithstanding that the requisite statutory majority approval had already been obtained at the scheme meetings. While some objections were raised, the court ultimately focused on whether there existed a “roadblock” or “blot” which rendered the schemes incapable of implementation.

Even after creditors approve a scheme by the statutory majority under section 366(3), the court retains an independent supervisory role at the sanction stage. The High Court affirmed the well-established four-stage Buckley test for sanction of a scheme which requires consideration of whether:

• the statutory requirements had been complied with;
• creditors were fairly represented and the majority was not coercing the minority;
• the scheme was one that a reasonable creditor could approve; and
• there existed any “blot” or defect rendering the scheme unlawful or ineffective.

In the present matter, the court found that the collapse of the proposed disposal transaction constituted precisely such a “roadblock”; the schemes were heavily dependent on the disposal proceeds as the primary source of repayment to creditors. However, Bursa Malaysia’s rejection of the regularisation plan meant that a key condition precedent under the sale agreement could not be fulfilled. Matters deteriorated further with NGK’s withdrawal from the transaction altogether, which fundamentally undermined the commercial viability of the schemes. Although the applicants argued that discussions with alternative purchasers remained ongoing and sought to preserve their legal position against NGK, the court found that there was no sufficient evidence of any realistic replacement funding structure.

Therefore, these developments constituted a fatal “roadblock” under the fourth limb of the Buckley test.

Accordingly, the court dismissed the sanction application with costs.

Comment

First, the decision demonstrates the distinction between the convening stage and the sanction stage in scheme proceedings relating to assessment of the feasibility of a scheme. At the convening stage, the court is primarily concerned with whether the feasibility of the scheme is arguable. In this case, the court had earlier granted convening orders because the proposed disposal transaction and the executed sale agreement provided a sufficient degree of commercial feasibility to justify allowing creditors to vote on the schemes. However, by the sanction stage, the court undertook a more exacting examination of whether the schemes remained realistically capable of implementation in light of subsequent events.

Second, the judgment reinforces that the court’s supervisory role under section 366 is not displaced by overwhelming creditor support. Although the schemes obtained the requisite statutory majority and were supported by the principal financial creditors, the court emphasised that sanction is not a rubber-stamping exercise. The court retains an independent obligation to assess whether the restructuring is workable and capable of practical implementation. The decision serves as a reminder that creditor commercial approval and judicial sanction remain distinct inquiries.

Third, the judgment highlights the importance of the fourth limb of the Buckley test, namely whether there exists a “blot” or “roadblock” rendering the scheme ineffective or inoperable. This decision illustrates that the court may still refuse sanction if supervening commercial developments fundamentally undermine the viability of the restructuring itself.

Fourth, the case also demonstrates how events occurring after the scheme meetings may materially affect the outcome of the sanction application. Although the schemes were approved by overwhelming majority at the scheme meetings, the subsequent withdrawal of the purchaser significantly altered the commercial feasibility of the scheme before sanction was granted. The decision therefore illustrates that sanction proceedings are not confined to an assessment based solely on the position at the date of the meetings. The court may consider intervening developments that bear directly on the feasibility and effectiveness of the proposed compromise.

Finally, the decision reflects judicial reluctance to sanction restructuring proposals founded upon speculative possibilities. The applicants relied on ongoing discussions with potential purchasers and attempts to preserve claims against the original purchaser. However, the absence of binding agreements, committed funding arrangements, or concrete replacement transactions meant that the restructuring remained contingent on uncertain future events.