In the latest chapter of KNM Group’s high-stakes restructuring, the High Court has allowed the company to proceed with its fifth scheme of arrangement proposal. However, the Court declined to grant a restraining order, which would have given KNM a moratorium on legal proceedings filed against it.
This is one of the first reported decisions on the amended scheme of arrangement provisions. The decision deals with repeat restructuring attempts, related-party creditor classification concerns, and the ‘VC George Test’ for the grant of restraining orders.
I briefly analyse the decision of Judicial Commissioner Tuan Saheran Suhendran in his Grounds of Judgment dated 12 March 2025. I had earlier set out the legal framework for the amended scheme of arrangement and restraining order.
Brief Facts of KNM’s Three Court Actions
In total, KNM filed three consecutive applications relating to its scheme of arrangement and seeking restraining order protection.
As referred to in the decision, I refer to it as Originating Summons 1 or OS1, OS2 and OS3. There were also a total of five versions of the scheme proposal and will be referred to as Scheme 1 to Scheme 5.
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15 Dec 2022 – KNM obtained convening and restraining order in OS1 for Scheme 1.
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9 Mar 2023 – Extension granted for OS1 orders. Opposing creditors later applied to set it aside.
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9 Aug 2023 – KNM proposed revised Scheme 2 and sought a second extension.
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2 Nov 2023 – High Court (Liza Chan JC) dismissed the extension application and allowed the setting aside, citing, among others, flawed creditor classification and unrealistic asset sales. An Erinford injunction was granted pending appeal.
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6–10 Nov 2023 – KNM filed appeals and a formal Erinford application.
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16 Nov 2023 – Without notice, KNM filed OS2 for Scheme 3 and obtained fresh ex parte restraining orders.
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8 Apr 2024 – High Court (Atan Mustaffa J) struck out OS2, finding it an abuse of process and lacking in viability. See KNM Group Berhad v Ann Joo Metal Sdn Bhd [2024] CLJU 1250.
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26 Apr 2024 – KNM filed OS3 proposing a new Scheme 4, triggering an automatic two-month moratorium under section 368(1A).
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25 Jun 2024 – Automatic moratorium expired. The next day, the Court granted an ad interim restraining order.
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28 Feb 2025 – KNM proposed a further amended Scheme 5, pivoting to a managed sale of Borsig shares.
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12 March 2025 – High Court granted OS3 convening order but refused the restraining order.
- 27 March 2025 – High Court granted Erinford restraining order.
Summary of Legal Points
The decision clarifies and affirms certain important scheme of arrangement issues. My six takeaway legal points.
#1: Related-Party Creditors May Be Classified with Other Creditors with Same Rights
The Judicial Commissioner reaffirmed that creditor classification is grounded in a rights-based test—not an interest-based one—as established in Sovereign Life.
A scheme creditor raised the objection that certain creditors, who held charges over shares in a KNM subsidiary, were related-party creditors and should be placed in a separate class. The objection was based on the Federal Court’s majority decision in MDSA Resources Sdn Bhd v Adrian Sia Koon Leng [2023] 5 MLJ 900 (see my case commentary on MDSA Resources).
The Judicial Commissioner distinguished MDSA Resources, preferring the Court of Appeal’s brief grounds dated 24 June 2024 in Fulloop & Ors v BGMC Holdings. In BGMC Holdings, the scheme company’s related company creditors were in the same class as the external creditors. The Court of Appeal clarified that the MDSA Resources majority turned on a factual finding—that the related-party creditors in MDSA Resources had different legal rights, not merely a different interest.
The Judicial Commissioner also touched on whether related-party creditors’ votes should be discounted. It held that there is no automatic discounting of related creditors’ votes. There must be evidence that the related parties have interests adverse to the rest of the class. In any case, such concerns are better addressed at the scheme sanction stage—not the scheme meeting stage.
In my view, the broader question remains unresolved under Malaysian scheme law: can related-party creditors vote in the same class as others, if their legal rights are identical? BGMC Holdings attempts to draw a narrower reading of MDSA Resources. In my view, the BGMC Holdings decision would be the preferred approach and dovetails with the principles in other common law authorities for a pure rights-based test.
#2: Consecutive and Repetitive Restraining Order Applications
Here, there were three filings of consecutive Originating Summons applications for the restraining order. Also, this was against a backdrop where KNM had effectively enjoyed restraining order protection since December 2022 to March 2025 (2 years and 3 months).
The Judicial Commissioner accepted that a scheme company may legitimately file consecutive applications for convening and restraining orders. However, the applicant must show progress and/or genuine changes in the restructuring plans.
#3: Tips on Adequate Disclosure at the Initial Convening Order Stage
At the convening stage, the Judicial Commissioner provided helpful guidance on disclosure standards. The required disclosure is to assist the Court—not to provide creditors with disclosure of full details for decision-making (which is the role of the Explanatory Statement).
At one end of the spectrum, a scheme may involve share issuance or other securities. The Court expects disclosure of business prospects that make the shares commercially attractive and of value. This includes the need to show a business plan, proforma profit and loss statement, and a post-scheme balance sheet to show solvency.
At the other end, the scheme may involve a managed sell-down of assets (like in the case of KNM). The focus of the disclosure is on whether the asset realisation will yield meaningful returns to creditors. In such cases, financial projections and business plans are less critical at this stage for the Court.
#4: The VC George Test for the Initial Grant of a Restraining Order
The Judicial Commissioner noted that the initial grant of the three-month restraining no longer requires the four pre-conditions of section 368(2) of the Companies Act 2016 to be met.
The initial grant of the restraining order would then need to meet what was titled the ‘VC George Test’. This is the common law test laid down by VC George J (as he then was) in Re Kuala Lumpur Industries Bhd [1990] 2 MLJ 180. The case was decided under the former section 176(10) of the Companies Act 1965, which governed the grant of a restraining order.
The VC George Test has two elements of:
- Sufficient particulars of the proposed scheme to persuade the Court.
- Feasibility of the scheme – whether the feasibility of the scheme is respectably arguable.
#5: No Ad Interim Restraining Order Beyond the Initial Three Months
By the time of the hearing, the ad interim restraining order had been in place for over seven months—well beyond the initial three-month limit.
The Judicial Commissioner held that such an order cannot stand alone under the Court’s inherent jurisdiction. Its source is statutory, and it has statutory safeguards. In particular, the applicant must meet the four pre-conditions for any extension beyond the initial three months.
In short, the Court had exhausted its statutory runway. It could not grant a restraining order that would sidestep the legislative time limits of the initial three months.
Any subsequent order could only be obtained under an extension application under section 368(2) with full compliance of the four pre-conditions.
#6: Nonetheless, Court Did Grant an Erinford Restraining Order
After the restraining order was dismissed, the KNM Group did not pursue the Judicial Commissioner’s suggestion to file a fresh extension under section 368(2) of the Companies Act 2016.
Instead, KNM sought an Erinford-type restraining order—pending its appeal against the dismissal of the original restraining order.
The Judicial Commissioner held that the Court had jurisdiction to grant such an Erinford ad interim order. Especially where the Judicial Commissioner was concerned that there would be no protection for the KNM companies.
The Erinford restraining order remains in place, at least until September 2025. This is when KNM’s application for an interim preservation order before the Court of Appeal will be heard.
However, we end up with the following practical result. One which grants KNM a restraining order beyond the seeming statutory limit of 12 months of restraining order protection.
26 June 2024 – The Court granted restraining order protection – fashioned by way of an ad interim restraining order.
12 March 2025 – Court declines to grant the restraining order.
27 March 2025 – Court grants an Erinford restraining order.
September 2025 – Hearing at the Court of Appeal for KNM’s interim preservation order for a restraining order. There would be effectively close to 15 months of restraining order protection.
My View
For me, the most critical practical takeaway for future restraining order applications:
- Once a scheme company files for a restraining order application, the Court must move swiftly to fix the first hearing date. The scheme company would enjoy the automatic moratorium period up to a maximum of two months.
- At the first restraining order hearing date, the Court must summarily decide on the VC George Test and then either grant or dismiss the restraining order. There should not be a lengthy exchange of affidavits or submissions. Allow the creditors to reserve their rights to subsequently set aside or vary the initial grant of the restraining order.
- With the grant of the restraining order, the clock starts ticking for the maximum period of the 12 months of the restraining order.
