Cramming Down a Hostile Creditor: What Malaysia’s First Cross-Class Cramdown Decision Means for Restructurings

Introduction

In KL Petrogas Sdn Bhd v SA Puncak Management Sdn Bhd [OS No. WA-24NCC(SOA)-14-07/2025], the High Court granted a convening order under section 366 of the Companies Act 2016 (“CA 2016“), permitting KL Petrogas Sdn Bhd (“KL Petrogas“) to convene meetings of its creditors to consider a proposed cross-class cramdown scheme of arrangement (“Scheme 2“). This is the first time a Malaysian court has considered the cross-class cramdown provisions under section 368D of CA 2016 (“section 368D“).

The decision is significant as it appears to be an early Malaysian application of the cross-class cramdown provisions under section 368D, which were introduced by the Companies (Amendment) Act 2024. While the High Court acknowledged that the legislation in England for cross-class schemes is different from the Malaysian provisions, it nevertheless drew heavily on English jurisprudence, in particular Re AGPS BondCo plc [2024] EWCA Civ 24 (“Adler“), Kington SÀRL v Thames Water Utilities Holdings Ltd [2026] 1 BCLC 377 (“Thames Water“), and Saipem S.P.A. v Petrofac Ltd [2025] EWCA Civ 821 (“Petrofac“).

Key Takeaways

1. The “fair distribution of restructuring benefits” test, rather than the conventional “limited rationality” test, is the appropriate fairness standard for cross-class cramdown schemes under section 368D.

2. A scheme company may deliberately classify a hostile creditor into a separate class for the purpose of engaging the cramdown mechanism, provided fairness safeguards are met.

3. Whether such deliberate class composition constitutes an abuse of process remains an open question, reserved by the High Court for the sanction hearing.

4. The Absolute Priority Rule (“APR“) remains part of Malaysian law, unlike in Singapore, and may be relevant in future schemes involving creditors of unequal rank. 

Background Facts

KL Petrogas is an insolvent company engaged in subcontract work under the Kasawari Gas Development Project, valued at approximately RM16.8 million (“Kasawari Sub-Contract“). It obtained Islamic financing facilities exceeding RM22 million from SA Puncak Management Sdn Bhd (“SA Puncak“) (collectively, “SA Facilities“), secured by a debenture over KL Petrogas’s present and future assets (“Debenture“).

In January 2025, SA Puncak terminated the SA Facilities and appointed Receivers and Managers (R&Ms) over KL Petrogas pursuant to the Debenture, which in turn triggered a cross-default leading to the termination of the Kasawari Sub-Contract.

KL Petrogas commenced Suit No. WA-22M-787-05/2025 contending that the SA Facilities were unlicensed moneylending transactions in breach of the Moneylenders Act 1951. The court ruled in KL Petrogas’s favour, declaring the pre-factoring facility agreements unenforceable but ordering restitution of the principal sum of RM9,437,274.26 in favour of SA Puncak (“SA Judgment“). The Debenture was declared void to the extent it secured the pre-factoring facility, rendering SA Puncak’s claim unsecured. SA Puncak appealed the SA Judgment and separately claimed conspiracy damages of approximately RM23.4 million, maintaining it is a contingent creditor for approximately RM46.7 million in total. 

The “roadblock” and the Proposed Schemes

SA Puncak holds more than 25% of the total unsecured debt, giving it a statutory veto right under section 366(3) of CA 2016, and has made it clear that it would veto any scheme proposed by KL Petrogas. KL Petrogas initially proposed a single-class scheme (Scheme 1) with pari passu repayment over two years, but this was doomed to fail due to SA Puncak’s veto.

KL Petrogas then invoked section 368D to propose Scheme 2, splitting creditors into Class A (all other unsecured creditors, approximately 71% of total debt) and Class B (SA Puncak alone). Both classes would be paid pari passu, but if Class A achieved the 75% threshold, section 368D could be relied upon to cram down Class B. Counsel for KL Petrogas candidly admitted that the sole purpose of placing SA Puncak into a separate class was to enable the cramdown.

The High Court Decision

The Fairness Test

The High Court rejected the conventional “limited rationality test” as the appropriate standard for cross-class cramdown schemes. The High Court reasoned that where there is a dissenting class, Parliament’s 75% threshold has not been met and fairness cannot simply be assumed; the limited rationality test operates only as a “cross-check” to an affirmative vote and cannot apply where no such vote exists.

Instead, the High Court accepted that the correct test is whether there is a fair distribution of the benefits generated by the restructuring among all creditors, drawing on Snowden LJ’s reasoning in Adler and the subsequent application in Thames Water and Petrofac.

Second Issue: Abuse of Process

SA Puncak argued that deliberately placing it in a separate class amounted to a “capricious use of the cram down provisions” and an abuse of section 368D. The High Court acknowledged that this argument would have been correct in a conventional scheme, but held that the landscape has changed with the introduction of section 368D. Referring to both the Hansard debates and the English Court of Appeal’s decision in Petrofac, the High Court noted that the very purpose of the cramdown mechanism is to prevent any class from exercising an unjustified right of veto. The Judicial Commissioner (JC) could see no reason why a company may not take advantage of these provisions in an appropriate case. Nevertheless, the High Court reserved the bona fides question for the sanction hearing, noting that the issue was fact-sensitive and not fully argued.

Third Issue: the APR

Although not raised by the parties, the High Court nevertheless addressed the Absolute Priority Rule.

The APR, which originates from Chapter 11 of the United States of America (“US“) Bankruptcy Code (“US Chapter 11“) jurisprudence, requires that no junior class (including equity holders) may retain any value under a restructuring plan unless all senior classes have been paid in full. In a US Chapter 11 proceeding, this rule is enforceable because the Bankruptcy Code empowers the court to compulsorily cancel or transfer the debtor’s shares as part of a confirmed plan. Singapore initially adopted the rule but removed it on the enactment of the Insolvency, Restructuring and Dissolution Act 2018 (“IRDA“), because Singapore’s scheme framework has no equivalent power to compulsorily divest shareholders of their shares; if shareholders refuse to voluntarily surrender their equity, the scheme would fail the APR test and could not be sanctioned, effectively giving shareholders a veto over any cramdown scheme.

Malaysia retains the rule within section 368D(4)(b)(ii)(B) of CA 2016, but, like Singapore, has no mechanism to compulsorily divest shareholders. The High Court did not need to grapple with this tension in the present case, as all creditors rank pari passu and Scheme 2 proposes full repayment with no shareholder priority.

In light of the foregoing, the High Court granted the convening order, finding no unfairness in the distribution of restructuring benefits and no obvious roadblock to prevent the order being made.

Comparative Overview

Cross-class cramdown mechanisms now exist in the US (§1129(b), Chapter 11), Singapore (section 70, IRDA), the United Kingdom (“UK“) (Part 26A, Companies Act 2006 (“Part 26A“)) and Malaysia (section 368D). Malaysia’s section 368D was modelled on the Singapore version, which in turn drew from US Chapter 11. However, there are three practical differences that practitioners should note.

First, on the fairness threshold, the US, Singapore, and Malaysia all expressly require the court to be satisfied that the scheme is “fair and equitable” to each dissenting class. The UK’s Part 26A does not include these words in the statute, leaving the fairness inquiry to be developed through case law, culminating in Adler, Thames Water, and Petrofac. In practice, this means that in Malaysia, a scheme proponent faces a statutory “fair and equitable” hurdle that must be cleared at the sanction stage, whereas in the UK the court exercises a broader discretion informed by the case law.

Second, on the APR, Malaysia stands alone among these four jurisdictions in retaining the rule within section 368D(4)(b)(ii)(B) of CA 2016. The US retains the rule under Chapter 11, but Singapore removed it on the enactment of the IRDA on the basis that there is no mechanism under Singapore law to compulsorily divest shareholders of their shares. England also rejected it. The practical consequence is that in Malaysia, a scheme that proposes to pay junior creditors or allow shareholders to retain value ahead of dissenting senior creditors will face an additional statutory obstacle that does not exist in Singapore or England.

Third, on class composition, the US imposes a recognised limitation: in In Re Greystone III Joint Venture 995 F.2d 1274 (5th Cir. 1992), the Fifth Circuit held that a debtor may not place creditors with substantially similar rights into different classes except for reasons independent of the need to secure an assenting vote. Whether a similar anti-gerrymandering limitation applies in Malaysia was left open by the High Court for the sanction hearing. Until this is resolved, there remains uncertainty over how far a scheme company may go in engineering class composition to achieve a cramdown.

Conclusion

While the convening order has been granted, the sanction hearing will be closely watched. The High Court has expressly reserved the abuse of process question for full argument at that stage, and the outcome will provide important guidance on the limits of permissible class manipulation under section 368D. Additionally, the High Court’s observation that the APR remains part of Malaysian law (unlike in Singapore) may have implications for future schemes involving creditors of unequal rank or where shareholders seek to retain their interest ahead of dissenting unsecured creditors.

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