Committal: Prima Facie Case Test and of Last Resort

Justice Wong Kian Kheong’s Grounds of Judgment in the case of Tan Kang Ho v Mao Sheng Marketing (M) Sdn Bhd provides a useful summary of the typical issues and challenges raised in a committal application. I have shared some tips about making a committal application earlier as well.

The Case of Tan Kang Ho

In summary, this case involved a consent Order allowing one of the party’s appointed auditor to inspect and to take photocopies of accounts of the company. This is the Order that triggered the subsequent committal application. This Order arguably had vague terms, it did not have a proper sealed penal indorsement, it did not provide for any time limit for the carrying out of any act, and the Order had not been served personally on the alleged contemnors. All of these were upheld as the procedural defects going towards the dismissal of the committal application.

This case also usefully sets out two points.

Firstly, what is the threshold to be met for leave for committal to be granted? Committal proceedings are a two-stage process. The first stage is to apply ex parte for leave to commence committal proceedings. At this stage, the case law sets out that a prima facie case for contempt has to be made out. The Court noted that there did not appear to be any Malaysian decision setting out what is the threshold for such a prima facie case. The Court’s view was that this prima facie case is met where:

  1. The Statement and Affidavit Verifying show that the alleged contemnor has committed a specie of contempt of court e.g. breaching a Court Order or having scandalised the Court.
  2. The contents of the Affidavit should not be inherently improbable.
  3. The standard of proof at the leave stage is not beyond a reasonable doubt. The Court should keep an open mind and not make any finding of fact.

Secondly, this case also reiterated that committal should only be used as a last resort. The Court did take into account alternative remedies open to the applicant. In this case, for example, the Court was of the view that complaints could be lodged with the Companies Commission of Malaysia for it to investigate into any breaches.

Conclusion

In conclusion, my view is that Courts can afford to be extra vigilant in committal proceedings, even at the leave stage. Committal proceedings are quasi-criminal in nature and with the real possibility of imprisonment if there is a finding of contempt. One of the side effects of there being an Order allowing leave for committal is that the alleged contemnors must then first purge their contempt. The alleged contemnors will find it difficult to continue with their own applications and must first oppose the committal application.

Where a party applies for leave for committal (and the Rules of Court 2012 sets out that this is done ex parte), then the general duty to make full and frank disclosure should oblige the applicant to highlight the possible procedural problems in the committal application. So for example, here, where the consent Order did have procedural weaknesses for the purposes of making a committal application. At the ex parte leave stage, the Court could also query an applicant on any of such issues and to also query whether there were alternative remedies open.

 

 

 

 

Time can be Extended for Affidavits in Winding Up

In winding up proceedings, the Companies (Winding-up) Rules 1972 provide for strict timelines for the filing of the affidavits. Rule 30 provides that the affidavit in opposition to the Petition shall be filed and served at least 7 days before the hearing of the Petition. In turn, the Petitioner’s affidavit in reply to the affidavit in opposition shall be filed and served within 3 days of the date of service of the affidavit in opposition. This makes the timeline very tight, especially for the Petitioner’s affidavit in reply.

Since the Court of Appeal decision in Crocuses & Daffodils (M) Sdn Bhd v Development & Commercial Bank Bhd [1997] 2 MLJ 756, there has been a line of authorities which has applied these timelines strictly. This is due to the use of the word “shall” in the Rule 30.

Court of Appeal decision in Kilo Asset

In the recent unreported grounds of judgment in Hiew Tai Hong v Kilo Asset Sdn Bhd, the Court of Appeal had to consider the issue as to whether there could be an extension of time to allow for the late filing of the various affidavits in a winding up Petition. In this case, the winding up petition involved a shareholder dispute where the petition relied largely on the just and equitable grounds. Extensive facts and the history between the shareholders were set out in the petition. This was not a case where the petition was based on an inability to pay debt and where a creditor was petitioning for winding up.

While the affidavits in opposition by the respondent were filed in time, the Petitioner filed his three affidavits in reply well past the 3-day timeline as set out in Rule 30. The Respondent then filed further affidavits in opposition.  Presumably because of an objection raised on the late filing of the affidavits in reply, the Petitioner filed an application for an extension of time. This application was based on Rule 193 which allows for enlargement or abridgment of time and Rule 194 which provides that no proceedings shall be invalidated by any formal defect or any irregularity unless the Court views that substantial injustice has been caused.

The High Court Judge dismissed the Petitioner’s extension of time application and therefore disregarded the Petitioner’s affidavits in reply. As the High Court Judge viewed that the Respondent’s affidavits in opposition was therefore left unanswered, the Petition was dismissed.

On appeal, the Court of Appeal allowed the extension of time and ordered that the Petition be remitted back to the High Court for a full hearing. Firstly, the Court of Appeal was guided by the wordings of Rules 193 and 194 which would allow for an extension of time. These Rules were not referred to in the judgment of Crocuses & Daffodils. This is consistent with the current approach of the Courts to have regard to the justice of the case and not only to the technical non-compliance.

Secondly, the Court of Appeal also made a distinction between the present just and equitable winding up Petition and a Petition based on an inability to pay a debt (the latter being the Petition in Crocuses & Daffodils). In a just and equitable winding up Petition, involving a dispute among the shareholders and allegations against the directors, it is common for the facts to be hotly disputed and  where there is the possibility of cross-examination of deponents as well. Therefore, it would not be possible for the Court to adopt such a rigid approach to non-compliance.

Commentary

This decision is welcomed in taking a step away from a mechanical rigid approach for such affidavit timelines. Instead, the Court weighs up the justice of the case in deciding whether to allow for an extension of time or not. This is even more important in such a just and equitable winding up scenario where the facts are commonly disputed and where it is very common to have an extensive exchange of affidavits.

In practice, for a just and equitable winding up petition, the solicitors commonly agree among themselves for an extension of time for the filing and exchange of affidavits. It can be very difficult for the Petitioner to comply with the 3-day rule to file in the affidavit in reply. Rule 30 is also silent in allowing for the further filing of affidavits since no timeline is provided. This decision however appears to only apply in the context of such a Petition based on the just and equitable ground. A party seeking such an extension of time must still file in an application under Rules 193 and 194.

However, this decision does not go so far as to outright overrule the Crocuse & Daffodils approach in maintaining strict timelines for the inability to pay debt scenario. It can also be quite common to have a lengthy exchange of affidavits if the debt is heavily in dispute. Nonetheless, to prevent the risk of such a technical objection, all parties had best still comply strictly with the timelines set out in Rule 30.

 

 

Speaking in Kuching on the Companies Bill

I have been invited by CLJLaw to speak on 16 January 2015 at the Pullman Hotel, Kuching.The registration form is over here.

Due to the good response in KL the last time for the Companies Bill seminar, this will now be held over in Kuching.

 

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A lot of us are expecting the new Companies Bill to be tabled during the Parliamentary sitting in March 2015. The Bill and the changes it brings have been long-awaited.

The MAS Administration Act is Gazetted

I had earlier written about the Bill relating to Malaysia Airlines. As an update, the Bill has received Royal Assent on 30 December 2014 and Gazetted on 5 January 2015.

It is now known as the Malaysian Airline System Berhad (Administration) Act 2015. However, the Act will only come into operation on a date to be appointed by the Prime Minister by notification in the Gazette.

One particular significant change between the Act and the Bill has been the removal of certain powers of the Administrator. The Act has removed the provisions which originally allowed the Administrator to assume control over the property and business of a transition service provider and to carry on that business, if that transition service provider refused to provide such goods and services to the new MAB.

Such very wide powers have been dialed down such that if the transition service provider refuses, the new MAB and its subsidiary companies shall only have the right to recover any costs incurred or damage suffered.

Watch the Clock: Limitation Period for Enforcement of Arbitral Award

The Federal Court in Christopher Martin Boyd v Deb Brata Das Gupta [2014] 9 CLJ 887 resolved the issue as to the limitation period for the enforcement of an arbitral award (whether under the old Arbitration Act 1952 or the present Arbitration Act 2005). The Federal Court Grounds of Judgment are found here.

Briefly summarising the grounds, for an arbitral award, there are two different limitation periods applicable. The first is the 6-year time limit (under section 6(1)(c) of the Limitation Act 1953 (“Act”)) from the date of the arbitral award for the award to be registered or enforced as a Court Judgment. The arbitral award would then be deemed to be a Judgment from that date.

Thereafter, the second period is the 12-year time limit (under section 6(3) of the Act) from the date of that Judgment for any action to be taken based on that Judgment (e.g. execution proceedings or bankruptcy proceedings). Therefore, there could potentially be close to a total of 18 years for an arbitral award to be eventually executed on. There is the first 6-year period to obtain the Court Order enforcing the award as a Judgment and thereafter, the second 12-year period for legal actions to be taken based on the Judgment.

 

 

Insolvency and Arbitration: Will a winding up petition be stayed in favour of arbitration?

I am just setting out my thoughts and where I will be planning to write a more extensive article on this area. I have always been fascinated on the interaction of the statutory process of winding up and the contractual bargain of arbitration. Will one process always necessarily trump the other?

There are now several cases which try to deal with whether there can be a form of a stay of the Court winding up proceedings in favour of arbitration. The winding up itself can arise from either a creditor petitioning on the grounds of insolvency or a shareholder petitioning on the just and equitable grounds. In the former scenario, the petition may be grounded on a debt arising from a contract containing an arbitration clause. In the latter, the shareholder’s complaints may be arising from a shareholders’ agreement with the other shareholders. I now just record down some cases in the scenario of a petition being presented by a creditor on the grounds of insolvency.

There is a recent English Court of Appeal decision in Salford Estates (No. 2) Limited v Altomart Limited [2014] EWCA 1575 Civ  which held that the mandatory stay provisions in the English Arbitration Act would not apply to stay winding up proceedings. Instead, the Companies Court would exercise its usual discretion in whether to stay or dismiss a winding up petition, for example, if there was a bona fide dispute of the debt on substantial grounds.

This is a similar approach taken in Hong Kong, where its Arbitration Ordinance closely follows the Model Law (and therefore, may be more persuasive in Malaysia). The case of Jade Union Investment Limited [2004] HKCFI 21 also similarly held that the mere existence of an arbitration clause does not mean that the mandatory stay provisions under the Arbitration Ordinance would apply. The Court would still apply the test as to whether there was a bona fide dispute of debt when hearing the petition. Another case of Re Sinom (Hong Kong) Ltd [2009] HKCFI 2201 similarly followed Jade Union when deciding whether to grant an injunction to restrain the presentation of a petition.

It will be interesting to see how such a situation would play out in Malaysia. I am not aware of any such case involving a stay of a winding up petition or an injunction to restrain presentation based on the Arbitration Act 2005 (“AA”). I know of one or two cases under the old Arbitration Act 1952 where a stay of winding up proceedings was sometimes granted and sometimes not.

If there is an arbitration clause in a contract and a statutory demand is made for payment under the contract, would the other contracting party be able to apply under section 11 of the AA for an injunction to restrain the presentation of the petition? What would the test for such an injunction be? Would it still be the Tan Kok Tong Court of Appeal test of a bona fide dispute of debt on substantial grounds? Or would the mere existence of an arbitration clause be sufficient? Or would an application for an injunction have to be grounded outside of the AA and the Court would exercise its inherent jurisdiction to grant a Fortuna injunction to restrain the presentation?

If the Petition was filed, would a stay of those Court proceedings be allowed under section 10 of the AA? The test for a stay under section 10 of the AA will not require the Court to decide on whether there is a bona fide dispute (that original provision has been taken out) and it is almost mandatory for a stay unless the arbitration clause can be questioned (e.g. the clause is null and void or inoperative).

I will try to deal with these questions in my more extensive article and after I have done more research.

The Repetitive Restraining Orders

Background and History to the Restraining Order

Under the scheme of arrangement framework, the Court can grant a restraining order under section 176(10) of the Companies Act 1965 (“Act”) to restrain further proceedings in any action against the company undertaking a proposed scheme. This allows the financially distressed company to have a moratorium and have breathing space from creditor action, while the company attempts to restructure or compromise its debts. Ordinarily, it would be the company itself which would apply for a restraining order but section 176(10) of the Act allows any member or creditor of the company to also make such an application. I had earlier written a general overview on the law of schemes of arrangement.

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The restraining order would have to strike a balance between different interests. On the one hand, a moratorium may be beneficial to the overall pool of creditors in order to prevent the scramble by creditors to execute against the distressed company’s assets. The restraining order could therefore facilitate the orderly restructuring of the debts where there was a genuine and viable scheme proposal. On the other hand, a wide stay of legal proceedings could also be abused. A company could sit on a restraining order, without any viable scheme proposal, and frustrate the actions by the creditors.

The potential for the abuse of the restraining order may have led to the amendment to our Act in late 1998 to tighten up the use of restraining orders. Additional restrictions and creditor-protection provisions were built in through the introduction of sections 176(10A) – (10G) of the Act. Essentially, it limited the grant of each restraining order to prima facie not more than 90 days with certain mandatory requirements to be met. Further, once the restraining order was granted, there could not be the disposition of any property of the company outside the ordinary course of business.

A recent case highlighted a situation where there could be the repeated use of a restraining order. That might delay legal proceedings by creditors but it may also be a lifeline for an ailing company, if there was a viable scheme proposal.

The Repeated Use of a Restraining Order

In the unreported case of Dynawell Corporation (M) Sdn Bhd (in provisional liquidation) v Universal Trustee (M) Berhad (Seremban High Court Originating Summons NCVC-24M-63-06-2013) (see [2013] 1 LNS 1391), the High Court was made aware of multiple applications for a restraining order and made a finding that the application for a restraining order was mala fide. Dynawell can also be read together with the related High Court decision in RHB Bank Berhad v Gula Perak Berhad [2013] 1 LNS 1409. From a reading of both the cases, the brief facts appear to be as follows.

Gula Perak Berhad was listed on the stock exchange and in May 2010, it was classified as a PN17 company. It was eventually de-listed in May 2011. In turn, Dynawell is a wholly-owned subsidiary of Gula Perak Berhad and where its core asset is the Dynasty Hotel. Several secured lenders initiated legal proceedings against both Gula Perak and Dynawell, including foreclosure proceedings on the Dynasty Hotel. Winding up proceedings were also taken against Gula Perak and Dynawell and where both companies had Provisional Liquidators appointed over them.

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During the course of these legal proceedings, there appeared to be at least 6 different applications filed in different Courts seeking for a restraining order on the basis of a proposed scheme of arrangement. Applications were filed in Kuala Lumpur, Shah Alam, Seremban and Taiping. There were different applicants, some may have been creditors or members of Gula Perak/Dynawell or in the Dynawell case, it was Dynawell itself. It was noted in the Dynawell judgment that the proposed schemes of arrangement applications had similar grounds and traits and where the averments in the affidavit in support were largely the same. Justice Zabariah Yusof remarked that this indicated that it originated from the same source or author.

Procedurally, an application for such a restraining order would ordinarily be taken out ex parte. This is because  only the Applicant would need to apply and need not necessarily add in any other party, or to add in any of the other creditors with pending legal proceedings for instance. Once the initial restraining order is granted ex parte, and this should only be for a limited time not exceeding 90 days, it will then have a universal effect in restraining all legal proceedings by all the creditors listed in the proposed scheme. The onus then shifts to the opposing creditors to intervene and to attempt to set aside the restraining order or to oppose the extension of the restraining order.

Hence, the two judgments show that the opposing creditors had to go to each of the different Courts to apply to set aside the restraining orders obtained by different parties. The restraining orders and the related legal proceedings also delayed the foreclosure and the winding up proceedings.

The history of the litigation then led to the High Court in Taiping and in Seremban making orders that any further application for a restraining order be made inter partes and for such an application to be advertised in 3 newspapers.

Justice Zabariah Yusof made the following critical remarks:

“In view of the circumstances and the time line of the ex parte Originating Summons in Enclosure 2 filed, clearly shows the mala fide intent of Dynawell to conceal the application from UTB and at the same time concealing the material and relevant facts from the court.

Section 176(1) of the Companies Act does not state that an RO application may be made ex parte. It merely states that a party may apply. However, given the chequered history of Dynawell, the propose (sic) scheme of arrangements and the ROs applications which have been explained above, this is a case of abuse of process of the highest order. I would be failing in my duty if I do not invoke my inherent jurisdiction to curb further abuse by Dynawell.”

Costs of the setting aside of the restraining order were then made personally against the director of Dynawell.

Conclusion

A restraining order is usually a useful and often crucial mechanism to achieve a viable restructuring. However, this case shows how the repeated use of a restraining order could amount to an abuse of process. The present provisions in the Act, and the impending amendments to the Act, will not address this potential for abuse. An application for a restraining order can continue to be taken out ex parte, and where an applicant may still attempt to bypass the mandatory protection laid in the section 176(10A) requirements. Any creditor or member of the company could potentially also apply for a restraining order, thereby resulting in multiple and parallel restraining orders. The protection against any abuse of process therefore rests on the vigilance of the Courts when hearing such ex parte applications.