Malaysia: New Test for Fiduciary Duties of Employee

In the recent Court of Appeal decision with grounds of judgment dated 9 September 2015 by Tan Sri Idris Harun, the Court of Appeal set out the test for the imposition  of fiduciary duties on employees.


Unlike a director, an employee of a company would ordinarily not owe any fiduciary duties to the company.An employee may owe contractual duties as well as the common law duty of fidelity to the employer, but this is far removed from the stricter fiduciary duties.

Where an employee carries out some form of wrongdoing, whether to cause damage to the company or to even fraudulently dissipate monies or assets, the company may then be confined to merely seeking personal remedies against that employee. So, for example, to sue for breach of the contractual duties and may make that employee bankrupt. Any monies or assets secreted away to other individuals or  entities may be out of reach of the personal remedy.

If a fiduciary duty can be imposed on the employee however, and if the employee acted in breach of those fiduciary duties, the company could likely rely on the far wider proprietary remedies. The company could argue that any monies or assets wrongly dissipated are held on constructive trust, and the company could cast the net wide through equitable tracing to trace the monies or assets.

In this Court of Appeal decision, on the facts, the employer failed to establish liability against the employees for any breach of fiduciary duty.

Nonetheless, the Court of Appeal upheld (at page 25) the finding that there was a fiduciary duty owed by the employees to the employer.

The test that the Court of Appeal applied appeared to focus (solely) on the fact that the contract of employment involved receipt of the company’s property. That appeared sufficient to impose fiduciary duties on the employee.

This dramatically lowers the bar to establish fiduciary duties on employees, regardless of the level of seniority of the employee in the organisation. It was sometimes held that a senior-ranking employee, such as a CEO, may owe fiduciary duties to the company. This appellate decision may now make it far easier to impose fiduciary duties on employees.

Earlier, I had touched on how the Federal Court had ruled that the standard of proof of fraud is now on a balance of probabilities. With a clear threshold to meet to impose fiduciary duties on employees, an employer will now have wider remedies to try to recover against an employee the proceeds of the fraud.

Court of Appeal Rules Petra Perdana Directors in Breach of Duties

I highlight the recent Grounds of Judgment dated 27 August 2015 by Justice Dr Prasad Abraham in the Petra Perdana Court of Appeal decision.

The case involved the former directors of Petra Perdana Bhd being sued for breach of their duties in selling down the company’s stake in Petra Energy Bhd. The High Court had dismissed the suit finding that they had not acted in breach of their duties. They had exercised their business judgment in selling off those shares due to liquidity and cash flow problems (see Petra Perdana Bhd v Tengku Dato’ Ibrahim Petra bin Tengku Indra Petra & Ors [2014] 11 MLJ 1).

At the Court of Appeal, the Court focused on the interplay between the directors’ powers of management (including the power to deal and dispose assets of the company) and the shareholders right to make resolutions to intrude on those powers of management.

This case suggests that the directors powers of management can be curtailed and restricted by shareholder resolutions, especially with the relevant provision in the Articles of Association in this case. The relevant provision essentially mirrored Article 73 of Table A in the Companies Act. The section reads:

“The business of the Company shall be managed by the directors who may exercise all such powers of the Company … subject, nevertheless to any of these regulations, to the provisions of the Act, and to such regulations, being not inconsistent with the aforesaid regulations or provisions as may be prescribed by the Company in general meeting …” (emphasis added)

Any breach of those shareholder resolutions could render the directors in breach of section 132 of the Companies Act which is the general duty to act in the best interests of the company. The shareholder mandate in the general meeting provided a barometer as to what the shareholders gauge as being the best interests of the company. This is relevant when the directors’ conduct is put under the microscope to ascertain whether the directors were in breach of section 132 of the Act.

The Court of Appeal interpreted the phrase “regulations … as may be prescribed by the Company in general meeting” as being the terms of the resolutions provided by the shareholders in general meeting and therefore the directors must comply with such mandate.

The classical legal position (see Automatic Self-Cleansing Filter [1906] Ch 34] is that there is a demarcation of powers between the Board of directors and the shareholders in general meeting. The directors have the exclusive powers of management and they must act in the best interests of the company. The shareholders ought not interfere in those powers of management and it is merely by statute, that directors may have to seek approval from the shareholders (but it is not the shareholders imposing such business decisions on the directors). So for example under section 132C of the Act, the directors need to seek approval from the shareholders in general meeting for a disposal of the company’s undertaking or property of a substantial value.

This Court of Appeal decision in the Petra Perdana case may now blur the position on this strict demarcation of powers. Shareholder resolutions may now very well impinge on the directors’ powers to make business and management decisions.


Fraud in Civil Claims: Balance of Probabilities

The Federal Court in its grounds of judgment dated 10 August 2015 in the case of Sinnaiyah & Sons Sdn Bhd v Damai Setia Sdn Bhd has made a significant clarification on the law. The standard of proof of fraud in a civil claim is now only based on a balance of probabilities and not beyond a reasonable doubt. The Federal Court overturned its earlier  decisions in Ang Hiok Seng [1997] 2 MLJ 45 and Yong Tim [2005] 3 CLJ 229.

The Federal Court examined the different authorities in the UK, Canada, Australia, and Singapore. The Federal Court emphatically adopted the English position as set out in the House of Lords decision in In re B (Children) [2008] UKHL 35. At law, there are only two standards of proof: beyond reasonable doubt for criminal cases and on the balance of probabilities for civil cases. As such even if fraud is the subject in a civil claim, the standard of proof is on the balance of probabilities.

There is no other hybrid or third standard. Neither the seriousness of the allegation nor the seriousness of the consequences should make any difference to the standard of proof to be applied in determining the facts.

The Federal Court made it clear however that the judgment only applied to the appeal in question and to future cases, and should not be utilised to set aside or review past decisions involving fraud in civil claims.

From Star Chamber to Celestial

I write about the Singapore Court of Appeal decision on the liquidator’s ability to obtain audit working papers. This article was originally published in Skrine’s Legal Insights Issue 2/2015.

The Singapore Court of Appeal in PricewaterhouseCoopers LLP and others v Celestial Nutrifoods Ltd (in compulsory liquidation) [2015] SGCA 20 laid down important guidelines on the grant of an Order to summon persons connected with the wound up company and to produce documents. The liquidator had successfully compelled the former auditors of the company to hand over all the audit-related documents including the audit working papers.

The statutory provision is far from being a “Star Chamber” clause (as originally described in In re Greys Brewery Company (1884) 25 Ch D 400 at 408), referring to the secretive Elizabethan court proceedings where prisoners were forced to answer self-incriminating questions.


Times and attitudes have changed and the Court recognised that the power of summoning persons and ordering production of books can assist in promoting corporate governance.

The Singapore provision mirrors Malaysia’s section 249 of the Companies Act 1965 and this case would be of persuasive value here.


The appellants were PricewaterhouseCoopers and two of its audit partners (“Auditors”). They were the former auditors of Celestial Nutrifoods Limited (“Celestial”), a company formerly listed on the Singapore exchange. It was incorporated in Bermuda and had three wholly-owned British Virgin Island (“BVI”) subsidiaries. In turn, these BVI subsidiaries were the investment holding companies for subsidiaries incorporated in the People’s Republic of China (“PRC”).

Celestial was wound up in 2010 and a private liquidator (“Liquidator”) was appointed. After taking control of Celestial, the Liquidator discovered that the group’s operating companies, management and directors were all based in the PRC. He was unable to obtain any meaningful assistance from them with regard to the affairs of Celestial and of its subsidiaries.

The Liquidator identified several key suspicious and/or irregular transactions undertaken by Celestial and the group which warranted further investigation.

As Celestial did not have the funds to enable the Liquidator to investigate the suspicious transactions, the Liquidator entered into a funding agreement with several creditors in 2012. The funding agreement was sanctioned by the High Court.

Thereafter, the Liquidator filed an application under section 285 of the Singapore Companies Act (“section 285”) against the Auditors. The Liquidator wanted the Auditors to disclose documents in their custody, power or control relating to Celestial’s trade dealings, affairs and property, including documents given to the Auditors by Celestial’s subsidiaries. The application also sought for an oral examination of the two audit partners.

The Auditors had provided the Liquidator with three arch-lever files of documents. They only contained high-level consolidation schedules, limited company and subsidiary level financial information, year-end balances and other minutes which the Liquidator had already recovered from other sources.

The Liquidator sought further documents from the Auditors to allow him to reconstruct the financial records of Celestial and to investigate the suspicious transactions. These included the general ledger and trial balance(s) of each entity in the group, bank statements and bank reconciliations by each entity, a register of fixed assets of each entity, loan facilities documents, contracts, detailed creditors and debtors schedule. In particular, the Liquidator also sought the Auditors’ working papers.

The Auditors resisted the application. They argued that the Liquidator was not objective, the Liquidator’s true motivation in making the application was to obtain evidence for a negligence suit against the Auditors, the disclosure may be illegal under PRC law, and that the request was too wide.

The High Court allowed the Liquidator’s application and the Auditors filed an appeal to the Court of Appeal.


Although a preliminary point was raised as to whether the Court of Appeal had the jurisdiction to hear the appeal as the Auditors had not obtained leave to appeal to against the interlocutory order by the High Court, their Lordships decided to consider the merits of the appeal as there was no earlier Court of Appeal decision which precluded it from doing so.


As mentioned, the Singapore section 285 mirrors section 249 of the Companies Act 1965. Both sections provide that the Court “may summon before it any officer of the company or … any person whom the Court deems capable of giving information concerning the … affairs … of the company.” Further, the Court may “require him to produce any books and papers in his custody or power relating to the company.”

Provisions similar to section 285 may be found in other jurisdictions such as in England (section 236 of the UK Insolvency Act 1986), Australia (section 597 of the Corporations Act 1989) and Hong Kong (section 221 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance).

The Court of Appeal held that section 285 is couched in very generous terms and should not be interpreted in a restrictive manner. It is not limited to eliciting such information as would reconstitute knowledge which the company once had or had been entitled in law to possess. This is the more constrictive view seen in some of the English decisions, for instance, in Cloverbay Ltd (Joint Administrators) v Bank of Credit and Commerce International SA [1991] Ch 90.

Instead, the Court of Appeal preferred the more expansive view as adopted by the Singapore High Court in W&P Piling Pte Ltd v Chew Yin What and others [2004] 3 SLR(R) 164 (“W&P Piling”) which followed the House of Lords decision of British & Commonwealth Holdings Plc (Joint Administrators) v Spicer and Oppenheim [1993] AC 426.

This wider approach allows the power under the English-equivalent of section 285 to be invoked to assist in the accumulation of facts, information and knowledge that would enable or facilitate a liquidator to better discharge his statutory function. This includes information that the company may not have been apprised of prior to the onset of insolvency.

The Singapore Court of Appeal held that the grant of such an order would be a two-stage process:

  1. The liquidator has to show some reasonable basis for his belief that the person can assist him in obtaining relevant information and/or documents, and that they are reasonably (and not absolutely) required. There is a general predisposition in favour of the liquidator’s views.
  1. There is then a balancing of conflicting interests. On the one hand, the liquidator is usually a stranger to the affairs of the company, and may be unable to obtain information which he needs from the persons connected with the company. A liquidator requires a strong and cost-effective mechanism to enable him to discharge his functions, including determining the cause of the insolvency and whether to commence legal proceedings against any wrongdoers. On the other hand, in view of the inquisitorial power conferred by the provision, the court should be careful not to make an order that is wholly unreasonable or oppressive.


In carrying out the balancing exercise in the second stage, the following seven principles are instructive:

(i)      No distinction should be made in the exercise of the power against officers of the company and third parties. The absence of a fiduciary or contractual relationship with the company in the case of third parties should not fetter the exercise of the power so long as the third party is able to provide relevant information or documents. The lack of a direct relationship between the company and the respondent is nonetheless a pertinent factor that would be considered.

(ii)     The risk of a respondent being exposed to liability is a factor relevant to determining whether there would be oppression. But it does not bar the making of an order. This provision is to enable a liquidator to discover facts and documents relating to specific claims against specific persons. He is entitled to do so with as little expense as possible and with as much ease as possible. Nonetheless, the closer a proposed respondent is to being a defined target, the more oppressive an order for examination is likely to be.

(iii)    An order for oral examination is much more likely to be oppressive than an order for the production of documents. An order for the production of documents involves only advancing the time of discovery if an action ensues. On the other hand, oral examination provides the opportunity for pre-trial depositions which the liquidator would otherwise not be entitled to. The person examined has to answer on oath and his answers can both provide evidence in support of a subsequent claim brought by the liquidator and also form the basis of later cross-examination.

(iv)    The risk of exposure to a claim for serious wrongdoing/fraud carries with it an element of oppression. It is oppressive to require someone suspected of serious wrongdoing/fraud to prove the case against himself on oath before proceedings are brought. But it is not a conclusive factor as there is a public interest in the investigation of fraud.

(v)     Attempts to gain undue advantages in the litigation process will also be closely scrutinised to prevent abuse.

(vi)    Weight will be given to the risk that compliance might expose the respondent to claims for breach of confidence, or criminal penalties in the jurisdiction in which the documents are situated.

(vii)   The practical burden imposed on a respondent when a great deal of time and expense is required to comply with an order for disclosure of documents.


The procedure for a section 285 application and examination is provided for under rules 49, 52, 55, 56 and 57 of the Singapore Companies (Winding Up) Rules. The Singapore provisions are almost identical to the same rules in our Companies (Winding-Up) Rules 1972.

The Court of Appeal adopted the following three points made by W&P Piling on the section 285 procedure:

(a)     Rule 49 states that the application to the Court to summon persons for examination “shall” be made ex parte. Nonetheless, the Court of Appeal held that it is not mandatory that all applications be made ex parte. In the normal course of events, applications should be made inter partes. But the Court would be pragmatic if the liquidator is able to adduce some evidence that prior notice of such an application might result in the redefining of facts, or the concealment or destruction of documents.

(b)     Secondly, in the absence of special considerations, a liquidator ought to elicit the co-operation of the proposed examinee before invoking section 285. It is sound practice for a liquidator to first make a written request for the documents he seeks or to submit a list of questions to the proposed respondent (or both).

(c)     Thirdly, a liquidator should place his reasons for the application on record and on oath and this should be disclosed to the proposed respondent. But instances might well arise where, because of public interest considerations or sensitivity involving informants, the confidentiality of communications with the court might have to be strictly preserved. The court would in such cases be prepared to maintain the confidentiality of such information.


Court’s Powers Not Limited by Availability of Pre-Action Procedures

The Singapore Court of Appeal held that section 285 does not provide that it should be restricted by pre-action procedures such as pre-action discovery. Further, it does not state that it cannot be used once a liquidator contemplates litigation. Section 285 is couched in very generous terms and should not be interpreted in a restrictive manner.

Stage 1: Threshold Requirement

The Court was satisfied that the Liquidator had shown that there was a reasonable belief that the Auditors were able to assist him, and that the documents he sought were reasonably required.

 The Court rejected the Auditors’ assertion that the Liquidator was not objective based on two grounds, namely that the Liquidator was incentivised under the funding arrangement to pursue a claim against the Auditors and that the Liquidator sought to maximise recovery for the creditors by applying pressure on parties using section 285 to obtain more reasonable settlement offers.

 The Court saw nothing objectionable about the funding arrangement. Firstly, although the Liquidator stood to recover half of his outstanding fees if he could identify potential claims, it was also in the interest of all the creditors that a proper investigation be done to determine whether there were any viable claims. The Liquidator was duty-bound to identify potential claims to maximise recovery for Celestial’s creditors. The Liquidator should not be hindered by allegations of bias merely because he too may benefit from the same.

Secondly, one of the Liquidator’s duties was precisely to maximise recovery for the creditors. The fact that some of the creditors had agreed to fund the investigation and pursue potential claims was irrelevant.

Stage 2: Balancing Exercise

The Court balanced various factors and found that the disclosure order would not be oppressive for the following reasons:

 (i)      It is legitimate for a liquidator to rely on section 285 to investigate whether a claim exists, and if so, to sue the party responsible. It would be a breach of a liquidator’s duty if he does not sue when there is a legitimate claim against a third party.

 (ii)     The Court recognised that the audit working papers did belong to the Auditors and contained proprietary information meant for internal use. But this does not mean that the disclosure of these documents cannot be ordered. The Court referred approvingly to English and Hong Kong authorities where working papers were ordered to be turned in. The papers should be disclosed as long as they contain information that is relevant to the liquidator’s investigation.

(iii)    Next, the Court was not convinced that the Auditors would expose themselves to civil and criminal sanctions under PRC law if they were to comply with the disclosure order. The Auditors would also not be in breach of their duty of confidentiality owed to the PRC subsidiaries since the documents and information were disclosed pursuant to a court order.

(iv)    Finally, the Court found that the disclosure order was not too wide. It was not uncommon for courts to grant orders compelling parties to disclose all documents in their possession, custody or control relating to the insolvent company in question. The Auditors also came from a respected and large audit firm. It should have kept proper records in relation to Celestial and should have the means to retrieve and disclose them expeditiously.


This Singapore Court of Appeal decision sets out useful guidelines for the grant of a Court Order under section 285 for the production of the documents, including the audit working papers.

As Malaysia has not had any appellate authority on the equivalent section 249 of the Companies Act 1965, this decision would provide guidance and be persuasive. The High Court decision of HICOM Bhd v Bukit Cahaya Country Resorts Sdn Bhd & Anor [2005] 8 CLJ 194 had already referred approvingly to the Singapore decision in W&P Piling.

On the risk of oppression where auditors are hauled up and questioned on oath, the Court Order in this case was only limited to the production of the documents, in particular the audit working papers. At the Singapore High Court level, the Court held that any oral examination of the Auditors would be premature. After the documents had been supplied, the Liquidator may have questions for the Auditors and these may be put and answered by letter. If the Liquidator considered that his questions had not been adequately answered, he may then make a further application to Court for oral examination in relation to the matters which have not been answered.

This may therefore provide some balance on the exercise of the power to summon such persons connected with the wound up company.

Guarding against Champerty: Litigation Funding in Insolvency

The Singapore High Court in its decision in Re Vanguard dated 9 June 2015 dealt with the interesting issue on whether to approve a litigation funding arrangement in insolvency.


It is common in the winding up of a company, there may not be enough money left in the company for the liquidator to fund litigation. This litigation in turn could successfully lead to more assets being paid back to the company, for the benefit of the general pool of creditors. The liquidator may therefore need to obtain funding to fuel this litigation.

This may then sail dangerously close to breaching the common law doctrines of maintenance and champerty. Maintenance is the giving of assistance to a party in litigation by a party who has no interest in the litigation while champerty is the maintenance of an action in exchange of getting a share of the proceeds. These common law doctrines, still existing here in Malaysia, are meant to protect the purity of litigation.


Sale of Property: Assignment of Proceeds

The route allowed in this case, when dealing with the funder being paid out of the litigation proceeds, was to allow for an assignment of proceeds. This would be treated as the liquidator exercising his power of sale under the equivalent of section 236(2)(c) of the Companies Act 1965.

Three shareholders wanted to enter into a funding arrangement with the liquidator to fund litigation to be initiated on behalf of the wound up company. The shareholders’ funding would be secured with the agreement providing for an assignment of the litigation proceeds to cover the amount of funding. The liquidator obtained approval at the creditors’ meeting and sought the Court’s approval to enter the agreement.

The Court gave approval for the agreement. It was held that the assignment of the litigation proceeds (essentially a sale) would be a sale of “property” under the Singapore equivalent of our section 236(2)(c) of the Companies Act. The liquidator has the power to “sell the immovable and movable property and things in action of the company”.

This statutory power of sale would therefore allow both an assignment of the chose in action i.e. allowing other parties to bring the action, or an assignment of the proceeds arising from the litigation brought by the liquidator. Even if the funders were to be rewarded with more funds than they had put in, that should not prevent such an assignment since the funder would be taking on the risks of unsuccessful litigation.

The Court held that this statutory power is an exception to the common law doctrines of maintenance and champerty.

Of interest is that the original funding agreement ran into issues and was amended to become an assignment agreement. The original agreement provided for the company to use part of the litigation proceeds to repay the shareholders’ funding. That would essentially allow the shareholders’ funding to also be paid in priority to the other costs and expenses of the winding up.

The Court was of the view that this original funding agreement may have run foul of the Singapore equivalent of our priority provision in section 292(1)(a) and (2). Further, the original funding agreement could not be approved under the equivalent of section 292(9) since the Court has no power to make an order until actual assets have been recovered.

For those interested in reading more, there is a Singapore Law Reform Committee Report issued in 2014 setting out an analysis of the issues relating to litigation funding in insolvency.

Arbitration Trumps Insolvency , English High Court finds

In a follow up to my earlier article on Arbitration and Liquidation: Never the Twain Shall Meet?, there is now a recent English High Court decision that raises a few more questions on whether arbitration would trump liquidation.


English High Court Decision

In Philpott & Orton v Lycee Francais Charles De Gaulle School [2015] EWHC 1065, the wound up company had earlier entered into a contract with a school. This contract contained an arbitration clause. The company subsequently went into creditors’ voluntary liquidation. The school filed a Proof of Debt with the liquidators. There was a dispute on the final account and a dispute whether a set-off based on mutual dealings could be applied. The liquidators’ position was that £615,000 is due to the company while the school claimed it was owed £270,000. The liquidators applied to the court for directions on how to resolve this issue.

The school objected to the liquidators’ application for directions on the ground that the arbitration clause was still binding between the wound up company and the school. The school successfully applied for a stay under the Arbitration Act 1996.

It was held in this case that arbitration would trump the insolvency procedure of the Court giving directions on the final account. There was a dispute as to whether the company could claim a set-off since the liquidators were asserting that the company was owed that substantial sum as well. Therefore, the Court held that if the company were to bring proceedings against the school, such proceedings would have to be initiated by the liquidators of the company through arbitration.

Further, the English High Court also examined the issue of the school having filed a proof of debt and held that this did not prejudice the school’s reliance on the arbitration clause. The Court found nothing inconsistent with filing the proof of debt and then still bringing an arbitration claim. In such a case, the liquidator and the winding up court could wait the outcome of the arbitration before dealing with the proof of debt.

Malaysian Position on Arbitration vs Winding Up Procedures

I briefly examine how these facts and issues may have played out in Malaysia.

(i) Statutory Stay and the Proof of Debt Process

As an introduction, in a compulsory winding up and a creditors voluntary winding up, the law provides for an automatic stay of legal proceedings against the wound up company, except if the Court grants leave to proceed against the company (see the statutory stay under section 226(3) of the Companies Act 1965 for a compulsory winding up and section 263(2) for a creditors voluntary winding up). As an aside, I have written about a Malaysian Court of Appeal decision that suggests that there is a statutory stay even in a members voluntary winding up.

The legislative intent of the statutory stay is that the liquidator of the wound up company should not be forced to incur unnecessary expenses through defending legal actions if the creditors can obtain their relief within the winding up process through the filing of a proof of debt. This preserves the pari passu distribution, allows the cheap summary process of determination of the proof of debt, and preserves the assets in liquidation from being spent on litigating multiple suits (see generally, the Supreme Court case of Mosbert Berhad (in liquidation) v Stella D’Cruz [1985] 2 MLJ 446). Therefore, in almost all cases, if a creditor merely wishes to pursue a monetary claim, the appropriate process is to comply with the statutory process and file a proof of debt.

On these principles, it should ordinarily be the case that the insolvency procedure of the proof of debt trumps arbitration. If a creditor intends to bring a claim in arbitration against a company in compulsory or creditor voluntary liquidation, then the creditor must apply for leave from Court to proceed. Ordinarily, a monetary claim, even subject to an arbitration clause, should then be dealt with through the proof of debt. The wound up company should not have to expend money, thereby depleting the asset pool for the other unsecured creditors, in defending a claim in arbitration.

Taking it further, even if the creditor were to succeed in its arbitration claim and were to obtain an arbitral award, that creditor cannot execute against any of the assets of the wound up company. The creditor would still need to file in a proof of debt. Of course, the quantum in the proof of debt becomes much more concrete and the liquidator would find it difficult to reject the proof of debt. The argument by such a creditor pursuing the arbitral claim (and this is also inherent in the English High Court decision) would be that the creditor wants to pursue the contractually-provided platform to determine the quantum of that claim. The creditor wants the agreed arbitral tribunal to determine the claim and not the liquidator to determine the claim in the proof of debt process.

(ii) Arbitration Stay of Seeking Directions in Winding Up

 In a winding up, it is possible for a liquidator to seek directions in any particular matter arising under the winding up (section 237(3) of the Companies Act). It is quite possible, just like in the English High Court decision, that the directions sought may impact on a claim which is subject to an arbitration clause. Section 10 of the Arbitration Act 2005, which allows for a stay of court proceedings pending arbitration, refers to any court proceedings which are “brought in respect of a matter which is the subject of an arbitration agreement” and that could be wide enough to even cover such directions sought in a winding up. It will be interesting to see how such objections or applications would be dealt with in Malaysia.


Strict Requirements for a Stay of a Winding Up Order

A recent High Court decision sets out the strict requirements to be met when applying for a stay of a winding up. In this case, despite there being no objections raised by the liquidator or the other parties, the Court would still scrutinise the evidence before deciding whether to grant the stay or not.

In the Grounds of Judgment dated 2 June 2015 for the case of Percetakan Warni Sdn Bhd, the Court dismissed an application by a shareholder under section 243 of the Companies Act 1965 for a permanent stay of a winding up. This is despite the Petitioner and the Liquidator (being the Official Receiver)) not objecting to the application and where the Respondent (through its shareholder) would be paying off the debts of the Respondent company.

Of interest was that there were uncommon features which the Court insisted should have been met for such a section 243 stay application. The Court took the step of carefully assessing whether all of these requirements were met:

  1. In addition to the established section 243 principles from the leading Federal Court case of Vijayalakshmi and other cases, the Court held that there must be evidence to demonstrate the company will be commercially solvent after the section 243 stay. It is not sufficient to show assets outweigh the liabilities. Commercial solvency can be shown through injection of funds from a “white knight”, evidence that the company will be gaining a lucrative contract, or an expert opinion from a restructuring expert or accountant on the likelihood of the company’s commercial solvency. There was no evidence of any of these.
  2. The company had earlier been granted an ad interim stay of the winding up, since the OR had no objections to that. However, there was no evidence that the Board had even carried on the business or operated the company throughout that ad interim stay.
  3. The Court also scrutinised the Statement of Affairs filed by the directors and compared it with the Liquidator’s report filed by the OR. There were inconsistencies in the directors’ Statement of Affairs and not sufficient disclosure. While no objections were raised by the other parties, the Court held that this showed that the applicant’s evidence was not credible.
  4. The application also did not exhibit the latest audited accounts of the company. The last audited accounts were in 2010 and no updated financial information was provided by the applicant.

As these requirements were not met, the stay application was dismissed. So be aware of the possibly stringent requirements when seeking for a section 243 stay of a winding up Order. These additional requirements would also provide good grounds to object to a section 243 stay application.