A commentary on the Court of Appeal’s views on conflicts of interest involving liquidators|
[edit 7 January 2012: The Federal Court has overturned the Court of Appeal decision.]
The Court of Appeal judgment of Dato’ See Teow Chuan and others v Ooi Woon Chee and others  1 LNS 594 involved the situation where a Liquidator and his accounting firm may be held to be acting in conflict of interest.
The Winding Up of Kian Joo Holdings
In 1994, a winding up petition was filed against Kian Joo Holdings Sdn Bhd (“the Company”) by several of its shareholders. The Company’s shareholders are all members of the See family. Subsequently, in 1996, the Company was wound up by the High Court by consent of the parties.
Two liquidators were appointed jointly and severally by the Court, with the current liquidators being Ooi Woon Chee (who, in 2007, replaced Abdul Jabbar bin Abdul Majid) and Ng Kim Tuck (“the Liquidators”). All were partners of KPMG Peat Marwick (“KPMG”). KPMG Corporate Services Sdn Bhd (“KCSSB”) was an entity used by the Liquidators to carry out some of their duties.
The Company’s contributories are broadly divided into 2 groups. The first group, led by Dato’ See Teow Chuan (“Dato’ See”), were the majority contributories representing 52% in value of the shares in the Company (“Majority Contributories”). The second group, led by Dato’ Anthony See Teow Guan, were the minority contributories representing 48% in value of the shares in the Company (“Minority Contributories”).
The Company owns shares representing approximately 34% of the issued and paid up capital in Kian Joo Can Factory Berhad (“KJCFB Shares”), a company whose shares are listed on Bursa Malaysia.
Upon the winding-up of the Company, the Liquidators had called for meetings of the contributories to ascertain their views on the method of distributing the assets of the Company. The two groups of contributories put forward two differing views. The Majority Contributories favoured the sale of the KJCFB Shares, while the Minority Contributories preferred a distribution in specie (a pro-rated distribution among the existing contributories) of the KJCFB Shares. At three separate meetings of contributories, the Majority Contributories voted in favour of the sale of the KJCFB Shares while the Minority Contributories voted against the sale.
The Sale of the KJCFB Shares
The Liquidators eventually decided to sell the KJCFB Shares. The Liquidators held an open public tender and received expressions of interest from several parties including Gold Pomelo Sdn Bhd (“Gold Pomelo”), a private vehicle of Dato’ See, and a third party, Can-One International Sdn Bhd (“Can-One International”). After some increase in the offers, the Liquidators accepted the higher offer by Can-One International and the parties entered into a conditional share sale agreement.
By this time, all the contributories were now against the completion of the sale of the KJCFB Shares to Can-One International. The Minority Contributories objected as they had always taken the position that the KJCFB Shares ought to be distributed in specie. The Majority Contributories on the other hand alleged that the acceptance of the Can-One International offer by the Liquidators was tainted with fraud and corrupt practice, and they filed a civil suit (“the Suit”) against the Liquidators.
The Court Applications
Various Court applications were then filed in the High Court, including two that were of particular significance. The first was the application by the Majority Contributories for leave to proceed with the Suit or alternatively, leave to commence legal action against the Liquidators, KCSSB, KPMG and Can-One International for damages for alleged breach of fiduciary duties and/or alleged fraud (“the Majority Contributories’ Leave Application”).
The second was an application by the Liquidators for directions from the Court, pursuant to section 237(3) of the Companies Act 1965 (“the Act”), as to whether the Liquidators should proceed with the completion of the sale of the KJCFB Shares to Can-One International.
The High Court dismissed the Majority Contributories’ Leave Application and gave directions to the Liquidators to proceed with the sale of shares. These Orders were then appealed to the Court of Appeal.
WHETHER DIRECTIONS FROM THE HIGH COURT WERE APPEALABLE
At the Court of Appeal, the Liquidators raised a preliminary objection as to whether the directions given by the High Court were appealable. The question to be determined was whether such a direction would fall within the meaning of “judgment or order of any High Court” under section 67(1) of the Courts of Judicature Act 1964. The Court of Appeal held in the affirmative and ruled that it was appealable. The Court held that a liquidator’s discretion must take a back seat once the Court gives its direction. A liquidator is therefore bound to act in the way in which the court has so directed because that direction is a judgment or an order emanating from the Court. Therefore, such a direction by the Court would be appealable.
ALLEGATIONS OF CONFLICT OF INTEREST AND BRIBERY
The Court of Appeal then dealt with the issues relating to the Majority Contributories’ Leave Application. In seeking leave to commence an action against a liquidator, it was accepted by both the High Court and Court of Appeal that there must be sufficient prima facie evidence to support such allegations.
To make out such a prima facie case, the Majority Contributories raised two grounds. Firstly, that the Liquidators, KCSSB and KPMG had acted in conflict of interest and therefore were in breach of their duties, and secondly, they alleged that secret meetings had been held in which a solicitation of illegal gratification had taken place. Both these allegations were not accepted by the High Court.
Conflict of Interest
In determining the first ground on conflict of interest, the Court of Appeal found that it could not categorically say that the Liquidators had not acted in breach of their fiduciary duties or that the entire public tender exercise was tainted with conflict of interest or fraud.
In the High Court, the Majority Contributories had raised the allegation of conflict of interest as KPMG were the auditors of both Can-One International and its parent company, Can-One Berhad (collectively the “Can-One Companies”), and it was alleged that the Liquidators, who were partners in KPMG, had failed to disclose this fact. The High Court dismissed such a challenge and held that the Liquidators were personally appointed as liquidators and were at all times acting for the Company. Can-One International on the other hand was an audit client of KPMG and not the Liquidators. Hence, there was no conflict of interest.
However, the Court of Appeal disagreed with this finding. Abdul Malik Ishak JCA (in delivering the Judgment of the Court) held that not only were the Liquidators in possible breach of their fiduciary duties, but that both KCSSB and KPMG were also in possible breach as these two companies were the vehicles and/or entities used by the Liquidators. The Court of Appeal held that KCSSB and KPMG, along with the Liquidators, were trustees and agents of the Company and/or the Majority Contributories in relation to the KJCFB Shares where the Majority Contributories are the beneficial owners of the KJCFB Shares in the liquidation exercise.
The Court of Appeal listed out the particulars of the fiduciary duties breached by the Liquidators, KCSSB and KPMG, some of which are highlighted below:
(i) KPMG received and had continued to receive financial remuneration from the Can-One Companies in respect of auditing and/or accounting services. Based on this fact, the Court held that the Liquidators, as partners of KPMG, received pecuniary benefit from the Can-One Companies. The Court therefore commented that the Liquidators, KCSSB and KPMG had only themselves to blame for being in a position of possible conflict of interest.
(ii) It remained to be answered whether the Liquidators, KCSSB and KPMG had suppressed and concealed their conflict of interest, and whether the entire public tender process and award of the bid to Can-One International was “tainted and infected with the conflict of interest element”.
(iii) It could not be ruled out that the Liquidators, KCSSB and KPMG had acted in conflict of interest for their own benefit and for the benefit of their existing clients, the Can-One Companies.
In considering the financial remuneration received by KPMG from the Can-One Companies, the Court of Appeal held that once there is any pecuniary relationship between the Liquidators and KPMG together with the Can-One Companies, there is an automatic disqualification in law and the Liquidators are disqualified from considering and awarding the bid to Can-One International.
It also found that the Liquidators, KCSSB and KPMG were inextricably linked, intertwined, and involved in the entire liquidation process of the Company. In making such a finding, the following facts were relied on:
(i) The Liquidators’ correspondence, business cards and advertisements of the tender were all under the name of KPMG.
(ii) In the course of their work, the Liquidators delegated various duties to the employees of KPMG and/or KCSSB.
(iii) All payments and advances for the Liquidators’ services were paid to KPMG or KCSSB.
(iv) The Liquidators’ statutory reports were filed by KCSSB.
The Court of Appeal therefore found that the Liquidators were KPMG and/or KCSSB’s “men” and once KPMG and/or KCSSB had put their men in as liquidators of the Company, KPMG and/or KCSSB owed a duty to the contributories as beneficiaries of the assets of the Company.
Although the Court of Appeal had earlier on in its judgment said that there were possible breaches of duties and possible conflicts of interest, it proceeded to nonetheless make findings of facts that the Liquidators had actually acted in conflict of interest in awarding the bid to, what the Court held as, the Liquidators’ client and paymaster, Can-One International.
Secret Meetings and Alleged Bribery
The second allegation raised by the Majority Contributories was that one of the Liquidators had held two secret meetings with a representative of Gold Pomelo. It was alleged that at both the meetings, the Liquidator concerned had asked for a substantial cash consideration and in return he would ensure that the bid would be awarded to Gold Pomelo. The High Court found that such allegations amounted to bare assertions, that they appeared to have been made with the intent of derailing the sale of the KJCFB Shares and therefore disregarded these allegations.
The Court of Appeal reversed such a finding. It held that it was not disputed that two meetings had taken place and the Court found that the two private and secret meetings outside the office in connection with the bid was akin to a judge meeting lawyers or clients outside the context of a court. Therefore, serious questions had been raised which must be investigated and answered.
The Court of Appeal therefore ordered, amongst others, that the directions given to the Liquidators to proceed with the completion of the sale of the KJCFB Shares be set aside, and that leave be granted to the Majority Contributories to proceed with their legal action against the Liquidators.
The appeal arose in relation to the Majority Contributories’ Leave Application. The appropriate test should have been whether the Majority Contributories had succeeded in establishing a prima facie case on the allegations of breaches of duties. Nevertheless, the Court of Appeal went a step further by making findings of actual conflicts of interest on the part of the Liquidators, KPMG and KCSSB when these matters should have been determined at the hearing of the legal action to be filed by the Majority Contributories.
This decision also arguably goes against the grain of accepted views and practice in other jurisdictions. The effect of this decision is that a liquidator and even a Receiver and/or Manager (“R&M”) will automatically be held to be in conflict of interest whenever the liquidator/R&M has any dealings with another company in which the liquidator’s/R&M’s accounting firm has provided any auditing or other services to. For instance, a public tender exercise carried out by a liquidator or R&M will now have to exclude all companies in which such an accounting firm (and likely the firms in the same global network) has provided any services to. As the foregoing will be impracticable, and clearly not in the interest of the company which is the subject of liquidation or receivership, the liquidator or R&M would have to cease acting in the transaction once bids are received from any party to whom their accounting firm provides services to unless consent is obtained from all relevant parties.
Further, notwithstanding the general view that a liquidator is appointed in his personal capacity and that it is the liquidator who then owes a duty to the company, the decision of the Court of Appeal suggests that the accounting firm in which the liquidator is a partner would also be treated as a trustee and agent of the company and both could be sued for any breaches of duties.
The Liquidators have applied for leave to appeal to the Federal Court against this decision. It is hoped that leave will be given so that the Federal Court can clarify these important points of law.
Originally published in Skrine’s Legal Insights.