Directors Ability to Move the Company to Wind Itself Up

Section 217 of the Companies Act 1965 (“the Act”) lists out the persons who have standing to petition the Court for the winding up of a company, and section 217(1)(a) of the Act allows for the company itself to also petition for winding up.

The question then arises that when a company petitions to wind itself up, does this require merely a directors’ resolution or a shareholders’ resolution? It may not be clear whether the Board of Directors’ general power of management to conduct the business of the company extends to destroying the business of the company through winding up.

In the High Court decision of Miharja Development Sdn Bhd & Ors v Tan Sri Datuk Loy Hean Heong & Ors and another application [1995] 1 MLJ 101, Justice VC George (as he then was) considered the competing arguments and held that the Board would have such a power to move the company to wind itself up and bring itself within section 217(1)(a) of the Act.

In summary, the High Court agreed with the submissions that unlike section 254(1)(b) of the Act which expressly states the requirement of a special resolution for the purposes of voluntary winding up, section 217 of the Act for compulsory winding up makes no reference to either an ordinary or special resolution. Further, the High Court agreed that there may be circumstances that the directors will need to decide to wind up an insolvent company, as the directors may be exposed to criminal liability under section 303(3) of the Act. This section deals with insolvent trading and the liability on the part of the directors. The company may not be able to expeditiously hold a shareholders meeting or there may even be a form of deadlock at the shareholder level. Thus, there may be situations where the directors may need to urgently move the company to petition for winding up.

On a practical note, while the company may cross the threshold of section 217 of the Act, the Petitioning company will still have to ensure that it brings itself within one of the grounds for winding up listed in section 218 of the Act. For instance, in the case of an insolvent company, under section 218(1)(e) of the Act (where the company is unable to pay its debts) and read with section 218(2)(c) of the Act (taking into account the contingent and prospective liabilities of the company).

I set out below the relevant passages from Justice VC George from the High Court decision (starting from page 106). It makes for interesting reading in comparing the approaches from different jurisdictions:

I will first deal with the locus standi of a company to petition to wind up itself at the instance of the board of directors without the sanction of the shareholders.

In the State of Victoria, Australia, the courts have construed the article in the articles of association of a company in pari materia with art 116 in the articles of association of each of the petitioner companies that provides that:

The business of the company shall be managed by directors who may exercise all such powers of the company as are not by the Act or by these presents required to be exercised by the company in general meeting, subject nevertheless to any regulations of these presents, to the provisions of the Act, and to such regulations, being not inconsistent with the aforesaid regulations or provisions as may be prescribed by special resolution of the company, but no regulation so made by the company shall invalidate any prior act of the directors which would have been valid if such regulation had not been made. The general powers given by this Article shall not be limited or restricted by any special authority or power given to the directors by any other Article provided that any sale of the company’s main undertaking shall be subject to ratification by the members in general meeting.

as being limited for the purpose of conducting the business of the company and not for the purpose of destroying the company. They take the view that the board of directors have no power to present a petition to wind up the company without the support of the shareholders – Re StandardBank of Australia Ltd (1898) 24 VLR 304; 4 ALR 287 and Re Birmacley Products Pty Ltd [1942] ALR 276. The Irish courts hold the same view – Re GalwaySalthill Tramways Co [1918] 1 IR 62.

Although the old English case, Smith v Duke of Manchester (1883) 24 Ch D 611, also seemed to take a similar view, it would seem that up to the end of the 1979, it was the generally accepted English practice to recognize that the board of directors were entitled to present a petition to wind up the company without first obtaining the sanction of the shareholders to do so – see Buckley on the Companies Act (13th Ed, 1959) at p 462 and 1 Palmer’s Company Law (22nd Ed, 1976) at p 691.

This was the position until the end of 1979, when Brightman J delivered the judgment in Re Emmadart Ltd [1979] 1 Ch 540 at p 547; [1979] 1 All ER 599 at p 605; [1979] 2 WLR 868 at p 874 where he said:

The practice which seems to have grown up, under which a board of director of an insolvent company presents a petition in the name of the company where this seems to the board to be a sensible course, but without reference to the shareholder, is in my opinion wrong and ought no longer to be pursued … What is stated in Buckley to be the law according to Irish authority is in my view equally the law in this country.

In 1986, the legislature intervened and the English Insolvency Act 1986 specifically provided for the directors to present the petition without reference to the shareholders. In New Zealand also, there are statutory provisions to the like effect.

This issue of the locus standi in the context of the board of directors has apparently never come up before the Malaysian or Singapore courts and it has now fallen on me to lay down what the Malaysian practice should be.

I agree with Encik Sri Ram, leading for the petitioners, that Emmadart does not lay down any universal principle of law but only reversed a practice. In this context, I found myself persuaded by the reference and relevance of s 303(3) of the Companies Act 1965 and to the distinction between ss 217(1)(a) and 254(1)(b) of that Act which for convenience are reproduced here:

217(1) A company (whether or not it is being wound up voluntarily) may be wound up under an order of the Court on the petition of –

(a) the company; …

254(1) A company may be wound up voluntarily –

(b) if the company so resolves by special resolution.

303(3) If in the course of the winding up of a company or in any proceedings against a company it appears that an officer of the company who was knowingly a party to the contracting of a debt had, at the time the debt was contracted, no reasonable or probable ground of expectation, after taking into consideration the other liabilities, if any, of the company at the time, of the company being able to pay the debt, the officer shall be guilty of an offence against this Act.

My attention was particularly drawn to Palmer’s Company Law (24th Ed, 1982) at p 1374:

Petitions by the company are not very common; for if a company desires to wind up, it has only to pass a special, or an extraordinary, resolution for voluntary winding up (Insolvency Act s 84). However, if the directors find the company to be insolvent owing to matters which ought to be investigated by the court, it may well be that their proper course is to apply at once on behalf of the company to the court by petition for a compulsory order.

If the shareholders pass a special resolution, the comparatively simple and cheaper procedure for voluntary winding up of the company provided by s 254 can be invoked. If there is such a special resolution, there would appear to be no point in invoking the s 217 procedure for winding up by the court.

There is, I think, significance in the fact that the legislature has specifically provided in s 254 for a special resolution of the shareholders, and omitted to provide, as a condition precedent even, for an ordinary resolution with reference to s 217(1)(a). If it had been the intention of the legislature that one of the conditions precedent to the company taking out a s 217 petition is that the sanction of the shareholders be obtained, it would have provided for that and could have done so conveniently in s 217(2) where a number of qualifications to the provisions in s 217(1) are made. The omission must have been a deliberate and considered omission.

I also agree that in the face of s 303(3), a fetter on the directors is far from desirable. In the New South Wales case of Re Inkerman Grazing Pty Ltd (1972) 1 ACLR 102 at p 106, Street J said:

Not only is there the authority of a course of practice recognized and given effect by judges in this State and, practical justifications and, indeed, necessities, for recognizing this power in directors. As is pointed out in Palmer’s textbook, there can well be occasions where the proper course is for directors of a company to apply at once for a winding up by the court. It is often only by a procedure of this nature that a company with widespread financial interests affecting a great many actual and prospective creditors, let alone shareholders, can move to protect its creditors and shareholders in the event of a sudden financial crisis developing which leaves it in a position of insolvency.

Unlike Brightman J in Emmadart, who had to descend into the arena himself as it were because only one party to the matter before him was represented by counsel, I have here had the benefit of the learned and well researched submissions of the opposing teams of lawyers each led by an eminent leader of the commercial Bar in the persons of Encik G Sri Ram and Encik KS Narayanan who have, between them, covered every possible aspect of the issue. Inter alia, I take the point that was made that Brightman J does not appear to have been referred to the New South Wales practice and the merits of the practice as set out in the various judgments of the courts there. He was also not referred to the Privy Council’s opinion expressed in 1932 in the Australian case, Campbell v Rofe (1932) 48 CLR 258, PC. It had been contended in that case that either art 10 of the company in question or art 117 (in pari materia with art 116 in the Articles of the two companies here) had provided the directors with the power to take the action that they had taken in respect of which their Lordships of the Privy Council, having expressed the view that art 10 provided the power exercised by the directors, went on to say at p 265:

In this view, art 117, which only purports to confer additional powers, does not include the powers conferred by art 10; but, if their Lordships had taken a different view as to art 10, they would have been prepared to hold that art 117 clearly delegated to the directors power to do everything that the company could do except where the authority of a general meeting of the company is expressly prescribed, …

I would echo Inkerman and say that it is not desirable that there be a fetter on the directors. While the directors may not cause the company to voluntarily be wound up without a special resolution to do so by the members because there is express provision to that effect in s 254, they should not be prevented, if they feel that that is the sensible course to take, to move the court for a winding-up order without first obtaining the sanction of the shareholders to do so. I would apply the wide (rather than narrow) construction to art 116 recommended by the Privy Council in Campbell v Rofe. I would respectfully share the opinion of the English legislature manifested in the restoration of the English pre-1979 practice and of the New Zealand legislature in sanctioning a similar practice – I would and do lay down that the effect of and the practice in respect of s 217(1)(a) is and should be that the directors of a company may petition the court to wind up the company without having to first obtain the sanction of the shareholders. I have particularly in mind that there could be situations where expediency calls for urgent steps to be taken or where as is the case here, it is not possible to obtain the views of the real shareholders at an EGM because the shares are held as security by a financial institution in whose name they are registered and because of that it appears that it is not possible to obtain the sanction of the shareholders because of the doubt of the status of the alleged real shareholders vis-ê-vis the shares. It is not difficult to think of other situations obtaining where the directors think it desirable that the company be wound up but the shareholders cannot or cannot expeditiously be summoned for an EGM.

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