In The Edge: Balancing act for directors

I was interviewed by The Edge Financial Daily and I shared my views on some of the challenges that directors will face under the upcoming Companies Bill.

theedge

“It’s not an easy balancing act to be done. But if you are speaking from the perspective of minority shareholders or even shareholders, I would say they will be welcoming these changes because there is more information, and the directors have to allow a platform for the shareholders to discuss, query, ask questions, even if it’s not contained specifically in any audited accounts.

“Free flow of information is quite welcomed,” Lee told The Edge Financial Daily after presenting his paper “New Companies Bill: Upcoming Changes and Impact on Directors and Shareholders” at the Malaysia Legal and Corporate Conference on Oct 7.

Although Lee welcomed the greater flow of information and interaction between the board and the shareholders, he warned of the possibility of shareholders abusing the new privileges to the detriment of the company and its operations.”

My views in The Edge were also briefly discussed on the BFM Morning Run.

It appears from the Parliament website that the Companies Bill 2015 was tabled for its First Reading on 19 October 2015 and its Second Reading on 20 October 2015. We are now close to ushering in the new laws.

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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.

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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.

 

Some Procedural Points for the Statutory Derivative Action

In the recent unreported High Court decision of Abdul Rahim bin Suleiman and another v Faridah binti Md Lazim & 7 Others dated 3 April 2015, Justice Wong Kian Kheong considered an application for leave under section 181A of the Companies Act 1965 to bring a statutory derivative action. I have written a commentary on the statutory derivative action provisions over here before.

The decision is useful in setting out some of the procedural guidelines that must be met in bringing such an action. Some of the significant points are:

  1. A complainant only apply under 181A to bring a new action, to act for the company when the company intervenes in an action, and to defend a pending action against the company.
  2. A complainant cannot seek to apply to act for the company where the suit is already concluded or where the suit is pending (as that suit would be under the control of the present management of the company).
  3. Notice under section 181B must be given to each of the directors. It is not sufficient just to address it to the Board of Directors.
  4.  This decision gave some guidance on what should be in the contents of the section 181B notice and the decision referred to several Canadian cases.
  5.  The application for leave is filed by way of Originating Summons (OS). In the OS, the applicant need only cite the Company itself as the sole Defendant. There is no need to cite the other alleged wrongdoers as parties to the OS. Nonetheless, citing the other alleged wrongdoers was not fatal in this case.

A Singularis Approach to Cross-Border Insolvencies

[Originally published in Skrine Legal Insights Issue 1/2015]

The Privy Council in Singularis Holdings Ltd v Pricewaterhouse Coopers [2014] UKPC 36 (“Singularis”) has clarified the extent to which courts can render common law assistance for cross-border insolvencies.

In summary, there is a limited common law power to assist a liquidator appointed by a foreign court by ordering the production of information. Such information must be necessary for the administration of the foreign winding up and this power is only exercisable if the foreign court could have made such an equivalent order.

BACKGROUND: MODIFIED UNIVERSALISM

In a cross-border insolvency, courts may be faced with difficult questions. Should a domestic court apply its domestic laws as if the case had no international aspects or should a domestic court defer to the foreign laws of the main jurisdiction of incorporation of the wound up company?

In other words, should a ‘territorialist’ approach be applied where the domestic court only applies its domestic laws? Alternatively, should a ‘universalist’ approach prevail in allowing a single set of the foreign laws of the main winding up jurisdiction to govern all of the global winding up proceedings?

A middle ground between these two concepts is that of ‘modified universalism.’ The courts of all countries should cooperate, as far as possible, with the laws of the main jurisdiction, except where the domestic jurisdiction has a compelling reason to apply its domestic laws.

It is against this backdrop of the increasing recognition of modified universalism that the facts of Singularis are set out below.

BRIEF FACTS OF SINGULARIS

Singularis Holdings Limited (“Singularis”) had been wound up in its place of incorporation, the Cayman Islands. The liquidators of Singularis (“Liquidators”) obtained court orders in the Cayman Islands against the company’s former auditors, PricewaterhouseCoopers (“PwC”) in Bermuda, to deliver up to the Liquidators certain documents. This was in order to facilitate the Liquidators’ investigations to trace certain assets. However, the law of the Cayman Islands only provided for documents “belonging to” a company to be delivered up to a liquidator. There was no dispute that this would not include material belonging to PwC itself, principally their audit working papers.

Subsequently, in Bermuda, while there was no ancillary liquidation of Singularis, the Liquidators obtained an order from the Bermudan court recognising their status as liquidators. Where a company is wound up in Bermuda, Bermudan law had a wider provision where documents “relating to” a company are to be delivered up to the liquidator of the wound up company. Relying on this Bermudan provision, the Liquidators applied for a Bermudan court order for PwC to deliver up its audit working papers.

At first instance, the Bermudan court allowed the Liquidators’ application and relied on the principle of modified universalism. The Bermudan court exercised a common law power to order PwC to produce the same documents which they could have been ordered to produce under the relevant Bermudan provision.

PwC appealed the decision and on appeal, the Bermudan Court of Appeal set aside the first instance decision. The Liquidators appealed to the Privy Council.

PRIVY COUNCIL DECISION

The Privy Council, by a three to two majority decision,  dismissed the appeal on grounds that the Liquidators would not have had the power to require PwC to produce the documentation under the laws of the Liquidators’ main winding up jurisdiction i.e. Cayman Islands law. While the Privy Council was deciding on Bermuda law, the common law of Bermuda is the same as that of England.

The Privy Council had to consider two issues:

(1)    Whether a common law power existed to assist foreign liquidators by ordering parties to provide information in circumstances where the equivalent statutory power did not apply to foreign liquidators; and

(2)    Whether, if such a power existed, it should be exercised where an equivalent order could not have been made by the court in the main winding up proceedings.

Firstly, the Privy Council upheld the general principle of modified universalism as set out in the Privy Council case of Cambridge Gas Transport Corp v Navigator Holdings plc Creditors’ Committee [2006] UKPC 26 (“Cambridge Gas”). At common law, the Court has power to recognise and grant assistance to foreign insolvency proceedings. However, the Privy Council overruled some of the other wider principles set out in Cambridge Gas and held that a domestic court does not have the common law power to assist the foreign court by doing whatever it could have done in a domestic insolvency.

In dealing with the issues in the appeal, the majority decision held that there is a common law power to assist a foreign insolvency court by ordering the production of information, whether oral or documentary, which is necessary for the administration of a foreign winding up.

However, this common law power is subject to the following five limitations:

(i)    It is only available to assist the officers of a foreign insolvency court. It would not be available, for example, to assist a voluntary winding up, which is essentially a private arrangement and is not conducted by or on behalf of an officer of the court.

(ii)    It is a power of assistance and exists to enable courts to surmount the problems posed for a world-wide winding up of the company’s affairs. It is therefore not available to enable foreign liquidators to do something which they could not do under the law by which they were appointed.

(iii)    It is available only when it is necessary for the performance of the office-holder’s functions.

(iv)    Such an order must be consistent with the substantive law and public policy of the assisting domestic court, in this case that of Bermuda. Following from this, it is not available to exercise such a common law power to obtain material for use in actual or anticipated litigation. Further, in some jurisdictions, it may be contrary to domestic public policy to make an order which there would be no power to make in a domestic insolvency.

(v)    The exercise of this power is conditional on the applicant being prepared to pay the third party’s reasonable costs of compliance.

Therefore, the Bermuda court had both the right and the duty to assist the Cayman court in so far as it properly could within the limits of its own inherent powers. This was to enable the officers of the Cayman court to do in Bermuda that which they could do in the Cayman Islands.

However, the Bermuda court could not exercise a common law power which was not exercisable by the Cayman court and could not apply the legislation applicable to its domestic winding up by analogy ‘as if’ the Cayman winding up was a domestic (i.e. Bermudan) winding up. It was not a proper use of the Bermuda court’s common law power of assistance for it to purport to use a power analogous to the Bermudan statutory provision to compel disclosure and production of information which belonged to PwC rather than the company.

LOCAL APPLICATION

In Malaysia, the Privy Council decision would not be binding but would be persuasive. Where a foreign company is wound up by the court of its main jurisdiction, and there is no ancillary winding up in Malaysia, the foreign liquidator would likely be able to obtain a Malaysian order recognising its status as a liquidator and possibly obtain an order for the production of information which is necessary for the administration of the foreign winding up.

Similarly, a local court-appointed liquidator of a Malaysian company with worldwide links may also apply for such orders for production of information in other common law jurisdictions.

It appears that this broad principle of allowing a production of information, both oral and documentary, would allow a foreign liquidator to also apply for orders allowing for private or public examination of persons in connection with the affairs of the company in winding up (assuming that there are such equivalent provisions in the foreign liquidator’s main jurisdiction).

Decades ago, the Singapore High Court in Re China Underwriters Life and General Insurance Co Ltd [1988] 1 MLJ 409 held that the court had no inherent jurisdiction or power to order the private or public examination of persons and dismissed the Hong Kong liquidator’s application. It was recognised in that case that such a power of examination was an extraordinary one which invoked images of the Inquisition and of the Court of Star Chamber. This decision was upheld by the Singapore Court of Appeal in Official Receiver of Hongkong v Kao Wei Tseng & Ors [1990] 2 MLJ 321. At that time, it was held that it was only a statutory power available in a domestic winding up.

As a result of Singularis, we may now have a broadening of the courts’ power in Malaysia to assist foreign court-appointed liquidators.

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.