I had earlier blogged about the dire conflict facing Liquidators arising from the Court of Appeal decision of Dato’ See Teow Chuan. The reported Court of Appeal decision can be read at [2010] 6 MLJ 459 and I had pointed out the grave implications arising from the Court of Appeal decision relating to Liquidators, Receivers (and Managers) and auditors.This Court of Appeal decision had proceeded to the Federal Court and based on this Bursa announcement, the Federal Court had allowed the Liquidators’ appeal.

It will be very interesting to read the Federal Court’s written grounds of judgment. I expect that the reasoning set out in the High Court decision (See Teow Guan & Ors v Kian Joo Holdings Sdn Bhd & Ors [2010] 1 MLJ 547) would be reinstated.

My debut article on LoyarBurok.

The Fire-Breathing Dragon

I had earlier highlighted the High Court decision of Mohd Shuaib Ishak v Celcom (Malaysia) Berhadwhich was the first Malaysian decision interpreting the provisions of the statutory derivative action under the Companies Act 1965.This decision has been overturned on appeal in the as-yet unreported decision of Celcom (Malaysia) Berhad v Mohd Shuaib Ishak [2010] 1 LNS 560 (“Celcom”). While I am not altogether surprised with the reversal of the High Court decision, let me analyse some of the principles of law enunciated by the Court of Appeal that will not govern the leave requirement for a statutory derivative action. I had earlier set out my analysis of some of the other Canadian and Singapore authorities on the principles in those jurisdictions, especially since their statutory provisions are very similar to ours. [edit: Based on a Bursa announcement dated 10 August 2010, the leave to appeal to the Federal Court against the Court of Appeal decision has been dismissed. So this is a final decision.]

When looking at judgment of Celcom, the Court of Appeal seems to have taken a stricter approach in deciding whether to allow leave under section 181A compared with the approach advocated by the High Court. This restrictive approach could be justified in this case since the case involved a former member complaining about certain acts of the company.

The Court of Appeal, when analysing the first limb requiring good faith, held the test is two-fold. One is an honest belief on the part of the Respondent, and two, that this application is not brought up for a collateral purpose. It applied the dicta of Palmer J found in Swansson v R.A. Pratt Properties Pty Ltd & Anor [2002] NSWC 583):

“Nevertheless, in my opinion, there are at least two interrelated factors to which the courts will always have regard in determining whether the good faith requirement of s. 237(2)(b) is satisfied. The first is whether the applicant honestly believes that a good cause of action exists and has a reasonable prospect of success. Clearly, whether the applicant honestly holds this belief would not simply be a matter of bald assertion: the applicant may be disbelieved if no reasonable person in the circumstances could hold that belief. The second factor is whether the applicant is seeking to bring the derivative suit for such a collateral purpose as would amount to an abuse of process”.

In the Celcom decision, a significant factor the Court took into consideration that there was a prudent business and commercial decision of the directors, made under independent legal advice. The Court would be slow to interfere and substitute its own judgment in such a situation.

It appears from the judgment, that the Court did not fully consider the requirement that the proposed action must prima facie appear to be in the best interest of the company. The Court of Appeal did apply the judgment in Swansson to hold that there was no reasonable prospect of success, and hence it could be said that the other requirement under section 181A was also not satisfied.

Nonetheless, the Courts should be slow to refer in a blanket manner to Australian authorities on statutory derivative actions, since the Australian Corporations Act 2001 (specifically section 237) have quite different provisions from ours. Firstly, Australian law requires an applicant to show that “it is in the best interests of the company that the applicant be granted leave” whereas our act states merely that “it appears prima facie to be in the best interest of the company” for leave to be granted. This seems to mean that our Act requires a lower threshold than that in Australia. Secondly, Australian law requires an applicant to show a serious question to be tried and such a requirement is absent in the provisions in Malaysia, Singapore and Canada (where all 3 have similar wordings in their provisions).

It is useful to to now have an appellate authority to refer to, when seeking to apply for leave under section 181A of the Companies Act 1965. On the facts of Celcom, I think it is the correct decision for leave to be denied. However, it remains to be seen whether this interpretation of section 181A will shut the door on any legitimate applications for leave to initiate a statutory derivative action.

One of the important ways in which the members of a company can express their views and concerns about the management of the company is at the general meetings of a company. Ordinarily however, the power to convene an extraordinary general meeting (“EGM”) vests in the directors of the company (for instance, Article 44 of Table A of the Fourth Schedule of the Companies Act 1965 (“Table A”) allows any director to convene an EGM). The members themselves do not have a common law right to compel the directors to convene an EGM.

Sections 144, 145 and 150 of the Companies Act 1965 (“the Act”) provide different mechanisms for the members to convene an EGM. In a majority of cases, such an EGM is convened to allow the members to vote on the removal and replacement of the directors. As a riposte, whether by an opposing shareholder faction or the directors themselves, legal challenges may then be made based on whether the procedural requirements have been adhered to.

This article therefore analyses the three different modes and their requirements for convening an EGM as provided for under sections 144, 145 and 150 of the Act.

SECTION 144 – SHAREHOLDERS REQUISITION DIRECTORS TO CONVENE AN EGM

Section 144 of the Act allows members, holding not less than 10% of the voting rights, to requisition the directors to convene an EGM of the company. Section 144(1) of the Act makes it clear that this statutory right of the members is preserved notwithstanding anything in the Articles of the company. The reason for the 10% shareholding threshold under section 144 of the Act, which is also present in section 145 of the Act, is necessary to prevent frivolous convening of meetings which would disrupt the administration of the company.

(i) “Members”

It is likely that notwithstanding the term “members” under section 144 of the Act, even a single member, holding not less than 10% of the voting rights, can rely on the provision. The High Court in Granasia Corporation Bhd & Ors v Choong Wye Lin & Ors and another case [2008] 4 CLJ 893 held that a single member could requisition under section 144 of the Act and the Court referred to the Australian decision in South Norseman Gold Mines No Liability v MacDonald [1937] SASR 53.

(ii) Requisition Requirements

Section 144(2) of the Act lists the requirements of the requisition notice in that it must state the objects of the meeting, it must be signed by the requisitionists and deposited at the registered office of the company. It is sufficient if the requisition is sent by post to the registered office of the company (Hup Seng Co Ltd v Chin Yin [1962] MLJ 371).

Upon the deposit of the requisition notice, the directors have 21 days from that date to issue a notice to convene the EGM (section 144(3) of the Act). Further, the EGM must be held within 2 months from the date of the deposit of the requisition notice (section 144(1) of the Act).

It is likely that a meeting requisitioned by the members cannot deal with a resolution not included in the objects for which the meeting was requisitioned (Scottish authority of Ball v Metal Industries 1957 SC 315). However, there is the alternative view that any business can be transacted at such a requisitioned meeting if sufficient notice of the necessary resolutions is given (Holmes v Life Fund of Australia Ltd [1971] 1 NSWLR 860).

(iii) Directors Fail to Convene EGM

In the event the directors fail to convene the EGM within the 21-day period from the date of requisition, then section 144(3) of the Act gives the requisitioning members a remedy of self-help in that the requisitionists themselves can convene the EGM.

Nonetheless, if the directors were to issue the notice to convene the EGM after the 21-day period and the EGM were to be held after the 2-month period from the date of requisition (without objection from the requisitionists), such an EGM would not be void. Such was the case in the High Court decision of Dato’ Hamzah Abdul Majid & Anor v Wembley Industries Holdings Bhd [1998] 4 CLJ Supp 471 where the directors who had been removed at such an EGM had tried to seek a declaration that the EGM was void for breach of section 144 of the Act. It was held that the duty on the directors to convene an EGM under section 144 of the Act was owed to the requisitionists. If the meeting was held on a late date, and the requisitionists had not sought to convene one on an earlier date, it would be because it still suited the requisitionists’ purposes. Nonetheless, holding a late EGM would still expose the directors to the general penalty provisions under section 369 of the Act.

(iv) Members Convene the EGM

In exercising their right to convene an EGM under section 144(3) of the Act, the requisitionists also face a deadline in that the EGM must be held within a period of 3 months from the date of the requisition (Court of Appeal decision of HL Nominees (Tempatan) Sdn Bhd v SJA Bhd & Anor and Another Appeal [2005] 1 CLJ 23).

The rationale for this time limit is to maintain good order in a company. The requisitionists having been conferred the power to convene the EGM, must not delay in holding the meeting (Dato’ Hamzah Abdul Majid & Anor v Wembley Industries Holdings Bhd [1998] 4 CLJ Supp 471).

As long as requisitionists holding one-half of the total voting rights of the original requisitionists convene the EGM, it is valid (section 144(3) of the Act). Therefore, the withdrawal of some of the requisitionists does not affect the right of the others to call the EGM (Canopee Investments Pte Ltd v Landmarks Holdings Bhd [1989] 2 MLJ 469).

(v) Expenses

An advantage of requisitioning a meeting under section 144 is that if the requisitionists convene the EGM, then all reasonable expenses they incur shall be paid to them by the company (section 144(4) of the Act).

SECTION 145 – MEMBERS CONVENING MEETING THEMSELVES

Section 145 of the Act allows two or more members, holding not less than 10% of the issued share capital (or if the company has no share capital, not less than 5% in number of members) to directly convene a meeting of the company.

Instead of relying on the section 144 mechanism which necessitates waiting for the directors to decide to call an EGM, section 145 of the Act gives the advantage of allowing the members to call for such a meeting themselves and this route can be a lot faster. However, section 145 of the Act does not give the members a right to be repaid any expenses incurred by them in holding such a meeting.

(i) “Two or more members”

While it is likely that a single member can rely on section 144 of the Act, section 145 makes it clear that two or more members are required in order to convene a meeting under this provision.

(ii) Statutory Right?

Section 145 of the Act does not contain the wording “notwithstanding anything in its articles” which is present in section 144 of the Act. A question arises as to whether there can be a contracting out of section 145 of the Act i.e. whether the Articles can exclude members relying on section 145 of the Act.

The Court of Appeal in Indian Corridor Sdn Bhd & Anor v Golden Plus Holdings Bhd [2008] 3 MLJ 653 (“Indian Corridor”) had to deal with a question related to such an issue. The facts involved the two appellant-shareholders convening an EGM pursuant to section 145 of the Act and the respondent-company challenging the convening of the EGM. Article 55 in the respondent’s Articles provided that the directors may convene an EGM and that EGMs “shall also be convened on such requisition, or, in default, may be convened by such requisitionist, as provided by Section 144 of the Act.” One of the main issues in the appeal was whether Article 55 had the effect of contracting out of section 145 of the Act.

The Court of Appeal held that on a construction of Article 55, there had been no contracting out of section 145 of the Act. The wording of Article 55 did not state that the shareholders shall not resort to their right under section 145 of the Act.

Nonetheless, the decision leaves open the question if the Articles of a company expressly exclude members from seeking recourse to section 145 e.g. the inclusion of a phrase along the lines of “EGMs may be convened by such requisitionist only by way of section 144 of the Act and section 145 of the Act is expressly excluded.”

The Court of Appeal in Indian Corridor distinguished the equivalent Australian provision (section 242(1) of the Australian Companies Code) as that section has the wordings “so far as the articles do not make other provision” which the Australian courts have held allow for the contracting out of the statutory provision (LC O’Neil Enterprise Pty Ltd v Toxis Treatments Ltd [1986] 10 ACLR 337). The Court of Appeal found that while the Australian provision permits a contracting out of its provisions, section 145 of the Act has no equivalent. This question may therefore still be open to interpretation by the courts.

(iii) Notice Period

Section 145(2) of the Act makes clear that in relation to a meeting of a company, the minimum notice in writing must be not less than 14 days or such longer period as provided in the Articles. In the specific case of the convening of an annual general meeting of a public company, section 145(2A) of the Act requires that notice in writing of not less than 21 days or such longer period as provided in the Articles.

(iv) Service of Notice

Section 145(4) of the Act also requires that if the Articles do not make provision for service of the notice on every member having a right to attend and vote at the meeting, then the notice must be served in accordance with Table A.

Unlike under section 144 of the Act, where the primary obligation is on the directors to issue the notices to call for the EGM, the members relying on section 145 of the Act must carry out the issuance of the notices themselves. In planning the calling of a meeting under section 145, the members can rely on section 160 of the Act to inspect or to obtain a copy of the register of members of the company to obtain the names and addresses of all the members.

SECTION 150 – COURT ORDERED EGM

There may be situations where it is difficult or almost impossible to hold a meeting of the company, even if there is reliance on sections 144 or 145 of the Act. For example, an opposing shareholder may refuse to attend the meeting and the quorum requirement under the Articles cannot be met. The Court is empowered under section 150 of the Act to order a meeting of a company to be called where it is impracticable to call or to conduct a meeting in the manner prescribed by the Articles or the Act.

(i) Applicant

The Court may make an order to convene a meeting on its own motion or on the application of a director or any member who is entitled to vote or the personal representative of such a member.

(ii) “Impracticable”

The onus is on the applicant to show that it is impracticable to call for a meeting of the company in any manner whatsoever or to conduct the meting in the manner prescribed by the Articles or the Act. The word ‘impracticable’ is not synonymous with impossible (Re El Sombrero Ltd [1958] Ch 900 at 904).

The Court can also exercise its power under section 150 if the meeting cannot be conducted properly, even though it may be called. In both the High Court cases of Low Son Siang v Lee Kim Yong [1999] 1 CLJ 529 and Phuar Kong Seng v Lim Hua [2005] 2 MLJ 338, there were only two shareholders and the quorum requirement for a meeting was two. There had been a failure on the part of one of the shareholders to attend the EGM and the Court allowed the application under section 150 of the Act to call for an EGM and directed that the quorum at the meeting be one member.

(iii) Requirement to Attempt to Requisition Meeting under Section 144 or Section 145 first?

Before applying to the Court under section 150 of the Act, members who wish to convene a meeting of the company may have to try to resort to section 144 or section 145 of the Act first. In the High Court case of Kemunting Tin Dredging (M) Bhd & Ors v Baharuddin Ma’arof & Ors [1985] 1 CLJ 442, the Court dismissed the application under section 150 and held that it was not impracticable for the members to call a general meeting. It was held that the members still had two avenues open to them, either in reliance of the procedures under section 144 or section 145 of the Act.

CONCLUSION

The statutory right for members to call for meetings allows members to express their views and to influence corporate governance. Where the members wish to replace the directors, they then need not rely on those same directors to call for the necessary meeting. The right to call for meetings is therefore a safeguard to corporate democracy in allowing members the opportunity to vote on company matters.

Part A. Introduction to Schemes of ArrangementSchemes of arrangement under section 176 of the Companies Act 1965 (“the Act”) may be used for a variety of purposes. The common use of such a scheme is the restructuring of the financial affairs of a company heavily burdened with debt.

Section 176 of the Act provides a mechanism to facilitate a formal compromise which binds dissenting participants so long as agreement by the statutory majority has been achieved, and subject to the approval of the Court. This helps to overcome the impossibility or impracticability of obtaining unanimous consent of all the creditors to implement a debt restructuring scheme.

This article sets out the law on schemes of arrangement.

Part B. Restraining Order

In the interim period between the proposal of a scheme (the details of which may not be completely finalised) and its approval by the Court, a company would be vulnerable to its creditors who may move to wind up the company or institute execution proceedings on the assets of the company.

Under section 176(10) of the Act, the company or any member or creditor of the company may apply to the Court to restrain further proceedings in any action or proceeding against the company, except by leave of the Court. Such an order to restrain ‘any action or proceeding’ would extend to restraining legal suits, execution proceedings or winding up petitions filed against the company.

(i) Restraining Order for a Period of Not More than 90 days

Section 176(10A) of the Act sets out that the Court may grant a restraining order for a period of not more than ninety days or such longer period as the Court may for good reason allow if and only if-

“(a) it is satisfied that there is a proposal for a scheme of compromise or arrangement between the company and its creditors or any class of creditors representing at least one-half in value of all the creditors;
(b) the restraining order is necessary to enable the company and its creditors to formalize the scheme of compromise or arrangement for the approval of the creditors or members pursuant to subsection (1);
(c) a statement in the prescribed form as to the affairs of the company made up to a date not more than three days before the application is lodged together with the application; and
(d) it approves the person nominated by a majority of the creditors in the application by the company under subsection (10) to act as a director or if that person is not already a director, notwithstanding the provisions of this Act or the memorandum and articles of the company, appoints the person to act as a director.”

A question arises whether the requirements under sections 176(10A)(a) – (d) of the Act must be complied with even where the initial application for a restraining order is for a period of 90 days or less.

The unreported High Court decision of Jin Lin Wood Industries & 3 Ors v Mulpha International Bhd [2004] 1 LNS 432 (“Jin Lin”) involved an application to set aside the initial restraining order which was granted for a period of 90 days. Despite non-compliance with section 176(10A)(c) and (d) of the Act at the time of the grant of the initial 90-day restraining order, the Court dismissed the setting aside application.

The Court appeared to agree with the argument that section 176(10A) of the Act does not apply when a restraining order of not more than 90 days is sought and referred to the decision in Pelangi Airways Sdn Bhd v Mayban Trustees Bhd [2001] 6 CLJ 129 (“Pelangi Airways”).

In the earlier decision of Pelangi Airways, the High Court had allowed an application to set aside the initial restraining order which was granted for a period of 1 year. It is submitted that Jin Lin had misapplied Pelangi Airways since the latter never held that the requirements of sections 176(10A)(a) – (d) of the Act need not be complied with where the period was for not more than 90 days. Pelangi Airways merely held that the requirements under sections 176(10A)(a) – (d) of the Act must be complied with for extending the 90-day restraining period to the 1-year period.

This issue has also recently been considered in the unreported High Court decision of PECD Bhd & Anor (Applicants) (No. 2) [2008] 1 LNS 324 (“PECD Bhd”). The Court held that sections 176(10A)(a) – (d) of the Act “apply to any application for a restraining order pursuant to subsections (10) and (10A) of section 176 of the Companies Act regardless of the length of the period of the restraining order applied for.” The Court found on a grammatical reading of the section, if the requirements of paragraphs (a) to (d) were meant to not apply to any restraining order for a period not exceeding 90 days, then subsection (10A) would have been drafted differently. Further, the Court also distinguished Pelangi Airways based on the facts of that case.

(ii) Extension of the Restraining Order

If the applicant seeks a restraining order past the period of 90 days, or for an extension of the initial restraining order past 90 days, the applicant must demonstrate a ‘good reason’. The High Court in Metroplex Bhd & Ors v Morgan Stanley Emering Markets & Ors; RHB Sakura Merchant Bankers & Ors (Interveners) [2005] 6 MLJ 487 (“Metroplex”) held the words ‘good reason’ in section 176(10A) of the Act to mean that:

(i) a bona fide scheme of arrangement is presented, with sufficient details provided to the creditors to enable them to make informed decisions as to its feasibility and merits (Re Kuala Lumpur Industries [1990] 2 MLJ 253);
(ii) the scheme of arrangement presented must not be such that it is bound to fail (Twenty First Century Oils Sdn Bhd v Bank of Commerce (M) Bhd [1993] 2 MLJ 353); and
(iii) the interest of creditors, that is, the beneficiaries under the proposed arrangement is safeguarded (Sri Hartamas Development Sdn Bhd v MBf Finance Bhd [1990] 2 MLJ 180).

Metroplex also made it clear that for extensions of a restraining order, all the provisions of section 176(10A) of the Act must be met afresh.

(iii) Approval of At Least 50% in Value of Creditors for the Restraining Order?

Metroplex had interpreted section 176(10A)(a) of the Act to mean that the section requires the approval of at least 50% in value of creditors in order for the Court to grant a restraining order. However, the High Court in Re Kai Peng Bhd [2007] 8 CLJ 703 (“Re Kai Peng Bhd”) construed the section differently and held that all the applicant needs to show is that the proposed scheme involves more than 50% of its creditors. The Court held that the approval of the creditors is only relevant at the stage of the creditors meeting ordered under section 176(3) of the Act, but not at the stage of the restraining order. It is submitted, that on a plain reading of the wording of section 176(10A)(a) of the Act, the interpretation of Re Kai Peng Bhd is to be preferred.

(iv) Restrain De-listing Procedures

It is not conclusive whether a restraining order obtained by a public listed company would extend to restraining de-listing procedures against the company.

The High Court in CHG Industries Bhd & Ors v Bursa Malaysia Securities Bhd [2007] 6 CLJ 710 involved the applicant company successfully arguing that a restraining order under section 176(10) of the Act would restrain Bursa Malaysia Securities Berhad (“Bursa Securities”) from proceeding with procedures to de-list the applicant.

However, in the unreported decision involving Avangarde Resources Berhad, Bursa Malaysia had on 11 April 2007 obtained a declaration from the High Court that a section 176 Restraining Order does not extend to include the decision of Bursa Securities to de-list the company in accordance with the listing requirements (see Listing Circular No. L/Q: 4285 of 2007).

(v) Protection of Creditors’ Interests

The restraining order has the wide-ranging effect of staying most, if not all, of the creditors’ actions against the company. In order to temper the risk of the creditors’ interests being prejudiced, certain safeguards have been put in place.

Section 176(10A)(d) requires the Court’s approval of the appointment of a director nominated by a majority of the creditors. This director would have access to the records of the company and is entitled to ask for any information and explanation he may require for the purposes of his duty (section 176(10B) of the Act). The Act is silent however on the extent and scope of the creditor-nominated director; must the director act in the interests of the company or can he act in the interests of the creditors?

Further, section 176(10C) of the Act also prevents any disposition of the company’s property and any acquisition of property by the company, other than those made in the ordinary course of business, unless the Court otherwise orders. A breach of this subsection will result in every officer in the company who is in default to be guilty of an offence which carries a penalty of imprisonment for 5 years or RM1 million fine or both (section 176(10D) of the Act).

(vi) Corporate Law Reform Committee

The Corporate Law Reform Committee (“CLRC”) had conducted an overall review of the Act and had recently published its ‘Review of the Companies Act 1965 – Final Report’. It is useful to highlight the CLRC recommendations on the changes to the scheme of arrangement framework under section 176 of the Act.

In relation to restraining orders, the CLRC recommended that any extension of the 90-day moratorium should only be for a maximum of one year. The CLRC noted section 176 of the Act has been used as a delaying mechanism by companies to frustrate the enforcement of any judgment debts by creditors.

Further, the CLRC recommended that a restraining order should not be effective against the companies and securities market regulators so as to prevent them from commencing any enforcement actions to ensure compliance of corporate and/or securities law or guidelines.

Generally as well, the CLRC recommended the requirement of an appointment of a qualified insolvency practitioner to assess the viability of a scheme of arrangement between a company and its creditors.

Part C. Court Convened Meeting

Where there is a proposed scheme of arrangement, the company will have to apply to the Court under section 176(1) of the Act to order a meeting of the creditors or class of creditors or of the members of the company or class of members. Separate meetings of each class of creditor or member would have to be called and classes are viewed as separate if their interests are so different that they will not be able to consult together with a view to their common interest, as set out in the authority of Sovereign Life Assurance Co v Dodd [1892] 2 QB 573 (“Sovereign Life Assurance”).

At each of the court convened meetings, the scheme is considered to have been agreed to only if a majority in number (i.e. more than 50% in number) representing 75% in value of the class present and voting in person or proxy at the meeting or adjourned meeting agreed to it (see section 176(3) of the Act).

(i) Insolvent Company Embarking on a Scheme of Arrangement

A great utility of the scheme of arrangement provisions is that it would allow a technically insolvent company to restructure its debts and to return that company to a position where it could trade. It was held in the High Court decision of Intrakota Komposit Sdn Bhd & Anor v Sogelease Advance (M) Sdn Bhd [2004] 8 CLJ 276 that even if the applicant companies were in fact insolvent, that would not preclude the applicants from embarking on a scheme of arrangement.

However, in the earlier High Court decision of Sri Hartamas Development Sdn Bhd v MBf Finance Bhd [1990] 2 MLJ 31, the Court adopted the public policy argument that a scheme undertaken by an insolvent company would be against commercial morality as the court could not condone or encourage individuals to carry on business activities in a company which was handicapped by a heavy burden of indebtedness. The High Court decision has recently been quoted with approval in the unreported Court of Appeal decision of PECD Bhd & Anor v Amtrustee Bhd (Civil Appeal No. W-02(IM)-386-2009) where the Court of Appeal held that it was against public policy to approve a scheme by an insolvent company.

(ii) Classification of Related Creditors

One practical problem that arises in schemes of arrangement is in the classification of creditors which are related companies to the applicant company in the proposed scheme.

For instance, if the proposed scheme were to set out one class of unsecured creditors where more than half the number consists of subsidiaries of the applicant company, then this may draw the ire of the other unsupportive creditors since they may be outvoted.

On this issue, there is some divergence in approach of the Malaysian court decisions and that of other jurisdictions.

In the High Court decision of Re Sateras Resources (Malaysia) Bhd [2005] 6 CLJ 194, it was held that it was unfair to group the applicant’s subsidiaries in the same class of creditors with the applicant’s unsecured creditors as there was a divergence of interest. The Court held that it was undeniable that the applicant having full control of the subsidiaries would cause the subsidiaries to vote in support of the scheme. The test there focused more on community of interests.

In contrast, in the Singapore Court of Appeal decision of Wah Yuen Electrical Engineering Pte Ltd v Singapore Cables Manufacturers Pte Ltd [2003] 3 SLR 629 (“Wah Yuen”), the test was focused more on community of legal rights. The Singapore Court of Appeal agreed with the submission that related party creditors did not constitute a separate class of creditors for voting purposes simply because they were related parties. The test applied by the Singapore Court of Appeal was based on similarity or dissimilarity of legal rights against the company, not in similarity or dissimilarity of interests not derived from such legal rights. The fact that individuals may hold divergent views based on their private interests not derived from their legal rights was not a ground for separating the related party creditors into a separate class.

(iii) Explanatory Statement

Section 177 of the Act requires that an Explanatory Statement be sent out to each creditor or member explaining “the effect of the compromise or arrangement and in particular stating any material interests of the directors, whether as directors or as members or as creditors of the company or otherwise, and the effect thereon of the compromise or arrangement so far as it is different from the effect on the like interests of other persons.”

This explanatory statement must ensure that the creditors are provided with sufficient or material information to make a meaningful decision, and a failure on the part of the applicant to make such disclosure may be fatal to the scheme.

In the English decision of Re Dorman, Long & Co Ltd [1934] Ch 635 it was held that it was essential to see that the explanatory circulars sent out by the board of the company were perfectly fair and to give all information reasonably necessary to enable the recipients to determine how to vote.

(iv) Without Prejudice Proposal?

An explanatory statement in setting out the effects of the proposed scheme will also list out the debts of the various scheme creditors. One issue raised before the Court of Appeal in PB Securities Sdn Bhd v Autoways Holding Bhd [2000] 4 MLJ 417 was whether there could be a ‘without prejudice’ proposal in a scheme of arrangement.

The case involved the applicant company issuing to a scheme creditor, various proposals for the restructuring scheme. After the applicant company had obtained leave to convene the meeting of creditors and had issued out the explanatory statement to all the creditors, the scheme creditor filed a proxy form stating that they would be voting against the scheme. The applicant then decided to oppose that creditor’s claim and had excluded their proxy representative from the court convened meeting.

The Court of Appeal overturned the High Court findings and held that the question of a bona fide dispute of the debt did not arise in light of the repeat acknowledgements in the various proposals. Further, the Court of Appeal held that there was no such thing as a without prejudice proposal under section 176 of the Act and there is no such thing as a restricted proposal. The appearance of the phrase ‘without prejudice’ had no effect on the proposal.

Part D. Court Approval

In the event the terms of the scheme are approved by the scheme creditors at the court convened meeting stage, a separate application has to then be made to the Court for approval of the agreed scheme.

When considering such an application, the court will generally be guided by the following principles:

(i) that the statutory provisions have been complied with;
(ii) that various classes were property identified and effectively represented by those who attended the meeting;
(iii) that statutory majority acted bona fide and did not coerce the minority in order to promote interests adverse to those of the class they purport to represent; and
(iv) that the arrangement is such as an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonable approve.

These general principles were examined in the High Court case of Re Sateras Resources (Malaysia) Bhd [2005] 6 CLJ 194.

Generally, the court should be slow in interfering with the decision of the majority of the creditors in the creditors meeting. Businessmen are better judges of what is to their commercial advantage than the court could be. However, the court may interfere if there has been some material oversight or miscarriage.

A recent Court of Appeal decision in Tan Kim Hor & 3 Ors v Tan Chong Consolidated Sdn Bhd affirmed the absolute right of a director under section 167 of the Companies Act 1965 (“CA”) to inspect company records. I believe that this is the first Malaysian appellate authority dealing with this point of law.Section 167 of the CA states:

“(1) Every company and the directors and managers thereof shall cause to be kept such accounting and other records as will sufficiently explain the transactions and financial position of the company and enable true and fair profit and loss accounts and balance sheets and any documents required to be attached thereto to be prepared from time to time, and shall cause those records to be kept in such manner as to enable them to be conveniently and properly audited.
…
(3) The records referred to in subsection (1) shall be kept at the registered office of the company or at such other place in Malaysia as the directors think fit and shall at all times be open to inspection by the directors.
…
(6) The Court may in any particular case order that the accounting and other records of a company be open to inspection by an approved company auditor acting for a director, but only upon an undertaking in writing given to the Court that information acquired by the auditor during his inspection shall not be disclosed by him except to that director.”

This right is an absolute right and by virtue of his office, a director cannot be called upon to furnish his reasons before being allowed to exercise this right and in the absence of clear proof to the contrary, the court must assume that he will exercise it for the benefit of the company.

The burden of proving that the right of inspection will be exercised for improper motives will be on the party who so asserts. There has to be a real ground that the right would be abused and that a great deal of harm would be caused to the company.

Any improper motive or conduct of the plaintiff in seeking to inspect the records of the company must be an improper motive against the company per se and not against the other directors or members of the company.

The Court also correctly, in my view, adopted a more purposive interpretation of section 167(6) of the CA in relation to the written undertaking. In this respect, the appellant had failed at the High Court due to an alleged defective undertaking and the Court of Appeal overturned this point. This appellate authority will be useful in guiding future cases involving the provision of such an undertaking.

Edit 3/3/2009: I have heard that leave to appeal to the Federal Court has been granted in relation to this matter. Will be useful to have the Federal Court to authoritatively lay down the principles of section 167, especially in relation to the requirements of the undertaking of sub-section (6).