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.

Validation Order in a Just and Equitable Winding Up

This post will feature the different considerations for a validation Order (to allow for dispositions of property after the presentation of a winding up Order) in a just and equitable winding up Petition compared to that of a Petition based on the company’s inability to pay its debts.

Introduction to Section 223: Void Dispositions

In a compulsory winding up in Malaysia, winding up is deemed to commence upon the presentation of a Petition rather than at the date of the actual winding up Order. Therefore, there is the real risk that any disposition of property after the presentation of a Petition will be deemed void (under section 223 of the Companies Act).

The purpose of section 223 is to protect the interests of the creditors, especially since such winding up proceedings by the Court is predicated on the fact that the company is insolvent.

In the English High Court decision of Re A.I. Levy (Holdings) Ltd [1964] 1 Ch 19, Buckley J stated the following of the identical provision under the English Companies Act (at page 27):

“It appears to me that the object of the section is to protect the interests of the creditors from the possibly unfortunate results which would ensue from the presentation of a petition, and to protect their interests as much during the period while the petition was pending as after an order has been made on it.”

Difference in Winding Up Petition based on Alleged Insolvency and that of a Shareholders Dispute

However, the law draws a distinction between a creditor’s petition based on alleged insolvency and a contributory’s petition for winding up not based on insolvency. The Court ought not interfere with mere disagreements of business management or judgments.

As observed in Low Siew Cheang ‘Corporate Powers – Accountability’ (2nd Edition, 2002) (at page 1275):

“In a contributory’s petition for winding up and the ground is not insolvency, the general principles of law applicable to director’s powers in the management of the business and affairs of the company assume greater significance in cases where the company is an active company. This is but an application of common sense – the court does not interfere with mere disagreements in matters of business management or judgments.”

The English High Court decision of Re Burton & Deakin Ltd [1977] 1 WLR 390 (“Burton & Deakin”) involved a shareholders dispute (albeit concerning an oppression petition). The company in that case sought for a validation order under the equivalent provision of the English Companies Act and the petitioners therein opposed the application. Slade J allowed the validation and held the following (at page 397):

“At least so long as a winding up petition has not been presented, the court will not generally, save in the case of proven bad faith or other exceptional circumstances, interfere with the exercise of the discretion conferred on the directors by a company’s articles of association at the instance of a shareholder.

I can see no good reason why the rights of interference by a shareholder vis-à-vis the company or its directors should, in this kind of situation, for practical purposes be drastically improved during the interim period, merely because he happens to have presented a winding up petition which is not demurrable and which has not yet been heard.

If on an application under section 227 relating to a solvent company, (a) evidence is placed before the court showing that the directors consider that a particular disposition, falling within their powers under the company’s constitution, is necessary or expedient in the interests of the company, and (b) the reasons given for this opinion are reasons which the court considers that an intelligent and honest man could reasonably hold, it will in the exercise of its discretion normally sanction the disposition, notwithstanding the opposition of a contributory, unless the contributory adduces compelling evidence proving that the disposition is in fact likely to injure the company.”

The case of Burton & Deakin was referred to approvingly and applied in the High Court decision of Lim Pin Chuan v Delimec Hygience Sdn Bhd & 4 Ors [2000] 1 AMR 454. This case similarly involved a winding up petition based on the just and equitable ground. Mohd Ghazali b Mohd Yusoff J (as he then was) allowed an application for validation and applied Burton & Deakin.

In the High Court decision of BSN Commercial Bank (M) Bhd v River View Properties Sdn Bhd and another action [1996] 1 MLJ 872, Abdul Malik Ishak J (as he then was) allowed the validation of payments to run its daily affairs. His Lordship held (at page 882):

“It is my judgment that the court will always have regard as to whether the disposition was made bona fide in the course of the company’s current trade, and if not validated, the trade of the company would be paralysed without any advantage … Likewise here, as Mr Wong Kim Fatt rightly pointed out that River View needed the money to pay dividends and to run its daily affairs, without which River View would be paralysed, and on these grounds, the validation of the dispositions should be ordered in favour of River View and I so ordered accordingly.”

Conclusion

The reality is that upon the presentation of any winding up Petition, whether based on insolvency or the just and equitable ground, many banks will immediately freeze the bank accounts of the company. So even where a perfectly solvent company is subjected to a shareholder dispute between competing groups of shareholders, this company may find that its business operations come to a grinding halt when its bank accounts frozen. It is common to even have the Petitioning shareholder(s) to immediately inform the banks of the presentation of the Petition in the hope of exerting pressure on the responding group of shareholders when the company finds it difficult to operate.

It is therefore imperative that the Court quickly hears applications for validation Orders and where the Court gives different considerations where the Petition is based on a shareholder dispute.

Resolution of the Dire Conflict on the Part of Liquidators

Originally published in Skrine’s Legal Insights.

The Federal Court in Ooi Woon Chee & Anor v Dato’ See Teow Chuan & Ors [2012] 2 MLJ 713 has reversed the decision made by the Court of Appeal in Dato’ See Teow Chuan & Ors v Ooi Woon Chee & Ors (including Can-One International Sdn Bhd as 15th respondent) and other appeals [2010] 6 MLJ 459 (click here for my case commentary on the Court of Appeal decision). The Federal Court has clarified several important points of law touching on when a liquidator can be held to be in conflict of interest where the liquidator’s accounting firm has provided auditing or other services.

BRIEF FACTS

In 1996, Kian Joo Holdings Sdn Bhd (“Company”) had been wound up by the Court by consent of the shareholders. The liquidators of the Company (“Liquidators”) were partners of KPMG Peat Marwick (“KPMG”) and KPMG Corporate Services Sdn Bhd (“KCSSB”) was an entity used by the Liquidators to carry out some of their duties.

The facts leading to the appeal in the Federal Court centred on two main applications filed in the High Court. The first application was filed by the majority contributories (“Majority Contributories”) of the Company seeking leave to proceed with legal proceedings (“Leave Application”) against the Liquidators, KCSSB, KPMG and Can-One International Sdn Bhd (“Can-One”) for alleged misconduct in a tender of the assets of the Company, namely its 34.46% shareholding in Kian Joo Can Factory Berhad (“KJCFB”), and eventual award to Can-One.

The second application was filed by the Liquidators for directions from the High Court as to whether to complete the sale to Can-One (“Directions Application”).

At the High Court, the Leave Application was dismissed and pursuant to the Directions Application, the Court directed the completion of the sale to Can-One. The decision of the High Court was reversed by the Court of Appeal. The Liquidators were granted leave to appeal to the Federal Court in respect of both the Leave Application and the Directions Application.

FINDINGS OF THE FEDERAL COURT

The Federal Court first dealt with the issues arising from the Leave Application. The Federal Court noted that the Court of Appeal, when reversing the decision of the High Court, had granted leave to the Majority Contributories to proceed with the suit against the Liquidators where the suit was commenced in the names of the Majority Contributories and not in the name of the Company. The Federal Court held that the High Court was correct in holding that no leave ought to be granted as no cause of action vested in the Majority Contributories. The complaint was that the sale of the Company’s shares in KJCFB was improperly conducted and any loss would be suffered by the Company. The proper plaintiff would therefore be the Company and not the Majority Contributories.

Further, the Federal Court agreed that no pecuniary loss was suffered by the Company by accepting Can-One’s offer as it was the highest.

The Federal Court then further assessed whether the Majority Contributories had made out a prima facie case against the Liquidators in order to allow the Leave Application. The Majority Contributories had raised three main areas in the claim against the Liquidators and the Federal Court looked at each in turn.

Can-One’s Offer

The first was the Majority Contributories’ claim that Can-One had no valid offer for the Liquidators to accept. The Federal Court analysed the facts surrounding Can-One’s offer and held that the Liquidators had correctly exercised their discretion in accepting Can-One’s offer.

Conflict of Interest

The Federal Court next considered the issue as to whether the Liquidators, KCSSB and KPMG had placed themselves in a position of conflict when the Liquidators accepted the tender from Can-One where Can-One and its holding company were audit clients of KPMG. The Federal Court was guided by the legal principle that there cannot be an actual or apparent conflict on the part of the Liquidators.

In order to constitute actual conflict, the Federal Court held that there must be another partner from KPMG advising Can-One on the very sale itself in the opposite interest. The Federal Court found that there was no one from KPMG or connected with the Liquidators advising Can-One and that KPMG only acted in the audit of Can-One. There was no connection between the sale and the audit and hence, no actual conflict.

On the issue of apparent conflict, the Federal Court assessed the connection between the Liquidators who are partners in KPMG operating out of Kuala Lumpur/Selangor and KPMG’s Penang branch who were auditors of Can-One. The Federal Court was of the view that commercial reality was such that large accounting practices will give rise to associations with persons whom insolvency practitioners will sell assets to. To disqualify a liquidator merely because of an audit relationship would mean that almost every large accounting firm would be disqualified from holding a tender exercise.

The Federal Court held that commercial reality dictated that the existence of such a relationship by itself should not disqualify liquidators or their audit clients. Firstly, there is no express prohibition under the Companies (Winding Up) Rules 1972 for such a disqualification. Secondly, the Federal Court held that the High Court had correctly applied the Canadian case of Cobrico Development Inc v Tucker Industries Inc 2000 ABQB 766 (“Cobrico”) in finding there was no conflict. In Cobrico, the appointment of an auction house was criticized because the receiver’s firm was the auditor of the auction house in the same way as the Liquidators’ firm was the auditor of Can-One. It was held in Cobrico that that fact alone did not constitute a conflict of interest.

Alleged Bribe and Solicitation

The Federal Court agreed with the High Court that the allegation of solicitation for a bribe was devoid of merit. The Federal Court examined the chronology of events, in particular how the complaint of improper conduct and fraud were only made by a member of the Majority Contributories after the announcement that Can-One was awarded the sale. The Federal Court also held that the allegation, even if it were true, had no effect on the validity of the agreement with Can-One and whether or not it should be completed. In any event, the Federal Court found that no bribe was ever paid.

There were also other important issues touched on by the Federal Court in relation to other findings made by the Court of Appeal.

Standards Applicable to Liquidators and Judges

The Federal Court examined the Court of Appeal’s finding that the Liquidators, as officers of the Court, were expected to abide by the same standards as judges and hence could not hold meetings in connection with a bid outside their offices.

The Federal Court disagreed and held that the standards applicable to a Judge have no application to Liquidators on the sale of assets. The Liquidators do not act in a judicial capacity in selling assets and were instead making business decisions to obtain the best possible price. A liquidator is obliged to enter into the market and to use all powers to get that price. The Federal Court held that it would be unrealistic and against commercial reality to expect a liquidator to sit in his office in the expectation that competitive bids would come streaming in.

Duty Owed by KPMG and KCSSB to the Contributories

The Federal Court held that the Court of Appeal had erred in finding that KPMG and KCSSB owed a fiduciary duty to the contributories of the Company. KPMG and KCSSB were not vehicles used by the Liquidators and thus could not be liable for the alleged acts of the Liquidators. The appointment of the Liquidators was personal and KPMG as a firm of accountants and KCSSB as a company were never appointed as liquidators of the Company. It was held that the Liquidators were perfectly entitled to appoint KCSSB as an agent to assist in the liquidation.

Decision in the Directions Application Not Appealable

At the Court of Appeal, the Liquidators had raised a preliminary objection as to whether the directions given by the High Court were appealable. The question 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. While the Court of Appeal held that such directions were appealable, the Federal Court disagreed. It held that the directions given by the High Court were in the nature of advice and were accordingly not a “judgment or order” and thereby non-appealable.

COMMENTARY

This Federal Court decision clarifying the issue of conflict of interest on the part of liquidators is welcomed. This decision would similarly apply to the situation where receivers and/or managers (“R&M”) are appointed over a company. The mere fact that the accounting firm of a liquidator/R&M has provided any auditing or other services to a company is not sufficient to give rise to a conflict of interest on the part of the liquidator/R&M when dealing with that company. The Federal Court gave great weight to commercial realities and the far-reaching effects of making any finding of conflict of interest.

This decision however may not be the end of this dispute. The Majority Contributories have filed an application to review this decision of the Federal Court on the grounds that the Federal Court grounds of judgment had substantially reproduced the written submissions filed by solicitors for the Liquidators and Can-One in the Federal Court. It has been reported that the Majority Contributories allege that there was insufficient consideration by the Federal Court of the Majority Contributories’ case.

It has been further reported that the Liquidators have filed an application to obtain leave to cite the 14 of the respondents and their counsel for contempt of court on the basis that the grounds for their review application showed disrespect to the Court and that the counsel for the 14 respondents may file counter-contempt proceedings against the Liquidators.

Independence of Liquidator: Do Not Be a Lapdog Held Thrall to Improper Considerations

It is well established that a liquidator must not only act independently but that he must be seen to do so. In the Singapore Court of Appeal case of Fustar Chemicals Ltd (Hong Kong) v Liquidator of Fustar Chemicals Pte Ltd [2009] SGCA 35, the Court of Appeal reiterated that:

“All liquidators have to uncompromisingly observe their obligations to maintain independence and act fairly regardless of the manner of their appointment and the identity of their appointer. For instance, in a voluntary liquidation, the liquidator must act independently, and not be open to influence from appointing directors…”

The facts of Fustar Chemical related to the liquidator rejecting a proof of debt, the Court of Appeal spoke generally of the duty of a liquidator to hold an even hand. Therefore, the Court found that the liquidator had failed to act independently and fairly.

The English High Court case of Re Lowerstoft Traffic Services Ltd [1986] BCLC 81. Although, the case involved a creditor’s voluntary winding up rather than a member’s voluntary winding up, the facts therein are similar to the current facts. In Re Lowerstoft, the company had been put into creditor’s voluntary liquidation and a liquidator appointed by means of proxy votes although the appointment was opposed to by the other creditors present at the meeting. The other creditors thereafter presented a petition in court to wind-up the company. Hoffmann J allowed the order for compulsory winding-up, even where there was no evidence that the liquidator had failed in its duties, as:

“There was no general rule that an order would only be made where there was doubt as to the voluntary liqudiator’s competence or probity. It was in the public interest that creditors should have confidence in the liquidator’s independence and where there was suspicion of wrongdoing the liquidator should not only be independent but be seen to be independent.”

Further, Re Pinstripe Farming Co Ltd [1996] 2 BCLC 295 involved a company in a creditor’s voluntary liquidation and a voluntary liquidator had been appointed. The Court however allowed the appointment of a provisional liquidator pending the hearing of a winding up petition presented in Court as it was of the opinion that inter alia the voluntary liquidator and those entrusted with the liquidation were not sufficiently independent.

In the Singapore High Court decision of Liquidator of W&P Piling Pte Ltd v Chew Yin What [2004] 3 SLR 164, at para 27, VK Rajah JC (as he then was) held:

“the liquidator is expected to assume different roles and to discharge different responsibilities in different insolvency milieu. Where, as is usually the case, a company fails because of business conditions or for reasons which do not hint of any improprietary, to liquidator ought to assume a benign approach in dealing with the failed company’s affairs and processes. His role in such instances is that of a watchdog. Where there is evidence of impropriety,, the liquidator will have to shift gears. He then assumes the role of a hound dog. The court will however have to be astute to ensure that the liquidator does not use the insolvency scheme for improper third party collateral interests or personal considerations; in other words, he must not become a lapdog held thrall to improper considerations”

The Limits of a Stay of Winding Up

The Court of Appeal in American International Assurance Bhd v Coordinated Services L Sdn Bhd [2012] 1 MLJ 369 had the opportunity to clarify the limits of a stay of winding up Order. In my earlier post on Unwinding a Winding Up, I had highlighted the differences between a stay and a setting aside of a winding up Order and the great difficulty in arguing that a winding up Order can be set aside.As a brief summary of the facts of this AIA case, subsequent to the winding up of the Respondent company, a director of the company had obtained and renewed a fire insurance policy with AIA. It was not obtained by the liquidator. When a claim was later made on the policy, AIA discovered that the company had been wound up and repudiated the policy. The company then successfully obtained before the High Court an Order under section 243 of the Companies Act 1965 for a permanent stay of the winding up and, which is relevant for this commentary, a validation of all dealings and agreements from the date of winding up until the date of the stay Order.

The Court of Appeal did not disturb the first limb of the Order allowing the permanent stay. However, for the second limb, the Court of Appeal held that the Court had no jurisdiction, whether under section 243 or any other provision under the Companies Act 1965, to allow for such validation for the period post-winding up Order until the stay Order.

While the principles on the grant of a stay of a winding up Order are now quite settled, this case does confirm that the effects of a stay of a winding up can only take place upon the date of the stay being granted. There is no retrospective effect which would allow for the unwinding of a winding up so that the stay takes effect as if there was never any winding up. Any of the effects and repercussions of winding up would remain up until the date of the stay. This is unlike a setting aside of a Court Order where the Court Order would be deemed as never having been granted (and where in a lot of circumstances, one could then argue that the Order and any effects of the Order are reversed).This decision highlights the difficulties under the present law where the Companies Act 1965 does not allow for a rescission or a setting aside of a winding up Order. While applicants may attempt roundabout ways of stretching applications of a section 243 stay or even a section 223 validation of disposition of properties, the present law does not appear to allow for the reversal of the effects of a winding up Order.

Unwinding a Winding-Up?

This article was originally published in Skrine’s Legal Insights and I drew inspiration from Fahri Azzat’s article on LoyarBurok which featured the Federal Court decision below.

A commentary on Megah Teknik Sdn Bhd v Miracle Resources Sdn Bhd

The law allows the Court to exercise its discretion to set aside a Court Order under specific circumstances, for instance, where an Order has been granted in the absence of one party, or where there has been a contravention of a substantial provision of law.In the case of a winding up Order, the authorities strongly suggest that a Court has no jurisdiction to set aside a winding up Order. Instead, an applicant must apply for a stay of such an Order under the Companies Act 1965 (“the Act”). However, it can be argued that the Court still has some limited jurisdiction to set aside a winding up Order where the Order can be shown to be null and void due to illegality or lack of jurisdiction.All these principles will be analysed in light of the Court of Appeal decision in Megah Teknik Sdn Bhd v Miracle Resources Sdn Bhd [2010] 4 MLJ 651 (“Megah Teknik”). This decision was affirmed by the Federal Court (unreported judgment dated 13 October 2010 in Federal Court Civil Application No. 02(i)-29-2009).

BRIEF FACTS AT THE HIGH COURT

The Court of Appeal decision arose from a decision of the Kuala Lumpur High Court dismissing an application to set aside a winding up Order.

The petitioning company (“the Petitioner”) had presented a winding up Petition against the respondent company (“the Company”). The Company failed to enter an appearance and failed to file an affidavit to oppose the Petition. The Court then made a winding up Order against the Company.

Almost a year later, the Company filed an application to set aside the winding up Order on the ground that the winding up Order was made in default as the Company had no knowledge of the winding up proceedings. The Company claimed that it only became aware of the winding up Order when one of its directors had been blacklisted.

In the unreported grounds of judgment (Miracle Resources Sdn Bhd v Megah Teknik (M) Sdn Bhd [2008] 1 LNS 362), the High Court held that it was bound by the Court of Appeal decision in Vijayalakshmi Devi d/o Nadchatiram v Jegadevan s/o Nadchatiram & Ors [1995] 1 MLJ 830 (“Vijayalakshmi”). This decision held that a winding up Order cannot be discharged or rescinded after it had been made and the only remedy was to apply for a stay of the winding up under section 243 of the Act.

The High Court declined to follow other High Court authorities which allowed for the setting aside of a winding up Order.

THE COURT OF APPEAL

The Court of Appeal adopted the approach of the High Court in upholding the decision of Vijayalakshmi. It was pointed out in Vijayalakshmi, and noted in Megah Teknik, that there are no express provisions in the Act or the Companies (Winding up) Rules 1972 (“the Rules”) which allow for a setting aside or variation of a winding up Order. This is unlike the English Insolvency Rules 1986 which contain such a provision.

In Megah Teknik, the Court of Appeal held that a Court cannot invoke the general provision under the Rules of the High Court 1980 allowing for the setting aside of an Order made in default. This was because the Act set out specific provisions pertaining to winding up, including a stay of a winding up, but the Act was silent on allowing for a setting aside. Hence, the proper remedy in Megah Teknik was to apply for a stay under section 243 of the Act or to appeal against the winding up Order.

However, the Court of Appeal did leave the door open for a possible exercise of inherent jurisdiction to set aside a winding up Order under certain circumstances. The Court of Appeal did not explicitly list out these circumstances but adopted the Federal Court decision of Badiaddin bin Mohd Mahidin & Anor v Arab Malaysian Finance Bhd [1998] 1 MLJ 393 (“Badiaddin”). It was held by the Federal Court that there was inherent jurisdiction to set aside an Order where there was a contravention that defied a “substantive statutory prohibition so as to render the defective order null and void on ground of illegality or lack of jurisdiction.”

THE FEDERAL COURT

Leave to appeal to the Federal Court against the Court of Appeal decision was allowed. The question of law was whether a winding up Order could be set aside when obtained in the absence of the Respondent company. However, the Federal Court felt it was not proper to address the question as the Petitioner was not present and was not represented by solicitors. While declining to answer the question of law, the Federal Court nonetheless also held that there was no merit in the appeal and dismissed the appeal. Therefore, the Court of Appeal decision in Megah Teknik was upheld.

COMMENTARY

The upshot of Megah Teknik is that in general, one can only apply to stay a winding up Order. In circumstances like Megah Teknik, where the winding up Order was obtained in default, this decision suggests that there is no recourse to apply for a setting aside.

However, the Court of Appeal recognised that there would still be circumstances where the Court can exercise its inherent jurisdiction to set aside a winding up Order. Such circumstances could be where there was illegality or lack of jurisdiction. For instance, there may have been breaches in complying with the requirements under the Act and the Rules. Those breaches may have resulted in a respondent company not even having notice of the winding up Petition. Such an argument did not arise in Megah Teknik as the procedural requirements were complied with.

There are crucial differences between a stay and a setting aside of a winding up. While a stay of a winding up Order amounts to a total discontinuance of the winding up proceedings, there are several hurdles in applying for such a stay. The interests and views of the creditors, contributories and the liquidators must be taken into account in assessing whether a stay should be granted. On the other hand, for a setting aside, such a test would not be relevant as the focus would be on whether the winding up Order was granted illegally or with lack of jurisdiction. Further, for a stay, the records with the Companies Commission of Malaysia would still reflect the winding up but that it was now stayed. For a setting aside, there would not have been a valid winding up Order in the first place and the records should not reflect any winding up.

For the reasons discussed above, it is submitted that the Court ought to have jurisdiction to set aside a winding up Order. Echoing the words of Mohd. Azmi FCJ in Badiaddin, circumstances may exist where there is a “real need to set aside the defective order to enable to Court to do justice.”

It is a pity that the Federal Court in Megah Teknik missed out on the opportunity to clarify whether a Court can set aside a winding up Order and the specific circumstances in which it would do so.

See also my post on The Limits of a Stay of Winding Up.

Liquidators Now Facing a Dire Conflict

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 [2010] 1 LNS 594 involved the situation where a Liquidator and his accounting firm may be held to be acting in conflict of interest.

BRIEF FACTS

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.

COMMENTARY

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.
 

Liquidator Need Not Obtain Leave to Appoint Solicitors

In a useful clarification of the law, the Federal Court has recently decided on whether a liquidator requires authority of the Court or the committee of inspection to appoint lawyers to act on behalf of the company already in liquidation. The Federal Court answered the liquidator need not apply for such authority since the statute already allows a liquidator to bring or defend any action on behalf of the company and to appoint an agent to do so.Prior to this Federal Court decision of Zaitun Marketing Sdn Bhd v Boustead Eldred Sdn Bhd, there were conflicting High Court authorities on this point which dealt with the interpretation of section 236 of the Companies Act 1965. The relevant sections read:

“236. Powers of liquidator.

(1) The liquidator may with the authority either of the Court or of the committee of inspection –

(e) appoint an advocate to assist him in his duties.

(2) The liquidator may –

(a) bring or defend any action or other legal proceeding in the name and on behalf of the company;

(i) appoint an agent to do any business which the liquidator is unable to do himself;”

The conflict arose as to whether section 236(1)(e) of the Act, which required the authority of the Court or the committee of inspection, included the liquidator appointing lawyers to act in legal proceedings on behalf of the company. Section 236(2)(a) and (i) seemed to already allow for a liquidator to appoint lawyers to bring or defend any action on behalf of the company. Gopal Sri Ram FCJ approved of the High Court decision in Selvam Holdings (Malaysia) Sdn Bhd v Toby Lam as the Receiver and Manager and Liquidator of Selvam Holdings (M) Sdn Bhd & Anor [1994] 4 CLJ 899 and overruled the initial High Court decision of this matter. Some of the relevant portions in Selvam Holdings read:

“The second point is that s. 236(1)(e) does not apply to the appointment of an advocate and solicitor to defend a liquidator against a suit arising out of the performance of his duties as liquidator. Paragraph (e) of s. 236(1) speaks of the appointment of an advocate by a liquidator ‘to assist him in his duties’. In my opinion the duties envisaged are the ordinary administrative and management duties of a liquidator such as those that are within his ordinary professional competence. It is only that kind of duties that the words ‘to assist’ can comfortably go along with.”

This is a good clarification of the law and it is the sensible interpretation of that section. Liquidators now can minimise costs in not having to file a separate court application to seek leave of the Court to appoint solicitors, and it will also cut out preliminary objections raised against solicitors acting on behalf of the liquidator.

Demand for Insolvency Lawyers

Saw this on Law Alliancewebsite about the possible rise in demand for insolvency/restructuring lawyers in the Asian legal market.Unlike in Hong Kong and even in Singapore, there are no truly recognised specialists in insolvency and restructuring in Malaysia. Unlike firms in those jurisdictions, I am not aware of any firms having specialised units for such insolvency work. Such work would have to have a blend of corporate lawyers as well as litigators to go to court. I guess there is not enough of such work over here to necessitate such specialisation.

Even with the present economic downturn, we have not seen any major meltdowns that have headed into insolvency or that requires restructuring. Less work for the lawyers then.

Just and Equitable Winding Up: KFC or Chicken Farmer?

I am resurrecting this post after some editing.Under the Companies Act, one of the grounds which the Court may wind up a company is on the “just and equitable” ground. This is very different from the usual winding up proceedings based on a company’s inability to pay its debts.

One of the common examples for the imposition of these just and equitable principles is that the law takes into recognition some form of personal or quasi-partnership relationship between the shareholders. An example may be a family business, where the initial patriachal sole proprietorship has become a sprawling family empire controlled by the sons. A falling out between the shareholder-brothers may then jeopardise the relationship of mutual trust and confidence and may justify the winding up of the company.

The leading case on just and equitable winding up is that of the House of Lords decision in Ebrahimi v Westbourne Galleries Ltd and others [1973] AC 360. The principles enunciated in Ebrahimi are applicable within Malaysia, as held by the Privy Council in Tay Bok Choon v Tahansan Sdn Bhd [1987] 1 WLR 413. The Singapore Court of Appeal decision in Chow Kwok Chuen v Chow Kwok Chi and Another [2008] SGCA 37 is also an interesting case analysing the just and equitable winding up provisions.

In a particular clear cut matter, where I argued that the just and equitable principles did not apply, I simplified (whether rightly or wrongly) the principles as such:

“Imagine if you had a company, let’s call it KFC Pte Ltd…”

Imagine a company, let’s call it KFC Pte Ltd, and it happened that soon after its formation, it started to be very successful in making and selling fried chicken. Over the decades, you have different shareholders entering and exiting the company. As KFC’s chicken business got larger, other companies started to become shareholders as well. However with the drastic onset of bird flu, KFC’s board of directors makes a decision to diversify its business. KFC would no longer solely focus on fried chicken, it would start making and selling fish burgers as well.

The decision to diversify the company’s business was a purely commercial decision, and just like KFC, the company is a commercial entity, which was free to pursue other lines of business. There was no case for a failure of the substratum of company based on some form of mutual understanding.

In contrast to KFC, another scenario may perhaps justify the imposition of just and equitable considerations:

Two best friends meet and decide to form a private limited company. One has a factory to produce fried chicken, and the other friend has a large chicken farm. They decide to form this company for the sole purpose of producing and selling fried chicken. If the friend with the factory suddenly wants to start making fish burgers, then perhaps, the friend with the farm can say that look, we had this common understanding between us that the company was formed to produce fried chicken, there has now been a failure of the substratum of that company. It could then be argued that it might be just and equitable to wind up the company so that the two friends could go their separate ways.

“…whether the company was more KFC, or more of that of the chicken farmer.”

So the case may sometimes boil down to whether the company is more KFC, or more chicken farmer. Unfortunately, a case will unlikely be so clear cut to differentiate between these two scenarios and the Court will need to hear evidence, whether through affidavit or through witnesses, in order to assess whether a just and equitable winding up should be allowed.