Kian Joo Holdings and Contempt of Court

The ongoing conflict between See Teow Chuan and the Liquidators of Kian Joo Holdings Sdn Bhd (KJHSB) continue to rumble on. I had covered the Court of Appeal decision which had far-reaching effects on establishing conflict of interest on the part of liquidators. This decision was subsequently overturned by the Federal Court. The Federal Court grounds of judgment are out and I will follow up with a case commentary shortly.

See Teow Chuan and the other majority contributories of KJHSB then filed an application for a review of the Federal Court decision. It was reported that the main ground for the review is on the issue of plagiarism; that the Federal Court had substantially adopted the written submissions of the Liquidators’ solicitors in writing its grounds of judgment.

Far-fetched perhaps but what was unexpected was the step then taken by the Liquidators in applying to cite the majority contributories and their Counsel, Datuk VK Lingam, for contempt of court. An application for leave to issue committal proceedings has been filed. An interesting step and one which the Federal Court appears to be taking quite seriously and the Attorney-General will be intervening as well to put forward his views.

The news report from the New Straits Times is set out below.

…………………………………………………………

Application filed to cite lawyer for contempt

‘DISRESPECT TO COURT’: Lingam and clients had asked for case to be reviewed alleging Federal Court judges had plagiarised liquidators’ submission in written judgment.

Prominent lawyer Datuk V.K. Lingam and his clients in a civil suit are facing possible contempt charges after accusing a Federal Court bench of alleged plagiarism in their written judgment.

Lingam and his clients, Kian Joo Can Factory Bhd (KJCF) group managing director Datuk See Teow Chuan and 13 others, had accused the bench, led by Chief Judge of Malaya Tan Sri Zulkefli Ahmad Makinudin, of producing the submissions of the respondents, “lock, stock and barrel”, in the written judgment against the appellants.

The High Court had earlier allowed the liquidators, Ooi Woon Chee and Ng Kim Tuck, to sell the shares of (KJCF) to a company, Can-One Sdn Bhd.

See and 13 others appealed against the High Court’s decision, which the Court of Appeal allowed.

The liquidators, however, took the case to the Federal Court which reinstated the High Court ruling.

Following the Federal Court ruling, See and 13 others had on Feb 21, filed a review of the ruling, citing the grounds that the previous bench, led by Zulkefli, had committed plagiarism in their written grounds.

They alleged that the written judgment glaringly showed plagiarism as they “consisted very largely and substantially the reproduction, without any attribution, of the liquidators, Ooi and Ng’s written submission.

Yesterday at the Federal Court, Tan Sri Cecil Abraham, appearing for the liquidators, told a five-man bench chaired by Chief Justice Tan Sri Arifin Zakaria, that an application to obtain leave had been filed to cite Lingam, See and 13 others, for contempt.

“Their grounds for a review, showed disrespect to the court,” said Abraham, adding that he had invited Attorney-General Tan Sri Gani Patail to be a party in the proceedings.

“He has indicated his desire to be an intervener.”

Arifin agreed that the A-G should be present, and even the court could invite him, as it was a case of public interest. “This case is a serious allegation which affects the integrity of the judiciary.”

Cecil informed the court that the leave application was an ex-parte matter and Lingam wanted to be a party.

“We want to be heard during the leave stage as this is a serious issue, coming for the first time in this court,” Lingam said, adding that he may consider filing a counter-contempt proceeding against the liquidators.

Arifin said the court would decide later whether to also allow Lingam to be an intervener before he adjourned proceeding to April 3.

Lawyer Ranjit Singh is holding a watching brief for the Malaysian Bar.

See and 13 others, are in a legal dispute over KJCF shares, and are asking for an order of a re-hearing of two appeals by a new panel of Federal Court judges.

They said this was an appropriate case for the court to invoke its inherent jurisdiction to review the judgment and set it aside.

See and the others are the majority contributors of family investment holding company Kian Joo Holdings Sdn Bhd, which was ordered by a High Court to be wound up in 1996.

Judgment in Default: Hearing the Case on the Merits

Typically, when entering judgment in default of appearance, judgment is allowed by the Court as a mere formality. However, there may be situations where the plaintiff will still wish for the case be heard on its merit even though the defendant is not present in court.

In the Singapore High Court decision of Singapore Telecommunications Ltd v APM Infotech Pte Ltd [2011] SGHC 147, the facts involved the Defendant from India which had been served but did not enter appearance within the Singapore jurisdiction.

The Plaintiff, instead of obtaining Judgment in Default, had argued that the Court had jurisdiction to hear the case on the merits (nowithstanding the absence of the foreign Defendant) in order to obtain Judgment. The reason for this is that Indian law required a foreign Judgment to be heard on its merits in order to be enforced in India.

The Court agreed that it had the inherent jurisdiction to do so and was referred to English authorities such as Berliner Bank AG v Karageorgis and another [1996] 1 Lloyd’s Rep 426 as applied in Habib Bank Ltd v Central Bank of Sudan (formerly known as Bank of Sudan) [2007] 1 WLR 470 and Trafigura Pte Ltd, Trafigura Beheer BV v Emirate General Petroleum Corporation [2010] EWHC 87 (Comm).

Although I am not aware of this point arising in Malaysia, this is something we can consider as well when advising on entering Judgment against a foreign Defendant and for purposes of the subsequent enforcement in that foreign country.

Costs on an Indemnity Basis

When costs are awarded, it is usually on a standard basis and where the party claiming costs has to demonstrate that the costs are reasonable before being allowed to claim for it. In practice, what this means is that the amount of costs awarded can be significantly lower than any out-of-pocket legal fees you may have paid your lawyers. So typically, at the Court of Appeal, where costs is awarded whether the appeal is allowed or dismissed, the figure for costs can be as low as RM5,000 or RM10,000 although a party may have paid its lawyer a lot more than that.

In certain exceptional circumstances, costs can be awarded on an indemnity basis. In practice, this means that a party ought to be allowed a full reimbursement of that party’s out-of-pocket legal expenses unless the paying party can show that certain items were so unreasonable.

The guiding principles on costs on an indemnity basis was summarised in the English High Court decision of Fiona Trust & Holding Corporate and ors v Yuri Privalov and ors [2011] EWHC 664 (Comm), where Justice Andrew Smith at [61] identified the following guiding principles:

“(1) The court should have regard to all the circumstances of the case and the discretion to award indemnity costs is extremely wide.

(2) The critical requirement before an indemnity order can be made in the successful defendant’s favour is that there must be some conduct or some circumstance which takes the case out of the norm.

(3) Insofar as the conduct of the unsuccessful claimant is relied on as a ground for ordering indemnity costs, the test is not conduct attracting moral condemnation, which is an a fortiori ground, but rather unreasonableness.

(4) The court can and should have regard to the conduct of an unsuccessful claimant during the proceedings, both before and during the trial, as well as whether it was reasonable for the claimant to raise and pursue particular allegations and the manner in which the claimant pursued its case and its allegations.

(5) Where a claim is speculative, weak, opportunistic or thin, a claimant who chooses to pursue it is taking a high risk and can expect to pay indemnity costs if it fails.

(6) A fortiori, where the claim includes allegation of dishonesty, let alone allegations of conduct meriting an award to the claimant of exemplary damages, and those allegations are pursued aggressively inter alia by hostile cross-examination.

(7) Where the unsuccessful allegations are the subject of extensive publicity, especially where it has been courted by the unsuccessful claimant, that is a further ground.

(8) The following circumstances take a case out of the norm and justify an order for indemnity costs, particularly when taken in combination with the fact that a defendant has discontinued only at a very late stage in proceedings:

(a) Where the claimant advances and aggressively pursues serious and wide ranging allegations of dishonesty or impropriety over an extended period of time;

(b) Where the claimant advances and aggressively pursues such allegations, despite the lack of any foundation in the documentary evidence for those allegations, and maintains the allegations, without apology, to the bitter end;

(c) Where the claimant actively seeks to court publicity for its serious allegations both before and during the trial in the international, and national and local media;

(d) Where the claimant, by its conduct, turns a case into an unprecedented factual enquiry by the pursuit of an unjustified case;

(e) Where the claimant pursues a claim which is, to put it most charitably, thin and, in some respects, far-fetched;

(f) Where the claimant pursues a claim which is irreconcilable with the contemporaneous documents;

(g) Where a claimant commences and pursues large-scale and expensive litigation in circumstances calculated to exert commercial pressure on a defendant, and during the course of the trial of the action, the claimant resorts to advancing a constantly changing case in order to justify the allegations which it has made, only then to suffer a resounding defeat.”

Locally, the Federal Court in Takako Sakao (f) v Ng Pek Yuen (f) & Anor (No 2) [2010] 2 MLJ 181 has held that the discretion to award costs on an indemnity basis is unfettered. Gopal Sri Ram FCJ quoted with approval some of the guidelines for an award of indemnity costs as discussed by Millett J (later Lord Millett) in Macmillan Inc v Bishopsgate Investment Trust plc and others (No 3) [1995] 3 All ER 747 :

 The power to order taxation on an indemnity basis is not confined to cases which have been brought with an ulterior motive or for an improper purpose. Litigants who conduct their cases in bad faith, or as a personal vendetta, or in an improper or oppressive manner, or who cause costs to be incurred irrationally or out of all proportion as to what is at stake, may also expect to be ordered to pay costs on an indemnity basis if they lose, and have part of their costs disallowed if they win. Nor are these necessarily the only situations where the jurisdiction may be exercised; the discretion is not to be fettered or circumscribed beyond the requirement that taxation on an indemnity basis must be ‘appropriate’.

“Making a composition or arrangement with creditors” and its effect on contracts

The Federal Court in the as-yet unreported grounds of judgment in the Desa Samudra v Bandar Teknik and others (Federal Court Civil Appeal No. 02-9-2011) involved the consideration of the effect of the grant of a restraining Order and whether it would trigger a termination clause under a PAM contract.

It is very common for contracts (and in this case, it was a PAM Contract) to include a termination clause which allows for termination of the contract upon a contracting party facing winding up or when there is a “making a composition or arrangement with his creditors”.

The Federal Court ruled that a grant of a restraining order under s.176(10) of a Companies Act does not fall within the meaning of “making a composition or arrangement with his creditors” (for the purposes of a PAM Contract but this could be generally applied as well to other contracts if an identical phrase is used). The fact that a first step had been taken in relation to a scheme of arrangement through the grant of a restraining order did not mean such a scheme of arrangement was in the “making.”

It seems that only when the scheme of arrangement is eventually approved by the Court, would there be a trigger of the phrase “making a composition or arrangement with his creditors”.

An applicant company would have gone to Court two times (the first to seek leave to convene the creditor meetings and the second is to file a Petition for Court approval) and so those circumstances alone do not appear to be sufficient to trigger the phrase. I had further elaborated on the law concerning schemes of arrangement in my earlier article.

Practical Tips when Seeking Committal

Some practical tips to keep in mind if an applicant is ever seeking committal proceedings to enforce compliance of an Order.

1. Set time frame to do the act

During litigation, if you are seeking to compel someone to do something (e.g. hand over documents, to hand over vacant possession, etc), do include an explicit time frame for them to do it. Committal can then be easily enforced for if there is a breach to do that act within that time frame (O. 45 r. 5 of the Rules of the High Court 1980 (“RHC”)), then you can apply for leave to commit. There is case law that states without such a time frame, you may not be able to go for committal. Without such a time frame, you may also not be able to get the penal indorsement (see below).

2. Set long enough time frame to get sealed Order and to serve

 However, do list out a long enough time frame (e.g. 28 days) for that person to do the act as you can only go for committal if the sealed Order is served personally on that person before the expiration of the time frame (O. 45 r. 7(2)(b) RHC). You can however go for an extension of the time frame, but that will add further complication and another round of litigation.

3. Penal indorsement

In order for you to go for committal for failure to do something within a certain time, the sealed Order must be indorsed with the necessary penal notice. When trying to extract the sealed Order, please double check that both the Order is sealed AND the penal notice which is at the bottom of the Order is sealed as well. Failure to seal the penal notice will make it defective. Sometimes, the Registrar and the court staff will forget to get the penal indorsement sealed.

4. Leave for committal

When going for leave for committal, which is carried out on an ex parte basis, you may also want to consider whether you want to have an additional prayer to exclude the need for personal service of the committal papers. Possibly state that the proper service can be effected by service on the contemnors’ solicitors (applicable if there is already ongoing litigation).

This is useful where you have individuals who may evade the service of the contempt papers, because the RHC requires that the contempt papers, after you get leave, be served personally on the alleged contemnors.

There should be some explanation  in your affidavit in support of leave as to why you are asking for dispensation of personal service. You may have tried to serve an order before on these individuals for instance. If there is no disclosure of such grounds, the contemnors could try to set aside the ex parte leave Order.

5. Ex parte hearing for leave

If you are on the other side and your opponent is seeking leave for committal and you get wind of it, there is a High Court authority allowing a Judge discretion to hear you notwithstanding that the RHC states that leave must be ex parte.

I however lost before a Judge when the Court read the RHC very strictly and said since the RHC states that leave for committal “shall” be heard ex parte, the Court had no discretion and the Court did not allow me to be heard at the ex parte leave hearing. I still prepared submissions and left the submissions and authorities with the Court, as I stated that since this was an ex parte hearing, the Court would still have to consider all the arguments for and against the grant of leave. I still lost the leave application anyway (but eventually succeeded in opposing the committal proper).

Penal Notice on Court of Appeal Order

If pending your appeal at the Court of Appeal, you apply for an interim Order under section 44 of the Court of Judicature Act 1964, it is advisable to include a prayer along the lines of:

 “that the penal notice under Form 87(c) of the Rules of the High Court 1980 be endorsed unto this order”

The Rules of the Court of Appeal does not have a provision for the penal notice, so you will not be able to automatically include the penal endorsement. The prayer for the penal notice was granted by the Court of Appeal in the Metramac case for instance (see the Federal Court decision in Metramac Corp Sdn Bhd (formerly known as Syarikat Teratai KG Sdn Bhd) v Fawziah Holdings Sdn Bhd [2006] 4 MLJ 113).

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”

Foreign Deponents of Affidavits in Malaysia

What is the correct procedure to allow for foreign deponents to affirm affidavits for use in Malaysian Court proceedings? See my summary of the procedure.

(i) Affirmation

Under Order 41 Rule 12 of the Rules of the High Court 1980, deponents from a Commonwealth country can affirm the affidavit before a notary public or person having authority to administer oaths (where there are commonly Commissioner for Oaths in Commonwealth countries).

But where the deponent is NOT from a Commonwealth country, then he must affirm the affidavit before a consular officer of a Commonwealth country i.e. head to the nearest Commonwealth embassy in that country.

(ii) Translation

Have the deponent affirm everything in English (which would include the exhibit cover page and all the headings in English).

The English copy of the affidavit will be filed and a Malay version of the affidavit will have to be affirmed by a certified translator and this Malay affidavit will exhibit the entire English affidavit along with a Malay translation of the contents. You can see this method stated by Vincent Ng J in Gilbert Engineering Co Inc v Zainuddin Ahmad & ors (No. 2) [2003] 3 CLJ 39.

Singapore Court of Appeal addresses several important issues relating to schemes of arrangement

I had been looking forward to reading the Singapore Court of Appeal grounds for its landmark decision relating to the TT International case decision. The grounds were obtained from Singapore Law Watch.As both Singapore and Malaysia do not have guidelines or Practice Directions (unlike in the UK) to guide the schemes of arrangement process, the development of procedures through common law is extremely important. The TT International decision analysed the sometimes different approaches in Australia and the UK and the decision touched on classification of creditors, in particular the vexed question of how to deal with the votes of related creditors or wholly owned subsidiaries, the fiduciary duties owed by scheme managers and how to deal with the proof of debt process in a scheme.

The issues before the Singapore Court of Appeal were:

  1. when a proposed scheme manager might be placed in a position of a conflict of interest;
  2. whether scheme creditors are entitled to examine the proofs of debt submitted by other scheme creditors in respect of a proposed scheme;
  3. when a scheme creditor should be notified of the chairman’s decisions to admit or reject its own and other creditors’ proofs of debt;
  4. whether a scheme creditor may appeal the chairman’s decisions to admit or reject its own and other creditors’ proofs of debt;
  5. whether the chairman’s decisions to admit or reject certain proofs of debt for the purpose of voting, in this case, were correct;
  6. when scheme creditors should be classified differently for voting purposes in a s 210 scheme of arrangement; and
  7. when scheme creditors should have their votes discounted.
The Court of Appeal’s answers were:

  1. a proposed scheme manager is in a position of conflict of interest when he without good reason aligns his interests with those of the company, such as in this case, where the proposed Scheme Manager was the nominee for the individual voluntary arrangements (“the IVAs”) filed by Mr Sng and Ms Tong (see [74]–[78] of the decision);
  2. yes, scheme creditors are entitled to examine the proofs of debt submitted by other scheme creditors in respect of a proposed scheme (see [79]–[93]);
  3. a scheme creditor should be notified of the chairman’s decisions to admit or reject its own and other creditors’ proofs of debt before the votes are cast at the creditors’ meeting (see [94]–[99] );
  4. yes, a scheme creditor may appeal the chairman’s decisions to admit or reject its own and other creditors’ proofs of debt (see [100]–[110]);
  5. the proposed Scheme Manager’s decisions to partially reject Ho Lee’s proof of debt (to the extent that he did) and wholly admit St George Bank’s, Ascendas’ and First Capital’s proofs of debt for the purpose of voting were incorrect (see [111]–[129]);
  6. scheme creditors should be classified differently for voting purposes when their rights are so dissimilar to each other’s that they cannot sensibly consult together with a view to their common interest (see [130]–[151]);
  7. related party creditors should have their votes discounted in light of their special interests to support a proposed scheme, by virtue of their relationship to the company; wholly owned subsidiaries should have their votes discounted to zero and are effectively classified separately from the general class of unsecured creditors (see [152]–[171]).

It is a real pity that the law relating to schemes of arrangement is so underdeveloped in Malaysia. I still see too much of abuse of the restraining order in the Courts, a lack of sufficient understanding of the impact of schemes of arrangement, insufficient judicial safeguards of ensuring transparency and full disclosure in such schemes and with Courts not receiving enough guidance through reported decisions.

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.