The Companies Bill 2013

The Companies Commission of Malaysia (CCM) has issued its Public Consultation document enclosing the present draft of the Companies Bill 2013. The Bill, if passed in its present form, will greatly expand the present Companies Act 1965 where the Bill contains more than 631 sections compared with the 374 of the present Act.

For those who read the Bill, it is advisable to also read it together with the Final Report of the Corporate Law Reform Committee of the CCM issued back in 2008. This report formed the basis and contained the recommendations which were largely adopted within the Bill.

It will take a while for all the practitioners to digest all of these new provisions. My quick observation, from an insolvency practitioner point of view, is that the new Bill contains welcomed-additions to attempt to clarify the law of receivership while introducing more flexible corporate rescue mechanisms such as judicial management and the corporate voluntary arrangement.

I hope to share some of my thoughts on the Bill once I have had a bit more time to read through it all.

Federal Court Rules on Plagiarism Claim

Arising from an earlier Federal Court decision involving Kian Joo Holdings Sdn Bhd and its liquidators (see my earlier post on the decision), the dissatisfied contributories had filed an application to review this decision  on the grounds that the Federal Court grounds of judgment had substantially reproduced the written submissions filed by solicitors for the liquidators. The allegation was that there was insufficient consideration by the Federal Court of the Majority Contributories’ case.

I have now read off the Bernama website that this application has been dismissed on 22 May 2013. It is reported that in the Grounds of Judgment read out by Chief Justice Tun Arifin Zakaria, it was held that the adoption of counsel’s submissions as the court’s ground of judgment in itself was not a sufficient ground for the Federal Court to set aside its earlier judgment. Nonetheless, the Court did not encourage such practice as it had a tendency to invite negative perception, which would go against the presumption of judicial impartiality and accountability.

Chief Justice Tun Arifin Zakaria said scrutiny of the court’s grounds of judgment revealed that not all the submissions made by the liquidators’ counsel were adopted by the court.

He said out of the 189 paragraphs of the submissions, only 70 paragraphs were adopted by the court.

“And in so doing, the court inserted their own words in parts of the judgment.

“All these could not be done without the learned judges in fact applying their minds to the issues raised in the appeal,” said Arifin in a judgment delivered today.

…

In his 37-page judgment, Arifin said there had been due process as the case had gone through the full appeal process before the Court of Appeal and the Federal Court and that both the grounds of the High Court and Court of Appeal judgments were before the Federal Court.

Arifin said the 25 applicants were also given full liberty to make their oral submissions at the hearing before the Federal Court which was stretched over a period of two days, adding that written submissions were also filed.

“In fairness to the panel (three-member Federal Court panel), we have to assume that they must have considered the judgments of the courts below and the submissions of the parties, both oral and written, before arriving at their decision,’ he said.

The judiciary’s top judge (Arifin) said the adoption of counsel’s submissions as the court’s ground of judgment in itself was not a sufficient ground for the Federal Court to set aside its earlier judgment.

He cited a minority decision of a British Columbia Court of Appeal in the case of Cojocaru vs British Columbia Women Hospital and Health Centre which held that there was nothing inherently wrong with adopting the submissions of a party in whole or in part as reasons for judgment so long as those submissions truly and accurately reflect the judge’s own independent analysis and conclusion.

Arifin however said the court did not encourage such practice as it had a tendency to invite negative perception, which would go against the presumption of judicial impartiality and accountability.

What is still pending before the Federal Court are the application by the liquidators to cite these contributories and their lawyer, Datuk V K Lingam, for contempt of court for alleging plagiarism in the Federal Court judgment and the application to set aside this contempt application.

Another Commentary on the Decision of Jet-Tech

I had earlier written about the Federal Court decision of Jet-Tech Materials Sdn Bhd & Anor v Yushiro Chemical Industry Co Ltd & Ors and another appeal [2013] 2 MLJ 297 and its sweeping finding that breaches of shareholders agreement cannot form the basis for an oppression action under section 181 of the Companies Act 1965.

For a more detailed commentary on Jet-Tech do click on over to Weng Tchung’s view on this decision. It is a recommended read.

TT International Dispute Rumbles On

I had written earlier about the Singapore Court of Appeal decision in TT International No. 2 and how it set out important guidelines on the disclosure of fees of a scheme manager in a scheme of arrangement. In particular, a Value-Added Fee (“VAF”) arrangement had not been disclosed where the greater the amount of the creditors’ debt that is written off or extinguished, the greater the quantum of the remuneration received by the scheme manager’s firm (nTan). By that stage, it was estimated that the quantum of the VAF was between S$15 million to $30 million.

It has now been reported (click here) that nTan has been allowed to admit a Queen’s Counsel, Michael Beloff, to act in a hearing before the Court of Appeal scheduled for October 2013. nTan is seeking to set aside the TT International No. 2 judgment which effectively voided the fee arrangement agreed between nTan and TT International and also strongly criticised the firm.

nTan is arguing that it is unprecedented for an independent financial adviser’s fee arrangement to be decided in this manner. It also says that the judgment was made without proper jurisdiction, as nTan was never a party to the proceedings before the Court of Appeal; it also says it was deprived of natural justice as it never had the chance to challenge the assertions and evidence on which the judgment was based.

This will be an interesting case as I have been following the developments in the TT International dispute quite closely. It is also noteworthy that Singapore has seen more and more QCs gaining ad-hoc admission to argue cases in Singapore.

 

Protecting an Unguarded Pocket

[Originally published in Skrine’s Legal Insights Issue 2/2013]

The Singapore Court of Appeal in The Royal Bank of Scotland NV (formerly known as ABN Amro Bank NV) and Others v TT International Ltd and another appeal [2012] SGCA 53 revisited its earlier decision in The Royal Bank of Scotland NV (formerly known as ABN Amro Bank NV) and Others v TT International Ltd and another appeal [2012] SGCA 9 (“TT International No. 1”) (my earlier commentary on TT International No. 1 is found here) and laid down important guidelines on the disclosure of fees to be paid to a scheme manager in a scheme of arrangement.

BACKGROUND FACTS

Arising from the decision of TT International No. 1, the Court had ordered for meetings of the creditors to be called. At these meetings, the creditors approved a scheme of arrangement (“Scheme”) which was thereafter sanctioned by the Court. Under the terms of the Scheme, a Monitoring Committee made up of representatives from some of the major creditors was set up to oversee the implementation of the Scheme by the appointed Scheme Manager (“Scheme Manager”).

Close to a year after the sanction, during the implementation of the Scheme, the Monitoring Committee discovered that the company had prior to the sanction of the Scheme, entered into a success fee arrangement with the Scheme Manager’s firm. The Scheme Manager would be paid for the time costs incurred as well as a Value-Added Fee (“VAF”) which was a success-based fee. Under the VAF component, the greater the amount of the creditors’ debt that is written off or extinguished, the greater the quantum of the remuneration received by the Scheme Manager’s firm. By that stage, it was estimated that the quantum of the VAF was between S$15 million to $30 million.

The Monitoring Committee informed the Court of Appeal of the existence of this success fee arrangement and requested that the Court direct that the VAF be assessed in court. The key issue before the Court of Appeal was whether the VAF should have been disclosed to the creditors and/or the Court prior to the sanction of the Scheme.

COMPANY’S DUTY TO DISCLOSE MATERIAL INFORMATION

The Court of Appeal emphasised that transparency in the affairs of a distressed company through making available all material information that could impinge on the financial interests on creditors was essential. This duty of disclosure on the company has been emphatically declared to be an independent principle of law entirely distinct from the disclosure requirements mandated by statute.

The Court of Appeal took into consideration the prevailing practice of success-based fee remuneration of scheme managers both in Singapore and abroad. It was found that it was not uncommon for some scheme managers or financial advisers to include a success-based element in their fees for the debt restructuring work which they carried out. There was also no established practice in Singapore of such success-based fees of scheme managers being voluntarily disclosed to the creditors or the courts. Nonetheless, the Court of Appeal held that a commercial practice, no matter how widespread, does not have the force of law if it is contrary to legal principle.

In considering the legal issues, the Court of Appeal held that the company’s obligation to disclose all material information should cover liabilities such as the VAF which it had incurred immediately prior to the sanction of the Scheme. The VAF was a contingent liability incurred by the company which would have crystallised the moment the Scheme was successfully implemented. Ordinarily, such contingent liabilities would have been disclosed but the Scheme Manager’s firm was found to have been conveniently classified as an excluded creditor and therefore did not have to submit a proof of debt.

The Court did not view favourably the current practice of companies making use of the device of “excluded creditors” in order to not reveal to other creditors the actual or contingent liabilities, which may be very substantial. That practice would permit directors of an insolvent company to commit the company to a substantial contingent financial commitment that will come from an unguarded pocket. It held that the law does not allow such a practice as it can be used to conceal all kinds of financial arrangements which may prejudice the interests of the scheme creditors.

Therefore, it was held that the company was under a legal obligation to disclose all material information to the scheme creditors to enable them to make informed decisions on whether or not to support the Scheme. The company breached this obligation by failing to disclose the VAF to the scheme creditors. Furthermore, this information should have also been disclosed to the Court at the sanction stage.

SCHEME MANAGER’S DUTY OF DISCLOSURE

In referring to TT International No. 1, the Court of Appeal emphasised that it has been held that the Scheme Manager has to act in good faith towards the scheme creditors and must not mislead the scheme creditors or suppress material information.

In this case, the Scheme Manager had placed itself in a position of conflict, where the quantum of the VAF which would accrue to the Scheme Manager’s firm was dependant on the value of the debts which would be adjudicated upon by the proposed Scheme Manager himself. The Court of Appeal held that this conflict could only be resolved by the informed consent of the scheme creditors. There was no such informed consent because of the Scheme Manager’s (and also the company’s) failure to inform the scheme creditors of the VAF.

The Court of Appeal considered that the parties with a genuine interest to ensure that the proposed Scheme Manager is being reasonably remunerated would be the scheme creditors who would determine whether the scheme is commercially viable (and preferable to liquidation). It was therefore only fair, reasonable and right that both the company and the Scheme Manager disclose to the scheme creditors and the Court the terms of the proposed Scheme Manager’s appointment prior to the sanction of the Scheme.

REMUNERATION FOR INSOLVENCY PRACTITIONERS

In considering the above points, the Court of Appeal also considered that the issue of potentially exorbitant fees for insolvency practitioners was a matter of public interest. Central to this problem is the fact that their fees come from an unguarded pocket that in reality belongs to the creditors and not the financially distressed company.

The Court of Appeal found that the wildly divergent interests of the stakeholders often allow insolvency practitioners almost carte blanche to determine (without rigorous oversight) their levels of remuneration even for the most mundane tasks.

The Court of Appeal held as a matter of general principle, the determinative consideration as to the fair and reasonable remuneration for financial advisors/scheme managers should be the value contributed to the process in terms of tangible results for the creditors and the company, as opposed to the mere quantum of debt involved or the time spent.

CONSEQUENCES OF THE BREACH OF DUTY

As the company and the Scheme Manager were in breach of their common law duty of disclosure, the Court of Appeal found that ordinarily, the Scheme should be set aside and put to a fresh vote because it might not have been approved by the scheme creditors if they had known about the VAF. However, as the Scheme had been implemented for more than two years, the Court found that it was not practical to set it aside without causing more harm to the company and the scheme creditors.

Therefore, the Court of Appeal ordered the relevant parties to the dispute to try to reach an agreement on the proper amount of professional fees to be paid out. It also ordered that, if parties are unable to reach an agreement, then the fees would be assessed by a High Court Judge.

If the matter were to proceed to assessment, then the Court of Appeal laid down the following guiding principles. The Court would first consider the value (in this case the benefits, from a holistic and not mathematical standpoint, accruing to the company and the creditors) contributed by the Scheme Manager’s firm. Other factors would include the nature of the work involved, the time spent, the assistance provided, the scope of work and reasonable disbursements incurred.

CONCLUSION

Financial advisers or scheme managers in Malaysia may also include success-based components in their fee arrangements and there is no mandatory requirement to disclose such fee arrangements in the scheme papers.

Although decided in a Singapore context, the principles outlined in this decision should be equally applied here. The onus is on both the company and the scheme manager to disclose the fee arrangements of the company’s financial advisers or the proposed scheme manager to the scheme creditors and to the Court in a scheme of arrangement. This ensures that the informed consent of the scheme creditors is obtained and underlines the uncompromising need for transparency in relation to material information.

The aforesaid common law duty of disclosure imposed on the company and the proposed scheme manager would strike a sound balance between valuing the work done by financial advisors/scheme managers and safeguarding the interests of the creditors.

The decision is also significant in giving some guidance on the principle that should guide the determination of remuneration for such financial advisors/scheme managers in a scheme of arrangement. Rather than a mathematical scale based on the quantum of debt or time spent, the primary factor should be the value contributed to the process in terms of results for the creditors and the company.

Satellite Wars: A Commentary on the Astro v Lippo Arbitration Dispute

[Originally published in Skrine’s Legal Insights Issue 4/2012]

In the Singapore High Court decision of Astro Nusantara International BV and others v PT Ayunda Prima Mitra and others [2012] SGHC 212, the Plaintiffs from the Astro group of companies (“the Astro Claimants”) succeeded in enforcing five arbitral awards totalling more than US$250 million against the Defendants from the Lippo group of companies (“the Lippo Respondents”).

Although the case was decided under the provisions of the Singapore International Arbitration Act (“IAA”), the decision is also useful in the Malaysian context for the interpretation of the Arbitration Act 2005 (“Malaysian Arbitration Act”).

This article will first set out a brief overview of the relevant provisions of the IAA before going on to discuss the facts and the legal issues of the case.

SINGAPORE INTERNATIONAL ARBITRATION ACT

The IAA follows closely the UNCITRAL Model Law on International Commercial Arbitration (“Model Law”). Section 3 of the IAA states that, subject to the IAA, “the Model Law, with the exception of Chapter VIII thereof, shall have the force of law in Singapore.” The excluded Chapter VIII of the Model Law deals with the enforcement, and opposition to the enforcement of arbitral awards. There are a number of Articles of the Model Law (incorporated by IAA) and Singapore procedure which are relevant to the facts and disputes of the case.

First, Article 16 of the Model Law provides that the arbitral tribunal may rule on its own jurisdiction either as a preliminary determination or as a determination within the award on the merits. Where the arbitral tribunal makes such a preliminary determination on jurisdiction, the dissatisfied party may, under Article 16(3) of the Model Law (equivalent to section 18(8) of the Malaysian Arbitration Act), appeal to the Singapore High Court within 30 days.

Secondly, Article 34 of the Model Law (similar to section 37 of the Malaysian Arbitration Act) sets a time limit of 90 days for a dissatisfied party to apply to the Singapore High Court to set aside an arbitral award.

Lastly, in terms of enforcing an arbitral award and recognising such award as a Singapore Court Judgment, the Singapore procedure allows the Court to grant leave to enforce the award on an ex parte basis (i.e. without the presence of a respondent). The Order must be served on the respondent who may then apply to set aside the Order within a prescribed time frame.

FACTUAL BACKGROUND

In 2008, the Astro Claimants (consisting eight companies) initiated arbitration proceedings against the Lippo Respondents (being three companies) under the auspices of the Singapore International Arbitration Centre. The dispute concerned a failed joint venture relating to the supply of satellite-delivered direct-to-home pay television services in Indonesia.

The Astro Claimants succeeded in obtaining five arbitral awards against the Lippo Respondents, totalling more than US$250 million. The Astro Claimants then obtained leave from the Singapore High Court to enforce the five awards against the Lippo Respondents (“Enforcement Orders”) and attempted to serve the Enforcement Orders on the Lippo Respondents in Indonesia.

In this dispute, there were two important time limits that had passed. Firstly, in the course of the arbitration, the Lippo Respondents had challenged the jurisdiction of the arbitral tribunal on the ground that three of the Astro Claimants were not parties to the arbitration agreement. The tribunal ruled by way of a preliminary determination that it had the jurisdiction to adjudicate the disputes in the arbitration. The Lippo Respondents did not to appeal to the Singapore Court against this decision within the 30 days period prescribed under Article 16(3) of the Model Law. Instead, the Lippo Respondents chose to continue with the arbitration proceeding under protest, and filed a counterclaim against the Astro Claimants in the arbitration. The time limit for appeal against this determination of jurisdiction had long passed.

Secondly, after the five arbitral awards were issued in favour of the Astro Claimants, the Lippo Respondents did not to apply to the Singapore High Court to set aside the awards within the 90 days period prescribed under Article 34 of the Model Law. As such, the time limit for doing so had also expired.

The Enforcement Orders were then purportedly served on the Lippo Respondents in Indonesia. After the expiry of the period to set aside the Enforcement Orders, the Astro Claimants entered judgment against the Lippo Respondents. The Lippo Respondents subsequently applied to challenge the service of the Enforcement Orders and to challenge the enforcement of the awards on the ground that the tribunal had no jurisdiction to join three of the Astro Claimants in the arbitration.

THE LEGAL ISSUES

The Lippo Respondents challenged the validity of service of the Enforcement Orders. The High Court ruled that there was no proper service of the Enforcement Orders and gave leave to the Lippo Respondents to challenge the enforcement of the awards.

Of greater significance, however, were the issues concerning the challenge to the enforcement of the awards. These issues gave rise to certain novel questions of law and which led to the Singapore Court having earlier allowed the ad hoc admissions of foreign counsel, namely David Joseph QC for the Astro Claimants and Toby Landau QC for the Lippo Respondents, to argue the matters in the Court.

There were two significant issues concerning the challenge to the enforcement of the awards, viz:

1. Whether the Lippo Respondents were entitled to resist the enforcement of the awards in the country in which the awards were made when they did not take any steps to set aside those awards within the prescribed time frame; and

2. Whether the Lippo Respondents had a right to revive a challenge based on the alleged lack of an arbitration agreement and a misjoinder of some of the Astro Group companies to the arbitration well after the award had been made.

Issue 1: Failure to Apply to Set Aside and Ability to Resist Enforcement

Under the Model Law, it is generally accepted that there are two forms of challenging an award. The first is an ‘active’ remedy under Article 34 (equivalent to section 37 of the Malaysian Arbitration Act) to apply to set aside the award. The second is a ‘passive’ remedy under Article 36 (equivalent to section 39 of the Malaysian Arbitration Act) where the resisting party can wait until an application is made to enforce the award under Article 35 (equivalent to section 38 of the Malaysian Arbitration Act) and at that point in time, raise the grounds under Article 36 to oppose the enforcement.

As explained by the Singapore High Court, the IAA makes a distinction between an international arbitral award rendered in Singapore (i.e. a domestic international arbitral award) and an international arbitral award rendered in a foreign New York Convention country (i.e. a foreign international arbitral award).

For an international arbitral award (whether domestic or foreign), the IAA specifically excludes the mechanism of opposing the enforcement provided in Chapter VIII of the Model Law i.e. Articles 35 and 36. However, in respect of a domestic international arbitral award, an award is deemed “final and binding” under section 19B of the IAA, but subject to the express right of the dissatisfied party to resort to the sole and exclusive challenge through the setting aside mechanism.

Although Chapter VIII of the Model Law is excluded by the IAA, in the case of a foreign international arbitral award, the dissatisfied party may still oppose the enforcement of the award under the prescribed grounds set out in section 31 of the IAA (which reproduces Article V of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards concluded in New York on 10 June 1958).

The Court pointed out that this difference in approach to domestic and foreign international arbitral awards is not unique to Singapore as several civil law jurisdictions, such as Germany and Quebec also adopt a similar difference in the treatment of domestic and foreign international arbitral awards.

The Court further emphasised that the Model Law more properly resembles civil law rather than common law drafting. Hence, any discussion on the Model Law should draw from arbitration law in civil law jurisdictions.

The Lippo Respondents’ sole avenue of challenge in the Singapore Courts in relation to the arbitral awards was through an application to set aside those domestic international arbitral awards. The Lippo Respondents had failed to do so within the statutorily prescribed time limits. Therefore, the Lippo Respondents could not avail itself of the remedy of opposing the enforcement of those awards.

Issue 2: Failure to Appeal on Jurisdiction Challenge

In relation to the issue of the tribunal’s preliminary determination on jurisdiction, an aggrieved party in such a situation would have three options in attempting to challenge this preliminary determination:

1. Appeal to the Court under Article 16(3) of the Model Law;

2. Choose to leave the arbitral regime in protest and not to appeal under Article 16(3), and boycott the proceedings. Arguably, the boycotting party would then be able to apply to set aside the award under Article 34(2)(a)(i) on jurisdictional grounds; and

3. As arose in the present facts, the aggrieved party could choose not to appeal under Article 16(3) but continue with the arbitral regime by fully participating in the hearing with an express reservation of its rights.

The High Court held that in relation to the third option, it would not be open to a party to hold off bringing a jurisdictional challenge (i.e. by failing to appeal to the Court within the set time limit) and, at the same time, participate in the arbitration on the merits in the expectation that it could revive its jurisdictional challenge at a later stage should it prove to be unsuccessful in the arbitration. Such conduct would make a mockery of the finality and effectiveness of arbitral awards on jurisdiction.

Challenging such an award on jurisdictional grounds is thus excluded from the grounds which a party may invoke at the setting-aside or the enforcement stage if the party has chosen not to bring an appeal under Article 16(3).

It was held there are no passive remedies when it comes to challenging jurisdiction under the IAA – a party wishing to oppose a jurisdictional award must act within the prescribed time frame.

The Singapore High Court cautioned that if a party decides to hedge its bets as the Lippo Respondents had done, the disadvantages and risks of this tactic are dire under the IAA if the outcome is an adverse award on the merits.

COMMENTARY

Failure to Set Aside and Ability to Resist Enforcement

Unlike the IAA, the Malaysian Arbitration Act permits the dissatisfied party under either a domestic or a foreign international arbitral award to oppose the enforcement of the arbitral award in the enforcement proceeding.

One interpretation of the Malaysian Arbitration Act (and one which is in line with jurisprudence from many other Model Law countries) is that, a party can always opt for either the ‘active’ remedy by applying to set aside an award under section 37 of the Malaysian Arbitration Act or for the ‘passive remedy’ by opposing the enforcement of the award in the enforcement proceeding under section 39 of the Malaysian Arbitration Act.

However, there are High Court authorities that suggest that the failure to set aside an award within the prescribed time limit may be fatal to the party’s subsequent attempt to oppose enforcement (Ngo Chew Hong Oils & Fats (M) Sdn Bhd v Karya Rumpun Sdn Bhd [2009] 1 LNS 1321 and Bauer (M) Sdn Bhd v Embassy Court Sdn Bhd [2010] 1 LNS 1260).

It remains to be seen whether this will be the approach that will be confirmed by the appellate courts.

Failure to Appeal on Jurisdictional Challenge

This Singapore High Court decision on the interpretation of Article 16(3) of the Model Law does provide a useful guide on the interpretation of section 18(8) of the Malaysian Arbitration Act.

Applying the principles of the Singapore High Court decision, if a party fails to appeal to the High Court pursuant to Section 18(8) of the Malaysian Arbitration Act against the arbitral tribunal’s preliminary determination that it has jurisdiction, then the party could possibly be precluded from raising a challenge on jurisdiction in either the subsequent setting aside application of the final award under section 37 of the Malaysian Arbitration Act or in enforcement proceeding under section 39 of the Malaysian Arbitration Act.

The Singapore High Court decision referred to authorities from Germany and Quebec on this point which the Malaysian courts can also draw reference from in the future.

Breaches of a shareholders agreement cannot form oppression

The Federal Court in Jet-Tech Materials Sdn Bhd & Anor v Yushiro Chemical Industry Co Ltd & Ors and another appeal [2013] 2 MLJ 297 (original Grounds of Judgment here) set out an important (and another possibly controversial) clarification on the law concerning oppression proceedings under section 181 of the Companies Act 1965 (“the Act”).

Raus Sharif PCA (delivering the judgment of the Court) first held that the just and equitable principle under 218(1)(i) of the Act, being principles emanating from the House of Lords decision of Ebrahimi, would equally apply in a situation involving section 181 of the Act. This is very useful and it helps streamline our Malaysia approach to the English approach already set out in the House of Lords decision of O’Neill v Phillips in that the concept of unfairness under section 210 of the English Companies Act (the equivalent of section 181 of the Act) is parallel to the concept of “just and equitable” expounded in Ebrahimi.

But the Federal Court seems to have made a sweeping finding at [37] that matters concerning a shareholders agreement and the breach of such an agreement are not matters relating to the affairs of the company. Therefore, such breaches cannot form the basis for a section 181 action. It was held that these are only private matters enforceable by the parties to the shareholders agreement. I do not think other jurisdictions and other cases in Malaysia have actually made such a far-reaching finding.

Oppression under section 181 of the Act revolves around whether there is commercial unfairness. Such unfairness is judged by the agreement, both formal and informal, reached among the parties. That is why the Articles of Association and, I would have thought, any shareholders agreement would be the primary assessment of whether any of the acts are unfair and are in breach of those formal agreements.

So say for instance, a typical situation where a shareholders agreement provides that there are reserved matters that will require the vote of the minority shareholder / nominated director of the minority shareholder. The shareholders agreement could contain a clause that the Articles of Association would be amended to reflect the terms of the agreement but it is quite common to see that the Articles of Association not amended. If the majority shareholder pushes through certain resolutions (for instance to transfer out assets) which is oppressive against the minority, a direct application of the Jet-Tech decision would mean that the minority shareholder would have not be able to rely on section 181 of the Act. The minority’s remedy may only be to sue for damages for a breach of the shareholders agreement.

I don’t think any Malaysian case or authorities from other jurisdictions have made such a sweeping finding before, in that breaches of a shareholder agreement cannot form the basis of oppression.

On a related note, this statement by the Federal Court, applied directly, may be used in support of the conflict between an arbitration clause in a shareholders agreement and statutory relief under section 218/181 of the Act (see for instance, the English Court of Appeal decision in Fulham Football Club (1987) Ltd The Football Conference Ltd [2011] EWCA Civ 855). It is now quite common to find an arbitration clause in a shareholders agreement. Therefore, if a breach of the shareholders agreement is only a private matter, then there may not be section 181 relief and parties may only be able to rely on the arbitration clause and have the dispute (for instance, the above example of the resolutions passed in breach of the agreement) referred to arbitration.

Stay of Execution of Judgment May Be Insufficient To Prevent Winding Up

The Court of Appeal in Juara Inspirasi (M) Sdn Bhd v Tan Soon Ping [2012] 1 MLJ 50 considered an appeal against the grant of a winding up order based on a judgment debt. The primary finding was on the respondent company’s failure to file an Affidavit in Opposition (see the oft-cited decision of Crocuses & Dafodils).

The interesting point was that the Appellant (the debtor company in the High Court) raised the argument that there was an ad interim stay of the judgment at the time of the winding up order. As the company’s solicitors had not exhibited the stay order, there was no direct evidence before the High Court and it could be said that the High Court proceeded to make obiter findings.

The Court of Appeal nonetheless agreed with the High Court that a stay of execution of a judgment would not necessarily extend to staying or preventing a winding up because winding up is not a form of execution.

Strictly speaking, that is true in that winding up is not an execution proceeding. The forms of execution are spelled out in the Rules of High Court 1980 (and now the Rules of Court 2012) and it is well accepted that procedures like winding up and bankruptcy are not forms of execution. However, where there is a stay of execution of the judgment, for all intents and purposes, no further proceedings should be taken based on the judgment. The judgment debtor need not pay the judgment sum over to the judgment creditor with the stay of execution in place.

The strict application of this Court of Appeal decision would mean that even where there is a stay of execution of a judgment, the judgment creditor could still issue a 218 notice against the judgment debtor company. The debtor may then have to go through the process of applying for an injunction to restrain the presentation of the petition. It may then be debatable whether such an injunction can be obtained since the question is whether there is any bona fidedispute of debt. If the petition were to be filed and proceeded to hearing, the debtor may find itself at a real risk of being wound up notwithstanding the stay of execution. Just like in this case, the Court found that the debtor company was insolvent and there were other supporting creditors for the petition.

This shows the importance of ensuring that the wording of the stay of execution application and the eventual Order is drafted as wide as possible to include a stay of execution and to prevent or stay any further step in any winding up proceedings. So for instance in the unreported decision of Poh Loy Earthworks Sdn Bhd v Mascon Sdn Bhd, the High Court stayed the hearing of the Petition as there was a stay order drafted in general terms “staying the judgment” rather than specifically staying the execution of the judgment.

Receiver and Manager Can Co-Exist with a Liquidator

The Court of Appeal in Yayasan Bumiputera Sabah & Anor v Apoview Wood Products Sdn Bhd [2012] 7 CLJ 593 (see here for the Grounds of Judgment of the Court of Appeal) considered the issue of whether a receiver and manager (“R&M”) could continue with an action on behalf of a company when a winding up Order was granted and a Liquidator appointed. In this case, the action was in respect of machineries owned by the company.

The Court of Appeal held that a winding up of a company after the appointment of the R&M only terminated the R&M’s personal powers but not his in rem power in that the R&M continues to retain possessory rights conferred by the Debenture to take custody and control of all assets charged under the Debenture, as well as the right to institute an action in the company’s name for the recovery of such charged assets. In this case, the machineries had been charged under the Debenture. The R&M’s right to the machineries therefore did not disappear when they were wrongfully disposed of to a third party.

The winding up of the company would only deprive the R&M of any power to carry on the business of the company as its agent so as to create debts as against its unencumbered assets.

Hence, the R&M and the court appointed liquidator in winding-up can exist side-by-side and each exercised separate duties and powers under the Companies Act 1965, in particular s. 236 and the Debenture.