Corporate Litigator’s WMDs Talk at the KL Bar

I am delivering a talk at the Kuala Lumpur Bar this afternoon and where I was invited to speak again on corporate litigation. I have set out below the Prezi I am using where I have updated some of the content. Hopefully the participants will find the talk useful.

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.

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.

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.