Beware of the Hidden Winding Up Notice: New Federal Court decision

The Federal Court in Lai Yak Kee v Pembinaan Alam Cemerlang Sdn Bhd [2012] 1 LNS 1464 has clarified important points regarding the statutory demand issued under section 218 of the Companies Act. Any letter of demand, without any reference to possible winding up proceedings, can be an effective statutory demand. Beware of this possible landmine.

Danger Mines

The Federal Court held that the statutory demand need not stipulate that it was issued pursuant to section 218, and there is no need to mention any 3-week payment period. Further, there is no requirement to give any warning that there will be winding up proceedings.

The demand merely needs to be for a sum of more than RM500, issued under the hand of the creditor or his agent, and served on the registered address of the debtor company. This is due to the plain application of the wording of section 218.

This is significant as companies are used to receiving mere letters of demand as precursors to possible civil suits. Companies may even ignore such letters of demand.

On the other hand, when companies receive a clearly-marked statutory demand issued pursuant to section 218, there is an obvious threat of possible winding up proceedings. Companies would know that they must immediately react to oppose this statutory demand.

Companies will now have to be very cautious in assessing every letter of demand that they receive, whether there is a reference to section 218 or not.

If the claim is not paid within the 3-week period, there can be the presumption of insolvency and where the creditor can file a winding up petition against the company.

So, every simple letter of demand could now be a hidden landmine where winding up proceedings may be initiated if the demand is not paid after the expiry of the 3-week period.

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Federal Court amends the principles for amendment of pleadings

The Federal Court decision in Hong Leong Finance Bhd v Low Thiam Hoe and another appeal [2015] 8 CLJ 1 sets out a significant clarification on the principles for amendment of pleadings very close to trial (as opposed to amending pleadings at the beginning of proceedings).

Salzburg_-_Violin_repair_shop_-_2910

This decision adds additional requirements to the Federal Court case of Yamaha Motor [1983] 1 MLJ 21 which originally, set out three basic requirements: (i) whether the application was bona fide; (ii) whether the prejudice caused to the other side can be compensated by costs; and (iii) whether the amendments would not in effect turn the suit from one character into a suit of another and inconsistent character. Continue reading

Contractual Clause that Damages are Not an Adequate Remedy

The Federal Court in the AV Asia v MEASAT decision (Grounds of Judgment dated 20 January 2014) dealt with the issue on the existence of a contractual clause providing that “monetary damages will not be sufficient … and that injunctive relief would be appropriate to prevent any actual or threatened use of disclosure of such Confidential Information …”

Would such a clause bind the Court in holding that damages are not an adequate remedy for the purpose of granting an injunction?

The Federal Court agreed with both the High Court and the Court of Appeal in finding that the Court would not be bound by this contractual term. The Federal Court referred to two Canadian and American authorities. Those authorities held that where a clause stipulates that damages may not be adequate and that injunctive relief may or shall be the appropriate remedy, that does not mean that such relief will be granted as of right. The party seeking to secure equitable relief must still satisfy the Court that the pre-requisites for granting injunctive relief are prevalent.

 

Federal Court Ajwa decision on the Arbitration Act 2005

The Federal Court has recently released its Grounds of Judgment for its decision in the arbitration case of Ajwa for Food Industries Co (MIGOP), Egypt v Pacific Inter-link Sdn Bhd. This is the first reported Federal Court decision relating to the Arbitration Act 2005 and I had written earlier on the Court of Appeal decision.

The facts of this case involved Court applications to set aside or vary two PORAM arbitration awards. The parties had dealt with each other in an informal basis and that agreements were concluded through telephone conversations and email exchanges prior to any formal documentation. The Appellant, Ajwa, did not dispute purchasing the products from the Respondent, Pacific. Ajwa contended however that it never agreed to refer any disputes to PORAM arbitration.

Ajwa’s contention was that the Sales Contracts relied on by Pacific did not contain any specific dispute resolution clause and in most cases, were unsigned. Pacific had also relied on certain Standard Terms and Conditions (“STC”) and which Ajwa contended it had never seen nor agreed to. Therefore, Ajwa’s case for setting aside was essentially that the PORAM Tribunal had no jurisdiction to conduct the arbitral procedings as there was no agreement, written or otherwise, to refer the disputes arising from the purchases.

The Federal Court had granted leave to appeal on these two questions of law:

1st Question:

Whether for the purpose of section 9(5) of the Arbitration Act 2005, the agreement in writing where a reference is said to be made to a document containing an arbitration clause must satisfy the conditions of an agreement in writing as set out in section 9(4) of the Arbitration Act 2005.

2nd Question:

Whether an arbitration agreement in writing in respect of specific transactions, can be constituted by reference in an agreement to a document containing an arbitration clause pursuant to section 9(5) of the Arbitration Act 2005, where:

(i) The document containing an arbitration agreement is not attached to the purported agreement or otherwise published; and/or

(ii) Notice of the document containing an arbitration clause is purportedly founded on past conduct of the parties in referring to arbitration disputes arising out of unrelated transactions.

It was held at [28] that:

  1. There is no requirement under the Act that where a reference is said to be made to a document containing an arbitration clause in an agreement, that agreement must be signed. In the present case, it is clear that the contract of sale was in writing and satisfies the requirement of section 9(4) of the Act. That agreement in writing incorporates the STC which contains the arbitration clause and satisfies the requirement of section 9(5) of the Act.
  2. Section 9(5) of the Arbitration Act does not require that the STC which contains the arbitration agreement being attached or published. It is sufficient that the incorporation is by notice in the document.
Commentary

I was anticipating this Federal Court decision not so much on the specific legal issues raised but more on the chance for our apex Court to lay down a conclusive pro-arbitration policy for the judiciary under the Arbitration Act 2005. From that aspect, I was left disappointed.

Intelek Timur Sdn Bhd v Future Heritage Sdn Bhd [2004] 1 MLJ 401 (FC) but this was under the old Arbitration Act 1952. In my view, it would have been useful for our apex Court to have seized this opportunity to explain the significance of our Arbitration Act 2005 in adopting the Model Law and to reiterate the policy of judicial non-interference save in the exceptional and the specific circumstances provided for under Model Law / the Arbitration Act 2005.

This pro-arbitration approach by the judiciary can be seen time and time again in the apex Court of Singapore. We see such a pronouncements such as in the decisions of Soh Beng Tee & Co Pte Ltd v Fairmount Development Pte Ltd [2007] 3 SLR 86 (CA), Tjong Very Sumitomo and others v Antig Investments Pte Ltd [2009] 4 SLR 732  (CA) and AJU v AJT [2011] 4 SLR 739 (CA). In England, we also see a similar pro-arbitration stance taken by the House of Lords in Fiona Trust & Holding Corporation & Ors v Privalov & Ors [2007] 4 All ER 951 (HL).

It is hoped that in the near future, through the guidance of submissions of Counsel, Malaysia’s Federal Court will lay down this marker that Malaysia is very much in support of the party’s right to choose arbitration and that the Court will not easily interfere in the arbitration process.

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.

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.

Statements in Police Reports Attract Absolute Privilege

The Federal Court in its Grounds of Judgment dated 28 November 2012 in Lee Yoke Yam v Chin Keat Seng has confirmed that statements made in police reports are protected by absolute privilege and hence cannot form the basis of any defamation claim. The Federal Court had also referred to the position in India and England where absolute privilege did apply in such a situation.

The Federal Court agreed that similar to the situation where absolute privilege protects a statement made in judicial proceedings, for example evidence given at trial, a police report being a statement leading to judicial proceedings would also be protected.  This is because a police report which from its very nature, is a statement which the complainant is prepared, if so called upon, to substantiate on oath and for that reason must be protected by absolute privilege. Consequently no action for defamation should lie against the maker of a police report.

The overriding public interest is that a member of the public should be encouraged to make police report with regard to any crime that comes to his or her notice. Such a report is important to set the criminal investigation in motion. With such report, the alleged crime may be investigated and the perpetrator be brought to justice. It is without doubt that public interest should override the countervailing consideration that this may sometime lead to an abuse by a malicious informant. In any event, if a false report is lodged by a complainant, he is liable to be prosecuted for making false report under s.177, s.182 or s.203 of the Penal Code.That would be a sufficient safeguard against any person from making a false report.