Oppression of the Majority

Deepa Nambiar explains the UEM Genisys saga

 

 

The Federal Court in UEM Group Berhad (formerly known as United Engineers (Malaysia) Bhd) v Genisys Integrated Engineers Pte Ltd & UEM Genisys Sdn Bhd recently held that the Court of Appeal had erred in interfering with the findings of fact of the trial judge that a company and its Chief Executive Officer had acted oppressively against a shareholder within the meaning of Section 181 of the Companies Act 1965 (“the Act”).

 

 

BRIEF FACTS

In 1993, United Engineers (Malaysia) Bhd (“UEM”) and Genisys Integrated Engineers Pte Ltd (“GIE”) entered into a joint venture agreement (“Shareholders Agreement”) to jointly venture into and exploit the mechanical and electrical engineering market in Malaysia. A private limited company, UEM Genisys Sdn Bhd (“UEG”), was incorporated for this purpose, with UEM and GIE holding 51% and 49% respectively of its issued share capital.

 

The day to day management of the business affairs of UEG was delegated to its Chief Executive Officer, Seow Boon Cheng (“Seow”), who was also the managing director and majority shareholder of GIE.

 

The business venture got off to a healthy start, but sometime in 1997, UEM entered into an agreement to sell its 51% shareholding in UEG to Nova Nusantara. When GIE learned about the transaction, it reminded UEM that under the Shareholders Agreement, UEM was obliged to first offer those shares to GIE, which UEM then did.

 

This was followed by protracted negotiations between UEM and GIE over a period of two years, during which, as the Federal Court put it, “the worms in UEG started to crawl in the open”. UEM, which had hitherto allowed Seow to manage UEG with minimum interference, alleged that he was untrustworthy. What followed was a total breakdown in the relationship between UEM and GIE. Both UEM and GIE then presented petitions under Section 181 of the Act, contending that the other party had acted oppressively (respectively “the UEM Petition” and “the GIE Petition”).

 

 

HIGH COURT DECISION

UEM complained in the UEM Petition that Seow had conducted the affairs of UEG with a lack of probity and oppressed UEM as a shareholder. UEM submitted that Seow had performed acts without proper board authorisation and kept UEM in the dark about certain transactions and payments. Accordingly, UEM sought that UEG be wound up or, alternatively, that GIE’s shares in UEG be sold to UEM.

 

In the GIE Petition, the complaint by GIE was that firstly, UEM had acted in breach of the Shareholders’ Agreement by dealing with Nova Nusantara and secondly, that UEM had starved UEG of funds so as to eventually have it wound up.

 

The two petitions were consolidated and heard together. The High Court, after hearing oral testimony from the witnesses of both parties, dismissed the GIE Petition and allowed the UEM Petition.

 

In respect of the UEM Petition, the Court found that the complaints raised by UEM, taken jointly and severally, clearly indicated that the affairs of UEG had been conducted in a manner that was oppressive to UEM and in total disregard of its interest as a shareholder of UEG. Among the acts which the Court deemed oppressive were the following:

 

(1) Certain moneys due to UEG had been diverted to GIE and other sums had been wrongly siphoned off to GIE and spent;

(2) Moneys in UEG had been used for GIE’s purposes;

(3) GIE's nominee directors on UEG's board had made secret profits;

(4) Seow had used the staff of UEG for GIE's projects without compensating UEG and had managed UEG unilaterally without reference to UEG's board; and

(5) UEM's nominee directors on the UEG board had been denied access to UEG’s office records and had thereby been prevented from discharging their duties as directors.

 

The learned trial judge concluded that it was gravely oppressive to allow UEG to continue as a joint venture. As UEG was insolvent, His Lordship was of the view that a buy-out was not a viable option and ordered that UEG be wound up.

 

GIE appealed against the decisions of the High Court.

 

 

COURT OF APPEAL DECISION

On 14 July 2008, the Court of Appeal disallowed GIE’s appeal against the High Court's decision to dismiss the GIE Petition but allowed GIE’s appeal against the UEM Petition.

 

In setting aside the orders made by the High Court in the UEM Petition, the Court of Appeal overturned almost all the findings of fact by the trial judge. The Court of Appeal relied heavily on documentary evidence to exclude the findings made by the High Court judge as to Seow’s lack of credibility based on His Lordship's observation of Seow's demeanour and the inconsistencies in his oral testimony.

 

The Court of Appeal ordered that the executive authority be re-vested to UEG’s board and that Seow be restored to his position as the Chief Executive Officer of UEG. Subsequently, on 7 November 2008, the Court of Appeal ordered UEM to purchase GIE's 49% shareholding in UEG.

 

 

FEDERAL COURT DECISION

UEM obtained leave to appeal to the Federal Court against the decisions made by the Court of Appeal on 14 July 2008 (“1st Appeal”) and 7 November 2008 (“2nd Appeal”).

 

1st Appeal

The main issue to be determined was whether the Court of Appeal had erred in interfering with the findings of fact of the High Court judge.

 

The Federal Court held that this was a case where the positions of the respective parties depended largely on the oral evidence of the witnesses and it is for this reason that the finding of the High Court judge that Seow, the only witness put forth by GIE, was not a witness of truth was of great significance. The Federal Court was of the view that it was clear that the High Court judge’s conclusion on Seow’s credibility was based on his observation not only on material attributes of Seow’s demeanour but also on evident contradictions and inconsistencies on the relevant and material matters.

 

The High Court judge had commented that “the demeanour of Seow when he gave his evidence, was to say the least, at its lowest ebb. There were pauses, cynical smiles, confusion and inconsistencies, all rolled into one.” The High Court judge also cited several examples of the inconsistencies in Seow’s oral testimony, one being that he had initially stated that he could not recall why he had unilaterally accepted 2 condominiums as settlement to a debt due to UEG but moments later, proceeded to explain the reasons for that transaction.

 

The Federal Court was of the view that the Court of Appeal had erred in reversing the findings of fact by the High Court judge based on certain documents which had been disputed by UEM. In the opinion of the Federal Court, the Court of Appeal should have disregarded these documents as they had not been proven by GIE.

 

The Federal Court observed that the High Court judge had painstakingly identified and dealt with each of the issues exhaustively. As it was unable to conclude that the findings of fact by the High Court on the alleged oppression of GIE were unsustainable and plainly wrong, the Federal Court held that there was no reason for the Court of Appeal to reverse those findings. Accordingly, the Federal Court allowed the 1st Appeal and reinstated the orders made by the High Court.

 

 

2nd Appeal

The Court of Appeal had ordered UEM to purchase GIE’s 49% shareholding in UEG and adopted the valuation of the valuer who had valued UEG at approximately RM81 million. The Federal Court held that the effect of the orders of 7 November 2008 were tantamount to unjust enrichment as the court had failed to consider Seow’s own evidence which led to the High Court’s finding that UEG was insolvent. In any event, as the orders of the High Court had been reinstated, there was no necessity for the court to address this issue. Accordingly, the Federal Court allowed the 2nd Appeal.

 

 

CONCLUSION

This Federal Court decision sends a clear message that appellate courts should be slow to interfere with decisions of the court of first instance which are predicated on the oral testimony of the witnesses and the findings of the trial judge as to their credibility based on his observation of their demeanour.

 

This decision serves as a reminder of the principle laid down in Kumagai Gumi Co Ltd v Zenecon-Kumagai & Ors [1994] 2 MLJ 789 and affirmed per obiter by the Federal Court in Owen Sim Liang Khui v Piasau Jaya Sdn Bhd & Anor [1996] 4 CLJ 716 that relief under Section 181 of the Act may be sought by the majority shareholders of a company in circumstances where they are unable for any reason, such as the existence of an arrangement to share management power, to exert their will at a general meeting.

 

 

DEEPA NAMBIAR ( This e-mail address is being protected from spambots. You need JavaScript enabled to view it )

Deepa is an Associate with the Dispute Resolution Division of SKRINE. She is a graduate of the University of London.

 
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