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The Grim Reaper Cometh, But Which One?

 

Eyza Farizan Mokhtar examines a fight over the appointment of a provisional liquidator

Can a company hasten its impending death by committing suicide? While awaiting death, can a company choose its own executioner?

These were the issues faced by the High Court in Malayan Banking Berhad v Chip Lam Seng Enterprise Berhad [2014] 1 LNS 1583.

On 27 October 2014, the High Court decided that the Respondent could not avoid a compulsory winding up by undertaking a voluntary winding up. In coming to its decision, the High Court also discussed the court's power to appoint a provisional liquidator pending the disposal of a winding up petition.

THE DEATH SENTENCE

The Respondent, Chip Lam Seng Enterprise Berhad, is the holding company of the "Chip Lam Seng" group of companies ("CLS Group"), a family business controlled by one Mr. Tan Keng Beng ("TKB").

The CLS Group was in financial difficulties and appointed Grant Thornton Consulting Sdn Bhd ("Grant Thornton") to prepare a debt restructuring proposal. Grant Thornton prepared a report dated 30 November 2012 which stated that as at December 2012, the CLS Group had a total debt of RM500,805,244 owing to 11 banks and RM10,746,766 owing to trade creditors. The Petitioner, Malayan Banking Berhad, was the largest creditor, holding 51.39% of the total indebtedness of the CLS Group.

On 19 December 2013, the Petitioner obtained a summary judgment against the Respondent for a sum of RM8,886,339.01. The Respondent did not appeal against the judgment.

After the Respondent had failed to comply with a notice issued under section 218(2)(a) of the Companies Act 1965 ("CA") in respect of the judgment sum, the Petitioner presented a petition to wind up the Respondent on 28 August 2014 and served the Petition on the Respondent at its registered address on the same day.

On 2 September 2014, the Petitioner's solicitors informed the Respondent's solicitors that the Petition had been filed and the Petitioner would be filing an application to appoint a Provisional Liquidator ("PL").

Two days later, on 4 September 2014, another firm of solicitors informed the Petitioner's solicitors that they had instructions to accept service of the Petitioner's application on behalf of the Respondent. On 5 September 2014, the Petitioner filed its application to appoint a PL. From the affidavits filed in the proceedings, it came to light that a flurry of events had taken place with devil's haste on 5 September 2014.

The Respondent's two directors affirmed a statutory declaration that the Respondent could not "by reason of its liabilities continue its business" and signed a directors' circular resolution which resolved, among others, that there be a creditors' voluntary winding up of the Respondent, for one Mr. TCK to be appointed as the Respondent's PL, and for a meeting of the Respondent's creditors to be summoned on 25 September 2014.

It also came to light that on 2 September 2014, TKB had filed a suit against the Respondent to claim for RM488,444,360 based on an alleged undertaking and indemnity given by the Respondent to TKB. TKB obtained a judgment in default of appearance against the Respondent on 18 September 2014, thereby purportedly making TKB the largest creditor of the Respondent.

SUICIDE OVER COMPULSORY DEATH

The Court found that there were no cases in Malaysia nor in any of the countries with provisions similar to the CA in their companies' legislation, i.e. Singapore, Australia, New Zealand and England, which could shed light on the validity of the Respondent's voluntary winding up by way of an appointment of a PL.

Where a winding up petition has already been presented on the ground of a company's inability to pay debts before a company's voluntary winding up, the Court held that section 276 of the CA requires the company to obtain leave of the winding up court before it could pass a special resolution under section 254(1)(b) of the CA to commence voluntary winding up. In this respect, the Court relied on Hasjuara (M) Sdn Bhd v Bio Science Capital Sdn Bhd & Anor [2010] 7 MLJ 33 and the decision of the Supreme Court of Victoria in Re North Western Fruitgrowers Pty Ltd [1965] VR 306.

The Court referred to the Australian cases of Re Horsham Kyosan Engineering Co Ltd [1972] VR 403, Re South Australian Air Conditioning Centre Pty Ltd (1977) 2 ACLR 539 and Re Akai Australia Pty Ltd [1978] 3 ACLR 353 as authorities that allow a company to apply for retrospective leave from the winding up court under a provision of the Australian companies legislation which is similar to section 276 of the CA.

The Court, relying on Re Septimus Parsonage & Co [1901] 2 Ch 424 (which was referred to by the Court of Appeal in Jasa Keramat Sdn Bhd v Monatech (M) Sdn Bhd [2001] 4 CLJ 549 and subsequently, by the Federal Court in the same case reported as Jasa Keramat Sdn Bhd v Monatech (M) Sdn Bhd [2002] 4 CLJ 401), also held that if a company commenced voluntary winding up with the intention to interfere with the winding up court's jurisdiction, such interference may amount to a contempt of the winding up court.

THE MODE OF EXECUTION

The Court gave four reasons for refusing retrospective leave to the Respondent.

Firstly, the Court ruled that the Respondent's voluntary winding up was not bona fide and was contrived to thwart, unlawfully, the Petition and the Petitioner's application to appoint a PL.

Secondly, the Court found that there were matters and transactions which required investigation by a compulsory winding up liquidator under the supervision of the winding up court.

Thirdly, the Court took into account the unanimous consensus by the Petitioner and the Supporting Creditors in opposing the Respondent's Application and the large amount of debt owing by the Respondent to them. The Court referred to two Australian cases, Re South Australian Air Conditioning Centre Pty Ltd and Re Akai Australia Pty Ltd, which decided that the wishes of the creditors is a relevant fact to be considered.

Fourthly, the Court found that the Respondent had failed to discharge the burden of establishing that there are special circumstances to show that the Respondent's voluntary liquidation was preferable to a compulsory winding up by the court. The Court held that the five reasons advanced by the Respondent did not amount to special circumstances which showed that the Respondent's voluntary liquidation was preferable and hence, did not justify leave under section 276 of the CA. The Respondent's five reasons were as follows:

  1. That a creditors' voluntary winding up was "more efficient and cost effective";
  2. A creditors' voluntary winding up would not trouble the winding up court;
  3. There would be no prejudice to the Respondent's creditors as they could ventilate any issue before the PL appointed at the Respondent's Creditors' Meeting;
  4. A creditors' voluntary winding up was necessary as the Respondent had concluded that it could not continue its affairs due to its financial state; and
  5. A creditors' voluntary winding up was a more democratic process as it took into account the wishes of the Respondent's creditors and contributories.

The Court observed that if the Respondent's five reasons amounted to special circumstances to justify leave being granted under section 276, this could encourage abuses of the voluntary winding up procedure as has happened in this case.

Consequently, the Court allowed the Petition as a compulsory winding up was to be preferred as it was more advantageous to the Respondent's general body of creditors than the Respondent's voluntary winding up.

THE CHOICE OF EXECUTIONER

The Respondent contended that the Petitioner should file a new suit under section 266 of the CA to invalidate TCK's appointment as the Respondent's PL and remove TCK as the Respondent's PL. The Court did not agree with this contention on four grounds.

Firstly, relying on Indah Water Konsortium Sdn Bhd v Yong Kong Fatt [2007] 4 CLJ 613, the Court held that section 276 of the CA also conferred power on the winding up court to do whatever was "reasonably necessary" after deciding whether to grant leave or otherwise - this would include the power to annul TCK's appointment as PL and to set aside his appointment as the PL for the Respondent's voluntary winding up.

Secondly, relying on Progress Printers and Distributors Pty Ltd v Production and Graphics Communications Pty Ltd [1996] 21 ACSR 241, the Court held that if the winding up court could appoint a liquidator for a company's compulsory winding up in place of a liquidator for a voluntary winding up who had already carried out substantial work in the voluntary winding up, the Court certainly had the power to remove a PL appointed for a voluntary winding up.

Thirdly, the Court held that section 266 applied in a voluntary winding up. As the Court had refused leave for the Respondent to continue its voluntary winding up, the section had no application in this case.

Fourthly, the Court held that if the Court agreed with the Respondent's contention, there would be duplicity in proceedings which should not be encouraged, more so when the proposed new action would not be heard by the winding up court which is the appropriate forum. The Court observed that the object of section 276 of the CA was to enable all matters regarding both voluntary and compulsory winding up of a company to be comprehensively decided by the winding up court.

The Court declared the appointment of the Respondent's PL as null and void and set aside the appointment of TCK as the Respondent's PL. The Court held that TCK's appointment as the Respondent's voluntary winding up PL lacked bona fides. Further, as the Court had already refused leave for the Respondent to continue its voluntary winding up, TCK could not continue as PL for the Respondent's voluntary winding up.

The Court also based its decision on the fact that by virtue of section 255(3) of the CA, the appointment of the PL in the voluntary winding up had lapsed after one month as there was no extension of the appointment by the Official Receiver and a liquidator had not been appointed for the Respondent's voluntary winding up.

The Court also observed that TCK had not commenced any work as PL for the Respondent's voluntary winding up.

The Court then exercised its discretion to allow the Petitioner's application to appoint a PL as the Court found that there was "sufficient ground" to do so under rule 35(1) of the Companies (Winding Up) Rules 1972. The Court provided a guide as to what constitutes "sufficient ground", namely that there must be evidence that ultimately the winding up court is likely to make a winding up order sought by the petitioner, there is a need to preserve the status quo i.e. to preserve the assets of the respondent company, there is some degree of urgency to appoint a PL, consideration of the balance of convenience of the competing interests and whether it is right to do so in the circumstances.

THE AFTERMATH

This case is significant as the learned Judicial Commissioner has through an insightful and carefully considered judgment, shown that the Court will not permit the voluntary winding up process to be abused in order to pre-empt a compulsory winding up.

The appeal filed by the Respondent was subsequently withdrawn. Thus the matter is laid to rest until the ghosts are resurrected in a similar case which may come before the Malaysian court in the future.

Writer's e-mail: This e-mail address is being protected from spambots. You need JavaScript enabled to view it

WRITER'S NAME: EYZA FARIZAN MOKHTAR

WRITER'S PROFILE:

Eyza is an Associate in the Dispute Resolution Division of SKRINE. She graduated from Universiti Teknologi Mara in 2011.

SUBJECT: CASE COMMENTARY

 
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