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This article first appeared in The Edge Malaysia Weekly on August 12, 2019 - August 18, 2019

THIS monthly report is compiled and briefly summarised by a group of lawyers on a voluntary basis for the benefit of readers of The Edge.

Please consult your own lawyers if you need advice on the cases, issues and related matters highlighted here.

 

 

CORPORATE GOVERNANCE

 

Boardroom tussle – right of members and directors to appoint additional directors

The constitution of companies usually provides for a maximum and a minimum number of directors. It also empowers incumbent directors to appoint additional directors to fill up casual vacancies.

At times, majority shareholders are in the minority in the board of directors. In a tussle for board control, the incumbent majority  directors may frustrate the known wishes of the majority shareholders in a general meeting to appoint more directors by appointing additional directors under the casual vacancy provision to fill up the number of directors to the permitted maximum.

 

Issue

In Majlis Amanah Rakyat v Dato’ Abd Rahim bin Abd Halim & Ors [2019] 7 MLJ 381, the issue was whether the exercise of the power of the board to appoint additional directors under the casual vacancy provision having the effect of frustrating the majority shareholders in a general meeting to appoint additional directors, was a valid exercise of the power.

 

Case summary and decision

The maximum number of directors in that case was nine. MARA, the majority shareholder, was represented by a minority of three directors — 4:3. MARA requisitioned the board to convene a general meeting to appoint two additional directors. In response, the majority directors appointed two additional directors to fill casual vacancies — 6:3. MARA on its own  convened the general meeting and which  appointed two additional directors. Was the appointment of the additional directors by the directors an invalid exercise of power?  

Justice Wong Chee Lin held that the appointment of the two additional directors by the incumbent majority was an invalid exercise of power — directors’ powers must be exercised to achieve a proper purpose and an exercise of power to defeat the constitutional right of shareholders to appoint additional directors is an abuse of power. There was no justifying evidence why there was any need for the appointment of two additional directors by the incumbent majority. Further, unless the constitution of a company expressly takes away the right of shareholders to appoint directors, the general meeting has  an inherent legal right to appoint directors.

‘The timing of the appointment of the [two additional directors], in light of the proposed resolution by MARA to appoint two additional directors … are determinative of the real intention behind the appointing of [the two additional directors]. It is to scuttle the attempt by MARA … to appoint two directors … to prevent MARA from exercising its right as a shareholder … the directors of [the company] did not act in good faith and for a proper purpose in appointing [the additional directors]’ — Justice Wong Chee Lin

 

Court of Appeal clarifies the ambit of directors’ duties   

Directors are fiduciaries of a company. Their core obligation is utmost loyalty to the beneficiary, the company. This core obligation has many facets. The Companies Act 2016, including the repealed Companies Act 1965, codifies in general terms some of the leading facets of the duties arising from the core obligation. It includes the duty (a) to act in good faith in the company’s interest and for proper purpose;

(b) not to engage in self-dealings and to make use of their office to gain, directly or indirectly, benefits for themselves or others (no profit rule),or to carry on a competing business, without the informed consent of the company.

 

Conflict of interest, diverting business, constructive trust and exemplary damages

Issues

Must conflict of interest be disclosed and if not disclosed, what are the consequences in law with respect to the directors resigning from the affected company and the recipients of the diverted benefits? These issues confronted the Court of Appeal in Taz Logistics Sdn Bhd v Taz Metals Sdn Bhd & Ors [2019] 3 MLJ 510.

 

Case summary and decision

Asdion Bhd (‘Asdion’) purchased 51% of Taz Logistics (‘TL’) from one of TL’s shareholders who was also a director of TL and the executive director of Asdion (‘ED’). The balance of 49% in TL was collectively held by the ED and another shareholder/director of TL (‘Non-active Director’). This transaction was commonly intended by the parties to assist TL to carry out stevedoring business  at the Kuantan Port. Asdion agreed to provide capital support and heavy equipment to TL, which it did. Soon after TL had  commenced the stevedoring business,  the assets, employees and business opportunities of TL were systematically diverted to Taz Metals (‘TM’). TM was a competing  entity of TL, set up without the consent of TL and in which the husband and son of the Non-active Director were the sole shareholders and the ED ‘takes care of and guides them in their business investments’. Soon after the diversion, the concerned directors resigned as directors of TL and the ED resigned his position in Adison.  

The Court of Appeal in a decision delivered by Nallini Pathmanathan JCA (now, FCJ) (Tengku Maimun JCA (now, CJ) and Zabariah Yusof JCA concurring) reversed the decision of the High Court and held that there had been clear breaches of statutory as well as fiduciary duties, including non-disclosure of conflict of interest on the part of the ED and Non-active Director. The resignations of the concerned directors were irrelevant and the Non-active Director could not escape liability as a fiduciary.  TM, as the ‘beneficiary or  repository of secret profits’ of the errant directors, was liable to account to Asdion and the business and assets of TM relating to the stevedoring business  are  constructively held in trust for TL’s benefit.   

‘…this was a case where the defendants collectively…had acted deliberately to ‘steal’ or ‘appropriate’ the business of Taz Logistics and transplant it to Taz Metals. The obvious benefit to them was the ability to acquire a thriving

business with no set-up costs …They transgressed the no profit and no conflict rule with impunity… We here ordered exemplary damages in addition to general and special damages by reason of the conduct of the defendants, which from the evidence and as we have indicated throughout the judgment, was calculated to gain profit to the detriment of Taz Logistics… the defendants’ conduct was calculated … to make a profit … to the detriment of the plaintiffs. The award of such damages signifies disapproval, condemnation or denunciation of the defendants’ acts against Taz Logistics…’ — Justice Nallini Pathmanathan

 

 

CONSTRUCTION CONTRACTS AND BANK GUARANTEEs(‘BG’)

 

Project construction contracts often require a contractor to provide the employer with a BG. The BG operates as an assurance that the contractor had performed its work satisfactorily and there are no defects up to the expiry of  the defect liability period (‘DLP’). If there are defects, the employer may call upon the BG. The general rule is that the issuing bank must honour calls for payments under the BG as the relationship between the bank and the beneficiary is autonomous of the relationship between the employer and contractor  —  disputes between the employer and the contractor is not the concern of the issuing bank.

The autonomous principle is essential to the integrity of the banking system.

 

Issue

Under what circumstances a contractor may restrain the employer from making call on the BG? This issue confronted the Court of Appeal in Maxwell Accent JV Sdn Bhd v Kuala Lumpur Aviation Fuelling System Sdn Bhd (Unreported judgment dated 4 April 2019 in Civil Appeal No. W-02(C)(A)-827-04-2017).

 

Case summary and decision

Maxwell Accent (‘Contractor’) was the contractor of a fuel hydrant pipeline network system project at KLIA 2 (‘FHP System’). The  beneficiary of the BG was KL Aviation (‘Employer’). The project was completed in April 2014 and a permit to operate the system (‘PTO’) was issued by the relevant authority. The FHP System was operational in May 2014. In October 2015, a leak occurred at Q12 of the airport parking area. The  Employer accepted the Contractor‘s quote for temporary works to address the leakage and the Contractor was accordingly paid. The certificate of initial acceptance was issued on 29.12.2015 and the expiry date of the DLP was 29.12.2016. Two weeks before 29.12.2016, the Employer claimed that the leak at Q12 in October 2015 was due to the Contractor’s fault. The Contractor’s request for justifying particulars and documents were refused. The Employer made a demand on the BG. The Contractor’s application to the High Court  to stop payment on the BG was dismissed. On appeal, the order of the High Court was set aside.  

Tengku Maimun JCA (now, Chief Justice) (Mary Lim and Hasnah Mohammed JJCA concurring) held that the law in Malaysia enabling the Court to restrain a beneficiary from calling upon a BG  had been extended  to cover cases of unconscionable conduct involving oppressive and unfair conduct and not just fraud in the orthodox sense, referring in particular to the earlier decisions of the Federal Court and the Court of Appeal. The issue of whether there was unconscionable conduct in any case is a question of fact. On the facts, the series of correspondence between the parties objectively showed that the Employer had acted unconscionably. In particular (a) the FHP System had been tested and accepted in 2013; (b) the PTO had issued in 2014; (c) although the leakage at Q12 occurred in October 2015, more than a year had elapsed before the Contractor was notified of the leakage; (d) the Employer had refused to provide particulars and documents to justify its conclusion that the leakage was due to Contractor’s fault; and (e) the documents relied upon by the Employer in the High Court to prove  fault on the Contractor’s part  was equivocal.  

‘…unconscionability may now be raised as a distinct ground, to restrain a beneficiary under a bank guarantee or a performance bond…the principle underlying the unconscionability doctrine was the prevention of oppression and unfair conduct…’ - Justice Tengku Maimum (now, Chief Justice)

 

ADMINISTRATION OF JUSTICE

 

Fair trial and freedom of speech

Everyone has a right to a fair trial. Unrestrained public discussions or publications touching upon, or expressing opinions with respect to, the guilt or innocence of a person in the media undermines the administration of justice. This principle is founded on the legal concept of sub judice, which embodies a rule limiting comment and disclosure relating to matters that are under judicial consideration. The rule is not against freedom of speech and the press or other media. It is to uphold the right to a fair trial and not to what is commonly called a trial by the media. The latter  may give rise to a real and substantial risk of serious prejudice to the due administration of justice in the sense that the issues involved in the subject matter of the legal proceedings are prejudged and thus putting undue influence on the minds of the witnesses to give testimony truthfully and the decision-maker.

On the other hand, fair and accurate reporting of facts and evidence is not objectionable so long as it does not prejudge issues. A balance between the right to a fair trial and the freedom of speech and the press must be struck.

The Court has the discretionary power to pre-empt the violation of the sub judice rule and where the rule is trangressed, the transgressor is guilty of contempt of Court. To justify a pre-emptive gag order, the circumstances must be special and exceptional.

 

Dato’ Sri Mohd Najib bin Hj Abd Razak v Public Prosecutor

In Dato’ Sri Mohd Najib bin Hj Abd Razak v Public Prosecutor [2019] 8 MLJ 624, the accused applied for a pre-emptive gag order to stop future publication and discussion of the merits of the criminal charges already filed against him. In essence, the High Court and the Court of Appeal were called upon to strike a balance between the two fundamental competing rights — the right to a fair trial and the freedom of speech and the press and other media in article 10(1) (a) of the Federal Constitution.

 

The application in the High Court

The relevant prayers for the gag order were:

1.     A direction be hereby issued that pending disposal of the proceedings in Kuala Lumpur High Court … (‘the Proceedings’), any person who shall publish and/or cause to be published in the media, to wit any broadcast and/or other communication in whatever form which is addressed to the public at large or any section thereof, any words,comments, discussions and/or statements, which would suggest, conclude or infer that Dato’ Sri Mohd Najib bin Hj Abd Razak has undertaken any of the acts outlined in the four (4) charges in the Proceedings, as annexed in annexure A  hereof and/or is guilty of the offences outlined therein, shall be liable to being punished for contempt of this Honourable Court.

2.     An order be hereby granted that pending disposal of the Proceedings, no person shall publish and/or cause to be published in the media, to wit any broadcast and/or other communication in whatever form which is addressed to the public at large or any section thereof, any words, comments, discussions and/or statements, which would suggest, conclude or infer that Dato’ Sri Mohd Najib bin Hj Abd Razak has undertaken any of the acts outlined in the four (4) charges in the Proceedings… and/or is guilty of the offences…

 

In support of the application that there was an immediate threat of a real and substantial risk of serious prejudice to a fair trial, documents containing many  and various written articles and comments with varying degree of relevance to the subject matter of the criminal charges were produced as exhibits. It included the charges and investigation by the MACC, comments made by public figures, members of the public and an article on an interview given by the applicant. In particular, the applicant gave emphasis to articles and online portal news reports in the form of personal opinions expressed anonymously which were said to be objectionable.

 

Decision of the High Court

Mohd Nazlan J, on examination of the evidence, held that the evidence fell short of establishing an immediate threat of a real and substantial risk of serious prejudice to a fair trial. The learned Judge, amongst other matters, took into consideration that (a) the abolishment of jury trial has substantially removed the  possibility of the decision maker being influenced by extrinsic matters; (b) a trial Judge only considers the facts and the applicable law; (c) the comments the applicant found to be prejudicial ‘are almost entirely anonymous’ and this cannot support a gag order; (d) the applicant (including his family members and counsel) have given interviews which have been widely and extensively published giving the applicant’s version of his story to ‘offset public opinion’; (e) the publicity originated from the Sarawak Report dated 2014 and had been in the public sphere for a number of years; (f) there was ready availability of remedies in contempt and defamation but no action had been taken by the applicant; (f) the gag order, if granted, would be disproportionate for infringement of the right of free speech. The Applicant appealed.

 

‘…the threat of a real risk of serious prejudice has not been established, and the laws on contempt and defamation are instead sufficient remedies to deal with the complaint of the applicant, it is inescapable that the granting of a gag order under such circumstances would be totally disproportionate for it risks infringement of the right of free speech and unnecessarily curtails public discussion of a matter of great public interest at the expense of the unfounded allegation of an immediate threat of a real risk of serious prejudice to the fair trial of the applicant.

When the case is of great public interest, like this case unquestionably is, the extent of the freedom of public discussion of the case becomes the test on the true extent of the adherence to the constitutional ideals as expressed in the Federal Constitution. Public discussion must not be prohibited and silenced.’ — Justice Mohd Nazlan

 

The appeal in the Court of Appeal

The appeal was heard by Zabariah Mohd Yusof, Rhodzaraih Bujang and Lau Bee Lan JJCA. In a unanimous decision delivered by Zabariah Mohd Yusof JCA, the Court of Appeal agreed with the High Court that to justify the grant of a pre-emptive or prior restraint gag order in anticipation of a contemptuous act being committed, it must be demonstrated by an applicant that (a) there is an immediate, clear and present danger that seriously prejudices the due administration of justice; (b) there is the absence of alternative measures; and (c) the gag order, if granted, must be proportionate in reference to the competing interest of free speech and risk of prejudice to a fair trial.

The Court of Appeal further agreed with the findings of the High Court that the publications complained of had been in existence for a long time, negating the element of immediacy of the threat of real risk of serious prejudice to a fair trial; the interviews given by the appellant, his family members and counsel had been publicised both nationally and internationally ‘as compared to the current allegations against the appellant which surfaced for a number of years before the application’ for the pre-emptive gag order was made; and granting the pre-emptive gag order to ban discussions and publications  concerning the proceedings in the terms of the application potentially infringes the statutory principle of the ‘open justice’ system embodied the Courts of Judicature Act 1964.

 

‘It is the finding of the learned trial Judge, which we agree as it is a finding of fact, that the proposed pre-emptive restraint order appears more to protect the appellant’s reputation and standing as a former leader of the nation rather than safeguarding the administration of justice. There is nothing to show that the learned trial Judge was plainly wrong in his findings…

Although the court has the power to issue a prior gag order in the nature of a prior restraint, in light of the application is for an order to prevent future or potential publications which may be prejudicial to his case, as opposed to dealing with a transgression which has already been committed, the applicant bears a heavy burden to prove to the court that the fair and proper trial of the issues in the pending action would be in any way hampered or adversely affected by the publications. There must also be a balancing act of competing interests between the rights of a fair trial and the freedom of free speech and publication and show absence of available remedies to the appellant under the law of contempt and defamation…

In balancing the constitutional conflict between achieving a fair trial to the appellant on the one hand and upholding freedom of speech and expression on the other, the learned trial Judge was of the view that, in our jurisdiction, greater emphasis should be given on the principle of the freedom of free speech and expression and that of the open justice system. We have no reasons to depart from such findings.’ — Justice Zabariah Mohd Yusof

 

 

BANK AND CUSTOMERS

 

Federal Court strikes down exclusion clauses exempting or limiting liability

Generally, parties are free to make contractual terms between themselves and the Court upholds the sanctity of contract provided the agreed terms are not contrary to public policy. Exclusion clauses are commonly inserted by parties in documents to exempt a party (‘A’) from liability or restricting the liability of A  for negligent acts or misstatements. Recently, the Federal Court delivered an important decision over the effect of exemption clauses affecting consumers of the retail banking industry.

 

The retail banker and housing loan borrower

In CIMB Bank v Anthony Lawrence Bourke & Anor [2019]  2 MLJ 1, Anthony and his wife borrowed money from CIMB to buy a property under construction. Progress payments were required to be made by CIMB on behalf of the borrowers when due to  the developer. Unfortunately, for about a year, CIMB failed to do so and the developer terminated the sale and purchase agreement (‘SPA’). Anthony and his wife sued CIMB seeking damages for breach of contract, negligence or breach of fiduciary duty. CIMB relied on the exclusion clause in the loan agreement that disclaims liability for any loss or damage incurred by the borrower. The High Court dismissed the action in view of the exemption clause.

 

Issue before the Federal Court

Section 29 of the Contracts Act 1950 provides to the effect that any agreement that restricts a person absolutely from enforcing his rights under a contract by legal proceedings is to that extent void. Is the exemption clause void, it being contrary to the statutory provision?  

 

Decision of the Federal Court

The Federal Court in a decision delivered by Balia Yusof FCJ (Zulkefli PCA, Zainun Ali, Zaharah Ibrahim, Azahar Mohamed FCJJ concurring) unanimously held that although the exclusion clause referred only to non-recoverability of damages or loss and s29 of the Contracts Act 1950 makes an absolute restriction to have recourse to the Court from enforcing rights under a contract, it is artificial to hold that a right of enforcement can be disassociated from the remedy to recover damages or loss. The exemption clause was therefore void.

 

‘[Exclusion clauses] may typically be found in most banking agreements. In reality, the bargaining powers of the parties to that agreement are different and never equal… In today’s commercial world, the reality is that if a customer wishes to buy a product or obtain services, he has to accept the terms and condition of a standard contract prepared by the other party. The plaintiffs, as borrowers in the instant case, are no different.

[This case] merits the application of [the] principle of public policy. There is the patent unfairness and injustice to the plaintiffs had [the exemption clause] been allowed to deny their claim/rights against the defendant. It is unconscionable on the part of the bank to seek refuge behind the clause and an abuse of the freedom of contract.’ — Justice Balia Yusof

 

Federal Court clarifies the effect of a survival and discharge clause in joint accounts

The relationship between a bank and its customers is contractual in nature. When a  personal account is opened in the names  of A and B (‘JA’), there is usually a survival and discharge clause (‘Survivorship Clause’) to the effect that upon the demise of a joint account holder, the bank has authority to pay the balance in the JA to the survivor  and the payment shall constitute a valid discharge of the bank.

 

Issues

Is a bank concerned with whether A or B  is the rightful beneficiary of the outstanding money in the JA upon the demise of B? If a forged cheque in A’s favour is honoured, can the bank rely on the Survivorship Clause to claim a valid discharge? The Federal Court in the course of an appeal in Public Bank v New Ace Digital Print Sdn Bhd & Cheah Yang Kiang (Unreported judgment dated 14.3.2019 in Civil Appeal No. 02(f)-133-11/2017(W)) had the opportunity to clarify these issues.

 

Case summary and decision

A JA was opened in the names of A and B. B and his wife (‘Cheah’) owned 75% of New Ace (‘Company’) and the balance of 25% were held by B’s nominees. It was claimed that the source of the money in the JA came from the Company but there was no evidence that the JA was opened for the benefit of any third party. Upon B’s demise, a cheque in A’s favour bearing a forged signature of B was honoured by the bank, leaving a balance (‘Balance Sum’). The bank froze the JA when it was  informed of B’s demise and the forgery. A then applied to the High Court for a declaration that he was entitled to the Balance Sum. Cheah was informed of A’s action but she did nothing and the declaratory order was granted for the Balance Sum. Meantime, Company and Cheah sued the bank for negligence.  

The Federal Court dismissed the appeal in that the Company and Cheah had no standing to sue the bank. They were not parties to the contract and the JA was not opened for their benefit.

In a decision delivered by Justice Rohana Yusuf (Ahmad Maarop CJM, Zaharah Ibrahim, Balia Yusof and Alizatul Khair FCJJ concurring), the Federal Court held that the Survivorship Clause (a) is only a mandate to the bank; (b) it does not determine who is or are the rightful owners of the money in the JA and a bank is not concerned with the question of ownership; (c) the ownership issue is a private matter between the surviving joint account holder and parties claiming to be beneficiaries; (d) payment under a forged cheque cannot constitute a valid discharge; and (e) Cheah did not plead that she was suing as the administrator of B.

 

‘…the Survivorship Clause was only a clause to instruct the … bank on how to handle the outstanding balance in the joint account upon the demise of one account holder. The issue of who was the rightful beneficiary…did not arise in this case because that was not the concern or the business of the… bank.’  — Justice Rohana Yusuf

 

 

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