This article first appeared in The Edge Malaysia Weekly on October 7, 2019 - October 13, 2019

CORPORATE GOVERNANCE

Unfair expulsion from management in a ‘quasi-partnership company’ (‘QPC’)

Our laws draw a distinction between an ordinary commercial company and a QPC, that is, a private company that was formed on a personal relationship of probity, good faith, mutual trust and confidence between the shareholders. The governance of relationship issues between ‘partners’ in a QPC go beyond the print of the constitution and the common law that govern shareholders in an ordinary commercial company. In a QPC, the constitution is regarded as not exhaustive of the rules governing the relationship between the parties. In a QPC, an aggrieved ‘partner’ whose conduct was not the operative cause of the breakdown in the relationship, may end the relationship or wind up the QPC on the basis that it is ‘just and equitable’ (‘J&E’) under S465 (1) (h) of the Companies Act 2016 to wind up the QPC.  

Issues

In an ordinary commercial company, the majority shareholders may ordinarily remove a director from management at will. In a QPC, the right to participate in management (when proven to exist) is a fundamental right. If a ‘partner’ is removed from management without just cause, it a breach of a fundamental understanding underlying the relationship. In Michael Yeang Tze Loong v FF Wire Sdn Bhd & Ors [2019] 3 MLRH 530, the High Court had to decide whether (a) the company was a QPC and the petitioning shareholder (‘M’) had a personal equitable expectation to participate in management; (b) M’s removal from management justified the winding up on the J&E provision; and (c) M’s conduct was the operative cause of the breakdown in the relationship and if so, whether it was J&E to wind up the QPC.

Case summary and decision

M, Fey and Kapil were the founding shareholders and directors of FF Wire Sdn Bhd (‘Wire’). On record, Fey owned 51% whereas M and Kapil owned 24.5% each. Despite the shareholding structure, they agreed that each of them had an equal, one-third share in Wire and its profits would be shared equally. They also agreed that each of them would be directors of Wire. A rift broke out between the parties. Fey and Kapil removed M as director. In response, M petitioned to wind up Wire. M claimed that the cause of the rift was that Wire’s cheque books and internet banking security devices had been removed intentionally by Kapil and that Kapil and Fey had decided to oust him from management by removing him as director.

Justice Azizul Azmi Adnan held that Wire was a QPC where the rights and obligations of the shareholders were not governed purely by the company’s constitution, but would be subject to equitable principles. However, the learned Judge found that M’s conduct was the operative cause for the breakdown in the relationship of mutual trust, confidence, good faith and probity between the parties. The operative cause was M’s proposal to Fey to divert monies away from Wire and its subsidiary and later to oust Kapil as director. Fey refused and she informed Kapil about M’s propositions. The actions by Kapil and Fey to remove M was a direct response to M’s attempt to divert monies and later to oust Kapil from the companies. The petition was dismissed.

Court of Appeal rules on sham transactions or acts

Persons may create ‘sham’ documents evidencing a transaction to evade statutory obligations or other legal obligations.  On the other hand, one of the parties to an otherwise genuine transaction may assert, in response to a lawful claim, that the document evidencing the transaction is a sham.

It is generally accepted that the legal concept of ‘sham’ means that acts done or documents executed by parties to the ‘sham’ are acts and documents intended to give to third parties or to the Court the appearance of a common intention to  create legal rights and obligations which they did not intend to create. The dishonesty in intention is to create an appearance of true intention for the purpose of deceiving a third party or the Court in a legal contest.

Issue

What is the approach to determining a sham document or transaction arose in the case of Dr Mansur bin Hussain & 3 Ors v Barisan Tenaga Perancang (M) Sdn Bhd and 4 Ors (Unreported decision in Civil Appeal No. W-02 (NCC)(W)-428-03/2016).

Case summary and decision

The simplified facts were that Dr Mansur (‘A’) and his wife (‘B’) were directors and shareholders of a company (‘ABco’) with a wholly-owned subsidiary (‘Subsidiary’). The Subsidiary was developing a condominium project (‘Project’) and was facing financial difficulties in paying its contractors. Datuk Chai (‘DC’) gave a loan of six months to A at 8% interest on condition that the shares in ABco were to be sold to DC with an option to re-purchase the shares by A’s son upon repayment of the loan. A share sale agreement (‘SSA’) and an option agreement (‘OA’) were entered into.

Undated resolutions appointing directors in ABco were signed by A and B, including letters of resignation of A and B as directors in ABco (‘Further Docs’). The loan (less legal fees and first interest payment) was used to pay a contractor (‘Cco’). A later found out that DC was the chairman of Cco and stopped further payments to Cco. DC used the Further Docs to gain control of ABco. ABco sued A and B from holding themselves out as directors and from interfering with ABco’s affairs. The High Court allowed ABco’s action and dismissed A’s counterclaim. The main issue in the Court of Appeal was whether the SSA, OA  and Further Docs were ‘sham’ documents or transactions  used to disguise an illegal money lending transaction under the Money Lending Act 1951 (‘MA’).

Abang Iskandar JCA (now FCJ) (Badariah Sahamid and Mary Lim JJCA concurring) held that in determining the issue, the Court is free to look at evidence beyond the four corners of the impugned documents to determine whether there was a common intention that the documents were not intended to bind the parties but to give a false impression to third parties that it is binding according to its terms.

The parties (a) were represented by their own lawyers; (b) its implementation was overseen by the lawyers; (c) the performance of the SSA was not at variance with the terms of the documents; (d) there was no protest when the balance of the purchase price was paid into A’s account; (e) A’s lawyer testified that the documents were genuine documents; and (f) there was no reason to upset the finding of the learned Judge that A was not a credible witness.  

THE JUDICIARY AND THE  INTEGRITY OF LEGAL PROCESS

Abuse of legal process

Every person with a legitimate cause has free and open access to the Court to vindicate rights or to enforce just claims by invoking due legal process, the machinery for keeping and doing justice. The Judiciary jealously ensures that its legal process is not used corruptly or diverted from its true course. A Malaysian Court, like its counterpart in other jurisdictions, will strike down cases before it whenever there is clear evidence that its machinery for keeping and doing justice is being abused by litigants to achieve improper ends.

Issue: What constitutes abuse of legal process?

The categories of conduct constituting abuse of process are not finite. Each case depends on its facts and the guiding determinant is whether on the facts, the machinery for keeping and doing justice is being used to divert it from its true course. Just as the Court will jealously guard against abuse of its process, it is equally anxious to uphold the principle of free and open access to justice. These issues confronted the High Court in Yong Toi Mee & Anor v Malpac Holdings Bhd & Ors [2018] 5 CLJ 619, a case with extraordinary facts. On 11.9.2019, the Court of Appeal (Umi Kalthum binti Abdul Majid, Suraya Binti Othman and Has Zanah Binti Mehat JJCA) unanimously affirmed the decision of the High Court, which is briefly discussed below.

Case summary and decision

Yong and another person were the plaintiffs (‘P’) who had purchased plantation lands from a wholly owned subsidiary of Malpac Holdings Bhd (‘Malpac Cap’) and had nominated a company to hold the plantation lands (‘Radiant’). The agreement provided that Radiant’s paid-up capital was to be increased from RM2.00 to RM100,000.00 to comply with licensing requirements for a palm oil mill. In 2007, P sued Malpac Cap in the High Court (‘HC’) and obtained an order for specific performance of the agreement. The Court of Appeal reversed the High Court’s decision. The Federal Court restored the decision of the HC and ordered P to make payment of the balance of the purchase price within a month. Malpac Cap refused to complete the transaction. Instead, it filed for a review of the Federal Court’s decision (‘FC Review’). This was dismissed. Following dismissal of the FC Review, P filed an application in the HC for orders to enforce the order of specific performance (‘Enforcement Proceedings’) .

Meantime, Malpac Holdings convened an EGM to seek approval for the disposal of the additional 99,998 shares in the enlarged capital of Radiant and the mill and plantation lands to P. The EGM disapproved the disposal pursuant to S32C of the Companies Act 1965 (now S223 of the Companies Act 2016). Subsequent to this, Malpac Cap filed an application in the HC to determine certain issues of law, which were directed at discharging the order of specific performance on the basis of absence of shareholders’ approval (‘Determination Proceedings’).

The HC allowed the Enforcement Proceedings and dismissed the Determination Proceedings. Malpac Cap’s appeals against these two decisions were dismissed by the Court of Appeal. This did not end the saga.

Malpac Holdings then sued its wholly-owned subsidiary Malpac Cap and others in the HC and claimed that Malpac Cap was a nominal defendant. It wanted the HC to determine the legal implications flowing from the disapproval of shareholders at its EGM to the transfer of the 99,998 shares. This action was dismissed by the HC and the Court of Appeal affirmed the dismissal. P, in the meantime, had filed an action against Malpac Holdings and Malpac Cap, amongst other causes, for the tort of abuse of process.

Mohd Nazlan Mohd Ghazali J held that the fundamental test of the tort of abuse of process is whether the legal process had been utilised for some improper or ulterior purpose. Abuse of legal process, according to the learned Judge, may be objectively inferred from overt acts; and most fundamentally, the abuse can be shown by the very steps taken in the Courts. The argument that the action filed by Malpac Holdings was based on legal opinion concerning S132C was rejected as it had been raised earlier but dismissed by the Federal Court in the FC Review. Also, the learned Judge held that decisions to continuously litigate on issues already decided by the Courts do not fall within the meaning of ‘business judgment’ in S132(1B) of the Companies Act 1965 (now S214 of the Companies Act 2016).

‘The design of these litigation is manifestly to achieve a purpose other than a genuine redress that the process actually offers. The dominant and collateral purpose for which these proceedings were initiated was to achieve a result not intended by the invocation of the process, which in this case had been to delay and altogether deny the fruits of the litigation to the Plaintiffs … by using the court process which in the first place is intended to achieve justice, to instead attain the complete opposite, and more so at the same time in the process, openly refusing to obey the decisions of the Courts …

The conduct of the Defendants … is plainly an abuse since it is engendering non-acceptance of judgments of the Courts that cannot be countenanced in any circumstances … judgments of the Courts must be obeyed not merely for the sake of ensuring respect for the Courts. It is essential for the higher and larger purpose that it underpins the administration of the system of justice. Acts or conduct which serve to undermine the integrity of the system erode confidence in the judicial institution that would in the process harm the nation’s constitutional democracy, its governance by the rule of law and deny the fundamental tenets on the supremacy of the Constitution.’

Justice Mohd Nazlan Mohd Ghazali

INTELLECTUAL PROPERTY RIGHTS

Copyright infringement

In Malaysia, the owner of a copyright work has an exclusive right to control the reproduction of the entire work or a substantial part of the work. When a copyright owner claims infringement, he must establish in the minimum that there is (a) a sufficient degree of objective similarity between the two works; and (b) some causal connection between the copyright work and the alleged infringing work in that the copyright work must be the source from which the infringing work is derived (‘Basic Elements’).

Issues

In Mohd Syamsul bin Md Yusof & Ors v Alias bin Idris [2019] MLJU 510, the matter concerned literary work (a novel) and a movie claimed to be based on the novel. The Federal Court had to decide whether the Court of Appeal (‘CA’) was justified in setting aside the decision of the High Court in dismissing the plaintiff’s claim of copyright infringement, or that the High Court had gone wrong in evaluating evidence relevant to the Basic Elements.

Case summary and decision

The plaintiff is the author of the novel Aku Bohsia and was claimed to be the novel’s copyright owner. He sued the defendants for copyright infringement by taking, without his consent, several of the novel’s contents, themes, plots and characters to produce a movie called Bohsia: Jangan Pilih Jalan Hitam. The defendants denied that the movie was based on the novel. The defendants argued that (a) there were many dissimilarities between both works; and (b) any similarity was purely coincidental due to similarity of ideas as both involved well known public social issues on ‘bohsia’ girls.

 The High Court Judge had read the novel and seen the movie and after having examined the relevant evidence and made comparisons between the novel and the movie, found that the similarities between both works by themselves cannot be said to be substantial that go to the root of the novel and the movie. Both works discussed the ‘bohsia’ phenomenon and the issue of ‘mat rempit’, which were common social issues that existed even before the novel’s publication and continued to be relevant even today. The plaintiff’s claim was dismissed.

The CA reversed the High Court’s decision and found that there were substantial similarities between the novel and the movie that could not be written off as merely coincidental. According to the CA, there were numerous similarities that could not be termed as commonplace, unoriginal or general ideas.

 The Federal Court disagreed with the approach taken by the CA and restored the decision of the High Court Judge, who undertook a full comparison of the two works to identify whether there were substantial similarities or dissimilarities. The CA erred by only comparing the similarities asserted by the plaintiff in his pleadings without examining and evaluating all the evidence and the distinct materials being the subject matter in a claim for infringement of copyright.

‘The question of objective similarity between the two works in question and its substantiality can only be determined by direct comparison between the two works. The novel needs to be read in full and the movie needs to be seen. This was done by the learned judge, but not by the Court of Appeal … Such determination can only be done after examining and evaluating all evidence available, but not by referring only to the statement of claim and pleadings.’

Justice Ramly Ali

BANK AND CUSTOMERS

Court of Appeal clarifies ‘cause to the contrary’ to grant an order for sale of charged property under the National Land Code 1965 (‘NLC’)

Subject

Real property, whether a house, apartment, factory or vacant land, is commonly taken by banks or lenders as security in the form of a charge under the NLC for loans or borrowings. In the event of contractual default in the repayment by installments or otherwise of the borrowed sum, it entitles the lender to apply to the Court for an order of sale to recover the outstanding loan under S256 of the NLC unless ‘cause to the contrary’ is shown by the borrower chargor as to why an order for sale should not be granted.         

Issue

What is meant by ‘cause to the contrary’ and the extent or range of proper considerations and factors that the Court may take into account when giving meaning to the phrase? This issue confronted the Court of Appeal in Tan Swee Thiam v United Overseas Bank (Malaysia) Bhd [2019 ] MLRAU 205.

Case summary and decision

UOB granted a housing loan and a fixed loan to Tan, which were secured by a charge over his property. In September 2013, Tan was adjudged a bankrupt and the loans went into default.

Shortly after that event, Tan discussed settlement of his loans in default with a manager of UOB seeking to redeem the charged property. Relying on the bank’s statements as to the redemption sum, Tan borrowed money from his wife to fully settle the loans. The loans were settled in 2013 and Tan’s lawyers informed UOB that the property had been redeemed and that they would be attending to the discharge of the charge over the property. Unknown to Tan, UOB had obtained an order for sale of the charged property in 2016.In 2017, Tan learnt that the property was to be put up for auction and that the letters from UOB had been sent to his previous office address notwithstanding that UOB had been informed of his current address.

After UOB had received the redemption sum in 2013, UOB wrote to the Director General of Insolvency (DGI) asking for consent to keep the monies paid and treat the property as redeemed. The DGI did not respond until 2015 and insisted the monies paid be forwarded to his office. UOB complied with this request and in 2016 commenced proceedings to obtain an order to sell the charged property. The order for sale was obtained with the consent of the DGI. Tan failed to set aside the order for sale in the High Court.

The Court of Appeal allowed Tan’s appeal and set aside the order. Mary Lim Thiam Suan JCA (Hamid Sultan bin Abu Backer, Abdul Rahman bin Sebli JJCA concurring) was satisfied that on an objective evaluation of the facts, Tan had demonstrated that there was ‘cause to the contrary’.

On the facts that UOB was under a personal obligation that bound its conscience not to enforce the charge. In particular, the redemption sum had been made and UOB had every intention of lifting the charge. After failing to get the DGI’s consent, UOB did not inform Tan or his wife of the events and failed to respond to Tan’s letters. Good conscience and the rules of equity militated against the granting of UOB’s application for an order for sale of the property in 2016.

‘On the facts and circumstances in this appeal, we are strongly compelled to intervene not because we feel “sorry for the borrower” or because we regard “the lender as arrogant, boorish or mannerly” but entirely because … having relied on the Notice of Redemption and having accepted payment for which [UOB] was thus seeking the agreement of the DGI to keep the payment and treat the loan as redeemed and the charge lifted, we find that good conscience and the rules of equity militate against the granting of [UOB’s] application for an order for sale of the said property. These are strong and compelling reasons to justify the withholding of the relief sought under section 256 of the [NLC].’

Justice Mary Lim

TAX LAW

Challenging tax assessments

The Director General of Income Tax (‘DGI’) is authorised under the Income Tax Act 1967 (‘ITA’) to issue notices of assessment to collect unpaid taxes and impose penalties. The ITA prescribes the procedure to challenge such notices of assessment by way of an appeal to the Special Commissioners of Income Tax (“Special Commissioners”). A tribunal of appeals made up of three Special Commissioners will then hear testimony, examine the accounts and adjudicate on the appeal (‘Domestic Remedy’).

Issue

Under what circumstances an aggrieved taxpayer may challenge the assessment of the DGI by way of judicial review instead of following the Domestic Remedy? This issue was dealt with by the Court of Appeal in Iskandar Coast Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri.

Case summary and decision of the High Court

The shareholders of Iskandar Coast Sdn Bhd (‘IC’), which included Iskandar Investment Bhd (‘IIB’) and Khazanah Nasional Bhd (‘Khazanah’), contributed parcels of lands as part of IC’s capital. Several parcels of the lands were compulsorily acquired subsequently by the State Government of Johor to construct a coastal highway. IC received RM85,970,820.00 as compensation.

A dispute arose between IC and the DGI. IC took the position that the gains from the compensation were not subject to income tax. The DGI decided otherwise and issued Notices of Assessment to IC with penalties. Dissatisfied, IC challenged the assessment in the High Court by way of judicial review. The High Court dismissed the application, holding that the challenge ought to be dealt with by way of the Domestic Remedy. IC appealed.

Decision of the Court of Appeal

In unanimous decision delivered by Abdul Rahman Sebli JCA (now FCJ) (Zaleha Yusof, Rhodzariah Bujang JJCA concurring), the Court of Appeal drew a distinction between the merits or otherwise of an assessment by the DGI and the lack of jurisdiction, dereliction of statutory duty and serious breach of natural justice on the part of the DGI in issuing notices of assessment. The latter situations constitute ‘very exceptional circumstances’ that will justify a case for judicial review.  

IC submitted that the notices of assessment were issued without jurisdiction and was therefore unlawful. This was because the compensation received by it from the compulsory acquisition of its lands was not taxable as the compensation was not income earned in the ordinary course of business. In examining the facts of the case however, the Court of Appeal found that IC had prior knowledge of the impending compulsory acquisition of the lands and had intention to profit from the same. This is borne out from the fact that IC is a subsidiary of IIB which in turn is a subsidiary of Khazanah. Khazanah, as the parent company of IC, was the entity responsible for drawing up the development plan for Wilayah Iskandar, which included the construction for the coastal highway for which the lands were compulsorily acquired. In the circumstances of the case, the Court of Appeal held that Iskandar Coast had derived income from the compulsory acquisition which is taxable.

‘Based on the relationship between the three entities, namely the appellant company [Iskandar Coast], IIB and Khazanah through their shareholdings, and the surrounding circumstances of the case, it was submitted by learned counsel for the respondent [Director-General] that not only did the appellant [Iskandar Coast] have prior knowledge that the lands would be acquired by the government but had intended to profit from the acquisition.

It was further submitted that the appellant’s [Iskandar Coast] knowledge and intention to profit from the compulsory acquisition is apparent from its move to apply to the Johor Land and Mines Office to change the status of the lands to freehold from agricultural lands and leasehold for 99 years.

We were inclined to agree with the respondent [Director-General].’

Justice Abdul Rahman Sebli

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