This article first appeared in The Edge Malaysia Weekly on January 11, 2021 - January 17, 2021

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.

Federal Court (‘FC’): Executive acts carried out pursuant to legislation affecting constitutional rights are invalid if not carried out in strict compliance with the letter of the rule of law

The Federal Constitution (‘Constitution’) guarantees several fundamental rights and liberties upon its subjects (‘Constitutional Guarantee’). The Judiciary is the guardian of that Constitutional Guarantee. Nonetheless, the Constitutional Guarantee is not absolute in the sense that Article 149(1) of the Constitution enables Parliament to pass laws that encroach upon the Constitutional Guarantee (‘Extraordinary Laws’) for the purposes of stopping or preventing ‘action that has been taken or threatened by any substantial body of persons, whether inside or outside, the Federation’ to cause, or cause a substantial number of citizens to fear, organised violence against persons or property, that subverts the well-being or safety of the nation or are prejudicial to public or social order. Extraordinary Laws that are designed to stop or prevent the acts or threatened acts set out in Article 149(1) are valid notwithstanding that they are inconsistent with Articles 5 (Liberty of the person), 9 (Prohibition of banishment and freedom of movement), 10 (Freedom of speech and assembly) or 13 (Right to property) of the Constitution. In cases of Extraordinary Laws validly passed by Parliament, the Judiciary, as guardian of the Constitutional Guarantee, ensures that the exercise of the powers by the Executive under the Extraordinary Laws are in strict compliance with the letter of the rule of law. One of the Extraordinary Laws that Parliament has passed pursuant to Article 149(1) is the Dangerous Drugs (Special Preventive Measures) Act 1985 (‘Act’) that provides for preventive detention of a person without trial. In this respect, executive detention without trial is contrary to the personal liberty of a person guaranteed under Article 5 of the Constitution.

Issue

Article 149(1) of the Constitution contain the crucial words ‘ action has been taken or threatened by any substantial body of persons’. It follows that Extraordinary Laws may only be passed by Parliament in this constitutional context. The Act was passed to deal with the menace of drug trafficking. The long title (‘LT’) states that it is a statute to provide for the preventive detention of persons associated with any activity relating to or involving the trafficking in dangerous drugs and the preamble to the Act (‘Preamble’) recites that the Act is passed to stop action that is prejudicial to public order which has been taken or threatened by ‘a substantial body of persons’. However, the operative provision in s 6(1) of the Act merely provides that the Minister is empowered to direct that a relevant person be detained for a period not exceeding two years provided he is satisfied, after considering a complete investigative report and the report of the inquiring officer (‘Reports’), that the person has been or is associated with drug trafficking and is also further satisfied that it is necessary in the interest of public order that the person be detained. Is it a lawful exercise of Executive power to direct or order preventive detention of a person (‘Detenu’) under the Act where the grounds of detention do not state the Detenu had been acting in concert or in association with a substantial body of persons involved in drug trafficking? This issue arose in Selva Vinayagama a/l Sures v Timbalan Menteri Dalam Negeri, Malaysia and 2 Ors for determination by the FC where the Appellant (‘Selva’) applied for a writ of habeas corpus on the grounds that his detention was unlawful.

Case summary and decision

A detention order was made by the Minister against Selva pursuant to s 6(1) of the Act. The grounds of the detention order, the allegations of fact and the Deputy Minister’s affidavit revealed that the appellant was acting alone without any participation from any other persons; it did not allege that the Selva’s activities were being conducted in association with a substantial body of persons and his detention was therefore unlawful. The Respondents argued that the language of s 6(1) of the Act is clear and unambiguous and the LT and Preamble, not being an operating part of the Act, should not be used in construing or cutting down the scope of s 6(1) of the Act. It was also argued that the scheme of the Constitution and the Act is to stop actions prejudicial against public order and the Court should adopt a broad and practical approach.

In a unanimous decision delivered by Vernon Ong FCJ (Abang Iskandar Abang Hashim CJSS, Mohd Zawawi Salleh, Zaleha Yusof and Zabariah Yusof FCJJ, concurring) on 11.12.2020, the FC rejected the arguments of the Respondents. The FC held that it was clear from the LT and Preamble that the Act was passed pursuant to Article 149(1) of the Constitution that enables the Executive to exercise powers which have the effect of circumscribing fundamental liberties under the Constitution or derogating the Constitutional Guarantee. In such cases, the Court will scrutinise the acts of the Executive to ensure that there has been strict compliance with the letter of the rule of law. In this regard, the FC emphasised that the guaranteed right to personal liberty is not freedom from Executive detention under the Act but freedom from Executive detention not authorised by the law. The absence of evidence that Selva was acting in association with a substantial body of persons with respect to the offence made his detention unlawful.

Federal Court (‘FC’): Once the complaints in a winding up petition are dismissed, the Companies Winding-Up Court should not take it upon itself to wind up the company on the just and equitable ground in the absence of ex facie illegality that has a sufficient nexus with the business of the company

Section 465(1) of the Companies Act 2016 (replacing s 218(1) of the Companies Act 1965) provides for various grounds for the winding-up of companies. It includes (a) that the directors have acted in the affairs of the company in their own interest, or in other manner whatsoever which appear to be unfair or unjust to other members; and (b) the Court is of the opinion that it is just and equitable to do so.

Issues

What are the parameters of the ‘just and equitable’ jurisdiction of the Court? Very often, it is alleged in winding-up proceedings that certain directors have engaged in ‘illegal activities’ in contravention of the provisions of the CA 1965 or the CA 2016 and other laws. Where the Court dismisses a winding-up petition based on the very grounds and factual basis relied upon by the petitioner, is it right for the Court in its civil jurisdiction to wind up the company nonetheless on ‘the issue of illegality and its factual basis’ which are entirely those of the Court? These key issues confronted the FC in Tan Keen Keong @ Tan Kean Keong and Tan Eng Hong Paper & Stationary Sdn Bhd and 4 Ors (Judgment dated 17.12.2020) (‘Case’).

Case summary and decision

The simplified facts of the Case involved six sons of the late Tan Boon Kak and his wife (‘Tan family’). All the six sons, whether themselves directly or indirectly or their respective families, were involved in the Case, the winding-up of three family companies — TEH Holdings, TEH Paper and PCSB. The petitioner alleged that the companies were ‘quasi-partnership’ companies founded on mutual trust and confidence and made a string of allegations to support the winding up of the three companies. The allegations included that the petitioner had been excluded from management, the companies had engaged in ‘nefarious accounting practices’ or ‘undercounter activities’ to deceive the Inland Revenue Department and the monies of TEH Holdings and TEH Paper and its subsidiaries had been siphoned into what was termed as a ‘family fund’ due to ‘under-counter activities’ and the ‘family fund’ had been wrongly used.

The High Court (‘HC’) found that (a) the evidence of the petitioner and those of his main witness ‘not credible and very much wanting’; (b) the petitions were filed for a collateral purpose to force a buy-out of shares; (c) the companies were not ‘quasi-partnership’ companies; and (d) there was inordinate delay in pursuing the complaints.

It was held that ordinarily, the petitions ‘would have been struck out and dismissed as being an abuse of process’. However, the HC went on to consider the issue of ‘illegality’ affecting TEH Holdings and TEH Paper. The learned Judge concluded that there had been gross violations of the provisions of the CA 1965 and other laws and illegalities cannot be sanitised. In the circumstances, the HC held that it was just and equitable to wind up TEH Holdings and TEH Paper due to the presence of illegality. PCSB was not involved in illegal activities and therefore the petition to wind up PCSB was dismissed. The CA affirmed the decision of the HC.

On appeal to the FC, in a unanimous decision delivered by Mary Lim FCJ (Tengku Maimun CJ, Azahar Mohamed CJM, Zaleha Yusof and Zabariah Yusof FCJJ concurring), the appeals by TEH Holdings and TEH Paper were allowed and the winding-up orders of these companies were set aside. The FC held that the HC having rejected all the complaints of the petitioner, there was nothing left to consider. Although the Court will act where there is illegality and the just and equitable ground is wide enough to cover illegality, it must be on the basis where the illegality is ‘ex facie and where facts in relation to the illegality or contraventions are uncontroverted’. The case before the HC was not of such character and it was wrong on the part of the learned Judge of the HC to enter into ‘the issue of illegality and its factual basis’, which were entirely of his own. Mary Lim FCJ held that there are differences between the law of crimes and the law of civil penalties and remedies and the applicable burden and standard of proof are different. If these differences are not adhered to, there is the danger of ‘overkill’ or applying the applicable law disproportionately. Also, there must be a nexus between the illegality and the activities or business of the company or for which the company was incorporated and the intent of the legislation must be carefully examined before ruling on the issue of illegality.

Court of Appeal (‘CA’) rules on right of creditors to remove liquidators

A liquidator or interim liquidator appointed by the Court has many statutory duties to perform. If the appointee fails to act honestly, diligently and competently in the exercise of his duties in the administration of liquidation for the benefit of the creditors, s 482(b) of the Companies Act 2016 (‘CA 2016’) confers discretionary power upon the Court to remove from office a liquidator or interim liquidator appointed by the Court ‘on cause shown’.

Issues

In an application by creditors to remove a liquidator under s 482(b) of the CA 2016, is leave of Court necessary? Is it also necessary that the applicants must have the support of all creditors and contributories? What failings on the part of the liquidator would fall within the meaning of ‘on cause shown’? These issues addressed by the CA in Jadgis Singh a/l Banta Singh and Anor v Return 2 Green Sdn Bhd (in liquidation) (Judgment dated 16.12.2020).

Case summary and decision

Return 2 Green Sdn Bhd (in liquidation) (‘R2G’) was wound by a company (‘TSLK’), an unsecured creditor. Augustin was appointed as liquidator (‘Liquidator’). Jagdis and another creditor (‘2 Creditors’) applied to remove the Liquidator. It was alleged that for a period of about 6 years, not much had been done by the Liquidator to recover assets for the benefit of the creditors except TSLK. The Liquidator disputed that the 2 Creditors were creditors but only rejected the proof of debt filed nearly 6 years ago by the 2 Creditors at the time the application for his removal was made. In essence, the 2 Creditors claimed that the Liquidator surrendered a machinery (‘Machinery’) to TSLK on the basis that TLSK claimed ownership to it based on a settlement agreement (‘SA’), which implied that TLSK had sold the machinery to R2G. In the SA, R2G admitted that RM8,994,484.71 (‘Sum’) was owing but TLSK’s position was that RM12,1000,000.00 was owing. The SA further provided that R2G was to return possession of the Machinery within 24 hours after execution of the SA to TLSK. If R2G failed to do so, the Sum would be ‘acknowledged as an undisputed debt’ owing by R2G. Aside this, TLSK may unilaterally confirm that the Sum as an undisputed debt. The Machinery was not returned and TLSK wound up R2G based on the Sum. The Liquidator applied ex parte and surrendered the Machinery to TSLK without notice to other creditors. The High Court (‘HC’) dismissed the removal application based solely on the fact that the application did not have the support of all other creditors.

In a unanimous decision of the CA delivered by Ravinthran Paramaguru JCA (Lau Bee Lan and Mohd Sofian Abd Razak JJCA concurring), the decision of the HC was reversed. It was held that there is no principle of law that an application to remove a liquidator must be supported by all creditors. The CA held that a liquidator may be removed premised on (a) personal unfitness or misconduct; (b) failure to conduct his office with due despatch; and (c) on the general ground that it is in the interest of the liquidation. In relation to the status of creditor, it was a breach of the winding up rules to have acted in a lackadaisical manner to either admit or to reject in whole or in part a proof and the evidence showed that the 2 Creditors qualified at least as contingent creditors. With respect to the essential claim, TLSK was an unsecured creditor as it had petitioned to wound up R2G based on the Sum owing to it. However, the Liquidator had acted as if TLSK was the owner when the Machinery was surrendered to it and which had the effect of treating TLSK as a secured creditor, contrary to the pari passu principle. On the facts, the CA was satisfied that ‘cause’ was shown for the removal of the Liquidator.

Court of Appeal (‘CA’): Award of an arbitrator delivered beyond the time frame agreed upon by the parties (‘Deadline’) may be set aside by the Court notwithstanding the absence of objections by the parties after the Deadline

Section 37(1) (a)(vi) of the Arbitration Act 2005 (‘Act’) provides that an arbitral award may be set aside if the arbitral procedure was not in accordance with the agreement of the parties.

Issues

Article 21.3 of the Pertubuhan Akitek Malaysia Arbitration Rules [2003 Edition] (‘PAM Rules’) provides that the ‘Arbitrator shall deliver his award as soon as practicable but not later than 3 months from receipt of the last closing statement from the parties. Such time of the award may be extended by notification to the parties. In the absence of notification by the arbitrator to the parties and the absence of objections from the parties after the Deadline and before delivery of the award, may the award delivered out of time be set aside under

s 37(1) (a)(vi) of the Act? Can there be a waiver of an arbitrator’s mandate or jurisdiction? These issues, amongst others, confronted the CA in Ken Grouting Sdn Bhd v RKT Nusantara Sdn Bhd (Judgment dated 8.10.2020).

Case summary and decision

Ken Grouting Sdn Bhd (‘Ken’) and RKT Nusantara Sdn Bhd (‘RTK’) were parties to a building contract that provided for arbitration in accordance with the provisions of the Act and the PAM Rules. Disputes arose between the parties and the disputes were referred to arbitration for resolution. The arbitrator delivered the original award (‘OA’) on 10.3.2017, beyond the Deadline. An amended award (‘AA’) was also delivered on 7.4.2017. The arbitrator (a) did not attempt to extend time to deliver the award by notifying the parties under Article 21.3 of the PAM Rules; and (b) neither Ken or RKT raised any objection that time for delivery of the OA or AA had passed. The OA ordered RKT to pay Ken a sum of RM908,713.83 and the AA reduced the sum payable by RKT to Ken. Ken was unhappy with the AA and applied to Court to set aside the AA and reinstate the OA. RKT applied to set aside the OA and AA premised on s 37(1) (a)(vi) of the Act. The High Court (‘HC’) set aside the OA and AA on the grounds the OA and AA were delivered beyond the Deadline. Accordingly, the awards were made ‘without mandate or authority’, or in excess of jurisdiction. Ken’s application was dismissed.

On appeal, in a unanimous decision delivered by Nantha Balan JCA (Kamardin Hashim and Lee Heng Cheong JJCA concurring), the decision of the HC was affirmed. The CA rejected the arguments advanced on behalf of Ken (a) that Article 21.3 of the PAM Rules is only a procedural and not a jurisdictional provision because the arbitrator has a unilateral right to extend time for delivery of the award by notifying the parties; and (b) the provision may be waived and it had been waived by RKT because it did not object. The CA held that Article 21.3 embodies the mandate to the arbitrator to deliver the award within the prescribed time and the fact that the arbitrator could unilaterally extend time is not indicative that the provision was a matter of procedure. Once the mandate of the arbitrator ceases, his jurisdiction also ceased. In cases where the mandate has ceased, the arbitrator may procure the consent of the parties to ‘resurrect his mandate and jurisdiction’ and if the parties disagree, the arbitrator may apply to Court under s 46 of the Act to extend time. The CA also held that waiver is inapplicable where an arbitrator’s mandate and jurisdiction had ceased.

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