This article first appeared in The Edge Malaysia Weekly on November 11, 2019 - November 17, 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

Directors are not to obstruct the statutory right of members to convene general meetings

Sections 310 and 311 of the Companies Act 2016 (CA) empower members to convene a general meeting (GM). The former right may be exercised without first having to requisition the directors to do so. The latter right arises if the directors refuse to convene the requisitioned GM after the expiration of 21 days from the date of the requisition. In both situations concerning public listed companies, it is not possible to convene and conduct the GM if the directors who are in control of the register of depositors (ROD) and the general meeting register of depositors (GMROD), unjustifiably refuse to provide the ROD and the GMROD.

The ROD is required for sending notice of the GM to members and the GMROD is for the purpose of determining who may be admitted into the venue of the GM on its scheduled date. This is because registered membership may change between the date the GM was convened and the scheduled date of the GM. Under the applicable rules, the GMROD must be dated not less than three market days before the scheduled date of a GM.

Issues

Various issues of interest in corporate governance arising under s310 confronted the High Court in Seacera Group Bhd v Dato’ Tan Wei Lian & Ors [2019] MLJU 470, an interlocutory judgment which was subsequently confirmed in a final judgment dated 30.9.2019. What if the directors furnish the ROD of a specified date at the last minute that makes it impossible for notices to be sent out to meet the requirement of 14 days’ notice? Can a ROD dated earlier than the specified date of the requested ROD be used? On the special facts of the case, was there an ‘accidental omission’ to give notice because an earlier ROD was used for sending notice to members? Should the Court countenance the conduct of the directors?

Case summary and decision

A GM was convened under s310(b) of the CA on 30.4.2019 (Convening Date) to reconstitute the board of directors. The particulars of the GM was advertised in the newspapers and announced in Bursa Malysia’s website. The GM was scheduled to be held on 29.5.2019 (Scheduled Date) and the last date to send out notices was 14.5.2019 (Last Date). The plaintiff (Seacera) was requested to furnish the ROD as at the Convening Date and latest by noon on the Last Date (Appointed Time). After exchanges of correspondences, Seacera agreed to do so on conditions which were satisfied. At the Appointed Time for collection of the ROD, a staff of Seacera was instructed to give the requested ROD at 4pm. At 4pm, it was impossible to post notices to thousands of members during the month of Ramadan where post offices close earlier than their usual hours. Faced with this impediment, and unknown to Seacara, an earlier ROD dated 15.4.2019 (ROD of 15.4.2019) was used to despatch the notices to members during the afternoon of the last Date. Later, Seacera refused to provide the GMROD but was compelled to do so by the High Court. Seacera then applied to injunct the GM on account of short notice. At hearing, the ‘short notice’ point was not pursued. Instead, Seacara argued that the ROD of 15.4.2019 could not be used because membership might have changed through trading of shares between the Convening Date and the Scheduled Date and therefore, some members might not have received the notice and the GM was accordingly invalidly convened.  

Ong Chee Kwan JC dismissed Seacara’s application. Amongst other reasons, that learned JC held that it was Seacara’s ‘brinkmanship conduct’ that frustrated the intention to use the ROD dated 30.4.2019 to give 14 days’ notice was ‘inexcusable’. It had not come to Court with ‘clean hands’ and was objecting to the GM based on reasons it had created. The objection grounded upon s321(1) of the CA that every member must be given notice was not tenable. That section must be read together with s147(4) and s7.16 of the Main Market Listing Requirements (‘MMLR’). Section 147(4) provides that a depositor is not a member entitled to attend a GM ‘unless his name appears on the record of depositors which is dated not less than three market days before the general meeting’ and the GMROD in the MMLR is to the same effect. The three provisions read together show that the right to notice is distinct from the right to attend, speak and vote at a GM and a member entitled to and receiving notice need not necessarily be the same person entitled to attend, speak and vote at the GM if he had sold his shares and his name does appear in the GMROD. As such, a person becoming a member but who did not receive the notice dispatched on 14.5.2019 in the case was free to attend, speak and vote at the meeting in person so long as his name appears in the GMROD against production of relevant identification document verifying membership. In the ‘unique facts and circumstances’ of the case, the omission to give notice to entitled members because the notice was based on the ROD of 15.4.2019 was not designed or intended by the defendants but was brought about by Seacera’s conduct. The meaning of ‘accidental omission’ to give notice is broad enough to cover the facts under consideration as opposed to cases where  it is known that a particular person is a member but a deliberate decision is taken not to give notice to that person. Also, the proper party to make objections is not Seacera but members who were entitled to notice but were not given notice. In any event, such members may turn up at the EGM under the rules.

“…the [company] has the obligations to ensure and to facilitate the convening of the EGM instead of acting to subvert the same…

…A shareholder… is entitled to assume that the company will not deliberately act in any way to frustrate and or defeat the convening of the general meeting.

…but for the Plaintiff’s action to deliver the ROD of 30.4.2019 to the Defendants only after 4pm on 14.5.2019, the Defendants would not have had to rely on using the ROD of 15.4.2019…

Having acted in abuse of its power, it does not lie in the Plaintiff’s mouth to now seek to prohibit the convening of the EGM on the ground that it is invalid because the Defendants had not used the ROD of 30.4.2019 to post the notices.

…the Plaintiff has not come…with clean hands and the equitable jurisdiction of this court will not be invoked to lend aid to a party that had caused and or contributed to the Defendants having to resort to relying on the ROD of 14.5.2019 instead of the ROD of 30.4.2019…”

CONTRACT LAW

Contracts tainted with illegality are not necessarily unenforceable

Section 24(b) of the Contracts Act 1950 provides that a contract is unenforceable if it is of such a nature that, if permitted, it would defeat any law. A contract that is outrightly illegal will not, as a matter of public policy, be permitted as it has the effect of defeating the law.

Issue

What is the position if a contract is just tainted in some way with illegality? The Federal Court in Liputan Simfoni Sdn Bhd v Pembangunan Orkid Desa Sdn Bhd [2019] 1 CLJ 183, was called upon to formulate a public policy test for determining when a contract that is tainted in some way with illegality is unenforceable.

Case summary and decision

Pembangunan Orkid Desa Sdn Bhd (Orkid) was a registered land owner. A replacement issue document of title to the land was issued by the Registrar of Titles to an imposter claiming to be Orkid (Imposter Orkid) on the basis that Orkid had lost the original document of title. Imposter Orkid then sold the land to Chai Sit Trading Sdn Bhd (Chai) and Chai became the registered owner. Chai then sold the land to Liputan Simfoni Sdn Bhd (Simfoni) for RM900,000 (second SPA). Simfoni also paid an additional sum of RM870,000 to Chai stated to be for the cost of earthworks (a total sum of RM1,770,000). Before the completion of Chai’s sale of the land to Simfoni, Imposter Orkid entered a private caveat on the land claiming that it had not been paid in full by Chai. Simfoni had the private caveat removed. Imposter Orkid then applied to the Registrar of titles for a Registrar’s caveat to be entered. Chai managed to remove the Registrar’s caveatand Simfoni was registered as the owner of the land. Orkid subsequently filed a suit claiming that the transfers of the land by Imposter Orkid to Chai and Chai to Simfoni under the second SPA are void.

One of Orkid’s arguments raised by Orkid was that Chai’s sale to Simfoni and the purchase by Simfoni (SPA) was void because the true purchase price was RM1,770,000 and not RM900,000. Therefore, that the SPA was void under s24(b) of the Contracts Act as it had the effect of evading (a) payment of real property gains tax under the Real Property Gains Tax Act 1976; and (b) the payment of stamp duty under the Stamp Act 1949 on the additional consideration of RM870,000. The High Court found in favour of Orkid. The Court of Appeal (COA) agreed with the High Court and found that as the underlying contract was void, the instrument of dealing (the transfer form) effecting the transfer of land by Chai to Simfoni was accordingly void.

On appeal, the Federal Court consisting of Hasan Lah, Ramly Ali, Azahar Mohamed, Balia Yusof Wahi FCJJ reversed the decision of the COA. The judgment delivered by Hasan Lah FCJ (as he then was) held that for a contract to be stricken with illegality, there must be a sufficient nexus between the requirements of law and the impugned contract. The sufficiency of the nexus in the context of public policy is threefold. The Court must consider (a) the underlying purpose of the prohibition which had been transgressed, (b) any other relevant public policies which may be rendered ineffective or less effective by denial of the claim; and (c) the possibility of an ‘overkill’ if the law is not applied with a fair sense of proportionality.

Applying the three considerations, the Federal Court found that compliance with the Stamp Act 1949 and the Real Property Gains Tax Act 1976 were not prerequisites for the enforceability of the SPA. The object of the two statutes is to raise revenue and there are penalties for breach of their provisions. Accordingly, there was no sufficient nexus between the statutory requirements and the second SPA.

”… the second SPA is not void. We agree… that the courts should be slow in striking down commercial contracts on the ground of illegality. The compliance with the Stamp Act 1949 and the Real Property Gains Tax 1976 are not the prerequisite for the second SPA to be enforceable. There is no prohibition under the two Acts to preclude the first defendant from acquiring rights to the subject land. The Stamp Act 1949 provides a penalty for breach of its provisions. Similarly, under the Real Property Gains Tax Act 1976 there are penalties for breach of its provision. In addition, it is provided that tax due and payable may be recovered by the Government by civil proceeding as a debt to the Government. The object of the two Acts is to raise revenue. There is therefore no sufficient nexus [between s24(b) of the Contracts Act and the second SPA]… The… infringement of the two Acts therefore did not prevent it from suing on the contract which is legal.”

CAPITAL MARKETS

Pre- and post-bond duties and liabilities of the adviser, lead arranger, security agent, trustee and reporting accountants in an excluded bond offer

The Court of Appeal (COA) had opportunity in Mayban Trustees Berhad v Amtrustee Berhad and 10 Ors and eight other appeals (Aldwich Bond Programme case) to examine and deliver an important decision explaining the provisions of the Securities Commission Act 1993 (SCA) (replaced by Capital Markets and Services Act 2007 (CMSA)) governing activities in the capital markets. The introductory narration and quotations are extracted from the decision.

The legislative intent of the SCA and CMSA ensures that issuers and its advisers disclose material information fully and frankly in an information memorandum (IM) or prospectus (Disclosure Document), to enable investors to make informed investment decisions. ‘The need for full disclosure is the bedrock of the securities market and its legislation’ and its purpose is to ‘bridge [the] gap’ in access to information and knowledge between issuers, its advisers and prospective investors. It is not ‘to insure investors against the risks inherent in any investment’. Liability arises from any statement or information in a Disclosure Document that is false or misleading, or from which there is a material omission (Misstatements).

In an excluded bond offer, an IM is required and it is deemed as a prospectus for the purpose of liability. Persons suffering loss as a result of Misstatements, or by relying on the conduct of the contravener, have a statutory right to recover the loss.  

The IM is preceded by a planning memorandum (PM) that sets out the respective scope of work, duties and responsibilities of each member of the due diligence working group (DDWG). When the DDWG members have respectively verified that there are no Misstatements, the IM is circulated to ‘sophisticated investors’ and a copy is lodged with the Securities Commission (SC).

Issues

Pre-issuance and post-bond issuance issues were raised for the first time in the Aldwich Bond Programme case, which included duties of the primary subscriber, adviser, lead arranger, security agent, trustee, reporting accountant and issuer. Are disclaimers against liability in an IM valid? Is a statutory distinction drawn under the SCA and CMSA with respect to the provision of information to ‘sophisticated investors’ and ‘retail investors’?

Case summary and decision

Maybank Investment Bank Berhad (MIBB) played multiple roles as adviser, lead arranger, security agent and primary subscriber; Mayban Trustees Berhad acted as trustees; Ernst & Young were the reporting accountants and auditor of Aldwich Berhad; (d) Aldwich Berhad (in receivership) was the issuer; (e) Aldwich Enviro-Management Sdn Bhd (AEM) sold its businesses and operations to Aldwich under the bond programme; and (f) Kamalul, a substantial shareholder of AEM and found by the High Court to be the alter ego of Aldwich and AEM.

AEM was involved in the business of catalyst recovery amongst other businesses. It intended to venture into waste oil recovery (WOR) by constructing a WOR plant (AEM’s Business). Finance was required and to raise funds, Aldwich was incorporated as a wholly-owned subsidiary of AEM to purchase AEM’s Business. EY provided a valuation for the sale and purchase between Aldwich and AEM (Valuation). Aldwich’s purchase was funded by the Aldwich Bond Programme and the primary source of repayment was from Aldwich’s expected future cash flows. To capture future cash flows, a ring-fencing structure was constructed (Security Arrangement). It included six designated accounts — the Revenue Account (RA) into which all sources of Aldwich’s future revenue would be credited. MIBB (controller of the RA) was to remit payments into the other accounts in an agreed order of priority. It included the Debt Service Reserve Account (DSRA) and monies remitted into the DSRA was meant to repay the bondholders.The Disbursement Account (DA) was the only account not controlled by MIBB. Monies remitted into the DA (operated by Aldwich) was meant to meet Aldwich’s operational expenses.

The Security Arrangement obligated (a) AEM to novate all its contracts with counterparties (Contracts) to Aldwich; and (b) Aldwich to assign and pay the proceeds of the novated Contracts into the RA. These were conditions precedent (CPs). The majority of AEM’s counterparties did not consent to the novation, destroying the Security Arrangement. MIBB’s lawyers devised a solution — (a) Aldwich and AEM to enter into supplemental agreements (SAs) that AEM continues to receive the proceeds from all Contracts not novated; and (b) AEM shall hold the proceeds in trust for Aldwich and remit the same into the RA (Altered Structure).

The IM contained a disclaimer which had the effect of absolving Aldwich and MIBB or any other party of liability for losses suffered by the bondholders (Disclaimer).

The IM was verified as accurate by the respective members of the DDWG notwithstanding that it did not disclose the Altered Structure. MIBB circulated the IM and confirmed with the SC that there had been no changes to the original terms and conditions. Years later, problems surfaced. Substantial sums from AEM’s counterparties were not remitted into the RA. Instead, remittances were made into the DA. On other occasions, sums received by AEM were not transferred into the RA and certain sums standing in the DA were diverted into AEM’s account and monies in the DA were paid to Kamalul.

The High Court found that a sum of RM265 million was dissipated or not ‘ring-fenced’ and the bonds were overvalued. On appeal, in a unanimous decision delivered by Nallini Pathmanathan JCA (now, FCJ) ( Badariah Sahamid and Zabariah Mohd Yusof JJCA concurring), the appeals were dismissed.

Parties to the IM cannot rely on the Disclaimer

Under the repealed s65 of the SCA, an ‘agreement’ containing a disclaimer clause is void. The COA rejected arguments that since an IM is not an ‘agreement’, the Disclaimer applied — (a) the bondholders’ cause of action was not founded on the Disclaimer or that the IM was an agreement but that the IM contained Misstatements; and (b) giving effect to the Disclaimer renders the mandatory disclosure provisions of the SCA ‘nugatory and impotent’.

‘Sophisticated investors’ and ‘retail investors’

‘Sophisticated investors’ may not require detailed information as in a prospectus as they have the expertise and experience in making decisions unlike retail investors. However, it does not follow that ‘sophisticated investors’ require less protection. The legislative scheme does not discriminate between the two categories of investors where the disclosure relates to specific information about primary or material facts. The Misstatements in the IM directly affected the primary or material facts and the Misstatements attracted deemed prospectus liability.  

“…there is… no distinction made under the SCA 1993 (and now the CMSA 2007) between a retail investor and a sophisticated investor in relation to the

need to provide true and accurate information about the business and affairs and other material facts and circumstances about the person making the invitation, offer and issue and the structure and workings of the proposed exempt security. [The provisions of the SCA] equate an IM with a prospectus for purposes of stipulating the need for disclosure in relation to specific information relating to the issuer and the product.”

MIBB’s role as the primary subscriber at pre-bond stage

The COA accepted that a primary subscriber may waive the CPs if allowed under the subscription agreement. However, MIBB played multiple roles in the transaction. As adviser, MIBB was the originator of the PM and a member of DDWG. It could not waive the structural pillars of the Security Arrangement devised by it and disclosed in the IM. As the lead arranger tasked with procuring investors based on the IM, MIBB must ensure that all the CPs stated therein had been satisfied. Since the CPs were not met before the bonds were purchased by investors and the Altered Structure was undisclosed, the IM was false or misleading and the failure to disclose the SAs amounted to material omissions.

“… waiver was only open to MIBB in its capacity as the primary subscriber, not as lead arranger. As lead arranger, it was bound to comply with s38(3) and s328 of the SCA 1993 as well as its obligations in contract. To that extent, MIBB would have been placed in a position of conflict if it had sought to waive the conditions precedent given the contents of the IM, which represented a scenario consistent with compliance of all conditions precedent…”

MIBB as security agent post-bond issuance

The COA held that post-bond issuance, MIBB’s role as security agent was not ‘purely administrative and ministerial’. As the sole signatory of the designated accounts, it failed to exercise any control over the flow of monies from contract counterparties into the RA. Instead, it allowed monies to flow into AEM’s account and the DA. This allowed AEM and Aldwich to deal with the monies. Accordingly, MIBB failed as a gatekeeper of funds under the Security Arrangement.

“The provisions of the agreements …envisage …MIBB …undertakes primary responsibility as a gatekeeper for the funds/proceeds of AEM and Aldwich’s businesses. It had an equally important function to monitor, regulate and enforce default in the remittance of monies from AEM and Aldwich to the [RA] and from there through the cascading waterfall structure of the other designated accounts. ”

“None of this was done …To adopt the construction advocated by MIBB would be aberrant in that it would render MIBB’s duties and obligations as lead arranger under the Aldwich Bond Programme virtually nugatory.”

The COA ruled that MIBB was the most proximate cause of the loss to the bondholders. Its failure in monitoring the flow of monies enabled AEM, Aldwich and Kamalul to wrongfully siphon off monies.

Trustees’ pre- and post-bond issuance duties

Mayban Trustees’ submissions that its duties only arose post-issuance was rejected and its ignorance of the Altered Structure until years later was inexcusable. It was a fiduciary of the bondholders and as a professional trustee, a higher standard of care was expected from it. At or before the time it signed the Trust Deed, it was bound to comprehend the structure, design and security features of the Aldwich Bond Programme and not after things had gone wrong.

“…Mayban Trustees was not conversant nor comprehended the significance of its role, as trustee…

It performed its obligations only after a six-year hiatus in relation to express default when performance by Aldwich… That, in fact, is precisely what a trustee is bound to ensure does not occur… Mayban Trustees’ stance that its duties are merely administrative and ministerial do not stand up to scrutiny… ”

“…Mayban Trustees merely assumed that the issuer complied with the provisions of the Trust Deed and the bond contracts without making any attempt to perform its duties to ensure compliance; more particularly it failed to detect that monies were not being remitted as required under the cascading waterfall system, which comprises a part of its duties to ensure with reasonable diligence that Aldwich was not in breach of its obligations; Mayban Trustees did not carry out any form of due diligence…”

Reporting accountant’s duties pre- and post-bond issuance

Pre-bond issuance, the COA rejected EY’s interpretation that because of the words ‘An [IM] issued by a person its agent’ in the SCA, only the issuer (Aldwich) and its agent (MIBB) are liable. However, MIBB as the principal adviser also relied on other professionals involved in an IM and a literal approach exculpates other contributors from liability. In turn, the SC relies on the veracity and full disclosure of all contributors of the IM and investors relying upon the conduct of a contravener of the SCA are entitled to recovery against the contravener. The COA agreed with the High Court that the Valuation was in excess of the actual value of AEM’s Business, a critical factor relied upon by investors.

Post-Bond issuance, the COA found that EY had a duty to monitor the flow of funds to ensure sufficiency of funding to repay bondholders. EY should have reported that the ring-fencing structure had been breached. At common law, there was no indeterminacy with respect to persons who may rely on the IM to make investment decisions, reliance was foreseeable and it was not unfair to impose liability on EY to the extent of its blameworthiness.  

LAND LAW

Indefeasibility of title

Federal Court rules in favour of purchaser in good faith and valuable consideration in a ‘land scam’ case

The National Land Code 1965 (‘NLC’) is based the Torrens system. A basic feature of the system is that the registered particulars of ownership contained in the land register is conclusive evidence of ownership. Thus, an honest prospective purchaser conducting an inquiry of the land as to ownership need not investigate beyond the register to find out whether the particulars of ownership are true or not. This is because of the statutory policy that confers upon the registered person for the time being (‘A’) a title that is indefeasible but subject to the exceptions in s340 of the NLC. If A’s registration as owner for the time being was obtained by unlawful means, the true owner may challenge the title of A under any one of the statutory exceptions. In effect, the statutory exceptions create the concept of ‘deferred defeasibility’ — A’s title is good until challenged by the true owner. However, if A transfers the title to B, a purchaser in good faith and for valuable consideration, B’s title is indefeasible, or cannot be defeated at the hands of the true owner.

Currently, manual titles are being phased out by electronically generated titles. Unfortunately, this has provided an opportunity to ingenious fraudsters to defraud the true owners of land of their rightful ownership. This happened in Rajamani d/o Meyappa Chettiar v Eng Beng Development Sdn Bhd and Infinite Income Sdn Bhd & 5 Others, described as a “land scam” case.

Issues

If a fraudster vendor impersonating the true owner of land (‘Rajamani’) through a crafty and elaborate scheme, transfers the land to a purchaser (‘Infinite Income’) and Infinite Income then on sold the land to a subsequent purchaser in good faith and for valuable consideration (‘Eng Beng’), is the title registered in the name of Eng Beng defeasible by the true owner, Rajamani? This issue begs another issue — was the land office wrong in issuing a replacement title in the computerised form to Infinite Income?

Case summary and decision

Rajamani was the true owner of the land. At all material times, she had in her possession the manually issued document of title (‘Original Title’). A fraudster entered into the picture and claimed to be Rajamani. The fraudster had copies of documents to show she was Rajamani and was the owner of the land, including a letter confirming that she had received a deposit from Infinite Income. A lawyer (‘D7’), who acted for Infinite Income, introduced the fraudster to D 3 (another lawyer) as she could not act for both the fraudster and Infinite Income. D3, after having satisfied himself that the fraudster was indeed Rajamani, asked the fraudster to sign the transfer form and the agreement to sell the land to Infinite Income. D7 was present during that event. After the fraudster had signed the documents, D7 then took away the signed documents for his ‘further action’. D3 subsequently wrote to D7 to enquire about the status of the transaction and was informed that the land had not been transferred to Infinite Income because the balance of the purchase price was unpaid. Unknown to D3, the fraudster had lodged a police report that she had lost the title document to the land and D7 was instructed to apply for a replacement title on the fraudster’s behalf.

The land office as part of the computerisation process had generated a computerised replacement title in the name of the true Rajamani to convert manual titles to computerised titles in accordance with the NLC. This could be done without request from the landowner. However, the computerised title cannot be delivered to the landowner until the manual title is surrendered. On the basis of the sale by the fraudster to Infinite Income and the reported ‘loss’ of the title, the land office issued a computerised title and registered the title in the name of Infinite Income (‘Replacement Title’). About four months later, Infinite Income sold the land to Eng Beng. Meantime, Rajamani did not receive her assessment rates and a through a search, Rajamani found out the Eng Beng had been registered as the landowner. She sued Eng Beng, the lawyers and the land office.

Rajamani’s lawyers argued that the Replacement Title was a ‘manufactured’ title. Thus, it could not support any transfer of interest in title to Infinite Income and the subsequent transfer to Eng Beng was also void. In rever-sing the decision of the Court of Appeal, Azahar Mohamed FCJ (Richard Malanjum CJ, as he then was, concurring) agreed with the general proposition that if a person does not have a valid title in the first place, one cannot acquire indefeasibility. However, the Replacement Title is void ab initio only if the land registry had acted in breach of its duties under the NLC. The land registry had correctly generated a replacement computerised title in the name of the true owner and did not surrender it to any third party. In this context, the findings of the High Court that the land office had not breached the provisions of the NLC and had adhered to its mandatory provisions were not disturbed by the Court of Appeal. The Federal Court held while the title in the name of Infinite Income was defeasible at the instance of Rajamani, it was indefeasible when Infinite Income transferred it to Eng Beng, a purchaser in good faith and for valuable consideration. If the law of registration under the Torrens system is otherwise, subsequent innocent purchasers in good faith and for valuable consideration may find their titles defeasible by claims from the original owners, an undesirable state of affairs.

The retired Chief Justice Richard Malanjum in a concurring judgment held that the Court must apply the law as it stands even if the Court is very conscious that either one of the two innocent parties is compelled to suffer the consequences of the acts of the fraudsters. It was suggested that a fund should be set up by the Parliament to compensate innocent parties as is done in other jurisdictions.

“The Court of Appeal’s reasoning goes against the conventional understanding of deferred indefeasibility. The Court of Appeal decided on the law indefeasibility of title by leaning towards the other extreme, by favouring the original owner against the subsequent purchaser for valuable consideration despite purporting to follow the principle of deferred indefeasibility…  The Court of Appeal was more concerned with the fact that the plaintiff had in her possession [the Original Title] but overlooked and failed to appreciate the fact that the register document of title was in the name of [Infinite Income]. This was conclusive evidence that the title to the land was vested in the first defendant. The effect of the decision of the Court of Appeal is that subsequent purchasers in good faith and for valuable consideration who are the current registered proprietors may find that their titles are defeasible by claims from the original owners, even when their titles are supposed to be protected by the principle of deferred defeasibility.”

CONSTRUCTION CONTRACT CLAIMS

Claimants of subcontract/variation works must adhere to the rules set out in the contract

The value of construction contracts may be for a provisional sum and which usually contains detailed and technical provisions dealing with interim progress claims and the taking of final account, including submissions for additional work claims. These include provisions for a complete set of measurements, contract drawings, conduct of joint measurements at site, quotation, cost and break-down, certification of works by the authorised representative of the main contractor in cases of a sub-contract and valuation of progress claims and preparation of the final account.

Issue

Where a sub-contractor furnishes a mere summary of the subcontract works and variation works without adhering to the terms and conditions of the construction contract when making a progress claim, is that a valid claim, or whether the main contractor is estopped from challenging the progress claim because it had received the final interim certificate of the progress claim but did not raise objections until sued? These matters were considered by the Court of Appeal in Brunsfield Construction Sdn Bhd v LDE Aluminium Industries Sdn Bhd.

Case summary and decision

Brunsfield, the main contractor of a hospital, awarded subcontract works to LDE. Pursuant to a variation order, LDE was also required to do certain variation works. The value for the subcontract works was provisional in nature. The works were completed and in aggregate LDE had issued 27 interim progress claims (‘PC’), out of which 26 PC had been paid. Out of the 26 PC, only 24 site valuations were undertaken jointly and 8 were done unilaterally by LDE. LDE issued the final interim PC 27 for approximately RM3.912 million, claiming a balance sum of as unpaid. Like the 26 PC that had been paid, no supporting documents were furnished to support PC 27 and neither was a joint measurement undertaken. PC 27 was a mere summary of the subcontract works. The High Court allowed LDE’s claim based on PC 27.

In a unanimous decision delivered by Mary Lim JCA ( Abdul Rahman bin Sebli JCA, now FCJ) and Hasnah Binti Dato Mohammed Hashim JCA concurring) the Court of Appeal reversed the decision of the High Court, holding that it was wrong to apply the principle of estoppel in that the terms of the subcontract governing payments must be adhered to by LDE and LDE must prove each and every item in PC 27.

“The filing of a claim to enforce its rights does not absolve [LDE] from having to comply with the terms and conditions of the Letter of Award… it is never the function of the Court to rewrite terms and conditions of contract… [LDE] must bring itself within the terms of the Letter of Award, show compliance and proof of work done. Tendering PC 27, without more… is far from being sufficient for that purpose; and this was not properly considered by the trial judge.

… PC 27 is the respondent’s final claim, there is still the matter of joint site measurement to measure the value and quantity of the respondent’s actual works. No evidence was adduced by the respondent that it had requested for such measurement, and that the same had been refused. Or, that the respondent had itself conducted a measurement on site and PC 27 reflects the records.”

COMPANY LAW

Court of Appeal differentiates between personal and corporate rights and losses and who has the right to sue for recovery

The core attribute of a company is its legal personality, which has several facets. These include that (a) it is the owner of its assets to the exclusion of its members; and (b) its right to sue its wrong-doers to recover corporate loss  suffered by it. In the past, if a company refuses to sue, a member may bring a common law derivative action (‘CDA’) on behalf the company — naming the wrongdoers as the defendants and the company as a nominal defendant.The CDA has been abolished. It is replaced by s348 of the Companies Act 2016. This provision empowers  the Court to allow members to bring a statutory derivative action (‘SDA’) if the statutory conditions are fulfilled. The CDA and SDA  share a common feature — the beneficiary of the reliefs is the company.

Issue

Where wrongdoings are done to a company and its effect resulted in a diminuition of its total assets and therefore a diminuition in the value of shares held by its general body of members, can a member bring a derivative claim on behalf of the company and shareholders to recover the corporate loss suffered by the company? This issue came before the Court of Appeal in Mak Siew Wei v Yeoh Eng Kong & Other Appeals [2019] 7 CLJ 470 in an amendment application.

Case summary and decision

Yeoh (‘Yeoh’) purchased shares in Scan Associates Berhad (‘SCAN’). Yeoh filed an action for misrepresentation and deceit against SCAN’s directors and its auditor, SCAN’s financial status had been concealed from him prior to his purchase of the shares as a result of which he had suffered loss.  It was a personal action for personal loss (deceit practiced on Yeoh as alleged in the pleadings). Yeoh subsequently applied to amend his pleaded personal claim to add a separate cause of action for and on behalf of SCAN and all the shareholders (except for two shareholders), namely a derivative action, for the same loss and based on the same facts.

The High Court allowed the amendment to add the derivative claim. The amendment did not make a distinction between the personal action brought by him in misrepresentation and deceit to recover his personal loss and the derivative claim.On appeal, the decision of the High Court was set aside.  

Nallini Pathmanathan JCA  (now FCJ) (Badariah Sahamid and Zabariah Mohd Yusof JJCA concurring) held that it is wrong to combine a personal and derivative claim based on the same facts. A personal action is to recover personal loss that is peculiar to the claimant . A derivative action is to recover  loss on behalf of a company. Where the loss suffered by individual members is inseparable or inalienable from the corporate loss suffered by the company because of diminution in value of its total assets, a member cannot bring a derivative action. In the amended pleadings allowing the added derivative action, the diminution in value of shares of individual members was merely reflective of the corporate loss actually suffered by the company. The ‘reflective loss’ principle prohibits double recovery from wrongdoers — once in a derivative action against wrongdoers on account of diminuition in the total value of the company’s assets and a personal action because of diminution in value of the shares held by members to the personal benefit of the members. This means that a member cannot bring a derivative claim to recover corporate losses merely because the company in which he has shares has suffered the losses, and the shareholder cannot recover a sum equal to the diminution in the market value of his shares or a diminution in dividend because such a loss is ‘reflective’ of the corporate loss suffered by the company.  

“What are in effect two claims of a fundamentally different nature and character, in law, are being sought interchangeably… the failure to recognize that the two claims are fundamentally dissimilar will lead to confusion and errors in assessing whether the claims are made out and in awarding damages and costs. There is a real danger of double recovery and prejudice to creditors…”

Justice Nallini Pathmanathan (now, FCJ)

Postscript: Whether Yeoh can successfully claim to recover personal losses based on alleged misrepresentation and deceit personally practiced on him is a matter for trial.  

ARBITRATION

Judicial approach when arbitration proceedings between parties to an arbitration agreement affects substantive rights of non-parties

Resolution of disputes by arbitral proceedings contractually agreed upon between parties is an alternative to resolution by judicial means. The statutory policy under the Arbitration Act 2005 (‘Act’) is for the Court to hold the parties to their arbitration agreement arbitrate and adopt a non-intervention approach under section 8 of the Act. This does not mean that the general jurisdiction of the Court is ousted. It only means that the Court will uphold the principle of contractual autonomy of the parties and excerise self-restraint. Section 10(1) of the Act provides an an exception warranting intervention — the arbitration agreement is void, inoperative or is incapable of being performed.

Issue

If party (‘C’), who is not a party to the arbitration agreement between A and B, will be affected in his proprietary rights by the arbitration between A and B, may C apply to the Court to intervene by bringing a halt to the arbitral proceedings, or do sections 8 and 10(1) the Act apply to C? This issue confronted the Federal Court in Jaya Sudhir a/l Jayaram v Nautical Supreme Sdn Bhd & ors (Civil Appeal No. 02(i)-83-09/2018(W).

Case summary and decision

Nautical Supreme Sdn Bhd (‘Nautical’), Azimuth Marine Sdn Bhd (‘Azimuth’) and Nautilus Tug & Towage Sdn Bhd (‘Nautilus’) were parties to a shareholders’ agreement (‘Agreement’). The Agreement governed the relationship of Nautical and Azimuth as shareholders in Nautilus. A clause in the Agreement prohibited the transfer of shares to a third party and another clause required disputes to be settled by arbitration. Jaya Sudhir (‘JS’), claimed to be a ‘white knight’ who had provided funding in the project undertaken by Nautilus on an understanding — JS beneficially owns the shares registered in Azimuth’s name and that Nautical’s consent was not required for Azimuth to transfer any part of its shares to JS.

Differences arose and Nautical commenced an arbitration against Azimuth and Nautilus pursuant to the arbitration clause for an order that Nautical was entitled to purchase Azimuth’s shares. Subsequently, JS filed action in Court against Nautical for a declaration that JS was entitled to receive the shares registered in Azimuth’s name without Nautical’s consent and for an injunction against the continuation of the arbitration.The Court of Appeal dismissed JS’s action on the basis of the underlying principles of the Act, chief of which were respect for party autonomy and self-restraint by Court as provided for in s8 of the Act.

The Federal Court, in a unanimous judgment delivered by Justice Idrus Harun (Ramly Ali, Azahar Mohamed, Abang Iskandar and Vernon Ong FCJJ concurring), reversed the decision of the Court of Appeal. It was held that s8 and s10(1) of the Act do not apply to a non-party to an arbitration agreement whose proprietary rights may be affected by the arbitration. With regard to the underlying legislative policy of non-intervention under the Act, it was held that the Court’s duty as an interpreter of statute is to construe the Act as it is worded. In the context of the case, a non-party person to an arbitration agreement seeking to injunct the arbitration which affects its proprietary rights does not have to establish that the arbitration agreement is void, inoperative or incapable of being performed under s 10(1) of the Act. It is merely required to comply with the usual requirements for seeking an injunction — serious questions to be tried and the balance of justice weighs in favour of granting an injunction.

”…the primary consideration on whether to grant the injunction to restrain the arbitration proceedings where the rights of a non-party thereto are involved is what would be the fairest approach to all parties. It must not result in any party suffering severe disadvantage...”

SECURED CREDITORS AND EARNED WAGES OF EMPLOYEES’ (EWE)

EWE has priority over proceeds of realised security in winding-up

Section 31(1) the Employment Act 1955 (‘EA’) provides that in the ‘the sale of a place of employment’ by a secured creditor (‘SC’) on which an employee to whom wages are due was employed, the receiver or manager (‘Receiver’) cannot pay out the proceeds of the sale to the SC until the Court or the Receiver has ascertained and paid out the wages of the employees for four consecutive months’ work. However, s527 (1) of the Companies Act 2016 (‘CA 2016’) provides that employees’ wages in a winding-up only have priority over unsecured debts.

Issue

When a Receiver sells charged property of a wound-up company to recover sums due to the SC, is s31(1) of the EA or s527 (1) of the CA 2016 applicable? In Perwaja Steel Sdn Bhd v RHB Bank Berhad and 789 others (unreported judgment dated 18.7.2019), the Receiver of Perwaja Steel sought the directions of the High Court over this issue.

Case summary and decision

The employees of Perwaja Steel were terminated prior to winding-up and were owed earned wages. After winding-up, a Receiver was appointed by the SC to sell lands charged to them. The realisable sale proceeds was not expected to be enough to pay the debt owing to the SC. Thus, the Receiver sought directions from the Court as to whether the employees’ wages have priority over secured creditors under the EA or only enjoy priority over unsecured creditors under the CA 2016.

Justice Darryl Goon held that s31(1) of the EA is a specific provision while s257(1) of the CA 2016 is a general provision. In construing statutes, the general provisions must give way to specific legislation governing companies in a winding up. Further, it is wrong to construe s31(1) of the EA restrictively — that the employees must be working at the place or charged lands at the time of the sale. The words in s31(1) are directed at ‘when and where’ the wages were earned and not whether the employees are still working at the place of employment at the time of the sale.

“…the wages that section 31(1) is concerned with are wages that have already been earned by the employees and due to them from the employer… to read into section 31(1) of the EA words that do not exist so as to delimit the recovery of such wages in priority over a secured creditor, would run counter to the very intention of the Legislature…  it must not be overlooked that the EA is a piece of “beneficient social legislation…catering for the interest of employees.”

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