This article first appeared in The Edge Malaysia Weekly on January 13, 2020 - January 19, 2020
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.
THE FEDERAL CONSTITUTION
Ministers are not immune from the tort of misfeasance in public office
Common law is unwritten law or is the law made by Judges. It is opposed to written law as in statutes enacted by Parliament and subsidiary legislation made under statutes. Section 3 of the Civil Law Act 1956 (‘CLA’) provides for the reception of English common law subject to limitations. The limitations are (a) no written or statutory laws have been made and are in force over the particular subject matter under consideration (‘Limitation 1’); and (b) the common law must be applied so far only as the circumstances of the States of Malaysia and respective inhabitants permit and subject to such qualifications as local circumstances render necessary (‘Limitation 2’). When particular English common law rules are applied by Malaysian Courts, those rules become part of the Malaysian common law.
Issues
Three important issues arose for consideration by a seven-member bench of the Federal Court (‘FC’) led by the Chief Justice Tengku Maimum Tuan Mat in Tony Pua Kiam Wee v Government of Malaysia, which was heard together with Tony Pua Kiam Wee v Datuk Seri Najib bin Tun Haji Abdul Razak.
Firstly, are Malaysian Ministers subject to the common law tort of misfeasance in public office? This depends on whether Limitation 1 or Limitation 2 of the CLA are applicable. Secondly, is the Government vicariously liable for acts of its ‘public officers’? This depends on the proper interpretation of the provisions of the Government Proceedings Act 1956 (‘GPA’). Thirdly, did Tony Pua (‘Appellant’) have the right to sue in that he had been injured by the misconduct alleged by him against Datuk Seri Najib Razak (‘Najib Razak’) the then Prime Minister of Malaysia (‘PM’)?
Case summary and decision
The two appeals concerned whether the Courts below were correct in striking out the actions filed by the Appellant on the basis that the actions were obviously unsustainable. In determining whether an action should be struck out summarily (i.e. without trial), the Court presumes that the allegations made in the claim are true.
The Appellant sued Najib Razak and the Government of Malaysia (‘Government’), premised on the common law tort of misfeasance in public office (an intentional tort). The action against Najib Razak relates to a sovereign fund commonly known as 1MDB and it was alleged that Najib Razak had abused his public office by personally benefitting or profiting or both from the receipt of monies from 1MDB. The action against the Government is that the Government is vicariously liable if the tort is proven against the former PM at trial.
The High Court struck out the actions, which were affirmed by the Court of Appeal. The FC, in a unanimous landmark decision dated 19.11.2019 delivered by Nallini Pathmanathan FCJ, restored the two actions. Accordingly, the Appellant is not shut out from opportunity to establish his case at trial.
Decision on Limitation 1 concerning the tort
In the context of the common law tort, Counsel for Najib Razak and the Government argued that the wider common law meaning of ‘public officer’ had been abrogated or modified or narrowed by the written law in Section 3 of the Interpretation Acts (‘IAs’) when read in conjunction with Articles 132(1) and 132(3) of the Constitution. In this regard, Section 3 of the IAs defines ‘public office’ as an office in any of the public services set out in Article 132(1) of the Constitution; a ‘public officer’ is a person who lawfully holds, acts or exercises the functions of a public service; Article 132(3) provides that public service ‘shall not comprise the office of any member of the administration’ in the Federation or a State; and Article 162(2) defines a ‘member of administration’ to mean ‘in relation to the Federation, a person holding office as Minister, Deputy Minister, Parliamentary Secretary or Political Secretary…’
Relying on the provisions (‘Provisions’), it was urged that the former PM was not a public officer and a public officer is merely a person who is a member of the public service. Thus, the Provisions read together had abrogated and effectively narrowed the common law meaning of ‘public office’ and ‘public officer’.
The FC clarified that the IAs and the Constitution draw a clear distinction between the written law and the common law and both branches ‘exist as independent streams of law’ save that the common law applicable in Malaysia is capable of amendment, modification and abrogation by written law. Also, it is ‘neither tenable nor prudent’ at common law to give an exhaustive definition of the term ‘public officer’ to cover all scenarios of abuse of power, a matter which would probably stultify the vitality of the tort. Accordingly, ‘the definition of [the] key ingredient [of ‘public officer’] and the ambit of that definition’ was the crucial issue. Here, the FC agreed with earlier Malaysian and decisions of other jurisdictions that at common law (a) the rationale of the tort in a legal system based on the rule of law is that executive and administrative powers may only be exercised for the public good and not for ulterior and improper purposes; and (b) the ambit of the term ‘public officer’ is not confined merely to persons employed in the public service.
The FC held that the crucial question before it was whether (a) Section 3 of the IAs and Articles 132(1) and 132(3) of the Constitution were specifically enacted for the purpose of abrogating or modifying the common law tort of misfeasance in public office with reference to the definition of a ‘public officer’ or ‘a person who holds public office’; or (b) the Provisions are of general application only and were not expressly or impliedly enacted for the purpose of abrogating or modifying the definition at common law.
In reversing the decisions of the Courts below, several grounds were advanced by the FC. The grounds included that (a) there is a common law presumption that the common law will continue to apply until written law is passed with the express intention of excluding its continued application; (b) the Provisions did not expressly state an intention to abrogate the common law tort as being applicable to Ministers; (c) the Provisions also did not do so implicitly by adopting a legal scheme applicable to Ministers that is incompatible with the continued application of the common law tort; (d) the IAs manifest Parliament’s intention that the IAs are for the interpretation of written law only and further, Article 160 (1) of the Constitution reinforces the legislative scheme that the Articles of the Constitution must be construed contextually and within its framework; and (e) an examination of the genesis of Part X of the Constitution dealing with ‘Public Services’ yields the answers as to why the Constitution purposively separated ‘Members of the administration’ from members of the public service — the purposes are (i) to provide for an efficient administrative structure; and (ii) create a public service that is’ free from executive influence…’
‘… while Ministers are not ‘public officers’ under the Federal Constitution, they are no less holders of ‘public office’ for the purposes and in the context of misfeasance in public office. They derive their salary from the public purse and carry out their functions with a public purpose …
The doctrines of the rule of law and the separation of powers underpin and comprise the ‘internal architecture’ of our Constitution… So, to conclude that the definition of public officer in Malaysia excludes members of the administration such as a Prime Minister, so that members of the administration… may allegedly act with impunity, so as to knowingly and/or recklessly dissipate public funds and remain immune to civil action under this tort, is anathema to the doctrine of the rule of law and the fundamental basis of the Federal Constitution. Such a construction of the term ‘public officer’ which erodes the rule of law, is repugnant and cannot prevail.’
Justice Nallini Pathmanathan
Decision on Limitation 2 concerning local circumstances
The FC held that there is no need to alter the common law cause of action in the context of Limitation 2.
‘…the tort of misfeasance in public office is grounded on the rule of law. Amongst the fundamental aspects of the rule of law is that: The law is supreme over the acts of both government and private persons. That law is one and it is applicable to all. To that end, no man is above the law and all are equal before the law…
The essential tenets of the rule of law remain of fundamental importance in Malaysia. As the tort of misfeasance in public office encapsulates the essence of the rule of law, it is applicable in its original form without modification under Section 3 of the CLA…
If anything, the importation and subsistence of the original tort should be strengthened and applied more stringently to address the subsisting problem of corruption in public office. However, it must be borne in mind that it remains a tort which requires several elements to be made out including material damage to the plaintiff bringing the action.’
Justice Nallini Pathmanathan
Decision on vicarious liability of the Government
Section 2 of the Government Proceedings Act (‘GPA’) defines an ‘officer’ in relation to a Government as a person in the permanent or temporary employment of such Government, including a Minister of such Government. Section 5, which deals with vicarious liability, uses the term ‘public officer’. Should the term ‘public officer’ be defined in accordance with the definition used in Section 3 of the IAs, or be defined by reference to the GPA in which the term appears?
The FC held that the term ‘public officer’ in Section 5 of the GPA should be construed in accordance with the GPA and not by reference to Section 3 the IAs because (a) using the definition of ‘public officer’ in Section 3 of the IAs would render the definition of ‘officer’ in Section 2 of the GPA otiose and Parliament does not legislate in vain; and (b) Section 2 (3) of the IAs expressly provides that the definition of ‘public officer’ does not apply if there is (a) an express provision to the contrary,or (b) something in the subject or context inconsistent with or repugnant to its application.
‘… the purpose of the GPA is to establish vicarious liability on the part of the Government (which is borne out by the express provisions of Section 5) it follows that importing the definition of ‘public officer’ in Section 3 of the Interpretation Acts would render the underlying purpose of the GPA meaningless. In other words, despite express provisions creating such vicarious liability, this may be circumvented by importing a definition from another statute, namely the Interpretation Acts. Any construction which allows for the express circumvention of the very purpose for which the statutory provision was established is perverse and cannot be sustained. Therefore, Section 3 of the Interpretation Acts cannot be imported to construe Section 5 of the GPA.’
Justice Nallini Pathmanathan
Decision on standing to sue
The FC dismissed the argument that in a striking out application for no cause of action (as opposed to a trial), it is possible to conclude that the alleged particularised losses of the Appellant’s are fictitious, namely and amongst others, that (a) the Appellant’s tax money had been utilised for the incorporation of 1MDB and it had been dissipated or misappropriated; (b) his tax monies will be used in the future to clear the guarantees given by the Government; (c) a travel ban had been imposed upon him because of his public statements in relation to 1MDB matters; and (d) loss in value of his wealth as a result of significant devaluation of the Malaysian Ringgit caused by the alleged misconduct. The losses, the FC held, should be left to the trial for the Appellant to establish.
THE FEDERAL CONSTITUTION
Writ of habeas corpus and the liberty of persons
Article 5(1) of the Federal Constitution (‘Constitution’) provides that no person shall be deprived of his liberty ‘save in accordance with law’ and citizens look to the Judiciary to uphold the Constitution without fear or favour and regardless of the status of the person before it. Thus, when a complaint is made to the Court pursuant to a writ of habeas corpus that a person is being detained not in accordance with law, the Court will inquire into the complaint and, unless satisfied that the detention is lawful, shall order the detainee to be produced before the Court and release him under Article 5(2) of the Constitution.
In essence, the remedy of habeas corpus is guaranteed under the Constitution and the guardian of the constitutional right against arbitrary or unlawful detention of an individual is the Judiciary. Certain statutes oust the jurisdiction of the Court to question and adjudicate upon the substantive correctness of executive decisions. However, where procedural rules are required to be complied with, the Malaysian Judiciary jealously protects the liberty of the subject even if it is statutorily barred from adjudicating upon the substantive merits of the decision of the executive.
Issue
What is meant by the words ‘save in accordance with law’ in Article 5(1) of the Constitution? Does it include compliance with rules of procedure? This issue confronted the Federal Court (‘FC’) in Chua Kian Voon v Menteri Dalam Negeri Malaysia and two others in the context of the Dangerous Drugs (Special Measures) Act 1985 (‘Act’), a decision dated 4.12.2019.
Case summary and decision
The Appellant (‘Chua’) was arrested under the Act. An investigating officer (‘IO’) recorded statements from him through an interpreter (‘Recorded Statements’). Upon being satisfied that Chua was involved in drug trafficking, a report was prepared and submitted to the Deputy Minister of Home Affairs and the Inquiry Officer at the Ministry. Following investigation by the Inquiry Officer, a report was submitted to the Deputy Home Minister (‘DHM’) stating that there were reasonable grounds to believe that Chua was involved with drug trafficking activities. The DHM issued a detention order on 17.11.2017 that directed that Chua be detained for a period of two years.
On the same date, the detention order, the grounds of the detention order, the Recorded Statements upon which the order was made and three copies of representations (‘Representations’, or ‘Form 1’) in connection with the detention order were served on and was said to have been explained to Chua. The Recorded Statements was dated but not the time the statements were recorded, contrary to the provisions of the Act (‘Error 1’).
Chua was said to have been given an explanation of his right to Representations under rule 3(1) of Dangerous Drugs (Special Preventive Measures) (Advisory Board Procedure) 1987 (‘Rules’ ) by a counsel of his choice in Mandarin and to call witnesses before the Advisory Board. Form 1 must be completed or filled up, one of which was the language in which explanation was given to the detainee. This was left blank (‘Error 2’) and neither was the secretary of the Advisory Board informed that Form 1 had been served on Chua (‘Error 3’).
The Advisory Board after considering Chua’s representation, forwarded its recommendation under the Act to the Yang di-Pertuan Agong. His Majesty affirmed the detention order made on 17.11.2017. The High Court dismissed Chua’s application for a WHC and an appeal was made to the FC, raising non-compliance with several procedural issues.
In a unanimous decision delivered by Mohd Zawawi Salleh FCJ (David Wong CJSS, Rohana Yusof (now PCA), Abang Iskandar and Nallini Pathmanathan FCJJ concurring), it was held that although Sections 11c and 11d of the Act ousted the right of judicial review of all acts done or decisions made in the exercise of the Minister’s discretionary power, there must nonetheless be strict compliance with mandatory procedural requirements. Non-compliance with mandatory requirements renders a detention illegal in that it is not in accordance with law. The FC reversed the decision of the High Court, holding that Errors 1, 2 and 3 were fatal to the case of the respondents and Chua was to be released forthwith.
‘The writ of habeas corpus is the fundamental instrument for safeguarding individuals against arbitrary and unlawful state action…
[It] is a powerful remedy in the sense that it is not discretionary. It is distinct from the prerogative writs such as those of certiorari, prohibition and mandamus. The writ of habeas corpus must be issued if the court finds that the detenu is illegally or improperly detained.’
Justice Mohd Zawawi Salleh
ADMINISTRATION OF JUSTICE
Power of the Federal Court to review its earlier decisions
Rule 137 of the Rules of the Federal Court 1995 (‘RFC’) reiterates the common law that the Court has inherent powers to enable it to function as a Court of Law — hear any application or make any necessary order to prevent injustice or to prevent an abuse of the process of the Court. The prevention of injustice pursuant to inherent powers includes hearing appropriate applications before it for the purpose of reviewing an earlier decision of its own to determine whether that earlier decision was wrongly or unjustly made. The power to review an earlier decision is an extraordinary power and will only be exercised in exceptional circumstances. When exceptional circumstances are shown, a Malaysian Court will not hesitate to set aside its earlier decision and order the case under consideration to be reheard.
Issue
What constitutes ‘exceptional circumstances’ to justify the exercise of this extraordinary power? This matter was considered by the Federal Court (‘FC’) in Bellajade v CME Group & Tan Sri Dato’ Lim Cheng Pow [2019] 5 AMR 101.
Case summary and decision
Bellajade Sdn Bhd (‘Bellajade’) sued CME Group Berhad and Tan Sri Dato’ Sri Lim Cheng Pow (‘Defendants’) in the High Court (‘HC’) concerning a tenancy dispute. The HC dismissed Bellajade’s claim. The Court of Appeal (‘CA’) set aside the decision of the HC. Bellajade was granted leave by the FC to appeal against the decision of the CA.
In March 2018, a panel of five Judges of the FC heard the appeal. Judgment was reserved. In July 2018, Zulkefli Bin Ahmad Makinudin PCA (as he then was), then a member of the panel, resigned from office.
In September 2018, the judgment of the FC was delivered by the four remaining Judges of the original panel (‘Impugned Judgment’). The Impugned Judgment was authored by the former PCA. Three of the remaining Judges (i.e. the majority) purported to “concur and adopt” the Impugned Judgment which dismissed Bellajade’s appeal. One Judge dissented.
Bellajade then filed an application in the FC to review and set aside the Impugned Judgment pursuant to rule 137 of the RFC on the grounds of, inter alia, coram failure. Bellajade contended that the majority of the remaining Judges could not concur and adopt the judgment of the former PCA, premised on Section 78 of the CJA, which provides that where judgment is reserved and where before the delivery of judgment any Judge hearing the matter is unable, through illness or any other cause, to attend the proceeding or exercise his functions as a Judge, the reserved judgment is to be delivered by the remaining Judges (not being less than two) and the proceeding is to be determined in accordance with the opinion of the majority of the remaining Judges.
In the decision dated July 16, 2019, delivered by David Wong Dak Wah CJSS (Rohana binti Yusuf (now, PCA), Mohd Zawawi bin Salleh, Tengku Maimum binti Tuan Mat (now, CJ) and Nallini Pathmanathan FCJJ concurring), the FC allowed Bellajade’s application. The FC also set out in a non-exhaustive manner the circumstances under which it would exercise its inherent power of review. Apart from coram failure, the exceptional circumstances justifying interference include cases where the earlier decision was obtained by fraud or suppression of material evidence, was made in clear infringement of law, where bias is established, breach of natural justice and lack of jurisdiction.
The FC held that the effective date of a judgment is the date of its pronouncement. In concurring with and adopting the Impugned Judgment as at the date of its pronouncement (a) there was an inference that the Impugned Judgment was not that of the majority of the remaining Judges but of a Judge who had lost his jurisdiction to decide as a Judge by reason of his resignation; and (b) at the time of pronouncement, the Impugned Judgment did not in law exist following the resignation of the then PCA and as such, the majority of the remaining Judges could not do what was done. The appeal was ordered to be reheard by a differently constituted panel of the Federal Court.
‘The judgment of [the retired PCA] in our view in law did not exist and cannot exist as there was no such Judge in the coram so to speak. Hence, any attempt to “concur and adopt” by the three majority Judges was an exercise in futility as there was no such judgment in existence… Section 78(2) of the CJA … requires judgment to be determined in accordance with the opinion of only the majority of the remaining Judges.’
Justice David Wong (CJSS)
COMPANY LAW
Company is not rendered dysfunctional because the number of representatives of class shareholders to constitute a quorum is reduced
A company’s shares may be divided into different classes with equal voting power in respect of all the affairs of the company but with other different rights. In a company with Class A, B and C shareholders, the constitution commonly provides for (a) an exit clause for a class shareholder who wishes to sell and transfer its shares; (b) the number of directors each class shareholder is entitled to appoint; (c) the requisite number and composition of the nominees of class shareholders to constitute a quorum for directors’ meeting and general meetings; and (d) the maximum percentage of equity that may be allotted to Class A, B or C shareholders.
If Class A shareholders may be allotted 51% of the issued capital in aggregate and there are two Class A shareholders, the transfer of shares from one class A shareholder to the other would pass control over the company into the hands of a single Class A shareholder. If the constitution provides for the representatives of two Class A shareholders to constitute a quorum for directors’ and general meetings, disgruntled minority shareholders constituting the other class of shareholders might argue that the transfer of shares amounts to an oppressive act as it has the effect of negating the quorum provision — it is mandatory that there must be two Class A shareholders at all times. Is it correct that the constitution of the company must be interpreted in the manner that there must always be two Class A shareholders?
Issue
This issue confronted the High Court in three actions that were heard together (‘2017 Actions’) — WTWT Sdn Bhd v Chew Meu Jong & 4 Others, Faroy Sdn Bhd v Chew Bros (M) Sdn Bhd & Another and Bina Securities & Management Sdn Bhd v Chew Meu Jong & 4 Others (Judgment dated 10.10.2019). The High Court had to decide inter alia, whether the transfer of shares from one Class A shareholder to the only other Class A shareholder caused the company to be dysfunctional and was oppressive of shareholders holding Class B and Class C shares.
Case summary and decision
The shares of Lysaght (Malaysia) Sdn Bhd (‘Lysaght’) are divided into 3 different classes, A, B and C. There were 2 Class A shareholders (Chew Bros (M) Sdn Bhd (‘Chew Bros’) and United Engineers Limited (‘UEL’)). Class A shareholders are entitled to appoint 3 directors — 2 directors nominated by Chew Bros and 1 by UEL. Class B and Class C shareholders are entitled to appoint 1 director each. One of the Class B shareholders is WTWT Sdn Bhd (‘WT’).
The quorum for general meetings was three in number — two Class A shareholders and 1 Class B. The quorum for board meetings was also three in number — a director each nominated by Class A shareholders respectively and one nominated by Class B shareholders.
In 2014, UEL invoked the exit clause in the constitution and sold all its Class A shares to Chew Bros, resulting in Chew Bros holding a majority control of 51.63% in Lysaght. WT challenged this sale in the High Court before Wong Kian Keong JC (now, J) who dismissed the action and upheld the transaction (‘2014 Action’).
The 2017 Actions were filed by WT, the Class B shareholder, and two Class C shareholders (Bina and Faroy). This round, the crux of the plaintiffs’ complaint was that the sale of UEL’s shares to Chew Bros constitutes a breach of the constitution in that it had eliminated the existence of the other mandatory Class A shareholder in Lysaght, namely UEL. This resulted in a lack of quorum to conduct meetings of directors and general meetings and Lysaght had become dysfunctional.
Ong Chee Kwan JC found that in the 2014 Action, the Court had decided that the sale of the UEL’s shares to Chew Bros is valid and would not make the articles affecting quorum in the constitution redundant. There are no provisions in the constitution that there must always be another Class A shareholder other than Chew Bros. The learned JC also held that (a) the consequential declaration asked by WT in its 2017 Actions under the guise of an oppression action to set aside the purchase of UEL’s shares (held to be valid under the 2014 Action) ‘is a clear abuse of process’; (b) although Bina and Faroy were not parties to the 2014 Action, they were bound by the outcome of the 2014 Action as they were fully aware of that action but chose to be mere bystanders, or they knew what was passing but were contented to stand by and watch their battle fought by somebody else in the same interest.
The complaints that Lysaght’s affairs had been paralysed because of absence of quorum in board meetings to declare and pay dividend to found an oppression case was self-inflicted as they refused to attend board meetings and had also refused to sign directors’ circular resolution to approve the financial statements and yet demanded that Lysaght declare RM30 million interim dividend.
‘Liew and Yusuf’s conduct in holding the company at ransom by not attending the BOD meetings and their failure, omission and refusal to participate in the management of Lysaght has caused Lysaght difficulties in complying with the provisions of the Companies Act and the routine business of Lysaght such as approval of audited financial statements, calling for AGMs, compliance with statutory obligations and declaration of dividends, to come to a grinding halt. Their conduct has seriously prejudiced the interest of Lysaght and the interests of the shareholders of Lysaght, including Chew Bros.’
COMPANY LAW
When restraining orders may be granted in a proposed scheme of arrangement between companies and their creditors
Sections 365 to 371 of the Companies Act 2016 (‘CA 2016’) empower the Court to facilitate proposals to carry out schemes of arrangement or compromise and reconstruction and amalgamation of companies. Such schemes invariably affect, or are intended to alter, in defined ways the rights of members and creditors. An arrangement or compromise is commonly resorted to by financially distressed companies to restructure their debts with its creditors (‘Scheme’).
Where a Scheme has been proposed and the company is not being wound up, the Court may under Section 368 (1) of the CA 2016 on the application of the company, creditor or member (a) summon a meeting of creditors to be held on a future date to consider a proposed Scheme; and (b) restrain further proceedings in any action or proceeding during the interim period against the company (‘Initial Restraining Order’) except with leave of the Court (‘Primary Application’). Section 368(2) provides that the duration of the Initial Restraining Order in the Primary Application shall be for a period of not more than three months and on further application, the restraint may be extended for a period of not more than nine months (‘Extended Restraining Order’) provided the conditions spelt out in Section 368(2) (a), (b), (c) and (d) are fulfilled.
Issue
Must the four conditions in Section 368(2) be satisfied when the Primary Application is made under Section 368(1) before the Initial Restraining Order may be granted, or whether the four conditions are applicable only to an application for an Extended Restraining Order under Section 368(2) upon expiration of earlier restraining orders? Aside the requirement that full and frank disclosure must be made when an ex parte application (without the presence of opposing parties) is made to the Court, the High Court in Barakah Offshore Petroleum Berhad & Anor v Mersing Construction & Engineering Sdn Bhd & 3 Ors [2019] 3 AMR 673 was called upon to construe the relevant provisions to resolve the issue.
Case summary and decision
Barakah Offshore Petroleum Berhad and its subsidiary (‘Applicants’) are involved in the oil and gas industry. From 2014 to 2105, the Applicants were facing financial difficulties. In 2018, Barakah’s subsidiary claimed that it had secured a contract said to be worth RM1.2 billion over a period of five years and with further tenders made for other projects in the pipeline. The Applicants were confident that they would be able to improve their financial situation and sought to restructure their debts. They proposed a scheme of arrangement with the view to securing a compromise with their creditors.
The four conditions in Section 368(2) are (a) a Scheme has been proposed between the company and its creditors or any class thereof representing at least one-half in value of all the creditors; (b) the restraining order is necessary to enable the concerned parties to formalise the Scheme for approval by creditors at a Court convened meeting under Section 366(1); (c) a particularised statement of affairs of the company made up to a date not more than three days before the application is lodged together with the Section 366 (1) application or Primary Application; and (d) the Court approves a person nominated by a majority of the creditors to act as director of the company or if that nominee is not already a director, the nominee is to be appointed as director.
In October 2018, the Applicants made the Primary Application ex parte. The High Court allowed the Primary Application and (a) ordered a meeting of creditors under Section 366(1) to be held at a future date; and (b) granted the Initial Restraining Order for a period of ninety days (‘Ex Parte Orders’). Upon the expiry of the earlier restraining orders obtained by the Applicants, applications were made for its extension. The last application was made in April 2019 to extend the life of the Ex Parte Orders to convene the creditors’ meeting under Section 366(1) and the duration of the restraining order.
Certain creditors intervened (‘Interveners’) in the proceedings. The Interverners raised issues, amongst other issues, as to whether (a) the entire Ex Parte Orders should be set aside; and (b) that part of the Ex Parte Orders consisting of the restraining order ought to be set aside.
The case for the Interveners was that in applying for and obtaining the Initial Restraining Order under Section 368(1) in the Primary Application, the Applicants failed to comply with all the mandatory requirements in Section 368 (2), namely Section 368(2) (c) and (d). The Applicants’ case in opposition was that the four conditions set out in Section 368(2) need only be complied with in relation to applications to extend an expired Initial Restraining Order or an expired Extended Restraining Order and not to the Primary Application under Section 368(1). In particular, the Applicants argued that there were practical difficulties in complying with the whole of the five conditions in the Primary Application, a matter made more acute by the element of urgency due to legal and pending legal claims against them (‘Practical Difficulties’).
The learned Judge of the High Court dismissed the Applicants’ arguments and held that all the four conditions in Section 368(2) must be satisfied before an Initial Restraining Order may be made at the time of the Primary Application under Section 368(1), including any application to obtain an Extended Restraining Order upon expiry of earlier restraining orders. According to the learned Judge, Section 368(1) only empowers the Court to grant restraining orders whereas Section 368(2) deals with the duration of restraining orders and the conditions that must be satisfied before any restraining order may be made.
‘… it cannot be the legislative intent that only Section 368(2)(a) and (d) need be complied with when applying for a restraining order. The conditions under Section 368(2)(a) to (d) need all be complied with. To hold otherwise, would do violence to the manner in which Section 368(2)(a) to (d) are drafted. It would call, unjustifiably, for ignoring the fact that the conditions set out in Section 368(2)(a) to (d) are cumulative …’
In relation to the Practical Difficulties faced by the Applicants, the learned Judge held that the statutory right in Section 368 must be weighed against the competing right of creditors to enforce their legal rights.
‘It is probably the case that companies in financial difficulties would be more likely to encounter legal suits with financial claims against them. However, such practical difficulties that a company invoking Section 368 might face, have to be weighed against the somewhat drastic effect of a restraining order that creditors may be stopped in their tracks from enforcing their legal rights in a Court of Law. It behoves applicants invoking Section 368 of the Companies Act 2016 to conscientiously prepare with care when making their applications and not to do so at the eleventh hour, after legal actions have been brought, judgments entered and enforcement proceedings commenced or about to be commenced’.
COMPANY LAW
The limit to written resolutions under the Companies Act 2016 (‘CA 2016’)
Section 32(2) of the CA 2016 provides that the constitution of a company (previously styled as the memorandum and articles of association (‘M&A’)) ‘has no effect to the extent that it contravenes or is inconsistent with the provisions of the Act’. Previously, members could pass written resolutions under Section 152A of the Companies Act 1965 without holding a general meeting notwithstanding anything in the CA 1965 or the constitution provided that that written resolution is signed by all members entitled to receive notice and attend a general meeting. Under Section 290(1) of the CA 2016, resolutions of members of private companies may be passed either (a) by written resolutions; or (b) at a meeting of members. Section 302(2) limits the matters which may be moved as a written resolution.
Issue
If the constitution of a private company requires that all ordinary resolutions be passed at general meeting, could the company appoint a director by written resolution under Section 290 (1) of the CA 2016 without calling a general meeting to pass such resolution? This issue came up before the High Court in Mohd Radwan Alami v Ibrahim bin Mohd Yusof & Ors [2019] 10 MLJ 761.
Case summary and decision
Director A was a minority shareholder in company Z. Director B was the only other shareholder. The relationship between A and B had broken down and this led to a deadlock. In an attempt to break the deadlock, B, as the majority shareholder, passed a written resolution appointing C as an additional director of Z pursuant to Section 290(1)(a) of the CA 2016.
A claimed that B could not do so because (a) Article 67 of the constitution of Z provided that all ordinary resolutions of Z must be passed at a general meeting; and (b) the impugned resolution was ineffective because Section 302(2) of the CA 2016 provides that a resolution is ineffective if it is inconsistent with the constitution. B claimed he could appoint C by written resolution because Article 67 is inconsistent with the statutory right to pass resolutions in writing without holding a general meeting pursuant to Section 290(1)(a). Accordingly, that article is ineffective because of Section 32(2).
Ahmad Fairuz JC held that Sections 32(2) and 290 must be read together with Section 302(2) (a). Section 302(2) limited the scope of matters that could be passed by way of written resolutions, one of which is that the written resolution, if passed, would be ineffective because of inconsistency with the constitution. The learned JC held that Section 302(2)(a) is a specific provision that plainly asserts the primacy of Z’s constitution and the general provision in Section 32(2) is inapplicable. Further, B could not make use of Section 290 to appoint C as an additional director to break the quorum requirement for meetings under the constitution. The solution is for B to make an application to Court to convene a general meeting and seek direction that a single member shall constitute a quorum.
‘This court is of the opinion that there is no incongruity between the constitution/ [articles of association] and the Act … The prohibition under s 32(2) merely operates as notice that when a company adopts a constitution, any provision of the constitution that contravenes the Act cannot be sustained. However, s 302(2)(a) cures the inconsistency as it provides primacy of the constitution/ [articles of association] over the Act.’
Save by subscribing to us for your print and/or digital copy.
P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.