On 9 June 2017, True Fitness Malaysia announced that it would close its True Fitness and True Spa centers in Malaysia on 10 June 2017. It cited that its businesses were no longer financially viable due to evolving market conditions.
It was reported that the True Fitness Malaysia gym members were left in the lurch and with uncertainty on their long-term memberships. The reports suggested that there may have even been new members being recruited for the gym very shortly before the announcement on the closure.
I address 5 key legal issues that arise from the closing down of the True Fitness business in Malaysia. I touch on the corporate restructuring of the True Fitness group, the impact of any winding up proceedings against True Fitness, and who may be liable for any claims by the gym members or creditors.
(1) Anticipated closure since at least May 2017?
It was reported that the closure of True Fitness Malaysia was part of the True Group’s corporate deal with the Hong Kong-listed company, Tongfang Kontafarma Holdings Ltd.
From this announcement to the Hong Kong Stock Exchange, we can already see that on 6 May 2017, agreements were signed for the True Group to essentially restructure, sell some of its shares and to then expand its business in China. This China expansion was also covered by news reports.
As can be seen from the following extract of the announcement, one aspect of this deal is that the True Fitness Malaysia and Thailand would be closed down by 31 December 2017.
We know that Mr PJW is Mr Patrick John Wee, who is the Group CEO of the True Group.
The agreements would have been negotiated long before 6 May 2017 and with this deal being confirmed on 29 May 2017 (as seen in the next announcement).
If it became quite certain that True Fitness Malaysia and Thailand would be closed down, then a key question is were new members still being actively recruited? Why were members only notified abruptly on 9 June 2017?
(2) Interim Liquidator over one of the True Fitness Malaysia Companies
It was mentioned in a news report that a True Fitness spokesperson mentioned about a court application for a provisional liquidator (or interim liquidator as it is now known). The quote was:
“He added that a creditor had filed an application to appoint a provisional liquidator before the company could arrange for the business to be restructured, saying that this forced the closure.”
I have done some checks and there was indeed a winding up petition filed against one of the True Fitness Malaysia companies, True Fitness World Sdn Bhd. This would mean that one of the creditors filed a court application to wind up True Fitness World. At the same time, the creditor filed a court application to appoint an interim liquidator over True Fitness World. This application was heard on 9 June 2017.
An appointment of an interim liquidator over a company is normally a drastic measure. The person applying to wind up a company would have to show to the court that there is a very strong case for winding up and that there is an urgent need to protect the assets of the company about to be wound up. If an interim liquidator is appointed, then the interim liquidator would take control of the company in order to protect the company’s assets pending the determination of the winding up petition.
The winding up petition itself is fixed for hearing on 27 July 2017.
It may well be that this particular True Fitness company had run into significant issues with its creditors and hence faced the winding up petition and the application for an interim liquidator. That may explain the abrupt effect on this particular company’s operations. But it is not clear what role this particular entity played in the overall True Fitness Malaysia operations. That then flows into the next point.
(3) Claim against which True Fitness company?
Arising from the above issue relating to True Fitness World, it is not clear how many True Fitness entities are in Malaysia. It is normal for a business to structure its activities into different companies within a group.
The news reports already report on gym members wanting to make legal claims and how employees may not have been paid their salaries or commissions.
In determining any sort of claims to be made against True Fitness Malaysia, the parties would have to know which legal entity it is making a claim against. When I checked with a friend who is a member of True Fitness, it seems that the gym agreement may be with a company named Fitness Growth Sdn Bhd. There is also a True Fitness Sdn Bhd and I mentioned True Fitness World Sdn Bhd above.
(4) Claims against directors or others?
Even if claims are made against the various True Fitness companies, if these companies were no longer financially viable in the first place, it is quite possible for the companies to face winding up.
If the company is wound up, any claims or judgments against the companies would have to be determined in the winding up process. That would involve all the creditors sharing equally in any assets that are sold off. If some of these companies have secured creditors, and where the True Fitness company assets are charged to banks for instance, then the banks would get to first sell the charged assets. The other creditors then only share equally in the remaining assets.
That leads to the question whether any of the directors can be made personally liable for the debts owed to the creditors. One route is to rely on the fraudulent trading provision under the Companies Act. But it is normally not easy to establish fraudulent trading. A legal action would have to be brought against the directors to generally show that the business of the company had some element of defrauding the creditors of the company. The court may then make the directors personally responsible for the debts of the company (for more details, see section 540 of the Companies Act 2016).
Another avenue that is sometimes explored is whether the court will allow the lifting of the corporate veil. This is where in certain circumstances, the court will look behind the corporate structure and attach liability to the company or person actually behind the companies acting as the front. Again, it is generally difficult to convince the court to look behind the corporate veil. There must ordinarily be some evidence of fraud and where the company was a façade or where the separate legal identity of the company was used to evade legal obligations.
(5) Cross-border Issues
Finally, in looking at possible claims and finding parties to be answerable, the entities or the individuals may lie outside the jurisdiction of Malaysia. The True Fitness Malaysia companies appear to have a Singaporean company as its sole shareholder. Some of the True Fitness Malaysia companies have one Singaporean director. We know from the Hong Kong Stock Exchange announcements that the True Group of companies structure has now been reorganised as well with new companies being created.
It won’t be easy looking beyond the shores of Malaysia to find answers from the entities lying outside the jurisdiction of the Malaysian courts or legal system.