Case Update: Court of Appeal Rules on Removal and Remuneration of Liquidator

The Court of Appeal issued its Grounds of Judgment dated 11 December 2018 in the case of Ong Kwong Yew and others v Ong Ching Chee and others. It is a cautionary tale for liquidators on the grounds for their removal as liquidator and their conduct in terms of seeking fees for work done.

The conduct of the liquidator was serious enough for the Court of Appeal to remark that the liquidator ought to be sanctioned by the Malaysian Institute of Accountants or the Director-General of Insolvency.

Background Facts

(i) Winding Up of Five Companies, Private Liquidator Appointed

The appeals arose from the winding up of five family companies. There was a dispute between the majority contributories and the minority contributories.

In April 2014, the High Court ordered the winding up of the five companies on the just and equitable ground and where a private liquidator was appointed. The choice of liquidator was at the behest of the minority contributories who presented the winding up petitions.

The five companies in question were: Elegant Palms Sdn Bhd, Pangangkutan Jasa Sdn Bhd, Ong Ching Chee Realty, Ong Ching Chee Capital, and Ong Ching Chee Lorry Transport.

(ii) Liquidator’s Sale of the Businesses and Assets

The liquidator commenced the sale of the businesses and assets of the companies. In particular, by June 2014, the liquidator carried out a tender and sold the businesses of Elegant Palms, Pengangkutan Jasa and Ong Ching Chee Lorry. The liquidator had accepted the highest bid from the majority contributories. On the other hand, the minority contributories raised numerous objections on the entire tender process.

In September 2014, the liquidator sought for bids from the two groups of contributories for certain landed properties of Ong Ching Chee Lorry Transport and Ong Ching Chee Realty. The minority contributories also objected to this tender exercise due to alleged irregularities.

(iii) Removal Application and Challenge to Payments made to Liquidator

Later in September 2014, the minority contributories applied for the removal of the liquidator. This application remained pending at that time.

In the meantime, in July 2015, the liquidator filed an application for release as a liquidator and for dissolution of Ong Ching Chee Capital. All the assets of this company had been realised by this time.

In October 2015, the minority contributories applied for injunctions against the liquidator to refund monies he had drawn from the companies’ accounts for work done.  Further, they wanted to restrain the liquidator from making further withdrawals without the consent and approval of the court. The liquidator then sought sanction for the interim remuneration he had procured as liquidator.

In 2015, the liquidator caused the companies to enter into settlement agreements with the purchasers (being companies related to the majority contributories) of the businesses of Elegant Palms, Pengangkutan Jasa, Ong Ching Chee Lorry Transport and Ong Ching Chee Realty. This was to deal with the non-payment of the balance purchase price. The solution reached between the liquidator and the majority contributories was for the balance purchase price to be set off against monies due and owing to the majority contributories.

In October 2015, the minority contributories filed further applications for injunctions against the liquidator. This was to order the liquidator to refund to the respective companies monies that had been drawn by the liquidator as remuneration. This was on the basis that the drawings were made without the knowledge and approval of the minority contributories and without obtaining leave of the winding up court.

In November 2015, the liquidator filed applications to seek the sanction of the winding up court to allow him to retain the sums comprising the subject matter of the injunction applications.

(iv) Removal of the Liquidator

In March 2016, the court allowed the order to remove the liquidator from each of the five companies. A new liquidator was appointed. I will still continue to adopt the reference to the liquidator to refer to the liquidator in question during the relevant period leading to the appeals.

The removal was allowed on the grounds that there was evidence of bias in the handling of the sale of business of Elegant Palms and Pengangkutan Jasa. This is where the majority contributories had purchased the businesses but the balance purchase price was not paid. There were also other breaches of the Companies Act 1965 (CA 1965).

In July 2017, the liquidator filed applications in each of the winding up courts for further remuneration.

(v) Current Appeals

The Court of Appeal had to hear 19 appeals. They were in relation to the following categories of decisions of the High Court:

  1. The Interim Remuneration Appeals – where the High Court allowed the interim remuneration to be drawn and retained by the liquidator.
  2. The Injunction Appeals – where the High Court refused to order the liquidator to refund monies drawn from the respective companies by way of interim remuneration.
  3. The Release Appeal – where the High Court allowed the release and discharge of the liquidator from Ong Ching Chee Capital.
  4. The Refusal to Sanction Remuneration Appeals – where the High Court refused the liquidator’s application to sanction sums drawn by the liquidator as interim remuneration.
  5. The Further Remuneration Appeals – where the High Court refused the liquidator’s application for further remineration post the liquidator’s removal.
  6. Liquidator’s Appeal against the Injunction – where the High Court made an order against the liquidator restraining him from drawing any payments from Ong Ching Chee Lorry Transport without procuring prior consent of the court.
  7. Examination of Sale of Business Appeals – where the High Court made certain orders to examine the sale of business of Elegant Palms and Pengangkutan Jasa.

Court of Appeal Findings

The Court of Appeal dealt with the following categories of issues, starting with the issue relating to the liquidator withdrawing monies for his own remuneration.

Can the liquidator withdraw remuneration without the consent of all the contributories and without court sanction?

The liquidator pointed to the fact that the winding up order appointing him contained a specific provision providing the liquidator with the power “to pay the expenses and remuneration of the liquidator out of the assets of the Company“.

The Court considered whether the liquidator is granted carte blanche to withdraw such quantum of monies as he deems fit as remuneration for work done. The Court held that the liquidator must still receive compensation in accordance with the provisions of the CA 1965 (which was in force at that material time).

Section 232(2) of the CA 1965 sets out the manner in which the liquidator can be paid salary or remuneration. The methods would be by agreement between the liquidator and the committee of inspection, by resolution passed at a meeting of creditors, and failing those two circumstances, by the Court.

The liquidator could not simply “help himself” to compensation without the consent of all the relevant creditors, or contributories in the instant case. A prudent liquidator, appreciating that he occupies a position of trust in relation to the company in liquidation, would have taken the precaution of obtaining the sanction of the Court.

More so, the timing of the withdrawal of the monies by the liquidator is also questionable. The monies were drawn out after the application for his removal.

The liquidator is in a fiduciary position in relation to the funds of the company which he holds on trust for both the contributories and creditors. It is untenable if not bordering on unethical conduct for him to pay himself out of those funds. This is particularly pronounced where the applications for his removal were before the Court. The withdrawals of monies appeared to be an imprudent attempt to collect his fees prior to any potential removal from office.

Therefore, the unilateral and period withdrawal of monies of the company in liquidation without the requisite consent of the contributories or the Court in the instant case was a contravention of section 232(3) of the CA 1965. Any attempts by the liquidator to obtain sanction ex post facto should be viewed with considerable caution.

The Court of Appeal ordered that the liquidator is to return all monies drawn and retained by him as remuneration for work claimed to have been done during his tenure as liquidator of the five companies. The monies were to be returned to the five companies within third days of the service of the sealed order on the liquidator.

further remuneration by the liquidator: basis and standards for assessing reasonable remuneration

These related to the appeals where the liquidator had applied for his remuneration for work that he had done. These appeals did not stand on the same footing as the issue where the liquidator attempted to draw and retain monies in contravention of section 232(3) of the CA 1965.

The Court of Appeal had to consider whether to allow any remuneration for the work undertaken by the liquidator, or should the Court simply refuse all remuneration.

The Court held that upon the liquidator returning all monies unilaterally withdrawn, the liquidator was entitled to some degree of remuneration. It was indisputable that the liquidator did carry out work in the course of his appointment as liquidator.

The Court set out the applicable principles when assessing the remuneration of a liquidator:

  1. Onus is on the liquidator to establish that the sum claimed is reasonable. But liquidators have no legitimate expectation to be remunerated on a time costing basis  as a matter of right. Considerable time might be expended on unproductive work. It is difficult to check charges and accurately gauge the time spent.
  2. Liquidator is bound to provide material on which the Court can undertake a reasonable analysis.
  3. The Court is to approach its task by determining the remuneration due on the established materials with an independent mind. It remains open for the Court to decide on the optimum mode of assessing fair remuneration, on a time basis, a realisation basis or an all encompassing basis where all the said criteria are considered.
inadequate material provided by the liquidator for the further remuneration

The Court of Appeal observed that the materials by the liquidator were not contemporaneous records of the work undertaken. The inadequacies of the materials were:

  • They were summaries of work done or merely contained time expended with the rates specified.
  • There was no specification of what work was undertaken during that time, or why such an amount of time was necessary.
  • No explanation on the specific time rates charges, the identity of the varying levels of personnel involved, nor the reason why each of them was necessary.
  • The time costing method was of no utility to the court when expressed on the terms of the present case. It did not afford any usable information for the Court to ascertain the remuneration that is fair and reasonable for work done.

The Court ordered the applications for further remuneration to be remitted back to the High Court to be taxed in full. The liquidator was required to present full particulars to substantiate his claims for remuneration.

Comments

This Court of Appeal decision emphasises the point that liquidators are custodians of the assets and monies of companies in liquidation. They hold a fiduciary position and liquidators cannot unilaterally withdraw monies from the companies to pay themselves. The law sets out the correct procedure in order to provide a check and balance.

Section 232(3) of the CA 1965 is reproduced in section 479(2) of the Companies Act 2016. So the same principles will apply for future liquidation cases.

 

 

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