Case Update: Federal Court Decides on Issue of Leave to Sue Liquidator Personally

I set out a case update on the Federal Court decision of Tee Siew Kai v Machang Indah Development Sdn Bhd (see the Grounds of Judgment dated 17 February 2020). The decision is on the law applicable to the grant of leave to sue a liquidator in his personal capacity. This decision reverses the Court of Appeal decision in Tee Siew Kai (as liquidator for Merger Acceptance Sdn Bhd) (in liquidation) v Machang Indah Development Sdn Bhd (in liquidation) (previously known as Rakyat Corp Sdn Bhd [2019] 2 MLJ 514.

This decision reiterates the importance of leave of the Court in order to avoid wasteful litigation against liquidators and to preclude unwarranted interference with the winding up process. There must be a prima facie case made out, the Court must evaluate the evidence to see if this has been met, and pecuniary loss suffered by the company must be shown.

Brief Facts

The Liquidator in this case was the liquidator of the company, Merger Acceptance Sdn Bhd (Merger). Merger was the registered owner of certain pieces of land in Penang.

In 1995, Merger entered into a joint venture agreement with Machang Indah Development Sdn Bhd (Machang) to jointly develop and complete a light industrial estate project. On that same date, Merger also appointed Machang as its attorney through an irrevocable power of attorney (PA) and also appointed Machang as the project manager.

In 1999, Machang, utilising the PA, caused the Merger lands to be charged to the bank for project financing to develop the lands.

In 2002, Merger was wound up by the Court and with the Official Receiver appointed. Subsequently, Machang abandoned this project. Then, in 2009, Machang was also wound up by the Court.

With the failure of the project and a default in the loan to the bank, the bank tried to sell the charged lands. All the bank’s attempts were unsuccessful.

Eventually, in August 2013, the Liquidator, Tee Siew Kai, was appointed as the liquidator of Merger, in substitution of the Official Receiver.

The Liquidator of Merger now tried to take steps to sell the charged lands. This was to realise these assets, repay the bank, and utilise any balance for the benefit of Merger’s unsecured creditors.

The Liquidator advertised the sale of the charged lands and eventually wanted to accept an offer from an interested purchaser. This sale price would be sufficient to meet the bank’s redemption sum in full.

However, by this time, Machang communicated with the Liquidator and insisted that Machang’s consent would be required for any sale. If there was no consent, Machang took the position that there would be a breach of the joint venture agreement and the PA.

The Liquidator eventually signed the sale and purchase agreement to sell the lands to the interested purchaser. The redemption sum was paid in full. Machang then applied for leave to sue the Liquidator personally. This was for alleged breaches of the joint venture agreement and the PA, and also with allegations that the sale was at an undervalue.

The High Court allowed the leave application, and the Court of Appeal affirmed this decision.  The Federal Court then reversed this decision.

I set out certain important points that are useful for liquidators.

Significant Points for Liquidators

First, the liquidator’s office is a statutory one. Under this office, the liquidator has custody and control of all the assets of the company in liquidation, and is an agent of the company.

Second, as an agent of the company in liquidation, the acts of the liquidator are binding on the company. But the liquidator is not personally liable for those acts that he carries out in his capacity as liquidator. So here, when the liquidator carried out his statutory function of selling the lands, he did so as an agent and on behalf of Merger. Therefore, a third party like Machang cannot sue the Liquidator for negligence. The Liquidator owed no duties to Machang, which was neither a creditor nor a contributory of Merger.

Third, under the statutory provision (section 236(2)(c) of the Companies Act 1965), the Liquidator was empowered to sell immovable property of the company via private contract. The Liquidator was simply carrying out his duties in accordance with statute. Therefore, the Liquidator cannot be alleged to have abused his office or committed misfeasance by selling the lands.

Fourth, any allegation of selling at an undervalue, even if true, is available only to a creditor or contributory of Merger. The Liquidator owed no duty of care to Machang and Machang could not raise this allegation since it is not a creditor of Merger.

Fifth, Machang’s primary complaint of an alleged breach of contract is against Merger, as the other contracting party. At its highest, Machang only has a contingent claim against the company, Merger. A contingent claim against Merger for damages from an alleged breach of contract does not give rise to a cause of action against the Liquidator in his personal capacity.

Sixth, an applicant cannot resort to the inherent jurisdiction of the Court in trying to initiate an action against a liquidator personally. The Companies Act provisions provide sufficient statutory remedies for any alleged acts of misconduct or misfeasance by the liquidator.

Seventh, prior leave of Court to sue a liquidator is required in order to avoid wasteful litigation against liquidators and to preclude unwarranted and wrongful interference with the winding up process. The test for leave is to show a prima facie case. Next, the court must evaluate the evidence to determine whether such a test is met, and pecuniary loss suffered by the company in liquidation ought to be shown.

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