Case Update: Federal Court Decides on Threshold for Winding Up Based on Illegality

In Tan Keen Keong @ Tan Kean Keong v Tan Eng Hong Paper & Stationery Sdn Bhd & Ors and other appeals [2020] MLJU 2204 (grounds of judgment dated 17 December 2020), the Federal Court dealt with an important question of law for a just and equitable winding up.

What is the threshold for winding up a company based on allegations of illegality or breach of statute?

Summary of the Case and Significance

The High Court had ordered the winding up of two family companies on the just and equitable ground largely based on the ground of illegality. The High Court decided that there had been the channeling or siphoning of monies out of these companies into a separate “family fund”. The funds were then utilised by some of the other family members.

The Federal Court overturned the winding up. The just and equitable ground is of wide application, and can include illegality or contraventions of the law.

The Federal Court found that none of the companies were formed with illegal purposes or intent of circumventing the law. The sufficient connection or nexus test is not satisfied.

On the other hand, where companies are fraudulently established and are themselves engines of fraud, their continued existences must be immediately apprehended. Winding up is necessary to put an end to that unlawfulness.

The Court ought not to conflate its directors’ wrongdoings with those of the company nor ascribe the wrongdoings of its directors to the company themselves.

Background Facts

The facts involved a petitioner-shareholder who had filed three winding up petitions essentially based on the just and equitable ground. The Court ordered two of the companies to be wound up. The just and equitable ground is commonly used in situations such as a quasi-partnership company, disputes in a family company, or a loss of substratum of the company.

The dispute here involved six sons and their families. These families were referred to as the Tan Families. The Tan Families owned various companies and the family members were shareholders in these companies.

The Petitioner, Tan Keen Keong, is from the first Tan Family. He filed winding up petitions against three of the companies owned by the Tan Families:

  • Tan Eng Hong Paper & Stationery Sdn Bhd – TEH Paper
  • Tan Eng Hong Holdings Sdn Bhd – TEH Holdings
  • Peace Centre Sdn Bhd – PCSB

In substance, the Petitioner alleged that the directors acted in their own interests rather than in the members’ interests as a whole and that it is just and equitable to wind up the companies. The Petitioner relief on similar facts for all three petitions.

Among the many allegations by the Petitioner, one significant ground was an allegation of the existence of a “family fund”. The Petitioner’s claimed that monies of TEH Paper and TEH Holdings, and its subsidiaries, had been siphoned into this “family fund” due to under-counter activities.

At the High Court, the winding up petitions proceeded by hearing witness evidence. The Court ordered TEH Paper and TEH Holdings to be wound up. The Court dismissed the winding up petition against PCSB.

During the trial, the High Court questioned the credibility of the Petitioner’s evidence and his main witness. The Court determined that the Petitioner had brought the petitions with a collateral purpose. Further, there was undue and inordinate delay in bringing the petitions.

Despite the above findings, the Court held that it was just and equitable to wind up TEH Paper and TEH Holdings on the ground of illegality. The Court found that these two companies had contravened the Companies Act 1965 and had committed an illegal act through the use of the “family fund”.

The illegality was purportedly through the channelling of funds from TEH Paper and TEH Holdings into this separate “family fund”. The High Court held there were breaches of the Companies Act 1965 for untrue and fair accounts, false statements on the accounts, giving of false evidence and tax evasion.

However, the Judge dismissed the petition against PCSB since the Judge found that PCSB was not engaged in such activities.

This decision was appealed to the Court of Appeal. The Court of Appeal dismissed all the appeals and affirmed the High Court decision.

The Federal Court then heard the appeal.

Decision

General Principles on Just and Equitable Winding Up

The Federal Court analysed the general principles for the winding up on the just and equitable ground.

First, the just and equitable ground is not dependent on any insolvency of the company.

Second, the term ‘just and equitable’ is not defined in the Companies Act 1965. The House of Lords in the Ebrahimi decision explained the wide application of the phrase. The Court can subject the exercise of legal rights of parties in a company to equitable considerations. Subsequent cases in Malaysia have confirmed that the ground is of wide and general import, and there are no exhaustive grounds.

The Federal Court’s Findings

The Federal Court allowed the appeal and overturned the winding up of TEH Paper and TEH Holdings.

We touch on some of the Federal Court’s findings on the issue of illegality.

  1. In general, the wide expanse of the just and equitable ground can encompass illegality and contraventions of the law. These contraventions would be the basis for the winding up of a company which is complicit in such illegality. However, that does not mean illegality would automatically result in winding up.
  1. It is a matter of good policy and proper administration of justice for a clear divide between the law of crimes and the law of civil penalties and remedies. Punishment for wrongdoing is the responsibility for the criminal courts. Punishment is not generally the civil courts’ function, which is concerned with determining private rights and obligations.
  1. The Federal Court found that none of the companies were formed with illegal purposes or intent of circumventing the law. The sufficient connection or nexus test is not satisfied. On the other hand, where companies are fraudulently established and are themselves engines of fraud, their continued existences must be immediately apprehended. Winding up is necessary to put an end to that unlawfulness.
  1. As an example, the Federal Court cited the High Court decision of Hj Afifi bin Hj Hassan v Norman Disney & Young Sdn Bhd & Ors [2014] 7 MLJ 738. In that case, the company’s business was being carried out in breach of the statutory requirements of the Registration of Engineers Act 1967. The Court of Appeal affirmed the High Court decision. The Court of Appeal found that the company’s directors had deceived and misrepresented to the authorities and public that the company was owned and controlled by a Bumiputera. But in fact the company was controlled by an Australian company through an elaborate scheme involving the execution of various agreements and the use of power of attorney. The Court of Appeal then held that “a contract which is designed to circumvent a statute and deceive a public authority is illegal in nature” and that it was just and equitable to wind up the company.
  1. A winding up order should only be granted against a company where there is no other avenue or recourse available other than a dissolution of the company to stop the illegality.
  1. In the context of the winding up provision, section 218 of the Companies Act 1965 spells out contraventions that can lead to a winding up. Section 218(1)(b) – default in lodging the statutory report or holding the statutory meeting, section 218(1)(c) – does not commence business within a year, and section 218(1)(d) – members fallen below two in number. The Court would be slow to import other contraventions of the Companies Act 1965 into the just and equitable ground.
  1. The Court ought not to conflate its directors’ wrongdoings with those of the company nor ascribe the wrongdoings of its directors to the company themselves.

Hence, the Federal Court set aside the winding up of TEH Paper and TEH Holdings.

Comments

This case is an emphatic reminder that mere findings or allegations of illegality cannot result in the winding up of a company under the just and equitable ground.

In fact, if there is a winding up action based on contraventions of the Companies Act 1965, such an action may largely be confined only to the winding up grounds under section 218(1)(b), (c) and (d).

These provisions are now largely mirrored in section 465(1)(b) – company defaults in lodging the statutory declaration under section 190(3), section 465(1)(c) – company does not commence business within a year, and section 465(1)(d) – the company has no member.

 

This article was co-written with Wong Li Qi.
Li Qi is a paralegal at Lim Chee Wee Partnership.

 

For a write-up generally on shareholder remedies in Malaysia:

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