Case Update: Court Will be Slow to Second Guess Liquidator’s Decision on Proof of Debt

The Court of Appeal in its grounds of judgment dated 18 March 2021 in Sunrise Megaway Sdn Bhd (in liquidation) v Kathryn Ma Wai Fong set out the principles when there is a challenge on a liquidator’s decision to admit or reject a proof of debt. Exceptional circumstances are required to second guess the liquidator’s decision.

Summary of Case and Significance

A liquidator of a company had accepted a creditor’s proof of debt of RM4 million for advances made by the creditor to the company. The liquidator had carried out an investigation of the creditor’s supporting documents and also interviewed the financial controller of the group of companies. Hence, despite the lack of a loan agreement or formal resolutions, the liquidator accepted the proof of debt.

The petitioner, who was a contributory of the company, applied to the High Court to challenge the liquidator’s decision. The High Court allowed the challenge.

The Court of Appeal reversed the High Court’s decision and reinstated the liquidator’s decision to admit the proof of debt. It is not for the Court to determine how the liquidator’s investigation is to be done or carried out. It is also not for the Court to determine the relevancy and adequacy of the documents to be considered by the liquidator in his investigation.

The Court cannot usurp the function of the liquidator or interfere with the conduct or decision of the Liquidator in discharging his role and function in a company liquidation.

This non-interference would apply unless the liquidator had failed to carry out investigations or his conduct was so unreasonable and absurd that no reasonable person would so act or has acted in bad faith.

Background Facts

The company in question is Sunrise Megaway Sdn Bhd (Sunrise). It is part of the WTK group of companies.

In October 2016, the Petitioner presented a winding up petition against Sunrise.

In May 2018, Sunrise was wound up by the Court and a private liquidator was appointed.

In August 2018, Lismore Trading Co Ltd (Lismore) is one of the creditors of Sunrise and also a company within the WTK group of companies. Lismore lodged a proof of debt for the sum of over RM4 million with the Liquidator. The Liquidator admitted Lismore’s proof of debt.

The sequence of events relating to Lismore’s proof of debt were as follows.

That Lismore had advanced the RM4 million sum in various tranches to Sunrise. This was through several telegraphic transfers from Lismore’s Singapore bank account to Sunrise’s bank account. The transfer documents were all exhibited in Lismore’s proof of debt.

The purpose was for Sunrise to then disburse the advances to another company called Arctic Star. When Sunrise received the Lismore transfers, Sunrise made out 12 cheques in favour of Arctic Star. Subsequently, Artic Star was also wound up. The liquidator of Arctic Star had admitted that Arctic Star owed a debt to Sunrise, and where Sunrise’s proof of debt was accepted in full.

The Liquidator of Sunrise also interviewed Madam Loh, who was a financial controller of WTK Management Services. She oversaw the accounts and finances of a few companies under the WTK group of companies, including Sunrise. The Liquidator carried out a few interviews and examinations of Madam Loh regarding Lismore’s proof of debt. Madam Loh believed that Sunrise was indebted to Lismore.

The Petitioner was dissatisfied with the admission of Lismore’s proof of debt. The Petitioner filed an application to oppose the Liquidator’s decision to admit the proof of debt.

In summary, the High Court held that Madam Loh’s evidence was questionable and not reliable. The Court found that the Liquidator failed to carry out more investigations such as the production of the company’s written resolution and loan agreement to support Lismore’s claim. The Liquidator made errors of law.

The High Court reversed the Liquidator’s decision and therefore, Lismore’s proof of debt was rejected. The High Court held that there was insufficient documentary evidence for Lismore’s claim that the RM4 million were advances to Sunrise.

The Liquidator appealed to the Court of Appeal against the decision.

Court of Appeal Decision

General Principles

The Petitioner had brought her application under section 517 of the Companies Act 2016 (CA 2016). The provision is identical to the previous section 279 of the Companies Act 1965. Any person aggrieved by any act or decision of the liquidator may apply to the Court. The Court may then confirm, reverse or modify the act or decision complained of.

The guiding principles are as follows. Based on the Federal Court decision in Wong Sin Fan & Ors v Ng Peak Yam @ Ng Pyak Yeow & Anor [2013] 2 MLJ 629, the court should be slow to interfere with any act or decision of the liquidators in discharging their role in a company liquidation. The court will only do so if it is unreasonable and absurd that no reasonable person would have acted in that way. The court will not interfere with the decision simply because its opinion might differ from that of the liquidator.

This principle was also applied by the Court of Appeal in Lim Chiew v Lee Choa Yong & Anor Appeal [2018] MLJU 956 and applied in a case under section 279 of the Companies Act 1965.

Decision

The High Court had held that there was non-production of material documents as part of Lismore’s proof of debt. The Court of Appeal took that to mean that the High Court was referring to any loan agreement that should have been produced by the financial controller. The High Court also found that the Liquidator failed to carry out more investigations for the production of the company’s written resolution to support Lismore’s claims.

The Court of Appeal disagreed with this finding.

First, it is not for the Court to determine how the Liquidator’s investigation is to be done or carried out. It is also not for the Court to determine the relevancy and adequacy of the documents to be considered by the Liquidator in his investigation. The Court cannot usurp the function of the Liquidator or interfere with the conduct or decision of the Liquidator in discharging his role and function in a company liquidation. This non-interference would apply unless the Liquidator had failed to carry out investigations or his conduct was so unreasonable and absurd that no reasonable person would so act or has acted in bad faith.

Second, the Liquidator had carried out an independent and thorough investigation on Lismore’s proof of debt. The Court of Appeal applied the Australian decision of Barnden (in his capacity as liquidator of Masonry Works Pty Ltd (in liq) [2020] FCA 545 where the liquidator in that case had carried out a detailed and thorough investigation when admitting the proof of debt. There was also no loan agreement or other document recording the terms of the loan in the case of Barnden.

Similar to Barnden, the Liquidator in this case had:

  • Applied accounting principles in matching and examining the bank statements produced by Lismore and Sunrise regarding the transactions. The amount of monies matched both sets of bank statements.
  • Requested for all credit notes/documents relating to the telegraphic transfers to support the admission of the proof of debt.
  • Examined and checked the 12 cheque payments made by Sunrise to Arctic Star.
  • Examined the relevant accounting record of Sunrise such as the general ledger to show that the 12 advances to Arctic Star were recorded.
  • Examined Sunrise’s proof of debt that was already admitted by Arctic Star.
  • Examined and reconciled the entries in Sunrise’s ledger that showed receipts of the advances from Lismore.
  • Reviewed the admission of Sunrise’s proof of debt by Arctic Star’s liquidator.
  • Interviewed the financial controller of the WTK Group, Madam Loh, to ascertain the trail of how the advancements were made.

Third, the Liquidator in discharging his role in the company liquidation was equipped with the necessary qualification, skill and ethics.

The Court of Appeal applied the principles from the Singapore Court of Appeal case of Fustar Chemicals [2009] 4 SLR 458. Generally, a liquidator is only bound to take extraordinary steps to scrutinise a proof of debt on the basis that it could be a false claim in cases where he has reason to be suspicious about its genuineness or legal validity. There is a range of factors to be considered. Also, the liquidator must rely on knowledge of the general principles of accounting, audit, the annual approvals of company accounts, customary insolvency practice, and some degree of common sense.

Fourth, the Court of Appeal agreed that the relationship between the subsidiaries in the WTK Group was a relevant factor to prove that the sum was an advancement. The lack of a directors’ resolution does not mean that such an advancement cannot be made. Transactions for the advancements were reflected in contemporaneous documents. Sunrise and Arctic Star were all run by and/or connected to WTK’s family as part of the WTK Group. It is not uncommon for an arrangement for the advancement of monies to be made among the entities.

Fifth, the Court of Appeal held that the High Court made a plain error in disregarding Madam Loh’s evidence. The High Court failed to appreciate the evidence of Madam Loh as the financial controller generally of the WTK Group and she gave evidence on the practices of Sunrise, Lismore and Arctic Star as part of the WTK Group.

Sixth, and finally, the Court should be slow to interfere with any act or decision of the Liquidator in discharging his role in a company liquidation in matters. Particularly, in matters involving the admission or rejection of proofs of debt that involve commercial considerations. The Court can only interfere in very exceptional circumstances when the liquidator has acted in utter unreasonableness. The Court applied the Federal Court decision of Wong Sin Fan and also the Court of Appeal case in Tan Kim Tian.

Commentary

This appellate decision is useful in setting out the general position that the Courts will be slow to interfere with the act or decision of the liquidator, more so, where the liquidator exercises his professional judgment in admitting or rejecting a proof of debt.

Nonetheless, a liquidator must be mindful that he or she is performing a quasi-judicial role in determining the admission of a proof of debt, the quantum of the debt, and in scrutinising the supporting documents. The liquidator discharges this role in the interests of all the creditors as a whole.

This case highlights the practical steps that a liquidator can take in discharging this important duty of examining the proof of debt that is lodged. These steps will help to justify the liquidator’s decision on the admitting or rejecting the proof of debt. The Courts would then require exceptional circumstances to second guess the liquidator’s decision.

 

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