Judgment

Augustine Paul JCA

(delivering judgment of the court)

1. The appellant (the plaintiff in the High Court) was a client of Labuan Securities Sdn Bhd (‘LSSB’), a stock broking company, and had given several loans to LSSB. On 12 February 1999, a Special Administrator was appointed for LSSB as provided for under s 24 of the Pengurusan Danaharta Nasional Bhd Act 1998 to settle LSSB’s financial problems with its creditors. As a result of the appointment a Transfer of Liability Agreement dated 30 October 2000 was entered into between the parties. Accordingly, all of LSSB’s liabilities to its creditors as of 2 September 1999 were transferred to Balforn Holdings Sdn Bhd (‘Balforn’) as ‘Special Purpose Vehicle’ for the purpose of the proposal for settlement. Subsequently, Balforn was wound up and on 17 January 2001, the respondents were appointed as the liquidators at the creditors meeting. On 1 March 2001, the respondents as Balforn’s liquidators invited the creditors to submit proof of debt through an advertisement placed in the New Straits Times. The appellant then submitted a proof of debt in Form 55 of the Companies (Winding Up) Rules 1972 (‘the Rules’) for the amount of USD5,169,154.76, SGD3,664,417.92 and RM42,165. On 24 May 2001, the respondents rejected the appellant’s proof of debt in Form 59 of the Rules (‘the respondents’ decision’). The appellant was dissatisfied with the respondents’ decision and thus filed an originating summons against the respondents seeking an order to reverse or vary the respondents’ decision.

   SUBMISSION BY THE APPELLANT IN THE HIGH COURT

2. By a letter of offer dated 4 July 1997 (‘letter of offer’), it was agreed by both the appellant and LSSB that the appellant would advance a sum of USD3.8m only to LSSB as a loan at an interest to be calculated in accordance with the terms of the letter of offer (‘loan facilities’). Pursuant to the letter of offer and subsequent verbal agreements the appellant transmitted into LSSB’s account the total sum which was more than what had been agreed upon. LSSB and the respondents did not deny the receipt of the sum advanced and it was not the appellant’s concern as to whether or not LSSB gave the money to another party after such acceptance. It was also not denied by LSSB and the respondents that the money was transmitted into LSSB’s account. The letter of offer was clearly signed by the authorized signatories of LSSB and was witnessed by an advocate and solicitor and its contents were admitted by the respondents in their submission. It was not proved that there was an understanding between the parties that the money was for the benefit of third parties. All the documents showed that LSSB was the receiver of the money. One Tan Eam Thong has admitted that LSSB had accepted the money from the appellant. The correspondence between the appellant and LSSB did not show that the money was for the benefit of Tan Eam Thong. If in fact the loan was made to Tan Eam Thong, the respondents did not explain in their affidavits the presence of the appellant’s name in LSSB’s statement of affairs.

   SUBMISSION BY THE RESPONDENTS IN THE HIGH COURT

3. The appellant’s proof of debt was rejected by the respondents on the ground that the money received was for the benefit of third parties and that LSSB was not the real borrower. Even if the letter of offer was signed and accepted by LSSB it was the understanding between the parties that the loan facilities were for the benefit of LSSB’s clients. LSSB only acted as an intermediary to arrange financial facilities for its clients for the purpose of purchasing shares at the Kuala Lumpur Stock Exchange (‘KLSE’). There are documents to show that the appellant had knowledge that the loan was for the benefit of third parties and that they were to pledge their shares in respect of the loans which they did. There are also documents to show that the appellant had asked the third parties for additional securities such as land in Kuala Lumpur, Penang and Bukit Mertajam for the loans. LSSB’s audited accounts for the years 1997 and 1998 did not show the payment of any sum of money from the appellant to LSSB. If in fact the loan was taken for the benefit of LSSB the necessary details must have been shown in the accounts. The Transfer of Shares Confirmation Report indicated that shares were pledged by third parties who were the real borrowers. The letter from Tan Eam Thong, exhibited as exh ‘TMK-9’ at p 71 of exh ‘OWC-3’ at encl 6, confirmed that he was one of the beneficial receivers of the loan. Furthermore, the appellant made an offer to execute a new agreement to replace the letter of offer to show that Utama Impian Properties Sdn Bhd was one of the real borrowers. The appellant also did not deny that its companies Compstate Sdn Bhd, Top Venue Sdn Bhd and Bakti Barat Sdn Bhd were also the real borrowers. Accordingly, it was contended that the respondents were correct in rejecting the appellant’s proof of debt and that the decision must not be interfered with unless it is such that no reasonable man could, properly instructed in the circumstances, arrive at it. The case of Yeomans v Walker [1986] 10 ACLR 753 was relied on in support.

   FINDINGS OF THE HIGH COURT

4. The learned judge of the High Court was of the opinion that the only issue to be resolved was whether the appellant had successfully proved that the loans were taken by LSSB. He said that the onus was on the appellant to prove that the loans were taken by LSSB and in support referred to cases such as Westpac Banking Corporation v Totterdell [1998] 25 ACSR 769 and Tanning Research Laboratories Inc v O’Brien [1990] 169 CLR 332. He said that the appellant had failed to prove that LSSB was the real borrower. He also said that the respondents had not acted arbitrarily nor did they reject the application without reasons. As he said in his grounds of judgment [translation]:

   From the viewpoint of legal principles it is clear that liquidators have discretion to accept or reject proofs of debts. Nevertheless, the courts have jurisdiction to overturn or amend liquidators' decisions on proof of debts. (Refer to Rule 93 of the Companies (Winding Up) Rules 1972.) Just as with other discretion, the courts would not simply interfere with the liquidators' exercise of discretion unless it is clear and apparent that the liquidators have acted arbitrarily and not in accordance with accepted principles. The reasons advanced by the defendants are reasonable. This is apparent from the loans which were said to be non-existent in the audit report of LS for the relevant years i.e. 1997 and 1998. It cannot be denied that the annual audit report is an important document which must be tendered following legal provisions to show the financial movements and activities of a registered company. (Please refer to ss 167, 174 Companies Act 1965.) The audit reports of LS for the material years would indicate the true financial position of LS and the said audit reports did not show any loan by LS to the plaintiff. Therefore, in my opinion, the liquidators have reasonable basis to reject the plaintiff's proof of debt. I am of the opinion that it is not proper for the liquidators to accept the proof of debt if the audit report of the company does not show the outstanding debt. Therefore, the decision by the defendants to reject the plaintiff's proof of debt was a proper exercise of discretion. I do not accept the plaintiff's submission that the correspondence and the statement in LS's statement of affairs are evidence that LS was a borrower. I would emphasise that the statement of affairs is only a statement by the company director during winding up concerning the assets and liabilities of the company. The statement of affairs and correspondence are not of equal status with the audited report of a company which was prepared by qualified auditors. There is another thing, a lot of documents particularly letters and facsimiles have been exhibited to show the plaintiff's knowledge that the money was received in the interest of LS's customers and was for payment of shares they purchased in the Kuala Lumpur Stock Exchange and the said customers would charge the shares to the plaintiff. There are also customers (Tan Eam Thong) who confirmed that he was a beneficial recipient of the said loan. The letter from Tan Eam Thong was dated 16 December 1997 ('MKT-9' at p.71 of exh. 'OWC-3' annexure 6) confirmed that he was a beneficial recipient of the said loan. In this matter the plaintiff exhibited a facsimile dated 16 December 1997 (exh 'AC-1', annexure 12) in which Tan Eam Thong said that he is not a beneficiary and denied writing the letter of 16 December 1997. In relation to this matter no affidavit of Tan Eam Thong was tendered by the plaintiffs to show whether or not he is one of the beneficiaries. The plaintiff has knowledge that Utama Impiana Properties Sdn Bhd and also three of the plaintiff's companies i.e. Compstate Sdn Bhd, Top Avenue Sdn Bhd and Bakti Barat were the true borrowers and the plaintiff did not deny this. The affidavits and annexed exhibits of both parties show the existence of understanding that the loan money was for the benefit of third party i.e. customers of LS. The plaintiff only stated that LS received the money but he failed to show proof that the money was meant for the benefit of LS. If the money was for the benefit of LS, why did the plaintiff ask for a charge over the shares and additional security like land from LS's customers?

5. On 29 April 2003, the learned judge of the High Court dismissed with costs the appellant’s application to reverse or vary the respondents’ decision made on 24 May 2001.

   SUBMISSION OF THE APPELLANT BEFORE US

6. In dealing with the rejection of the appellant’s proof of debt learned counsel said that the court is not bound by the respondents’ decision. He referred to Halsbury’s Laws of England (4th Ed), Vol 7 which says at p 745:

   The court decides on the merits on the evidence before it: its function is not that of deciding merely whether the rejection was right or wrong on the evidence available to the liquidator.

7. In further support he referred to the case of Re Kentwood Constructions Ltd [1960] 2 All ER 655 where Buckley J said at p 656:

   When an application was made to the court to reverse such a decision of a liquidator, evidence was filed which was commonly much fuller than the evidence available to the liquidator at the time when he decided to reject the proof, and the court was bound to decide the rights of the claimant in the light of the evidence which was before the court and not merely to express a view on whether the liquidator was right or wrong in rejecting the proof when he rejected it .... It was not merely the function of the court to say that a decision was right or wrong; it might vary the decision in any way that it thought necessary in the light of the evidence before the court. The court must approach the question de novo and determine to what extent the creditor ought to be allowed to rank as a proving creditor.

8. Learned counsel also referred to the Singapore case of Re Teck Hock & Co (Pte) Ltd; Morgan Guaranty Trust Co of New York v Wong Tui San CSLR XX 5132 where in citing Re Kentwood Constructions Ltd [1960] 2 All ER 655, Coomaraswamy J said in his judgment:

   My decision is that the applicants’ proof should be admitted as I am satisfied that in the circumstances Stearn’s statutory declaration is sufficient to establish the sums claimed.

9. Learned counsel said that there was sufficient evidence to show that the respondents had admitted that the loan was given by the appellant to LSSB. They are:

   (a)	The respondents did not deny in their affidavits that the appellant had given the loan to LSSB;
   (b)	The affidavits affirmed by Tan Miang Kieng, exhibited to the respondents’ affidavits and which were used by the respondents, also did not deny that the loan was given by the appellant to LSSB;
   (c)	The documentary evidence clearly showed that LSSB had applied for and had received the loan from the appellant;
   (d)	There was no affidavit from Tan Eam Thong to support the allegation that he was the beneficiary of the loan. However, on the contrary, there was an e-mail from Tan Eam Thong to state otherwise;

   (e)	If the loan was in fact given to Tan Eam Thong, the respondents did not explain in their affidavits the reason why the appellant’s name appeared in LSSB’s Statement of Affairs.

10. It was also submitted that the appellant did not breach any of the provisions of the Moneylenders Act 1951 and the loan agreement was therefore valid with the result that the debt can be enforced.

    SUBMISSION OF THE RESPONDENTS BEFORE US

11. Learned counsel for the respondents submitted that it was the understanding between all parties that the loan was taken for the benefit of third parties and that LSSB’s role was only to act as an intermediary to arrange for the loan. Pursuant to this understanding, the appellant would furnish loans to the clients of LSSB and the clients were required to charge the shares purchased by them to the appellant. The appellant was aware that the loan facilities were for the benefit of third parties. This is supported by a letter from Tan Eam Thong addressed to Steuben Capital Investment (Singapore) Pte Ltd which stated in clear terms that he was the true beneficiary of the loan facilities. It was further submitted that LSSB was not the real borrower in respect of the loan facilities for the following reasons:

    (a)	the appellant had offered to execute a new agreement to replace the letter of offer in order to show that the real borrower was Utama Impian Properties Sdn Bhd which was the nominee of the actual borrower;
    (b)	the appellant had requested LSSB to execute a corporate guarantee in favour of the appellant as security to which LSSB did not agree;
    (c)	the appellant had also requested LSSB to obtain further securities from the clients who were the real borrowers;
    (d)	averments were made in the affidavit affirmed by Tan Miang Kieng that the real borrowers were the appellant’s own companies, Compstate Sdn Bhd, Top Venue Sdn Bhd and Bakti Barat Sdn Bhd; and

    (e)	LSSB’s Audited Accounts for the years 1997 and 1998 did not reflect any credit of money and/or payment of money from the appellant to LSSB.

12. Learned counsel also referred to the following documents to support his submission that the respondents had correctly rejected the appellant’s proof of debt:

    (a)	A facsimile transmission dated 14 July 1997 from the appellant to Sime Bank Bhd, Geylang, Singapore which showed that the bank was requested to expedite the letter of offer with regard to an overdraft facility for Steuben Capital Investment (Singapore) Pte Ltd for a sum of SGD5 million secured against acceptable shares by the bank to enable the appellant to instruct LSSB to transfer the shares of Rapid and Instangreen Corporation Bhd;
    (b)	A facsimile transmission dated 16 October 1997 from the appellant to LSSB which showed that the appellant through his solicitors had made a fresh agreement which would supersede the letter of offer and which would reflect Utama Impian Properties Sdn Bhd as the real borrower;
    (c)	A facsimile transmission dated 13 October 1997 from the appellant to LSSB which showed that the appellant’s company was actually the real lender;
    (d)	A letter from the appellant to Tan Miang Kieng dated 4 December 1997 which showed that the appellant had made a request for the latter to obtain from the real borrowers additional securities such as land and properties in Kuala Lumpur, Penang or Bukit Mertajam;

    (e)	Transfer of Shares Confirmation Report which showed that there were transfers of various amounts of shares to Sime Nominees Pte Ltd by the actual receivers of the loan facilities namely Compstate Sdn Bhd, Top Venue Sdn Bhd and Bakti Barat Sdn Bhd; and
    (f)	A letter from Tan Eam Thong addressed to Steuben Capital Investment (Singapore) Pte Ltd for the attention of the appellant which stated that he was the beneficiary of the loan facilities.

13. Learned counsel contended that the onus of proof to show that the respondents’ decision was wrong was on the appellant. In support reference was made to cases such as Westpac Banking Corporation v Totterdell [1998] 25 ACSR 769 at pp 772 to 773 and Tanning Research Laboratories Inc v O’Brien [1990] 169 CLR 332. He said that the appellant had failed to produce evidence to show that the loan facilities given by him were for the use and benefit of LSSB. Accordingly, it was submitted, the learned judge was right in dismissing the appellant’s proof of debt.

    DECISION OF THIS COURT

14. The duty of the liquidator in making a decision and the right of a party to seek a court order to reverse or vary the decision is governed by rr 92 and 93 of the Rules which read as follows:

    Rule 92: The liquidator shall examine every proof of debt lodged with him and the grounds of the debt, and shall in writing admit or reject it, in whole or in part, or require further evidence in support of it. If he rejects a proof he shall state in writing in Form 59 to the creditor the grounds of the rejection. Rule 93: If a creditor or contributory is dissatisfied with the decision of the liquidator in respect of a proof, the Court may, on the application of the creditor or contributory, reverse or vary the decision; but subject to the power of the Court to extend the time, no application to reverse or vary the decision of the liquidator in a winding up by the Court shall be entertained, unless notice of the application is given before the expiration of twenty-one days from the date of service of the notice of rejection.

15. It must be observed that this appeal is essentially grounded on the finding of facts made by the learned judge. Common law cases indicate that the courts are reluctant to interfere with the decision of a liquidator and will do so only if it is so unreasonable and absurd that no reasonable person would have acted in that way. In this regard reference may be made to Re Edennote Ltd [1996] 2 BCLC 389 where Nourse LJ said at p 394:

    In general there seems to be something unrealistic in judging the propriety of the acts and decisions of a businessman by asking whether he took into account something he ought not to have taken into account or failed to take into account something he ought to have taken into account. That said, it is certainly possible for a liquidator to do something so utterly unreasonable and absurd that no reasonable man would have done it, simply by selling an asset of the company without taking into account the possibility that a third party might well have made a better offer than he to whom it was sold.

16. The court will not interfere with the decision simply because its opinion might differ from that of the liquidator. Generally, the court will recognize that the discretion has been vested by statute in the liquidator and will not interfere unless it is shown that he did not address himself to the correct questions or has made errors of law (see Avon Downs Pte Ltd v FC of T [1949] 78 CLR 353; Re Mineral Securities Ltd [1973] 2 NSWLR 207) or has not exercised his discretion bona fide or has acted in a way in which no reasonable liquidator would have acted (see Leon v York-O-Matic [1966] 1 WLR 1450) or has taken into account entirely irrelevant considerations (see Yeomans v Walker [1986] 10 ACLR 753) or when there is fraud.

17. The learned judge had taken into consideration the various documents tendered by both parties to support his conclusion that LSSB did not take the loan for its own benefit. In particular, he had considered LSSB’s audit reports which are a requirement of law for the years 1997 and 1998 to show the movement of the company’s financial activities. They did not reveal any loan taken from the appellant as opposed to LSSB’s statement of affairs which did so. But he rightly ruled that they are merely statements made by the company’s directors on the company’s asset and liabilities. He said correctly that the status of the statement of affairs was not the same as that of the company’s audit reports which were audited by a professional auditor. The absence of the loans in the audit reports as explained by the respondents in their affidavits and the exhibits annexed shows that there was an understanding between LSSB and the appellant that the loan was taken for the benefit of LSSB’s clients. In particular, exhs ‘TMK-3’ and ‘TMK-6’ annexed to exh ‘OWC-3’ in the affidavit affirmed by the first respondent on 8 Jun 2001 (hereinafter referred to as ‘the respondent’s affidavit’) reveal that the appellant had knowledge that the loans were taken for the benefit of third parties and that they were to charge their shares as security which they did. In this regard a facsimile transmission dated 4 December 1997 from the appellant to Tan Miang Kieng, exhibited as exh ‘TMK-7’ annexed to exh ‘OWC-3’ in the respondent’s affidavit, shows that the appellant had in fact asked for additional securities such as land in Kuala Lumpur, Penang and Bukit Mertajam to be provided by the third parties. The relevant part of the facsimile transmission reads as follows:

    M K Tan - .... Officially, I have recalled both loans and gave you till 10 December 1997 to pay up (if possible) before the next rollover and on the other hand, if you are sincere, get your client to give me other securities such as land, properties in Kuala Lumpur, Penang or Bukit Mertajam and I will discuss with my lawyer Yim Seong and reconsider my official stand which remains unchanged for the time being.  Regards Chuah

18. As a matter of fact exhs ‘AC-6’ and ‘AC-7’ in the affidavit affirmed by the appellant on 16 May 2001 reveal that with regard to the loan of USD3.8m the securities furnished by the third parties had been taken into account by the appellant in calculating the amount due. Thus, the real borrowers are the third parties of which the appellant was aware. It is therefore clear that LSSB acted only as an agent for the real borrowers to the knowledge of the appellant. There is therefore privity of contract between the real borrowers, who are the principals, and the appellant. In accordance with the principle of law in Montgomerie v United Kingdom Mutual Steamship Association (1891) 1 QB 370 such a contract is the contract of the principal, not that of the agent, and prima facie at common law the only person who can sue is the principal and the only person who can be sued is the principal. This rule is embodied in s 183 of our Contracts Act 1950 and was considered in Plantation Agencies Sdn Bhd v Ariffin Ismail [1978] 1 MLJ 219. LSSB is thus not a debtor of the appellant.

19. The proof of debt filed by the appellant is therefore without any merit. Accordingly, we dismissed the appeal with costs.

Cases

Avon Downs Pty Ltd v FC of T [1949] 78 CLR 353

Edennote Ltd, Re [1996] 2 BCLC 389

Kentwood Constructions Ltd, Re [1960] 2 All ER 655

Mineral Securities Ltd, Re [1973] 2 NSWLR 207

Montgomerie v United Kingdom Mutual Steamship Association (1891) 1 QB 370

Plantation Agencies Sdn Bhd v Ariffin Ismail [1978] 1 MLJ 219

Tanning Research Laboratories Inc v O’Brien [1990] 169 CLR 332

Teck Hock & Co (Pte) Ltd, Re; Morgan Guaranty Trust Co of New York v Wong Tui San (CSLR) XX [5132]

Westpac Banking Corporation v Totterdell [1998] 25 ACSR 769

Yeomans v Walker [1986] 10 ACLR 753

Legislations

Companies (Winding Up) Rules 1972: rule 92, rule 93

Contracts Act 1950: s.183

Moneylenders Act 1951

Pengurusan Danaharta Nasional Bhd Act 1998: s.24

Representations

Edwin Seibel (G Muden Chua with him) (Sheah, Tan & Rahman) for the appellant.

K.A. Gan (M.L. Chai with him) (Lee Hishamuddin Allen & Gledhill) for the respondents.

Notes:-

This decision is also reported at [2007] 2 MLJ 12; [2007] 2 AMR 245.