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[2000] Part 1 Case 8 [HCM] |
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www.ipsofactoJ.com/highcourt/index.htm
[2000] Part 1 Case 8 [HCM] |
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HIGH COURT OF MALAYA |
Lim
- vs -
Delimec Hygiene Sdn Bhd
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Coram MOHD GHAZALI MOHD YUSOFF J |
15 JULY 1999 |
Judgment
Mohd Ghazali Mohd Yusoff J
The
Petitioner who was formerly a director of the first respondent, a company
named Delimec Hygiene Sdn Bhd ("Delimec"), having been removed as
director on February 26, 1999, filed this petition ("the said
petition") on March 1, 1999 for the winding-up of Delimec pursuant to s
218(1)(i) of the Companies Act 1965 ("the Act"), i.e., the
"just and equitable" provision. The petition is fixed for hearing
on July 27, 1999. However on April 27, 1999 the respondents, viz,
Delimec, three directors and a shareholder of Delimec filed an application
by way of notice of motion (Encl 3) to move the court for an order pursuant
to s 223 of the Act, namely, that notwithstanding the presentation of the
petition-
payments
made into or out of all bank accounts of Delimec in the ordinary course
of its business; and
dispositions
of the property of Delimec made in the ordinary course of its business
for proper value,
between the date of presentation of the petition and the date of judgment on the petition in the meantime be validated and not held void by virtue of the provisions of the said s 223 in the event of an order for the winding-up of Delimec being made on the said petition, and it being further provided that Delimec's bankers shall be entitled to allow Delimec to operate its said bank accounts with the said bankers, being under no obligation to verify for themselves whether any transactions through Delimec's bank accounts is in the ordinary course of its business or that it represents full market value for the relevant transaction. Section 223 of the Act read -
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Any disposition of the property of the company including things in action and any transfer of shares or alteration in the status of the members of the company made after the commencement of the winding-up by the Court shall unless the Court otherwise orders be void. |
I
had on May 17, 1999 allowed the respondents' application with costs and
against that decision the petitioner has appealed.
THE
PETITION
Delimec was incorporated on May 5, 1992 and one of the principal objects for which it was established is
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to carry on the business and industry of manufacturing, importers, exporters and general dealers in machinery, tools, equipment and plant of every description and particularly all such as are requisite for or applicable to industrial cleaning, residential cleaning, commercial cleaning, home cleaning and general cleaning. |
As
at February 10, 1999, Delimec' s statutory records filed with the Registry
of Companies show its board of directors consisted of the petitioner, the
second, third and fourth respondents and two others. Delimec's authorised
share capital is RM1,000,000 divided into 1,000,000 ordinary shares of RM1
each and its paid-up capital is RM600,000. The records also show the
petitioner, the second, third, fourth and fifth respondents as being
shareholders and that the petitioner owns 20% or 120,000 shares of Delimec.
The
petitioner was removed as a director of Delimec at an extraordinary general
meeting of the company held on February 26, 1999. Three days later, i.e.,
March 1, 1999 the petitioner filed the said petition and pursuant to
s.218(1)(i) of the Act and prayed for the following reliefs -
that
Delimec be wound up; and
that
one Mok Yeun Lok of Horwath Mok & Poon be appointed as the
liquidator of Delimec.
Section 218(1)(i) of the Act reads-
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The Court may order the winding-up if- |
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|
(i) |
the Court is of opinion that it is just and equitable that the company be wound up; |
In
the said petition, the petitioner insists that Delimec, although
incorporated in form as a private limited company, is in fact and in
substance a partnership or quasi partnership between him and the second to
the fifth respondents, which relationship is founded upon legitimate
expectations, mutual understanding and underlying trust and confidence
amongst each other. However as a result of breaches of the legitimate
expectations by the second to the fifth respondents and the irretrievable
breakdown in the mutual understanding and underlying trust and confidence
between him and the second to fifth respondents, it is just and equitable
that Delimec be wound up
According
to the petitioner, he and the second to the fourth respondents were formerly
employees of one Ogosin Sdn Bhd, a company dealing in selling of cleaning
products and cleaning related products. Sometime in 1992, he and the second
to the fourth respondents decided to go into business and set up a private
limited company, in order to limit their personal commercial liabilities, to
deal in the selling of cleaning products and cleaning related products but
which is to be operated akin to a partnership. The fifth respondent
subsequently joined in the aforesaid partnership arrangement at the request
of the third respondent and with the consent of the petitioner and the
second and fourth respondents.
The
petitioner claims prior to the incorporation of Delimec on May 5, 1992, a
consensus was reached between him and the second to the fourth respondents
in relation to the management and conduct of the affairs of the company
("the aforesaid consensus") which included the following -
The
petitioner and the second to the fourth respondents shall be and shall
remain as directors of the company so long as they hold shares in the
company.
The
quorum of directors' meetings shall be four in number and all decisions
of the board shall be unanimous.
The
petitioner and the second to the fourth respondents shall each hold
executive positions over and on top of their roles as directors with the
initial agreed designations being-
the
second respondent as the technical manager;
the
petitioner as the sales and marketing manager;
the
third respondent as the sales manager;
the
fourth respondent as the chemist.
In
relation to the aforesaid executive positions, the renumeration and
benefits of the petitioner and the second to the fourth respondents are
to be bound by certain agreed rules, viz -
the
salary and benefits for the petitioner and the second respondent
shall be the same as between themselves but shall be more lucrative
than that of the third and fourth respondents;
the
salary and benefits for the third and fourth respondents shall be
the same as between themselves.
The
shareholders of the company shall stand as guarantors for the company
whenever necessary whether to procure loan facilities from banks and/or
financial institutions or to secure credit facilities for supplies to
the company.
The
second respondent and the petitioner shall be compulsory signatories to
all bank accounts of the company and that the third and fourth
respondents are to be signatories only in the event the petitioner is
unavailable to sign for the bank accounts.
The
second respondent shall be principally in charge of maintaining the
financial and accounting records of the company and the petitioner and
the third and fourth respondents shall have an unlimited right of access
to inspect, with or without the assistance of an agent and make copies
of the same.
After
its incorporation the affairs and business of Delimec were conducted in
accordance with the aforesaid consensus. The petitioner claims he diligently
and dutifully performed his role as director of Delimec and attended the
board meetings and contributed to the decision-making. He also diligently
and dutifully performed his role as the sales and marketing manager and
subsequently as general manager. He also claims he was involved, inter
alia, in the appointment of main distributors for Delimec in four
different states and the setting up of Delimec's branches in eight different
states. He was in charge of all of Delimec's branches' sales and collection
and in charge of export marketing and promotion of new products. He also
stood as guarantor for Delimec in several instances.
By
reasons of the matters aforesaid, the petitioner claims he has the following
legitimate expectations -
to
be and remain a director of Delimec so long as he remains a shareholder;
to
have a right to veto any decision of the other directors of Delimec;
to
play an active and executive role in the business affairs of Delimec as
a general manager;
to
be adequately remunerated as a general manager of Delimec;
to
be and to remain as a signatory of bank accounts of Delimec;
to
have an unlimited right of access to inspect, with or without the
assistance of an agent and make copies of the financial and accounting
records of Delimec.
In furtherance of the aforesaid consensus, he and the second to the fourth respondents also caused a company by the name of lmec Manufacturing Sdn Bhd ("lmec") to be incorporated on May 12, 1995. Its paid-up capital is RM 100,000 and the petitioner owns 20% of the shares. It was also agreed that lmec is to be run as a partnership and/or quasi partnership and that the partners are not bound by the memorandum and articles of association. The principal objects for which lmec was established is
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to carry on the business and industry of manufacturing, importers, exporters and general dealers in machinery, tools, equipment and plant of every description and particularly all such as are requisite for or applicable to industrial cleaning, residential cleaning, commercial cleaning, home cleaning and general cleaning. |
The
affairs and business of lmec were conducted in the following manner in
accordance with the aforesaid consensus, viz -
the
petitioner and the second to the fourth respondents were appointed
directors of lmec;
all
decisions of the board of directors were made unanimously;
the
petitioner and the second respondent were made compulsory signatories to
all bank accounts of the company and that the third and fourth
respondents are to be signatories only in the event the petitioner is
unavailable to sign the bank accounts;
the
second respondent was assigned the task of being principally in charge
of maintaining the financial and accounting records of lmec, and the
petitioner and the third and the fourth respondents would have unlimited
access to inspect, with or without the assistance of an agent and make
copies of the same.
Consequently,
in furtherance of the aforesaid consensus, he and the second to the fourth
respondents have also caused another company by the name of Delimec Hygiene
(Malaysia) Sdn Bhd to be incorporated on April 16, 1997 wherein the
petitioner also own 20% of its paid-up share capital of RM65,000. The object
of the company is similar to that of Delimec and lmec.
However,
certain events happened which gave rise to breaches of the said legitimate
expectations on the part of the second to the fifth respondents and leading
to the irretrievable breakdown in the mutual understanding and underlying
trust and confidence between the petitioner and the second to the fifth
respondents. Subsequently on February 26, 1999 he was removed as director of
Delimec despite his stand at the meeting that Delimec was set up with a view
of it being managed as a partnership based on the agreed rules. The second
to the fifth respondents voted for his removal as director. Amongst the
matters complained of by the petitioner are-
the
second, third and fourth respondents made decisions as directors without
his consent and despite his objection, namely-
denying
him the right to veto the decision of the board on February 3, 1999
in fixing a date for the extraordinary general meeting to be held to
pass the special resolution to remove him as director;
declaring
bonus for the year 1999 without his knowledge;
dealing
in foreign exchanges and making losses without his knowledge;
issuing
a memo on January 29,1999 without his knowledge and / or approval to
the effect that a director is only entitled to inspect the company's
records personally in the presence of an employee and no copies are
allowed to be made, unless prior written approval of the board is
obtained;
removing
his executive role in the business affairs of Delimec as general
manager;
precluding
him from being a signatory of bank accounts of Delimec;
prohibiting
him from accessing the premises of Delimec for a few days sometime in
January 1999 by manipulating the computers to refuse entry to his access
card;
restricting
him to inspect the financial and accounting records of Delimec with the
assistance of an agent and to make copies of the same.
In
relation to lmec, the petitioner claims he has also diligently and dutifully
performed his role as director and signed cheques for various purposes and
has the same legitimate expectations similar to Delimec. However certain
events happened giving rise to breaches of the legitimate expectations on
the part of the second to the fifth respondents and leading to the
irretrievable breakdown in the mutual understanding and underlying trust and
confidence between him and the second to the fifth respondents. Subsequently
he was removed as a director of lmec during an EGM held on February 10,
1999. His complaints and expectations in relation to Delimec Hygiene
(Malaysia) Sdn Bhd are similar. He was removed as a director of Delimec
Hygiene (Malaysia) Sdn Bhd on February 26, 1999.
By
reason of the matters aforesaid the petitioner avers that it is just and
equitable that Delimec be wound up. The petitioner insists there will be a
surplus of assets of Delimec upon its winding-up and subsequent liquidation
for the distribution amongst its members. The petitioner has also presented
petitions to wind up lmec and Delimec Hygiene (Malaysia) Sdn Bhd which is
pending hearing before another court.
NOTICE
OF MOTION
The
grounds forwarded by the respondents in their application for the order
pursuant to the said s 223 of the Act include the following -
that
Delimec's bank accounts have been the subject matter of a freeze by the
bankers thereby preventing the company from meeting its operating
expenses vis-à-vis, inter alia, its staff salaries
and other related payments as well as payments to suppliers who have
threatened to withhold supplies critical to the ongoing operations of
the company;
Delimec
is solvent and an ongoing entity which the respondents intend to keep as
an ongoing entity and that the provisions of s 223 of the Act has caused
concern to the company's bankers as to the company's continued right to
draw on its bank accounts;
the
petition has been presented by the petitioner as a contributory of
Delimec pursuant to shareholders' disputes with the respondents other
than the company itself and that the avoidance provisions under the said
s 223 ought not to strictly apply given the circumstances of the matter;
the
petition has been represented by the petitioner for collateral purposes
and the respondents have applied to strike out the said petition; the
petitioner has not made any attempts to offer for sale his shareholding
in Delimec but nevertheless has sought to serve and advertise the
petition on the same day with the intention to damage the ongoing
operations of the company.
In his affidavit in support of the application, the second respondent on behalf of all the respondents pointed out that the petitioner holds 20% of the issued and paid up capital in Delimec with the balance of 80% being held by the second to the fifth respondents. He insists that the petition has been presented by the petitioner by reason of grievances expressed by the petitioner against the second to the fifth respondents.
Essentially the petitioner asserts that there has been breaches of the legitimate expectations and an irretrievable breakdown in the mutual understanding and underlying trust and confidence and that in consequence of allegations made supporting the aforesaid, Delimec ought to be wound up. He contends that the respondents dispute the material allegations made by the petitioner relating to the said breaches and breakdown as well as those that purport to justify the winding-up of Delimec. The petitioner has not bothered to offer to sell out his shares in Delimec let alone make reasonable offers to do so prior to the presentation of the petition although he has knowledge that the respondents have no intention for Delimec to be the subject matter of a winding-up petition.
In
this respect the respondents wish the court to take note of the following
matters relating to the conduct of the petitioner, namely-
at
all material times prior to March 30, 1999 the petitioner never gave any
indication to the respondents that he had presented the said petition
nor for that matter to give them the opportunity to address any offer he
may have for the purchase of his shares in Delimec;
instead,
the petitioner suppressed from them that he had presented the said
petition on March 1, 1999 until March 30, 1999 when the said petition
was served and advertised in the local press all on the same day; the
petitioner knew or had means of knowledge that this act would have an
adverse effect on the operations of Delimec and this in fact did happen
when the bank accounts of Delimec were frozen by its bankers pursuant to
notifications which the petitioner caused to be made to the said
bankers.
The
evidence adduced by the respondents in their affidavit show the following-
by
letters dated April 15, 1999, the petitioner's solicitors informed
Public Bank Berhad and RHB Bank respectively that a winding-up petition
has been filed against Delimec, lmec and Delimec Hygiene (Malaysia) Sdn
Bhd and enclosed copies of the advertisements of the petitions which
appeared in the New Straits Times and the Star on
March 30, 1999 and March 31, 1999 respectively;
by
letter dated April 21, 1999, Multi-Purpose Bank informed Delimec that
their account with the bank has been "frozen pending outcome";
by
letter dated April 23, 1999, United Overseas Bank (Malaysia) Berhad
informed Delimec that their account with the bank "has been
frozen" on April 16, 1999 as a result of the winding-up petition.
The respondents insist that they remain willing to purchase the petitioner's shares in Delimec for a fair value in accordance with its articles of association but the petitioner has clearly not bothered to make a reasonable offer to sell and instead embarked on the present petition clearly for collateral purposes. They allege this position is further compounded by rumours that the petitioner has been instrumental in some of the recent resignations of staff of Delimec with the intention of setting up a competitive business to Delimec with attempts to solicit support of the current suppliers of Delimec.
The respondents state they wish Delimec to continue without any winding-up order being made against the same and that the petitioner himself recognised in the said petition that Delimec is solvent and capable of a distribution in favour of its shareholders should a winding-up order be made against the company. They then pointed out that Delimec has presently a staff of over 25 and whose salaries are now under threat of non-payment given that its bank accounts are frozen by the bankers following the petitioner's notification.
They
insist the petitioner is fully aware of the ongoing operations of Delimec
which has an average monthly turnover of approximately RM600,000 based on
its last financial report for the period of July 1998 to December 1998. The
petitioner is also fully aware that Delimec has substantial exposure to
suppliers for the supply of the necessary and essential products of the
company's business to the company and associated or franchised entities
within West Malaysia and East Malaysia covering eight other entities. Under
the circumstances they asked for the order pursuant to s 223 of the Act as
prayed for in their notice of motion.
In
a further affidavit, the respondents state -
the
shares of the petitioner have a net tangible value of RM1.024 per share
and taking into account the conduct of the petitioner, they are prepared
to make arrangements for the purchase of the said shares at the sum of
RM1.024 per share;
they
dispute the assertion that Delimec is in substance a partnership or
quasi partnership which should, as of right, be wound-up;
the
allegations of legitimate expectation, mutual understanding and
underlying trust and confidence relied on by the petitioner are disputed
to the extent that the complaints by the petitioner were brought about
by the petitioner's self-induced improper conduct in his relationship
within Delimec and to the respondents, namely -
he
has a collateral objective to undermine Delimec to advance his
personal objectives at the expense of the other respondents; he is
clearly involved with entities competing with Delimec and has sought
to retain control of the Johor Bahru branch to the exclusion and
detriment of the majority;
he
has used the present petition to inflict maximum harm on Delimec
with a view to achieving his collateral objectives; viz, he
has sought to freeze the bank accounts of Delimec to the point that
the company would have difficulty in meeting its obligations to
suppliers and staff;
Delimec
is dependent on the support of its suppliers and needs to maintain
confidence of these suppliers if it is to continue its business; the
petitioner was never involved in dealings with the suppliers;
the
petition was advertised on March 30, 1999 and March 31, 1999 but the
petitioner had on various dates prior to the presentation of the
petition as well as March 30, 1999 contacted no less than eight (8) of
Delimec's suppliers and has essentially invited those suppliers to
reconsider further business with Delimec on the basis that it is
insolvent and is going to be wound up.
The
respondents insist Delimec has enjoyed a substantial market position since
it commenced operations and the genesis of Delimec is more properly stated
as follows -
Delimec
was incorporated on May 5, 1992 by the third and fourth respondents and
the costs of its incorporation were borne by them; they were also the
only directors and shareholders and essentially held an equal position
in the company.
In
or about September 2, 1992, the third respondent invited the petitioner
and the second respondent to join Delimec; the fifth respondent is the
brother of the third respondent and had been with Delimec from the onset
except that the fifth respondent did not at that time hold shares or a
position as director.
Whilst
it is correct that the petitioner and the second to the fourth
respondents had a connection from their previous involvement with the
said Ogosin Sdn Bhd it is not correct for the petitioner to state that
Delimec was incorporated specifically following their departure from
that company.
In
September 1992 the shareholding of Delimec was enlarged to RM200,000
with the petitioner and the second to the fourth respondents assuming a
position on the board; the fifth respondent was not made a director.
In
September 1994 the share capital was enlarged to RM400,000.
In September 1995 the share capital was further increased to RM600,000. The shareholding of Delimec from September 1995 up to the present time is as follows -
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Party |
No. of Shares |
Percentage Holding |
|
Petitioner 2nd Respondent 3rd Respondent 4th Respondent 5th Respondent |
120,000 330,000 72,000 60,000 18,000 |
20 % 55 % 12 % 10 % 3 % |
It
is incorrect for the petitioner to state that there was a partnership or
quasi partnership from the onset or for that matter, that the relationship
between the parties was to be regulated on an equality or unanimous basis.
The bank accounts of Delimec are operated on the basis that the second
respondent is a mandatory signatory for any sums in excess of RM500 and this
was the position since October 1992 without protest or contestation by the
petitioner or any of the respondents. The cheques drawn on Delimec's bank
accounts were from 1992 to July 1998 signed by the second respondent and the
fourth respondent. In July 1998 the petitioner wanted to assume a role in
signing the cheques and this was allowed unconditionally without
reservations until December 1998 when the petitioner's conduct caused
concern to the respondents.
In his affidavit-in-reply the petitioner states it is inadequate for the respondents to give a blanket denial of his averments in the petition without condescending into particulars. He contends he is under no obligation to make any offer to sell his shares in Delimec.
Furthermore he has "lost all trust" in the second to the fifth respondents and seriously doubt whether they would make a genuine and sincere offer for the price of his shares reflective of their actual value. Since it is the respondents who are so keen to cut off all his ties with Delimec, they are the ones who should initiate any offer to purchase his shares if they are so minded. Until to date, no offer has been made by the respondents to purchase his shares in Delimec.
He insist that Delimec was set up with a view of it being managed as a partnership and / or quasi partnership with him being one of the directors and / or partners and since he has been removed as a director without any basis in breach of the aforesaid arrangement, Delimec ought to be dissolved and/or wound up as the partnership and / or quasi partnership with him being one of the partners no longer exists. He also insist that if the respondents do not intend Delimec to be wound up, they ought not to have removed him as director.
As
to the freezing of the accounts, it is his belief that it is a necessary
consequence of the law and of the respondent's conduct in removing him as
director and / or partner of Delimec.
In
relation to his removal as director, the petitioner states the provisions
referred to by the respondents in Delimec's articles of association do not
govern the relationship between them and insist that the said articles were
merely put up as it was a requirement under the law for the incorporation of
Delimec. In relation to the allegation that his petition was filed for
collateral purposes, he contends the respondents have not stated what the
purported collateral purposes are and have further failed to provide any
particulars to support such allegations. He denies being in any way involved
in the resignation of Delimec's staff and of which he is unaware of.
In
relation to the allegation that he has set up a competitive business to that
of Delimec, the petitioner states he has yet to give it any serious
consideration as he is "still in a state of shock over the recent spate
of events" including his removal as director and general manager of
Delimec. However even if he does set up a business which will become
Delimec's rival, he is advised by his solicitors that he is perfectly
entitled to do so bearing in mind s 28 of the Contracts Act, 1950.
In
relation to the freezing of the bank accounts, the petitioner contends as
follows -
the
respondents failed to state affirmatively that all Delimec's bank
accounts have been frozen and if there are any which have yet to be
frozen, they have failed to disclose the particulars of those accounts;
the
respondents have failed to disclose the amount of Delimec's cash and /
or funds which are not kept in banks;
the
respondents have failed to set out the sums which may be due to
Delimec's suppliers and to produce the supporting documents;
the
respondents failed to disclose that Delimec has other funds held under
the directors and / or partners' names in their individual capacities;
the
respondents have failed to set out Delimec's transactions between the
presentation of the petition on March 1, 1999 and the affirmation of
their first affidavit on April 27, 1999 wherein they sought to validate
and to address the supporting documents; this is necessary to ensure
that all the transactions are proper, bona fide and conducted in
the ordinary course of Delimec's business and in the light of him
raising issues of financial irregularities in Delimec, it is incumbent
on the respondents to make a full and frank disclosure to dispel any
suspicions of financial irregularities.
The
petitioner also pointed out that the respondents' application for a
validation order was only made about a month later, i.e., on April 27, 1999
although the petition was served on them on March 30, 1999. This shows a
lack of urgency on their part. They had more than adequate time to look for
and produce all the necessary documents to support their application. As
such he prays that the application be dismissed with costs.
In his submission counsel for the respondents stressed that the petitioner holds only 20% of the issued and paid up capital of Delimec whereas the second to the fifth respondents hold 80%. Furthermore, they oppose the winding-up of Delimec. He pointed out that the petition, which was filed on March 1, 1999 and then served on March 30, 1999 and advertised on the same day, was clearly not a creditor's petition but a shareholder's dispute brought by the minority to wind up a company which the majority do not wish to wind up.
In
relation to the application, counsel stressed the respondents is not asking
for an order to dispose of the property of Delimec but merely for an order
to be allowed to use the company's bank accounts and for the disposition of
property of the company in the ordinary course of business since the company
is now paralysed as a result of the freeze. In relation to the allegation of
delay on their part in making the application, counsel pointed out the banks
only replied between April 21, 1999 and April 23, 1999 and their application
was made on April 27, 1999. Be that as it may, the petitioner himself admits
that Delimec is a solvent ongoing trading company.
In opposing the application, counsel for the petitioner pointed out the petition is presented on the basis of the existence of a quasi partnership. If there is such a partnership, the legal rights under the memorandum and articles of the company would be subject to the legal consideration peculiar to a partnership and hence would be subject to equitable considerations. To support his contention, he submitted he is relying on the case of Ebrahimi v Westbourne Galleries Ltd [1973] AC 360. In that case the petitioner presented a winding-up petition based upon s 222(f) of the Companies Act 1948 (UK) which read:
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A company may be wound up by the court if - |
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(f) |
the court is of the opinion that it is just and equitable that the company should be wound up |
On the words "just and equitable" Lord Wilberforce said (at pp 379-380):
|
The
words are a recognition of the fact that a limited company is more
than a mere legal entity, with a personality in law of its own: that
there is room in company law for recognition of the fact that behind
it, or amongst it, there are individuals, with rights, expectations
and obligations inter se which are not necessarily
submerged in the company structure. That structure is defined by the
Companies Act and by the articles of association by which
shareholders agree to be bound. In most companies and in most
contexts, this definition is sufficient and exhaustive, equally so
whether the company is large or small. The "just and
equitable" provision does not, as the respondents suggest,
entitle one party to disregard the obligation he assumes by entering
a company, nor the court to dispense him from it. It does, as equity
always does, enable the court to subject the exercise of legal
rights to equitable considerations; considerations, that is, of a
personal character arising between one individual and another, which
may make it unjust, or inequitable, to insist on legal rights, or to
exercise them in a particular way. ... The superimposition of equitable considerations require something more, which typically may include one, or probably more, of the following elements:
My Lords, this is an expulsion case, and I must briefly justify the application in such cases of the just and equitable clause. The question is, as always, whether it is equitable to allow one (or two) to make use of his legal rights to the prejudice of his associate(s). The law of companies recognises the right, in many ways, to remove a director from the board. Section 184 of the Companies Act 1948 confers this right upon the company in general meeting whatever the articles may say ... And quite apart from removal powers, there are normally provisions for retirement of directors by rotation so that their re-election can be opposed and defeated by a majority, or even by a casting vote. In all these ways a particular director-member may find himself no longer a director, through removal, or non-re-election: this situation he must normally accept, unless he undertakes the burden of proving fraud or mala fides. The just and equitable provision nevertheless comes to his assistance if he can point to, and prove, some special underlying obligation of his fellow member(s) in good faith, or confidence, that so long as the business continues he shall be entitled to management participation, an obligation so basic that, if broken, the conclusion must be that the association must be dissolved. And the principles on which he may do so are those worked out by the courts in partnership cases where there has been exclusion from management... even where under the partnership agreement there is a power of expulsion ... |
In
the instant case the petitioner sought to set out in detail as to how the
partnership came about and has explained as to how he was led to believe he
has a right to participate in the management of the company but has now been
excluded from participating. He complained he was denied the right to
inspect the accounts of the company and make copies pursuant to s 167(3) of
the Act when he was still a director. He has adduced the letters he wrote to
the company's accounts executive wherein he asked for details of the
financial accounts. He has also alleged there were financial irregularities
and if the court is minded to allow this application, restrictions by way of
precautionary measures should be imposed, viz the court should impose
a direction that the second to the fourth respondents do jointly and
severally be personally liable to Delimec for losses suffered due to any
payment or dispositions which are subsequently found not to be in the
ordinary course of business.
In
his reply, counsel for the respondents submitted the court leans towards the
protection of the company as a going concern and would require compelling
evidence from the petitioner who resists a proposed validation order. He
pointed out the petition bears no evidence or assertion on financial
irregularities other than the complaint that there had been a breach of his
statutory right under s 167 of the Act. The petitioner knew on January 22,
1999 that he was going to be removed as director and all the documents and
letters he produced in relation to the allegation of financial
irregularities were engineered after January 22, 1999. It is the
respondents' stand that there was no strict denial of the right to inspect
and there was only a prohibition against photocopying and the right to make
use of an agent. Even if there was a breach of s 167 of the Act, such breach
does not translate to the conclusion there is financial irregularity let
alone justify the denial of a validation order.
Counsel
stressed the application is directed to keeping the company alive vis-a-vis
obligations to the world at large and itself. This is quite different from
whether or not the board of directors is a suitable board or not. He then
submitted he know of no authority in which conditions are placed at the
insistence of a mere shareholder to the right of the company to carry on its
day to day operations particularly when the petition which has yet to be
determined is a shareholder's dispute. He insisted that a normal shareholder
cannot dictate the management let alone place conditions to the board.
What is clear is the said petition has been presented by a contributory and not a creditor of the company and what is not disputed is Delimec is solvent and is still trading. One of Delimec's main object is to carry on the business of dealing in machinery, tools, equipment and plant of every description and particularly all such as are requisite for or applicable to industrial cleaning, residential cleaning, commercial cleaning, home cleaning and general cleaning and since its date of incorporation it has established branches in eight different states and has appointed distributors in four different states which, to me, reflect the company is not actually in dire straits.
The
company was incorporated on May 5, 1992 by the third and fourth respondents
and the petitioner together with the second respondent was invited to join
the company in or about September 2, 1992. Up to date the petitioner holds
only 20% of the issued and paid up capital. He was removed from the board at
an extraordinary general meeting held on February 26, 1999 and had almost
immediately, viz, three days later, filed the said petition to wind
up Delimec pursuant to the just and equitable provision.
The said petition has not been heard and hence it is not for the court at this juncture to go into its merits, i.e., whether the presentation of the petition is well-founded or ill-founded. What is not disputed is the company's bank accounts were frozen as a result of the presentation of the petition and presumably as a result of it being alerted by the petitioner vide letters sent to those banks on the same day the petition was served on the company. The company's business is still ongoing and there is nothing to suggest that its trading activities have collapsed notwithstanding the removal of the petitioner from the board. The respondents contend that Delimec's trading activities have been affected by the freezing of its bank accounts. Without those bank accounts being operational, the company cannot meet its operating expenses, namely, paying its staff salaries and making payments to its suppliers who have now threatened to withhold supplies critical to the ongoing operations of the company. The company is now finding it difficult to breathe and hence, this application.
What
must be made clear is the said petition has not been heard and that being
the position, it is not for the court at this juncture to go into its
merits, i.e., whether the presentation of the petition is well-founded or
ill-founded or as to whether the equitable considerations laid down in Ebrahimi
v Westbourne Galleries Ltd are applicable.
The purpose of s 223 is set out in the judgment of Cairns LJ in Re Wiltshire Iron Co, exparte Pearson (1868) 3 Ch App 433 at pp 446-447:
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This is a wholesome and necessary provision, to prevent, during the period which must elapse before a petition can be heard, the improper alienation and dissipation of the property of a company in extremis. But where a company actually trading, which it is in the interest of every one to preserve, and ultimately to sell, as a going concern, is made the object of a winding-up petition, which may fail or may succeed, if it were to be supposed that transactions in the ordinary course of its current trade, bona fide entered into and completed, would be avoided, and would not in the discretion given to the court, be maintained, the result would be that the presentation of a petition, groundless or well founded, would ipso facto, paralyze the trade of the company, and great injury without counterbalance of advantage, would be done to those interested in the assets of the company. |
The position seems to be where the company is solvent and is trading, the court can sanction transactions in the ordinary course of business. In Re Burton & Deakin Ltd [1977] 1 All ER 632, which was referred to by counsel for the respondents in his submission, Slade J was of the view that in the case of a solvent company the court will normally sanction a disposition which the directors consider to be necessary or expedient in the interests of the company for reasons which an intelligent and honest man could reasonably hold. That case dealt with s 227 of the English Companies Act 1948 which is in pari materia with s.223 of our Act. It provides -
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In a winding-up by the court, any disposition of the property of the company ... made after the commencement of the winding-up, shall, unless the court otherwise orders, be void. |
In Re Burton & Deakin Ltd two shareholders of a company presented a petition alleging that its affairs were being conducted in a manner oppressive to them. The company was solvent and able to pay its debts. The petition asked that the other shareholders be ordered to purchase the petitioners' shares or alternatively that the company be wound up. In consequence of the petition, certain credit facilities afforded to the company by a finance company were reduced and appeared likely to be withdrawn altogether. The board of the company therefore decided to look for equivalent facilities elsewhere. These were forthcoming from another finance company on condition that the company's indebtedness was secured by a deed of assignment.
The company applied to the court by way of notice of motion for an order under the said s 227 of the Companies Act 1948 that, in the event of a winding-up order being made, neither the deed of assignment in favour of that finance company nor the payment off of the company's indebtedness to that finance company should be avoided by the operation of s 227. The petitioners disapproved of the proposed new credit facilities, taking the view that it was not in the interests of the company's business and therefore opposed the making of the order sought by the company. Slade J granted the relief sought by the company. At p 636 the learned Judge said:
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However,
the weight that should be attached to the opposition of a
contributory to an application under s 227 in the case of an
admittedly solvent company is in my judgment a different matter.
Where such an application is made following the presentation of a
petition based on the alleged solvency of the company, it seems to
me natural and right to conduct a careful scrutiny of the
disposition or proposed disposition in question before granting
relief under the section. In Re A I Levy (Holdings) Ltd, for
example, Buckley J made an order under the section, authorising the
company to sell a certain lease, because he was satisfied on the
evidence that the transaction was one which 'must on any possible
view be beneficial to the creditors of the company'. I think the
creditors of the company, being interested solely in this capacity,
are reasonably entitled to assume that the courts will sanction no
disposition falling outside the company's ordinary course of
business under the section, unless it is affirmatively satisfied on
the evidence that the transaction is beneficial to the company. The
position of contributories, however, appears to me to very
different. As counsel for the company pointed out, the
responsibility of managing the business of the company is entrusted
by its articles of association to its directors. At least so long as
a winding-up petition has not been presented, the court will not
generally, save in the case of proven bad faith or other exceptional
circumstances, interfere with the exercise of the discretion
conferred on the directors by a company's articles of association at
the instance of a shareholder. Thus, if before the presentation of a
petition a shareholder were to come to the court in an attempt to
restrain a particular disposition of the company's property
contemplated by the board of directors and falling within their
powers, he would not generally succeed, unless he could prove bad
faith or other exceptional circumstances. He would not be able,
merely by adducing prima facie grounds for criticising the
wisdom or beneficial nature of a particular transaction, to place on
the company or its board of directors the onus of justifying the
proposed disposition by detailed evidence. I
can see no good reason why the rights of interference by a
shareholder vis-à-vis the company or its directors should,
in this kind of situation, for practical purposes be drastically
improved during the interim period, merely because he happens to
have presented a winding-up petition which is not demurrable and has
not yet been heard. The interim period may be quite a long one. In
the present case from what I have been told, it looks like being
between three and six months. In a case such as the present, the
court at the time when the application under s 227 comes before it
generally has not sufficient evidential material to enable it
properly to form even a prima facie view whether the petition
itself is ultimately likely to succeed or fail. It must therefore
necessarily assume that the petition is at least likely to fail as
it is to succeed. Indeed, in the case of many contributories'
petitions of which this is one, the primary relief sought by the
petitioners is an order under s 210 that other persons be ordered to
purchase their shares at a stated price, a winding-up order being
sought only as a second alternative, so that, if the primary relief
were granted, the petitioner would in the event have no interest in
the intended disposition at all. Taking all these considerations into account and in the absence of any authority demonstrating the contrary, I thus reach these conclusions on the question of principle raised by the present application: If on an application under s 227 relating to a solvent company,
it
will in the exercise of its discretion normally sanction the
disposition notwithstanding the opposition of a contributory, unless
the contributory adduces compelling evidence proving that the
disposition is in fact likely to injure the company. A fortiori
in my judgment the court will be inclined to exercise its discretion
in this manner in a case such as the present, where the primary
relief sought by the petition is an order under s 210 that the other
shareholders be ordered to purchase the shares at a stated price. While I have attempted to formulate these statements of principle so as to explain the basis on which I decide this particular case, I should nevertheless make it clear that they are intended merely as broad guidelines. No limits are placed by the sections on the court's discretion to grant or refuse an application under s 227 and such a discretion will of course be exercised in every instance having regard to the particular circumstances of the particular case. |
Thus,
it would seem that the courts will normally sanction the disposition
notwithstanding the opposition of a petitioning contributory where -
the
company is solvent;
there
is evidence to show that the directors consider that a particular
disposition falling within their powers under the company's memorandum
and articles of association is necessary or expedient in the interests
of the company;
the
reasons given are reasons which the court considers that an intelligent
and honest man could reasonably hold.
In
the instant case, I would adopt the broad guidelines suggested by Slade J in
Re Burton & Deakin Ltd in dealing with application before me and
in arriving at my decision took the following considerations into account,
namely -
the
petitioner is a contributory;
Delimec
is a solvent company and is still trading;
with
the freezing of its bank accounts, Delimec would not be able to make
payments to their suppliers or trade creditors and even payments in the
form of staff salaries;
Delimec's
payments made bona fide in the ordinary course of business should
be validated as long as they relate to the need to continue business and
earn income or to save loss during the pendency of a petition;
majority
of the shareholders holding 80% of the issued and paid up capital want
the company to continue trading pending the disposal of the said
petition and are willing to purchase the petitioner's shares if that is
what he desires;
it
will be against the interest of Delimec, its shareholders and its
creditors if the company is prevented from making dispositions of its
properties in the ordinary course of its business for value;
there
is nothing to suggest that the company will be injured if the
application is allowed.
The
petitioner remains a shareholder of Delimec notwithstanding he has been
removed as director and in my opinion it would be in his interest for the
company to continue trading during the pendency of the said petition. In his
petition he claims he has diligently and dutifully performed his role as
director and had attended the board meetings. He has however forwarded
allegations that there are financial irregularities and had in a letter
addressed to the company's accounts executive and dated January 26, 1999,
which he exhibited in his affidavit, requested for the company's accounts
for the last three years. If he had diligently attended those board
meetings, surely he would have been familiar with Delimec's financial
position and would have had access to the accounts seeing that he was only
removed as director on February 26, 1999 and had filed the said petition
three days later. If at all there were financial irregularities, there was
nothing to prevent him from raising them at those board meetings.
He
has even lodged two police reports, which are exhibited in his affidavit,
against the respondents when they attempted to repossess the company's
vehicle provided to him during his tenure as an officer in the company and
when he was refused entry to his office after his removal as director and
after the filing of the petition. A scorched earth policy thrusted upon an
ongoing concern pending the disposal of a contributory's petition to wind it
up would certainly not be beneficial to the company and its creditors in a
dispute between shareholders and for the reasons aforesaid, I exercised my
discretion and allowed this application with costs in the terms prayed for.
Cases
Burton & Deakin Ltd, Re [1977] 1 All ER 632; Wiltshire Iron Co, Re; Exparte
Pearson (1986) 3 Ch App 433;
Ebrahimi v Westbourne Galleries Ltd [1973] AC 360
Legislations
Malaysia
Contracts
Act 1950: s. 28, s. 167(3), s. 223
United
Kingdom
Companies Act 1948: s. 210, s. 222(f), s. 227
Representation
Su
Tiang Joo, Pang Kong Leng (Cheah Teh & Su) for Petitioner
Logan
B Sabapathy, Hema Markandan and CW Wong (Logan Sabapathy & Co) for
Respondents
Notes:-
This case is also reported at [2000] 1 AMR 454.
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