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[2002] Part 1 Case 7 [HCM] |
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www.ipsofactoJ.com/highcourt/index.htm
[2002] Part 1 Case 7 [HCM] |
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HIGH COURT OF MALAYA |
Arab-Malaysian Merchant Bank Bhd
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Orient Apparel Bhd
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Coram JAMES FOONG J |
11 SEPTEMBER 2001 |
Judgment
James Foong, J
INTRODUCTION
Oriental Apparel Bhd (OAB), a public registered company involved in the manufacturing and export of goods, was wound-up on the December 6, 1998 by a creditor's petition presented on the August 4, 1998.
OAB was a customer of Hong Leong Bank Bhd (the bank). Since May 1995, the bank had provided trade credit facilities to OAB totaling RM51,700,000. These facilities were granted by the bank pursuant to several letters of offer made to OAB between 1995 to 1997. Disbursements of these facilities and repayment thereto were through a current account maintained and operated by OAB with the bank. These facilities were initially secured:
by the deposit of third party fixed deposit receipts (FD) held in the name of one Seow Chee Hoong;
a joint and several guarantee by Seow Chee Hoong and one Chen Mee Mee in favour of the bank;
a deed of assignment and a power of attorney in favour of the bank of landed property known as Lot RKA 8 & 9 Bandar Baru Kundang, Rawang;
the setting up of a sinking fund where 5% of the proceeds of each export/trade bill of OAB would be deducted and placed in FD as security.
Sometime in February 1998 the bank discovered that majority of OAB's trade bills discounted in pursuant to the credit facilities it offered to OAB were in respect of one company in Hong Kong known as Monchique Holdings Ltd (Monchique). Monchique had only a paid up capital of HK1,000. To safeguard its exposure, the bank obtained from OAB further securities. These were:
a loan agreement between OAB and the bank dated April 10, 1998;
a debenture dated April 10, 1998 which creates a first fixed and floating charge over the assets of OAB;
an account assignment dated April 10, 1998 in respect of FD held by OAB with the bank;
a supplementary loan agreement between OAB and the bank dated May 4, 1998.
Due to liquidity problem encountered by OAB, in April/May 1998 Arthur Anderson were appointed as financial consultants to the company. It undertook to review and prepare a debt-restructuring scheme for OAB. From this exercise, Arthur Anderson prepared two reports dated June 23, 1998 and July 21, 1998 respectively. These reports were distributed to OAB creditors including the bank.
According to the bank, a meeting was held between them, Arthur Anderson and OAB. At this meeting, Arthur Anderson announced that OAB's business was still viable for the next one year. To support OAB, the bank continued to make available the credit facilities to OAB in order for the company to carry on with its business. To further protect itself, additional securities were obtained from OAB. These were:
a letter of assignment dated June 18, 1998 whereby OAB agreed to channel all export bills and proceeds therefrom to the bank;
a second supplementary loan agreement between OAB and the bank dated October 1, 1998.
THE LIQUIDATOR'S CLAIM
After OAB went into liquidation, the liquidator (the applicant in this application) took control of its affairs. He discovered that certain dispositions by OAB to the bank might be void under s 293 of the Companies Act 1965. To remedy this, he has filed this application (Encl 110) seeking from this court the following:
A declaration that all properties of OAB pledged as security for trade credit facilities granted by the Bank to OAB constitute undue preference and should be returned to the Liquidator.
A declaration that all monies withdrawn and paid out to the Bank between 4.2.1998 to 6.12.1998 under the current account operated by OAB with the Bank constitute undue preference.
A declaration that all monies credited to the current account of OAB with the Bank between 4.8.1998 and 6.12.1998 constitute undue preference and are therefore void.
Alternatively, all monies debited to the account of OAB with the Bank between 4.8.1998 and 6.12.1998 constitute undue preference and are void.
The Bank to account for all monies handled by them under prayer (2), (3) and (4) above and thereafter be returned to the Liquidator.
THE BANK'S STAND
The bank denies that the dispositions mentioned are void and insists that the bank is not liable to account and return any monies to the liquidator.
ISSUES
Based on the contentions above, the issue in this case is: whether the dispositions made by OAB in favour of the bank are preferential payment rendering them void under s 293 of the Companies Act to be read with s 53(1) of the Bankruptcy Act, and under s 223 of the Companies Act.
SUBJECT MATTERS IN CONTENTION
Realizing that the transactions between the bank and OAB, within the time span in question, cover a wide range of matters, Mr. Prakash, counsel for the liquidator, in his submission has confined the liquidator's claim to only the following dispositions:
Loan repayments by OAB to the bank from FD belonging to Seow Chee Hong.
Loan repayment by OAB to the bank through debit advice.
Bank charges on trade bills and overdraft (OD) facilities granted by the bank to OAB.
Execution of security documents by OAB or third party in favour of the bank.
PARTICULARS OF SUBJECT MATTERS IN CONTENTION
For consideration of this case, it is necessary to set out the particulars of each subject matter under contention.
(a) FD
There is a sum of RM18,688,647.57 in various FD deposited by Seow Chee Hoong with the bank before February 4, 1998 which were subsequently up-lifted by the bank in April 1998 to repay the credit facilities extended to OAB by the bank.
A sum of RM55,887.92 in several FD deposited by Seow Chee Hoong with the bank after February 4, 1998 which were also up-lifted by the bank in April 1998 to repay credit facilities extended to OAB by the bank.
(b) Debit advice
A sum of RM8,627,507.93 was taken from OAB's account by the bank to repay towards credit facilities utilized by the OAB between August 5, 1998 to December 6, 1998.
A sum of RM20,018,429.30 was taken from OAB's account by the bank to repay towards credit facilities utilized by OAB between February 4, 1998 to August 4, 1998 (the "twilight period").
(c) Trade bills & OD charges
A sum of RM49,537.99 and RM9,299.41 respectively levied by the bank as charges on trade bills and OD utilized by OAB between August 5, 1998 and December 6, 1998.
A sum of RM139,849.85 and RM1,695.56 respectively levied by the bank on trade bills and OD utilized by OAB between February 4, 1998 and August 4, 1998 (the twilight period).
(d) Security documents
Execution of a loan agreement dated April 10, 1998 for facilities extended to OAB by the bank.
Creation of a debenture for a first legal and floating charge over assets of OAB in favour of the bank on the April 10, 1998 (within the twilight period).
Execution by OAB of an account assignment dated April 10, 1998 in favour of the bank (within the twilight period).
Execution of a supplementary loan agreement OAB in favour of the bank on the May 4, 1998 (within the twilight period).
Execution by OAB of a letter of assignment dated June 18, 1998 (within the twilight period) in favour of the bank to channel all export bills and proceeds of OAB to the bank.
Execution by OAB of a second supplementary loan agreement .dated October 1, 1998 in favour of the bank.
THE APPLICABLE LAW
For determination of the issues in this case, the pertinent laws are s 223 of the Companies Act, and s 293 of the Companies Act to be read with s 53(1) of the Bankruptcy Act. These are set out below:
Section 223 of the Companies Act states:
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Avoidance of dispositions of property, etc 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. |
And s 293 of the Companies Act provides:
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Undue preference |
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(1) |
Any transfer, mortgage, delivery of goods, payment, execution or other act relating to property made or done by or against a company which, had been made or done by or against an individual, would in his bankruptcy under the law of bankruptcy be void or voidable shall in the event of the company being wound up be void or voidable in the like manner. |
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(2) |
For the purposes of this section the date which corresponds with the date of presentation of the bankruptcy petition in the case of an individual shall be - |
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(a) |
in the case of winding up by the Court |
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(i) the date of presentation of the petition. |
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Then s 53(1) of the Bankruptcy Act declares:
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Avoidance of preference in certain cases |
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(1) |
Every conveyance or transfer of property or charge thereon made, every payment made, every, obligation incurred and every judicial proceeding taken or suffered by any person unable to pay his debts, as they become due, from his own money in favour of any creditor or any person in trust for any creditor shall be deemed to have given such creditor a preference over other creditors if the person making, taking, paying or suffering the same is adjudged bankrupt on a bankruptcy petition presented within six months after the date of making, taking, paying or suffering the same and every such act shall be deemed fraudulent and void as against the Official Assignee. |
Undeniably, the objective of these provisions is to prevent a creditor from obtaining for himself an unfair advantage at the expense of other creditors by concluding transactions during these periods.
APPLICABLE PERIOD
By the nature of the laws to be applied there are two important periods to bear in mind:
Between August 5, 1998 (a day after the filing of the winding-up petition) and December 6, 1998 (the date of the winding-up). For this period the provision in s 223 of the Companies Act shall apply. For ease of reference, I shall refer to this period as "the period under s 223".
Between February 4,1998(6 months from the date of presentation of winding-up petition) and August 4, 1998 (the date of the filing of the winding-up petition). For this period the law as laid down in s 293 of the Companies read with s 53(1) of the Bankruptcy Act shall apply. This stretch of time is commonly known as the 'twilight period' for the simple reason that one is uncertain whether the company will be wound-up or continue to function. Again for ease of reference, I shall use this term to refer to this time frame.
ANALYSIS
I shall deal with each of the items in contention separately beginning with:
(a) FD
1. The sum of RM18,688,647.57
These FD were all taken before the twilight period but uplifted in April 1998 (during the twilight period). Since they were created outside the period in question, the bank contends that these are not liable for consideration under s 293 of the Companies Act to be read with s 53(1) of the Bankruptcy Act.
The liquidator disagrees and insists that the period of transaction must be the time when these FD were uplifted. For support the liquidator cited: Bah Heng Hong v The Provisional Liquidator [1992] 3 CLJ 1421; Bensa Sdn Bhd v Malayan Banking Bhd [1993] 1 AMR 417 and Lian Keow Sdn Bhd v Overseas Credit Finance (M) Sdn Bhd [1982] 2 MLJ 449. Of these three cases, my view is that the principle stated in Bensa is most appropriate for application to the present circumstances. This is for reason that, similar to the facts of the present case, FD was used as security for financial facility granted. In Bensa, the High Court declared that the date of transaction was the time when the FD was charged as collateral to the insurance company, not at the time when it was created. This, I believe is the correct approach. When the FD in this case were created there were no transactions within the meaning of s 293 of the Companies Act read with s 53(1) of the Bankruptcy Act. In fact these instruments were not even OAB's; they were the properties of a third party - Seow Chee Hong who decided to deposit monies with the bank for safe keeping. It was only when Seow Chee Hong pledged these FD to the bank that the transaction occurred. As correctly pointed out by Mr. Christopher Leong, counsel for the bank, one cannot charge one's own indebtedness. Once such transaction had taken place any act subsequent and associated with it must be considered to have arisen out of it. Likewise, the uplifting of the FD was not an independent act but an integral part of the transaction which commenced with the pledging of the FD as collateral with the bank. Consequently, the date for the uplifting of the FD cannot be accepted as the date of the transaction since the transaction had already occurred. The uplifting, being a process under the collateral, in my view, cannot be considered as a transaction within the relevant provisions of the law under discussion. For this I must reject the liquidator's approach that the date of uplifting of the FD was the date of transaction.
Once this time factor is decided attention must be concentrated on when the collateral was created over these FD. From the particulars as set out in p 25 of the Encl 116 at item 2.7 it is disclosed that these FD were "pledged as security pursuant to letters of offer dated 17/5/95, 25/10/95, 6/12/96 & 19/9/97".
All these dates were outside the twilight period exempting this transaction from scrutiny under the relevant provision of the law.
As a precaution, in the event that I may have erred on this point, I shall proceed to consider other arguments raised by the bank to counter the liquidator's claim for this item.
It is the view of the bank that even if the transaction is considered to be at the time when the FD were uplifted these FD would still be exempted from consideration for undue preference because the bank had a lien over them. Arising from this lien, the bank asserts that it had a common law and statutory right (by way of s 41 of the Bankruptcy Act) to set off this against any sum due by OAB to the bank. To support this assertion, the Federal Court decision of Sime Diamond Leasing (M) Sdn Bhd v Precision Moulding Industries Sdn Bhd [1998] 4 AMR 4141 is relied on.
Not willing to concede, the liquidator however argues against the availability of this protection by the bank on two fronts. Firstly, the common law right of a lien over the FD was extinguished by the failure to register these FD as charges under s 108(3)(k) of the Companies Act. Secondly, without this support the bank's common law right of a set-off could had not existed. As to the statutory right of a set-off under s 41 of the Bankruptcy Act, the liquidator insists that this provision cannot override s 293 of the Companies Act read with s 53(1) of the Bankruptcy Act. In short, the liquidator is defiantly asserting that Sime Diamond Leasing is incorrectly decided. As an alternative, the liquidator presents that even ifs 41 of the Bankruptcy Act predominates s 293 of the Companies Act to be read with s 53(1) of the Bankruptcy Act, there is no evidence to support the existence of "mutual credits and mutual debts or mutual dealings" at the material time between OAB and the bank to qualify the use of this provision.
Whether the FD need to be registered under s 108(3)(k) of the Companies Act is a point I have already decided in the case of Bensa (supra). As explained, these FD were only evidence of acceptance of deposits of Seow Chee Hong by the bank. It was only when they were used as securities that they fell within the category of "a charge on the credit balance of the company in any deposit account" as described in s 108(3)(k) of the Companies Act. Thus, standing by itself, these FD were not caught under s 108(3)(k) of the Companies Act but the pledging of these as securities were.
When such collateral were not registered they are void against the liquidator s 108(1) of the Companies Act. This statutory enactment must, in my view, override the bank's right to a lien under common law over these securities. Consequently, as argued, the bank's common law right to a set-off cannot be maintained for having no basis to rely on.
But what about the bank's statutory right of set-off under s 41 of the Bankruptcy Act? To examine this prerogative, which is often referred to as "insolvency set-off', s 41 of the Bankruptcy Act must first be looked into. It says:
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Mutual credit and set-off |
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(1) |
Where there had been mutual credits, mutual debts, or other mutual dealings between a debtor against whom a receiving order is made under this Act and any other person proving or claiming to prove a debt under such order, an account shall be taken of what is due from the one party to the other in respect of such mutual dealings, and the sum due from one party shall be setoff against any sum due from the other party, and the balance of the account and no more shall be claimed or paid on either side respectively. |
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(2) |
A person shall not be entitled under this section to claim the benefit of any set-off against the property of the debtor in any case where he had at the time of giving credit to the debtor notice of an act of bankruptcy committed by the debtor and available against him? |
By virtue of this section when mutual credits and mutual debits or other mutual dealings are apparent insolvency set-off is permitted. But this runs contrary to s 293 of the Companies Act read with s 53(1) of the Bankruptcy Act.
The Federal Court when encountered with this issue decided in Sime Diamond Leasing (supra) to adopt the approach of "where s 41 of the Bankruptcy Act applies, the payment or agreement for a set-off cannot be construed as a void preference under s 53 of the Bankruptcy Act".
To support this, Edgar Joseph Jr FCJ at p 4159 of the same judgment explains:
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Similarly, it is important to note that the case of Re Washington Diamond Mining Co [1893] 3 Ch 95 recognises that where s 41 of the Bankruptcy Act applies, the payment or the agreement for a set-off cannot be construed as a void preference under s 53 of the Bankruptcy Act. It has been said that in such a situation the fact that the debts would have been set-off in the bankruptcy means that the arrangements have not worked to the detriment of the other creditors of the company. As well put by Vaughan Williams J in Re Washington Diamond Mining Co at p 104, You cannot prefer a man ... by merely putting him in the very position in which he would be if a bankruptcy followed. This case should be compared with Re BP Fowler Ltd [1937] 3 All ER 781 where Crossman J held that the payment was a preference notwithstanding that he left open the question whether there would have been a set-off in liquidation, and on this ground his judgment may be regarded as unsatisfactory. |
But Mr. Prakash boldly points out that that this ruling is decided per incuriam. It has overlooked the reversal of Vaughan Williams J's decision of first instance by the English Court of Appeal in Re Washington Diamond Mining Co. I tend to agree with this view. As stated by Kay LJ in the Court of Appeal in Re Washington Diamond Mining Co at p 113:
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The first question is as to the meaning and the effect of 164th section (an earlier version of our s 293 of the Companies Act) of the Companies Act 1862. It is argued that this section only makes that a fraudulent preference which would be so if the company were an individual who has since become a bankrupt, and that in the case of such an individual any of his debtors who had a counter-claim against him which might be set-off in an action may be relieved of such debt by voluntary set-off by the bankrupt before bankruptcy. If this be so, it is by reason of the mutual credit clause, s 38 (similar to our s 41 of the Bankruptcy Act) of the Bankruptcy Act, 1883. The effect of that clause is to give the debtor after bankruptcy the advantage of set-off, and therefore, to set-off the debt before the bankruptcy cannot be in any sense fraudulent. But after a winding-up there is no such right of set-off, and, therefore to allow a set-off before a winding-up does confer on the debtor an advantage which may be deem to be fraudulent under s 164. I am unable to read the section as this argument requires us to do. Its object is to prevent a fraudulent preference. If it has the meaning suggested, the case of a voluntary set-off must be an unintentional omission in the statute. But I do not think there is any such omission. I think s 164 should be read as meaning that any preference by way of a set-off of a debtor who would have no right of a set-off after winding-up shall be treated in bankruptcy if he had no right to set-off after bankruptcy, and if such a set-off would be a fraudulent preference in bankruptcy it shall be so in a winding-up. |
By this it would mean that s41 of the Bankruptcy Act does not apply in a situation where s 293 of the Companies Act read with s 53(1) of the Bankruptcy Act operates. Taken in the context of our case, this would mean that the bank is not entitled to the set-off as claimed.
To save itself, the bank advanced another argument: that even if the charge instruments were not registered under s 108(3)(k) of the Companies Act and that the set-off (both the common law and statutory type) was not available to bank they are only void against the liquidator at the time when the liquidator was appointed. In this case when the liquidator was appointed the FD had all been up-lifted leaving the liquidator no opportunity to lay his hands on them. To support this, the Singapore Court of Appeal case of Ng Wei Teck v OCBC Ltd [1998] 2 SLR 1 is cited. There the court held that under a similar provision to ours 108(1) of the Companies Act, the effect of the non-registration of a charge is only void against the liquidator at the time when the liquidator was appointed.
I see no reason why this authority should not be adopted in view of the wordings of our s 108(1) of the Companies Act is the same as that of the Singapore equivalent. The liquidator in this case was appointed on the December 11, 1998. By this time, all the FD had been uplifted leaving nothing for this provision to bite on. Such pledges, I find, are therefore not void against the liquidator.
2. The sum of RM55,887.92 FD
These were deposits made by Seow Chee Hong with the bank after February 4, 1998 but similar to those FD of the earlier period, were up-lifted in April 1998. By deduction, pledges of these FD as security would have taken place between the time when the monies were deposited with the bank and the uplifting of these FD. This puts the creation of these collateral well within the twilight period and the ambit of s 293 of the Companies Act to be read with s 53(1) of the Bankruptcy Act. Applying the same rational as above, these pledges, though not registered under s 108(3)(k) of the Companies Act, are not void since they were uplifted and spent after the appointment of the liquidator.
(b) Debit advice
1. A sum of RM8,627,507.93 taken by the bank from OAB's account to repay credit facilities within the period under s 223
Record of these payments is in p 66 of Encl 116 under item 2.2. According to the bank, these were payments made in accordance with the terms of the credit facilities extended to OAB for settlement of trade bills, trust receipts and foreign bills of exchange utilized by OAB in its ordinary course of business. These were bona fide transactions and the bank possessed no knowledge of any impropriety.
Since these dispositions were after the presentation of the winding-up petition s 223 of the Companies Act applies. Prima facie, these payments are void to prevent improper alienation and dissipation of the property of the company in extremis but -
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when a company actually trading, which is 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, paralyse the trade of the company, and great injury, without the counterbalance of advantage, would be done to those interested in the assets of the company, per Lord Cairns LJ in Re Wiltshire Iron Company [1868] LR 3 Ch 443 @ 447. |
In more recent times, the courts in England have expressed harshness of this provision and recommended some form of relaxation in its approach. This can be seen from the judgment of Phillimore LJ in Re Clifton Place Garage Ltd [1970] 1 All ER 353 at p 359:
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This is a very harsh section as applied. We were told that the first result of a petition seeking an order for winding-up of a company by the court is that its bank refuses to honour its cheques, although it will continue to accept receipts in its favour. It follows that, even in a case of a company where the court ultimately refuses the order, serious damage may have resulted from the petition. After all, one of the results of the petition and of such action of the bank is that the company may have great difficulty in paying it employees, and, if it does pay them, the payments if derived from the funds of the company are prima facie void. All these dates from 'the good old days' where landlord and creditors came before anyone else. I am not suggesting that they should come after anyone else; but in my judgment the court should extend indulgence to any disposition by a company honestly designed to ensure that its employees are paid their wages or which was made to enable it to carry on its business and perhaps 'turn the corner'; provided always that it was a reasonable disposition and not dishonest or reckless. |
Though accepting these principles enunciated are correct, the liquidator argues that the bank has not provided any proof that these debit advice were for the continuation of OAB 's business and that the bank had acted in good faith. Further, there were no advantage enjoyed by OAB or its creditors on these dispositions. On the last factor the case of Hamilton v National Australia Bank Ltd [1991] 5 ACSR 432 is cited where McLelland J in the Supreme Court of New South Wales, Australia declares at p 434:
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the essential question for determination is to ascertain whether overall the relevant transaction could at the time reasonably be perceived as offering some advantage, or at least potential advantage, to the company and thereby its general body of creditors. It is necessary to weigh the benefits supposed to flow to the company from the transaction against the detriment to be suffered by the general body of creditors in consequence of the transaction. |
Bearing in mind the above propositions, I shall now proceed to analyse the facts of this case. These dispositions arose from the bank's consent to continue to finance OAB after Arthur Anderson' s reports on the financial viability of OAB and a subsequent meeting between Arthur Anderson, OAB and the bank. As a result of this decision, OAB was allowed to draw on credit to finance OAB's exports against trade bills, trust receipts and foreign exchange bills. And when these instruments matured monies generated therefrom were debited to the bank. This replenishment allowed OAB to operate within its credit limit for its next and subsequent line of export. This was the nature and characteristic of this type of facility. When dispositions were made to the bank generated from this type of arrangement I cannot see how undue preference could have been practised. These dispositions were part and parcel of a facility that benefited OAB directly and its creditors generally. It allowed OAB an opportunity to continue to trade in an attempt to "turn the corner" so to speak. In addition, I do not believe that the bank had acted dishonestly in accepting these dispositions or when extending such credit facility to OAB. And neither do I consider the bank reckless in arriving at such a decision. As disclosed, this decision was only resolved after the evaluation of Arthur Anderson's report which gave an optimistic view on the financial health of OAB. Besides there was also a conference between the bank, Arthur Anderson and OAB before the bank decided to go ahead to continue with the assistance to OAB. This summarizes the bank's prudence in its action. It must be accepted that all commercial decisions come-with risk and when outcome do not match the forecast, as was the case here, the bank cannot be taken to task for the decision it made when such decision was not dishonest or reckless. On these grounds, I am satisfied that the bank has rebutted the presumption that these dispositions were void under s 223 of the Companies Act.
2. A sum of RM20,018,429.30 taken during the twilight period by the bank from OAB account to repay towards credit facilities
These debit advice, according to the bank, were debited from OAB's account on the same arrangement as those above (concerning the sum of RM8,627,508.93), except that these were carried out earlier. The bank added that these payments were part of a wider transaction and were conducted under a running account.
The liquidator, on the hand, raised the same issue of whether the bank was bona fide in carrying out these dispositions and insists that OAB was, at this period, hopelessly insolvent making these payments preferential treatment over other creditors.
Undisputedly this item falls within s 293 of the Companies Act to be read with s 53(1) of the Bankruptcy Act for consideration. To reiterate, the design of this provision is to preserve the sanctity of the pari passu principle by which creditors in a winding-up share rateably in the asset available for distribution. But in order for the liquidator to succeed he must satisfy five conditions - see Sime Diamond Leasing (supra) and Bensa (supra). These are:
that the transaction in question took place within six months prior to the commencement of the winding-up;
that it is the type of transaction mentioned in s 53(1) of the Bankruptcy Act;
that it took place at a time when the company was insolvent;
that the person in whose favour the transaction was effected stood in the relation of a creditor to the company;
that the effect of the transaction was to confer on that person a preference, priority or advantage over other creditors in the winding-up.
The onus of proving whether all these conditions are complied with is on the liquidator, not the creditor - Sime Diamond Leasing (supra).
From the submissions of the parties, I gather that only condition 3 and 5 are questioned. The others, not being commended on, must be considered as satisfied. In any event from the facts presented, I am of the view that they are fulfilled.
Commencing with the insolvency factor, I shall first turn to the Australian High Court case of Sandell v Porter [1966] 115 CLR 666 for assistance. At p 670 of the judgment the definition of insolvency is described in the following manner:
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The conclusion of insolvency ought to be clear from a consideration of the debtor's financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporarily lack of liquidity. It is the debtor's inability, utilizing such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency. Whether that state of affairs has arrived is a question for the court and not one as to which expert evidence may be given in terms though no doubt experts may speak as to the likelihood of any of the debtor's assets or capacities yielding ready cash in sufficient time to meet the debts as they fall due. |
Now turning to the evidence I note that undoubtedly OAB was facing liquidity problem during this period. But from the outlook projected by Arthur Anderson this could be temporary. Its reports say-
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the short term viability review of the Group indicates that OAB has a viable core business with a net profit before tax exceeding RM16 million before finance charges with a surplus cash flow position expected to be generated over the next twelve months. |
Perusing further into Arthur Anderson's investigation I am of the view that against the liabilities of OAB with its assets and secured contracts, OAB was not insolvent though under enormous financial constrain. I have been reminded in the judgment of Sandell v Porter that the interpretation of insolvency of a company should not be left to the experts but in this case, I do not think it is unwise to rely on Arthur Anderson's assessment since this firm of financial consultant had the opportunity to examine and study all the relevant documents and books of accounts of OAB in the course of its evaluation of OAB's financial position at the material time. Who else would be in a better position? Further, I find no challenge mounted by the Iiquidator to indicate that these reports of Arthur Anderson were in any way biased or inaccurate.
The next factor to be considered is whether this transaction was a conferment of preference, priority or advantage on the bank over other creditors of OAB.
As pointed out in Australian High Court case of Airservices v Ferrier 21 ACSR 1 at p 14:
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For the purpose of s 122 (similar to our s 53 of the Bankruptcy Act), the effect of a payment on the other creditors of the debtor is determined objectively. If the payment has the effect of giving a creditor a preference over other creditors, it does not matter that neither the creditor nor the debtor intended to give the creditor preferential treatment. As Starke J pointed out in S Richard & Co Ltd v Llyods (1933) 49 @ 62 the section looks to the effect of the transaction and not to the intent, or state of mind, of the debtor'. But that does not mean that the purpose of the debtor in making a payment has no evidentiary significance. If a payment is a part of a wider transaction or a 'running account' between the debtor and the creditor, the purpose for which the payment was made and received will usually determine whether the payment has the effect of giving the creditor a preference, priority or advantage over other creditors. |
In this case of Airservices Australia v Ferrier a commercial airline company went into liquidation. In the six months prior to winding-up, this airline company had made payments to the civil aviation authority where the company operated its aircraft. Such payoffs, the liquidator of the company claimed, were undue preferential payments. The court, by majority, ruled that there was no undue preference and stated at p 19 of the judgment that the:
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account was an active one with daily dealings between the parties. Services rendered during the preceding month were debited to the account at the beginning of each month. In addition, penalties for late payment were debited monthly. The balance of the account rose and fell as debits and credits were recorded. There was but one account, not a series of separate accounts for each month or for each service. |
The factual matrix of our case is very similar to that of Airservices. There was a running account with credits and debits recorded. When OAB required to export its manufactured goods it used the trade facilities granted by the bank and when these trade bills, trust receipts and foreign exchange bills matured they were credited into OAB's account. The entire purpose of the operation was to sustain the business activity of OAB at that relevant time. I do not think that the debit advice transacted during this period have the effect, as well as, the purpose of giving undue preference to the bank.
They were, as stated earlier, a normal financial business transaction to cater for a company engaged in international trade.
(c) Trade bill & OD charges
1. RM49,537.99 and RM9,299.41 respectively incurred during the period under s 223 of the Companies Act
These were charges by the bank for credit facilities granted to OAB to continue with its business. The laws applicable on this subject are the same as those discussed above under paragraph (b)1 of "Debit Advice". There is no necessity for me to repeat them .As for its application to the facts I find that the bank has proved to the satisfaction of this court that these dispositions were not undue preference.
2. RM1,695.56 & RM139,849.85 respectively incurred during the twilight period
Again these were charges incurred in the use of the credit facilities granted by the bank to OAB for their business activity. The laws are once again that applicable to those discussed under paragraph (b)2 of "Debit Advice" warranting no necessity to go over them again. Similarly, applying the tests as set out to the facts of this claim, I find that condition 3 and 5, which are required to be fulfilled in order for s 293 of the Companies Act to be read with s 53(1) of the Bankruptcy Act to succeed, have not been satisfied by the liquidator. The claim for this item must therefore fail.
(d) Security documents
1. Loan Agreement; 2. Debenture; 3. Account Assignment Agreement; 4. Supplementary Loan Agreement; all made within the twilight period
Arising from these security documents were some of the dispositions considered by this court earlier. Once again for the purpose of determining whether these were undue preference under s 293 of the Companies Act read with s 53(1) of the Bankruptcy Act the five conditions as set out earlier (under paragraph (b)2 of "Debit Advice") must be satisfied. To reiterate, this court is of the view that at the material time when these instruments were created OAB was not insolvent. OAB, as discussed earlier, was facing liquidity problems but not insolvent within the concept as laid down in Sandell v Porter (supra). As the undue preference factor, from facts presented, I find no trace of mala fide on the part of the bank to secure these instruments other than to assist OAB to have an opportunity to regain its business strength. The creation of these instruments was part of this exercise as well as of a wider transaction that began way back in 1995. For the facilities to be made available it was not uncharacteristic of the bank to obtain securities. This was in accordance with normal ordinary banking practices. I am not convinced that these were carried out to give undue preference to the bank.
6. The second supplementary loan agreement created under s 223
Again the law as regards to s 223 of the Companies Act has been spelled out earlier. But I hasten to add that the approach adopted in Re Gray Inns Construction Co Ltd [1980], where banks should freeze the accounts or seize the monies of their customers facing a winding-up petition, is no longer encouraged. In fact the English Court of Appeal in Re Clifton Place Garages Ltd has commented that such practices are very harsh. Finally in Hollicourt (Contracts) Ltd v Bank of Iceland [2001] 1 All ER 281 the same Court decided that this recommendation in Re Gray Inns Construction Co Ltd is no longer applicable. Presently, a company faced with a winding-up petition should be encouraged to continue business in the ordinary way, and the court should extend indulgence to any dispositions made for payment of wages to the staff and those that enable the company to carry on its business provided they are "reasonable disposition(s) and not dishonest or reckless" - Re Clifton Place Garage Ltd (supra). Based on these and the similar reasons expressed earlier on other items under contention for this same period, I find the liquidator's claim to declare this disposition void and for the return of such monies unsustainable.
NON-COMPLIANCE WITH INTERNAL PROCEDURE OF OAB
There is an allegation by the liquidator against the bank which is out of the main stream of undue preferential dispositions under s 293 of the Companies Act read with s 53(1) of the Bankruptcy Act, and s 223 of the Companies Act. This relates to the security documents which the liquidator claims is void for being irregular by the absence of resolutions passed by OAB in the creation of these instruments and insufficient quorum of directors to transact them.
All these, I think, can be dismissed under the Turquand rule as adopted into our Malaysian law through the case of Bukit Nanas Industries Sdn Bhd v Chang Ching Chuan [1998] 1 MLJ 465. The liquidator has not rebutted the presumption that an outsider is not affected by the irregularity of the company. Further, the bank, who benefited from these transactions, had waived these irregularities to allow the stipulations in these documents to continue as they were - see the case of Tan Ah Chim & Sons Sdn Bhd v Ooi Bee Tat [1993] 3 MLJ 633 at p 654. And finally, under s 20 of the Companies Act no act or purported act of a company (including entering into an agreement) and no conveyance or transfer of property to or by the company shall be invalid by reason only of the fact that the company was without capacity or power to do the act or to execute or take the conveyance or transfer.
CONCLUSION
Based on the above, I hereby dismiss the liquidator's requests in Encl 110 with cost.
Cases
Bensa Son Bhd v Malayan Banking Bhd [1993] 1 AMR 417; Bukit Nanas Industries Sdn Bhd v Chang Ching Chuan [1998] 1 MLJ 465; Clifton Place Garage Ltd, Re [1970] 1 All ER 353; Sime Diamond Leasing (M) Sdn Bhd v Precision Moulding Industries Sdn Bhd [1998] 4 AMR 4141; Washington Diamond Mining Co, Re [1893] 3 Ch 95; Airservices v Ferrier 21 ACSR 1; Bah Heng Hong v The Provisional Liquidator [1992] 3 CLJ 1421; Gray Inns Construction Co Ltd, Re [1980]; Hamilton v National Australia Bank Ltd [1991] 5 ACSR 432; Hollicourt (Contracts) Ltd v Bank of Iceland [2001] 1 All ER 281; Lian Keow Sdn Bhd v Overseas Credit Finance (M) Sdn Bhd [1982] 2 MLJ 15; Ng Wei Teck v OCBC Ltd [1998] 2 SLR 1; Sandell v Porter [1966] 115 CLR 666; Tan Ah Chim & Sons Sdn Bhd v Ooi Bee Tat [1993] 3 MLJ 633.
Legislations
Bankruptcy Act 1967: s.41, s.53(1)
Companies Act 1965: s.20, s.108(1), s.108(3)(k), s.223, s.293
Representation
Prakash Menon and Steven Puung (Isharidah, Ho, Cheng & Menon) for Applicant
Christopher Leong and TS Lim (Chooi & Co) for Respondent
Notes:-
This decision is also reported at [2001] 4 AMR 4705
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