HIGH COURT OF MALAYA
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www.ipsofactoJ.com/highcourt/index.htm [2006] Part 2 Case 4 [HCM] |
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HIGH COURT OF MALAYA |
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RHB Capital Bhd - vs - Rashid Hussain |
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ZAINUN ALI, J |
16 DECEMBER 2005 |
Judgment
Zainun Ali J
The full ambit of s 137 of the Companies Act 1965 falls to be considered by this court in the instant case. A judicial determination of the section provides insight into how it operates and the purport of its existence not least when there is no decided authority on this particular provision of the Companies Act 1965 in Malaysia.
BACKGROUND
The factual position of this matter which is, in any case, undisputed is that:
The plaintiff and the defendant executed a service contract dated August 5, 1999 (i.e. the RHC contract). The terms of this contract governs the defendant's employment as the executive chairman and/or chief executive officer and/or chairman and/or director of the plaintiff and its subsidiaries which are described therein.
The RHC contract does not provide for compensation for loss of office. However clause 10(c) thereof provides that the RHC contract may be terminated at any time by the defendant upon the giving of at least 6 months written notice.
The defendant, at the same time also executed a service contract dated August 5, 1999 with RHB Securities Sdn Bhd (RHS) which governs the defendant's employment as the executive chairman of RHS. It is instructive to look at the relevant clauses of the RHS contract. It provides, inter alia, as follows:
Clause 15(c) provides that the RHS contract may be terminated at any time by the defendant upon giving of at least 6 months notice to RHS. In such event, RHS shall make payment to the defendant of an aggregate amount of the sum of RM 1,000,000 for each year of service to be calculated commencing from 1983, up to and including the year in which such termination occurs and such other additional payments as may be determined by the board of director of RHS and agreed to by the defendant.
Clause 15(d) provides that in the event that the defendant ceases to hold the position of executive chairman and chief executive officer of the group (which is defined in the RHS contract to mean the plaintiff, its subsidiaries and the companies in which the plaintiff has an interest in the equity share capital thereof, and includes such companies as may at the time of the RHS contract or at anytime thereafter subsists), RHS shall pay compensation to the defendant in the amount equal to the payment payable to the defendant pursuant to clause 15(c) of the RHS contract; and
Clause 15(f) provides that any payment under the RHS contract shall be made within 30 days of the applicable termination of employment of the defendant.
The defendant submitted his resignation as the executive chairman of the plaintiff by a letter dated January 24, 2003 to the plaintiff, the same to take effect from February 1, 2003. By a further letter also dated January 24, 2003, to RHS, the defendant submitted his resignation as the executive chairman of RHS, and same to take effect from the date of its acceptance by the Kuala Lumpur Stock Exchange.
The Kuala Lumpur Stock Exchange by a letter dated February 14, 2003, accepted the resignation of the defendant as a dealing member of the exchange and as executive chairman of RHS with effect from February 23, 2003.
The board of directors of the plaintiff on January 28, 2003 were informed by one Chong Kin Leong (DW1), who was at the material time, a director of the plaintiff, that, inter alia, a sum of RM20,000,000 representing a gratuity payment for a period of service of 20 years would be paid by RHS to the defendant pursuant to the RHS contract upon the retirement of the defendant on February 1, 2003.
A cheque dated January 29, 2003 for the said sum of RM20 million was issued by the plaintiff, made out to the defendant. The cheque was signed by the said Chong Kin Leong and one Rosley b Ahmad.
The said RM20 million cheque was paid directly into the defendant's bank account on February 7, 2003.
[See exh P30 — deposit slip; see also plaintiff's General Ledger Account No 209130 - cash in bank - RHB Bank Bhd - exh P65, CAB (3) p 32.]
The plaintiff's ledger states: "Gratuity paid on RHB Security behalf 27981 I TS Abd Rashid H." Thus it is not in dispute that:
Under the RHS contract, the defendant is entitled to a payment upon his retirement from RHS; and
The defendant did receive a sum of RM20 million upon his retirement from RHS.
PLAINTIFF'S PLEADED CASE
Based on the above uncontroverted facts, the essence of the plaintiff's claim is the said RM20 million being the purported gratuity referred to in paragraph 12 of the statement of claim was in fact thereafter paid out of the plaintiff's funds to the defendant by way of an RHB cheque no 279811 dated January 29, 2003, which cheque was signed by the said Chong Kin Leong and one Rosley Ahmad, to which the defendant admits (see paragraph 11 of the defence).
The plaintiff claims that the RM20 million payment contravened s 137 of the Companies Act 1965 as:-
The particulars of the RM20 million payment were never disclosed to the members of the plaintiff; and
Further or in the alternative, the RM20 million payment was never approved by the members of the plaintiff in a general meeting, (paragraph 14 of the statement of claim).
Thus the RM20 million payment was unlawful and the defendant holds it on trust for the plaintiff, (paragraph 15 of the statement of claim).
The failure by the defendant to return the RM20 million payment of the plaintiff is an act in breach of trust. Further or alternatively, the defendant has wrongfully had and received the RM20 million payment to the use of the plaintiff. (paragraphs 17, 18 and 19 of the statement of claim).
It is the plaintiff's case that the board of directors of the plaintiff did not approve nor agree that the RM20 million payment to the defendant be made from the plaintiff's funds and in fact the board of directors of the plaintiff was not informed that the RM20 million payment would be made from the plaintiff's funds.
It is the plaintiff's case that as at the date of both the RHC and RHS contracts (i.e. August 5, 1999) the shareholders/members of the plaintiff were RHB and members of the public. At the date of the plaintiff's RHB cheque no 279811 for RM20 million dated January 29, 2003, and at the date of the clearance of the said RM20 million cheque on February 7, 2003) the shareholders/members of the plaintiff were RHB and members of the public.
The plaintiff contends that the shareholding of RHS at all material times was as follows:
On August 5, 1999 (date of the RHC and RHS contracts), the sole 100% shareholder/member of RHS was the plaintiff;
Between December 9, 2002 and February 8, 2003, the RHS shareholding was: RHB Sakura Merchant Bankers Bhd held the beneficial interest in the entire issued and paid up share capital of RHS. From January 6, 2003 to date, RHB Sakura Merchant Bankers Bhd held both the legal and beneficial interest in the entire issued and paid up share capital of RHS.
That from November 21, 2002 to date, the entire issued and paid up share capital of RHB Sakura Merchant Bankers Bhd was held by the plaintiff. Prior to that it was a public listed subsidiary of the plaintiff. As for RHB's shareholding, it is as follows:
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On August 5, 1999 (date of the RHC and RHS contracts) the major shareholder of RHB were the defendant (23.95%), Malaysian Resources Corporation Bhd (22.69%), Kumpulan Wang Amanah Pencen (16.78%) and (9.3%). |
Thus the plaintiff's stance is that the:
shareholders/members of the plaintiff did not approve the RHC contract, neither was there relevant approvals from shareholders/members for the RHS contract; and
shareholders/members of RHB also did not approve the RHS contract.
The plaintiff contends that not only was there no request for an advance from RHS for the plaintiff to pay the RM20 million to the defendant, the plaintiff's board of directors did not approve that the RM20 million payment be made from the plaintiff's funds. That the matter is compounded when the said sum of RM20 million paid to the defendant from the plaintiff's funds and bank account was not disclosed to the shareholders/member of the plaintiff.
That the plaintiff's board of directors were not informed of nor did they approve or agree that the RM20 million payment be made from plaintiff's funds and bank account.
In short, the plaintiff says that:
There was no approval obtained from the shareholders/members of the plaintiff for the RM20 million payment to be made from the plaintiff's funds;
No approval was obtained from the shareholders/members of the plaintiff for the RM20 million payment to be made by RHS;
No approval was obtained from the shareholders/members of RHB for the RM20 million payment to be made by the plaintiff or by RHS;
No approval was obtained from the shareholders/members of RHB Sakura for the RM20 million payment to be made by RHS.
DEFENDANT'S CASE
The first of the defence is that the defendant contends that the RM20 million payment was in law and in fact a payment made to the defendant by RHS on the terms of the RHS contract and which payment was borne by RHS (paragraph 12 defence).
The defendant contends that the particulars of the payment of RM20 million to the defendant by RHS was disclosed to and approved by both the boards of directors of RHS and the plaintiff on November 8, 2002 and January 28, 2003 respectively.
In any case, the defendant contends that particulars of the payment of the RM20 million to the defendant by RHS need not be disclosed to the members of the plaintiff in a general meeting (paragraphs 12.2 and 12.3 defence). Thus the vigorous contention of the defendant is that the RHS contract:
was duly disclosed to and unanimously approved by RHS's shareholders on August 5, 1999, in accordance with the provisions of s 137(5)(b) of the Companies Act 1963; and
was duly approved by the RHS's board of directors on August 5, 1999; and
was also duly approved by the plaintiff's board of directors on August 5, 1999;
even though these facts are not directly relevant since RHS is not the plaintiff. [emphasis added]
That the RM20 million received by the defendant was in fact and in law, a payment made and borne by RHS and not by the plaintiff.
That since the RM20 million was not a payment made by the plaintiff, the consequences are that:
Section 137 has not been breached
The plaintiff is not entitled to any repayment of the RM20 million as prayed for, and
The plaintiff has no cause of action against the defendant.
Thus the RM20 million received by the defendant was:
a repayment made and borne by RHS under the RHS contract, and
the RM20 million cheque made out to the defendant by the plaintiff was intended and in fact meant as repayment by the plaintiff to RHS of part of the plaintiff's inter-company debt due and owing to RHS which at the time of payment totaled some RM182 million.
It is also the defendant's case that the mode of payment where the plaintiff released the RM20 million direct to the defendant instead of paying it first to RHS (which should subsequently pay the defendant) was undertaken for two reasons, i.e.:
It was done for commercial expedience since the same result would have been achieved should the plaintiff choose to pay the RM20 million direct to RHS who would then issue its (RHS's) cheque to the defendant being payment of his gratuity.
It was done, as a necessary precaution to preserve the Capital Adequacy Ratio (CAR) of RHS (which is one of plaintiff's subsidiaries).
Thus based on the plaintiff's pleaded case, the defence and the issues that are not in dispute, the issues for this court's determination are illustrated below.
ISSUES TO BE DETERMINED
To the sole issue proffered by the plaintiff (i.e. whether the RM20 million payment made to the defendant was in breach of s 137(1) of the Companies Act 1965), the defendant added two more adjuncts, i.e.:
For the purposes of s 137 of the Companies Act 1965 who, in fact and in law, made and bore the payment of the RM20 million received by the defendant upon his retirement from RHS? [emphasis added]
Whether the plaintiff is entitled to the payment of a sum of R20 million by reason of s 137 of the Companies Act 1965 — even if it was not the plaintiff who paid the defendant the RM20 million?
Section 137(1) of the Companies Act 1965 reads:
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(a) |
It shall not be lawful for a company to make to any director any payment by way of compensation for loss of office as an officer of that company or of a subsidiary of that company or as consideration for or in connection with his retirement from any such office; or |
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(b) |
for any payment to be made to any director of a company in connection with the transfer of the whole or part of the undertaking or property of the company, unless particulars with respect to the proposed payment (including the amount thereof) have been disclosed to the members of the company and the proposal has been approved by the company in general meeting and when any such payment has been unlawfully made the amount received by the director shall be deemed to have been received by him in trust for the company. |
This court had had the benefit of hearing testimony of witnesses from both sides and submissions and authorities cited by counsel for the plaintiff and defendant, over a period of days in which the trial proceeded. The one question one might ask is this: Why is it important to determine who actually made the RM20 million payment to the defendant? The importance of being earnest about establishing this fact in this case is that it would determine whether s 137 had been contravened. The evidence before this court, both oral and documentary are in themselves, eloquent testimony to the issue at hand. The multifarious issues, inter-connected as they are, would mean that the sum of the many parts herein require that they be given specific and singular treatment.
EVIDENCE (DOCUMENTARY AND ORAL)
It must first be reminded that the relevant documentary evidence adduced are documents of the plaintiff and/or RHS of which their accuracy, authenticity or correctness were never called into question.
The plaintiff's cheque dated January 29, 2003 for RM20 million [exh P28, CAB (1), p 135]: It is never in dispute that the plaintiff issued a cheque for RM20 million which was made out to the defendant.
The RM20 million deposit slip [exh P30, CAB (3), p 6]: It was also undisputed that cheque for RM20 million was paid directly into the defendant's bank account on February 7, 2003.
The plaintiff's General Ledger Account No 209130 [cash in bank - RHB Bank Bhd] (exh P63, CAB (3), p 32): This document being the plaintiff's accounting ledger staring its cash position with its bank, RHB Bank Bhd shows that a payment of RM20 million was paid out of the plaintiff's bank account with RHB Bank Bhd on February 7, 2000. The plaintiff's own ledger states as follows:
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Gratuity paid on RHB Sec. behalf 279811 TS Abd Rashid H |
indicating in express terms that the payment was a payment made on behalf of RHS.
The plaintiff's RHB Bank Bhd statement for its current account No 21412900017794 [exh P31, CAB (3), p 8]: This statement clearly indicates that the plaintiff's said cheque No 279811 for RM20 million was cleared on February 7, 2003.
The plaintiff's debit note of February 14, 2003 issued to RHS for the RM20 million payment [exh P62, CAB (3), p 11]: This debit note which is the plaintiff's own document shows that the plaintiff debited RHS for the RM20 million that was released to the defendant. In short, the uncontroverted fact is that the plaintiff "charged" RHS for the said RM20 million payment that it had released on RHS's behalf to the defendant.
The plaintiff's inter-company loan ledger account with RHS [exh P63, CAB (3), p 33]: This document shows that on the plaintiff's side, the plaintiff maintained an inter-company loan account with RHS under an account No 404000. The entry in exh P63 indicates that as at the beginning of January 2003, the plaintiff owed RHS a total sum of RM182,168,278 million.
RHS inter-company loan ledger account with the plaintiff [exh P64, CAB (3), p 27]: This document shows that at RHS, the RHS inter-company loan account with the plaintiff was maintained under the account No 402000.
The plaintiff debts RHS in its inter-company loan ledger account with RHS [exh P63, CAB (3), p 34]: This document illustrates clearly that upon release of the RM20 million by the plaintiff into the defendant's bank account on February 7, 2003, the plaintiff actually debited RHS with RM20 million. This debit is reflected in the debit entry in the plaintiff's inter-company loan account with RHS, account 404000 - on February 7, 2003 with the following words [exh P63AO]:
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Gratuity pd on RHB Sec. behalf 27981 I TS Abd Rashid H. |
The consequence of that entry is that the plaintiff's total debt of RM182 million owed to RHS at the beginning of January 2003 was actually reduced by RM20 million - which means that the plaintiff's "release" of the RM20 million was in fact a repayment by the plaintiff of part of its outstanding debt due and owing to RHS.
It was received and treated as such by both the plaintiff and RHS.
RHS credits plaintiff in RHS inter-company loan ledger account [exh P64, CAB (3), p 27]: RHS accordingly credited the plaintiff with RM20 million in its own books in relation to its inter-company loans with the plaintiff, after RHS received this debit note of February 14, 2003 from the plaintiff [exh IP62]. This was effected by way of a credit entry on February 14, 2003 of RM20 million in favour of the plaintiff in RHS's inter-company loan account with the plaintiff, account No 402000 in the following words:
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BGLS - TSARH - Gratui |
Significantly, in RHS's books, the plaintiff's total debt ofRM182 million owed to RHS was correspondingly reduced by RM20 million. Thus in both the companies' accounting records, the release of the RM20 million by the plaintiff to the defendant was treated by both plaintiff and RHS as a repayment by the plaintiff of part of the plaintiff's total outstanding debt due and owing to RHS. The defendant contends that the above entries are record of the fact that:
The plaintiff repaid RM20 million of its debt due and owing to RHS,
Both companies acknowledged that fact, and
The plaintiff's debt was actually reduced by RM20 million.
The defendant went on to say that if the plaintiff were to succeed in recovering the RM20 million from the defendant the plaintiff will be unjustly enriched by a windfall of RM20 million. It needs mention that the plaintiff found the defendant's contention above fallacious, on the grounds that:
Quite apart from the facts that there was no physical or actual payment by plaintiff to RHS (as per the RM20 million cheque) the whole transaction merely translated into there being a ledger entry only.
That it is admitted and proven that the RM20 million was made from the plaintiff's funds. Therefore it is the plaintiff which made the payment, not RHS (emphasis added).
That from the entries, it is clear that the said sum of RM20 million relates to the gratuity payment to the defendant and is therefore caught under s 137(1) of the Companies Act i.e. a payment by the plaintiff for the defendant's loss of office in the plaintiff or its subsidiary, RHS.
The plaintiff contends that RHS did not "make" the RM20 million payment within the meaning of s 137(1 )(a) of the Companies Act 1965. It was the plaintiff which made the payment. That making an accounting entry especially after the fact of payment has occurred, does not and could not alter the fact that it was the plaintiff which made the payment. The plaintiff argued that the defendant himself states that the payment was advanced by the plaintiff on behalf of RHS (see paragraph 7 at p 179 CAB exh P54) and any entry in the plaintiff's books that the RM20 million payment was "borne" by RHS does not change the fact that said payment was "made" by the plaintiff. Before this court gives its view on the plaintiff's contention as to the significance of these entries and consequently who made the payment of RM20 million, this court would first illustrate the rest of the documentary evidence so as to give a comprehensive take on the subject.
Looking at the next document which is the forgiveness of the debt proposal p 30 [exh P32 CAB (2)] dated February 26, 2003, it is found that:
The said proposal came about due to the plaintiff having warranted that all liabilities of RHS had been taken up (accounted for) in an agreement whereby the shares owned by the plaintiff in RHS were transferred to RHB Sakura.
The said proposal states in paragraph 2 that "RHB Capital [plaintiff] had in this month paid an amount of RM20 million on behalf of RHB Securities [RHS] to TSARH [defendant] as gratuity for TSARH's service with RHB Securities in accordance with the terms provided in TSARH's service contract with RHB Securities According to the defendant all the inter-company loan transactions and entries regarding the RM20 million were effected before this "forgiveness of debt proposal" was drafted.
The plaintiff contends that it would be appropriate for the plaintiff to "forgive" the amount owing to RHS for the payment made. The plaintiff's strong contention as regards the "forgiveness proposal" is that if the sum of RM20 million was in fact only a mere repayment by the plaintiff to RHS to reduce the inter-company debt due from the plaintiff to RHS by coincidentally a sum equal to that of RM20 million payment, then what amount would there be "owing by RHB Securities" (RHS) for the plaintiff to forgive at all? The plaintiff went on to say that if that was really the position there In any event, though entries of the "forgiveness proposal" were made in the books of the plaintiff and RHS, the board of the plaintiff subsequently decided to reverse the entries. The plaintiff went on to say that this reversal is reflective of the status of the accounting entries — in that accounting entries are not necessarily reliable as "they do not necessarily show the true facts or state of affairs. They are merely accounting entries,"
RHS statutory Financial statements of June 30, 2003 [exh D93, CAB (4) (a), p 39]: PriceWaterhouseCoopers (PWC) was the external independent auditors of RHS, which audited the accounts of RHS for its Financial year ended June 30, 2003. PWC states in RHS's statutory Financial statement (CAB (4)(a), p 1) that the Financial statements gave a true and fair view of the matters required under s 169 of the Companies Act 1965 and the state of affairs of RHS as at June 30, 2003. Importantly, this Financial statement was never altered in anyway and thus remains in its original form, representing a true and fair view of RHS's Financial affairs held by its independent professional auditors.
The plaintiff's annual report ended June 30, 2003 [exh P37, CAB (4)(a), p 40]: PWC being the plaintiff's independent external auditors stated in its report dated February 28, 2003 that the Financial statements gave a true and fair view of the matters required under s 169 of the Companies Act 1965 and the state of affairs of the plaintiff as at June 30, 2003. At p 102, there is note 34 of the plaintiff's financial statement of June 30, 2003, wherein PWC stated that:
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RHS had made a gratuity payment of RM20 million to the former chairman upon his retirement (emphasis added). The former chairman is the defendant. |
The plaintiff's board of director's view at its meeting of June 25, 2003 [exh P90, CAB (2), p 52]: The plaintiff's board of directors meeting of June 25, 2003 in its minutes of which exh P90 is a certified true copy thereof states at paragraph 2(b)(i) that:
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(i) |
RHB Securities RHB Securities recorded a loss before tax ofRM21 .9 million for May 2003 as compared to the budgeted PBT of RM2.2 million due to the reversal of the forgiveness of debt by the company to RHB Securities in respect of the gratuity payment RM20 million to Tan Sri Abdul Rashid Hussain. Revenue for the month of RM2.7 million was lower than the budget of RM8.1 million. |
RHS's board of director's view [exh P50, CAB (2), p 59]: These are certified true copies of extracts of the minutes of RHS's board of director's meeting of July 25, 2003, where paragraph (ix) states:
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The company incurred a loss before taxation of RM33.6 million for the financial year ended June 30, 2003 due largely to a gratuity payment of RM20 million made by the company to Tan Sri Abdul Rashid Hussain upon his retirement from the company. |
The errata to note 34 of the plaintiff's statutory financial statements of June 30, 2003 [exh P38, CAB 4(a), p 157]: Note 34 was originally written as:
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During the financial year, the securities subsidiary company RHB Securities Sdn Bhd made a gratuity payment of RM20 million to the former chairman, upon his retirement. |
During the plaintiff's annual general meeting of December 8, 2003, the plaintiff's management caused an errata to be made on note 34, which reads as follows:
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During the financial year, the company made a gratuity payment of RM20 million to the former executive chairman upon his retirement and this item is currently borne by the securities subsidiary. |
COURT'S VIEW ON THE DOCUMENTARY EVIDENCE AS FOUND IN THE ACCOUNTING RECORDS AND ENTRIES MENTIONED ABOVE
The said entries) by their explicit language provide stark indication of the actual status of the said RM20 million. Whilst it is in no doubt that it was the plaintiff which released its own cheque directly to the defendant, it is also in this court's view, in no doubt who actually bore the payment of the said RM20 million. The RM20 million as reflected in all the entries from both companies (plaintiff and RHS) show that the said amount was taken up, charged to, borne or suffered by RHS.
This court finds the approach on the issue of "payment" by the plaintiff completely inexplicable.
The plaintiff appears to disregard its own accounting records and entries of and those of RHS, as approved by their external auditors, when it proclaimed with complete insouciance that:
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It is admitted and proven that the RM20 million payment was made from the plaintiff's funds. Therefore it is the plaintiff which made the payment, not RHS. |
The plaintiff's reasoning above does no more than merely scratch the surface of the deeper issues involved. In fact a simplistic conclusion such as this would be acceptable only if parties are deprived of sight of the documents and entries and/or diligence of counsel.
But in the absence of these deprivations, there is judicial reluctance to subscribe to the plaintiff's unremarkable determination, as the word "payment", "bearing", "releasing" or "disbursing" are not terms of art. In plain English it simply means a situation where A makes payment on B's behalf to C, and if it was stated later that B bore or took on the burden of the payment, it is clear that it is B who made the payment. There is nothing sinister in this. Surely there is no other meaning or shades of meaning to the term (payment) or any nuance to it whatsoever.
Given the above situation it is clear that it was RHS that made the payment to the defendant.
On this point, it is seen that even the plaintiff's own witnesses PW1 and PW2 could not help but give unwitting and natural responses to the questions of who made the payment of RM20 million to the defendant, when under cross-examination PW1 said:
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PW1: |
I think it was out of plaintiff's accounting but paid by RHS. [emphasis added] |
When further cross-examined by counsel: "So based on the record, it was RHS who made the payment? PW1 answered: Yes.
In the case of PW2, in a series of replies to the defendant's counsel's question during cross-examination, PW2 gave an unhesitating answer that: ".... In reality RM20 million was made and borne by RHS." [see pp 83 & 84 notes of evidence dated January 5, 2003]
To another question from the defendant's counsel: ".... Apart from accounting perspectives, is it also a matter of fact that it was made and borne by RHS?" PW2 also answered in the affirmative.
Thus the unequivocal testimonies ofPW1 and PW2 are reason enough to say that the plaintiff's understanding of the word "payment" in the context of s 137(1) is suspect, for clearly the inescapable fact of who actually made the payment seems to elude the plaintiff.
Moving on to the issue of the "forgiveness proposal", the plaintiff's poser was, since the RM20 million was only a repayment by the plaintiff to RHS to reduce its debt, then what amount would there be owing to RHS for the plaintiff to forgive at all? In fact the plaintiff says, there is nothing to forgive.
This court finds from the materials before it, that the "forgiveness proposal" came about after all the inter-company loan entries regarding the RM20 million had already been effected and the said proposal arose due to the plaintiff's sale of RHS to RHB Sakura Merchant Bankers Bhd (RHB Sakura). Under the sale, the plaintiff gave warranties to RHB Sakura relating to RHS's liabilities. When the warranties were given, RHS's obligation and liability to pay the defendant under the RHS contract had not arisen; in fact it arose after the warranties were given.
To avoid any possible breach of the warranties, the "forgiveness proposal" was made to address the issue of the said warranties given to RHB Sakura that all liabilities of RHS had been taken up and to avoid any breach of warranties.
The "forgiveness proposal" was subsequently reversed, leaving the original entries intact.
In any case, given the factual position, the words "forgiveness proposal" strikes a wrong note, since the words are not so much a misnomer as much as an unfortunate label, giving an erroneous slant to the actual financial position therein.
The "forgiveness proposal" in fact, confirms the fact that it was not RHC which made the RM20 million payment to the defendant, especially when PW2, during cross-examination, agreed that the problem with the Sakura warranty would not have arisen (thus the need for the forgiveness proposal) if payment of RM20 million was not made and borne by RHS. Perhaps one of the most telling evidence as regards the accounting entries is found in note 34 to the plaintiff's statutory financial statements of June 30, 2003 and the errata which followed, on December 8, 2003.
The prelude to this unusual occurrence is that the language of note 34 merely states the fact that it was RHS which made the payment of RM20 million to the defendant. This was plain, simple and innocuous. The plaintiff's board at its annual general meeting of December 8, 2003 however took a slight turn with the language of note 34 to and effected an errata. However even the language of the errata is unable to obscure the fact that it was RHS that made the RM20 million payment. The errata states:
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During the financial year, the company made a gratuity payment of RM20 million to the former executive chairman upon his retirement and this item is currently borne by the security subsidiary. [emphasis added] |
The language of the plaintiff's errata is inconsistent at best and grossly paradoxical at worst, which again illustrates the plaintiff's misunderstanding of the term "payment".
In fact even PW1 could not help the plaintiff's case when she acknowledged during cross-examination that in her view the money (RM20 million) was made out of the plaintiff's account but paid by RHS. When reiterated by the defendant's counsel that: "So based on the record, it was RHS who made payment?" PW1 answered in the affirmative. (See notes of evidence for December 7, 2004, pp 30 and 51).
The plaintiff's second witness PW2 was of a similar view with PW1 as regards the errata as established during cross-examination as seen at p 107 of the notes of evidence for January 5, 2005. Thus the errata much like a comedy of errors, did not in any way change the true position that in fact, it was RHS which made the payment of RM20 million to the defendant. Even the plaintiff's statutory financial statements and that of RHS as of June 30, 2003 do not assist the plaintiff. Page 39 of RHS's statutory financial statements containing the report of its external auditors i.e. PriceWaterhouseCoopers (PWC) affirmed by one Ahmad Johan Roslan, states that the financial statements give a true and fair view of the matters required under s 169 of the Companies Act 1965 and the state of affairs of RHS as at June 30, 2005.
Since the said financial statements were never amended or altered in any way, it represents a true and fair view of RHS's financial affairs held by its independent professional auditors.
Likewise in the plaintiff's annual report for the period ended June 30, 2003, PWC as its external auditors had stated in its report of August 28,2003 that the financial statements gave a true and fair view required under s 169 of the Companies Act 1965 and the state of affairs of the plaintiff as at June 30, 2003. (exh P37, CAB 4(A), p 155).
Compare this with the plaintiff's board of director's meeting of June 25, 2003 (exh P90) where it was also the board's view that it was RHS which paid and bore the gratuity payment ofRM20 million to the defendant.
The significance of the above mentioned financial statements and statements in the plaintiff's annual report attesting and confirming that the payment of RM20 million is made by RHS bears heavily.
Seen in this light, the language of the errata is a contradiction in terms with the rest of the entries in the accounting record of both the plaintiff and RHS. In fact it is this court's view that the position taken by the plaintiff on the significance and importance of the entries in their own records appear to be at odds with the factual position, when the plaintiff caused an errata to be effected. If, as the plaintiff had time and again reiterated, that the accounting records are "irrelevant" or are "mere entries", it is farcical that the plaintiff then thought it fit to alter the record, when they effected the errata. Why bother at all if these are "mere" entries and could be altered capriciously and at will by the company? Such is the plaintiff's position and that the errata has much to do with the question posed vis-à-vis s 137, is not discounted.
Coming back to the stand taken by the plaintiff as regards its annual report ended June 30, 2003 and RHS's statutory financial statements ended June 30, 2003, the essence of it is that the plaintiff is dismissive of the auditor's opinion on the same.
The plaintiff's views are:
"The auditors opinion is irrelevant to determine whether there is a breach of s 137" and at p 25 of plaintiff's submission, plaintiff said: "PWC's opinion on whether the accounts are true or fair statements of the affairs of the company is of no significance."
In any event, such statements do not show at all whether PWC considered who made this RM20 million payment under s 137 of the Companies Act 1965 or whether the payment complied with s 137.
There is no evidence that PWC even considered s 137 vis-à-vis the RM20 million payment and even if they did, their opinion on the law would be irrelevant. [emphasis added]
The plaintiff's disregard for the duty of auditors seems to be at variance with the current consciousness of the statutory and professional status of auditors.
The plaintiff appears to remain misguided on the role of auditors (internal or external). This court finds that s 174 of the Companies Act 1965 would therefore be a good place for the plaintiff to start getting acquainted with this important component in corporate governance.
In the statutory financial statements of RHS and the plaintiff's annual report mentioned earlier, the auditors have a professional responsibility to make sure that the financial information is reliable. Auditors obviously have considerable legal responsibility for their work, especially in detecting corporate malfeasance.
PriceWaterhouseCoopers in both the above mentioned statutory financial statements and annual report gave unqualified statements as regards the accounts and state of affairs of the company (plaintiff).
This, and the clear language in s 174B of the Companies Act where it is stated that:
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If an auditor, in the cause of the performance of his duties as auditor of a company, is satisfied that:
he shall forthwith report the matter in writing to the Registrar. |
makes clear the professional duties of auditors. The penal consequence of such failure is imprisonment for 2 years or a fine of thirty thousand ringgit or both.
In the instant case, there was no such auditor's report of any breach or non-observance by the plaintiff or RHS of any of the provisions of the Companies Act.
In fact under s 169(4) of the Companies Act, all companies incorporated under the Act are statutorily required to have its profit and loss account and balance sheets duly audited before the accounts are presented at the annual general meeting.
In any case should there be any discrepancy or if the report of the auditor is questionable, the auditor stands to be questioned by shareholders at the AGM. In this connection it is apposite to note that no criticism whatsoever of PWC's conduct in this regard was even remotely suggested by the plaintiff.
Coming back to the instant matter, it is untenable therefore for the plaintiff to submit at p 25 (plaintiff's submission in reply) that:
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In any event, such statements do not show at all whether PWC considered who made the RM20 million payment under s 137 of the Companies Act or whether the payment complied with s 137 Companies Act. |
This court disagrees with the plaintiff's view and this court's view is that, it is not without significance that PWC had stated that in the above mentioned statements and accounts that it was RHS which made the payment of RM20 million to the former chairman. The plaintiff's submission that entries in the audited accounts are not reliable facts and cannot be relied on since the entries are changeable at will, do not stand up to scrutiny. It is evident that nowhere in the pleadings or at the trial were the entries challenged.
A bare allegation as it were, that the accounts are not necessarily accurate or unreliable is insufficient. The plaintiff has to substantiate their contention. In Ho v Comptroller of Income Tax [19941 SGITBR 2, the board accepted the HK Income Tax Board of Review's opinion that "if a taxpayer wishes to challenge the accuracy of his own audited statements .... made by a director it is not sufficient merely to say that .... a mistake was made .... Evidence to substantiate the mistake must be given in the strongest terms."
Then again in ABC Supermarket Pte Ltd v Kosma Handlings Pte Ltd (The Management Corporation Strata Title, 3rd party) (2004) SGDC 193, the deputy registrar in the lower decision had decided that "the figure in support of the alleged losses .... were based on the audited profit and loss accounts of the plaintiff's. The defendant's objection to its admissibility is misconceived ...."
In the instant case, the plaintiff had not challenged the accuracy of these accounts during the hearing and it is too late for them to do so during submissions.
In this context an imperative provision to consider is s 34 of the Evidence Act 1930 which provides:
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.... Entries in books of accounts regularly kept in the course of business are relevant whenever they refer to a matter into which the court has to inquire, but the entries shall not alone be sufficient evidence to charge any person with liability. |
It is explained in The Annotated Statutes of Malaysia (Butterworths, 2000 Reissue) that this section is based upon the principle that entries made regularly in the course of business are likely to be accurate. There is in fact the strongest improbability of untruth in such entries.
As to the second limb on sufficiency to charge a person with liability, what is necessary in each case is whether, besides the entries in a book of accounts, there is any evidence to prove that the transaction referred to in those entries actually took place.
In Sim Siok Eng v Poh Hua Transport & Contractor Sdn Bhd [1980] 2 MLJ 72 the court decided that the corroboration may not necessarily always come from extrinsic evidence, as it may intrinsically be proved by the book of accounts itself.
In view of the statutory requirements for the making of accurate accounting statements by companies and auditors to confirm that the accounts give a true and fair view of the state of affairs of the company and that the accounts have been made out in accordance with the applicable approved accounting standards (s 174 of the Companies Act 1965), and given the rules and duties of company directors and auditors, the plaintiff's counsels' argument that the entries in the audited accounts of the company are inaccurate means that the company is exposing its directors and auditors to liability under the Act. In fact, the plaintiff company may be incriminating itself too.
In view of the foregoing, one has to look again at s 137 and see how that section is treated by both the plaintiff and defendant.
The plaintiff maintains that despite the facts and circumstances in this case:
The payment of RM20 million was made by the plaintiff:
That the payment had not been disclosed to and obtained approval of the plaintiff's shareholders;
That the plaintiff's board of directors did not approve that the RM20 million payment was to be made from plaintiff's funds on behalf of RHS;
That there was no request from RHS to the plaintiff to make the RM20 million payment to the defendant.
This court, after much scrutiny of the court records finds that:
Before their execution, both the proposed RHC and RHS contracts were presented to the board of directors of the plaintiff on August 5, 1999 for their consideration and approval. RHS was at that time a wholly owned subsidiary of the plaintiff.
The defendant's first witness Mr. Chong Kin Leong (DW1) was given express authority by the plaintiff's board of directors to sign the RHC contracts for and on behalf of the plaintiff. This is a critical point, in view of s 137 and the exemption clause therein i.e. s 137(5)(b). Regard must be had to exh P13, p 7(CAB(2)), where pursuant to s 147(6) of the Companies Act 1965, Mr. Chong Kin Leong was the duly appointed representative of RHB Capital Bhd (plaintiff).
Was Mr. Chong, as the corporate representative of the plaintiff, authorized to act on the plaintiff's behalf in the EGM of RHS of August 5, 1999 when the service contract with the defendant was entered into with the executive chairman of the company, based on the terms and conditions of the service contract attached as appendix 1?
The plaintiff at the material time was the sole shareholder of RHS - and in accordance with s 147(6) of the Companies Act, DW1 as the corporate representative is therefore authorized to state that any act, matter or thing, or any ordinary or special resolution, required by this Act or by the memorandum or articles of the subsidiary to be made, performed, or passed by or at an ordinary general meeting or an extraordinary general meeting of the subsidiary has been made, performed or passed, that act, matter, thing, or resolution shall, for all purposes, be deemed to have been duly made, performed or passed by or at an ordinary general meeting, or as the case requires, by or at an extraordinary general meeting of the subsidiary.
The terms and conditions of the RHS contract were duly approved by RHS's board of directors on August 5, 1998. DW1 by the resolution was expressly authorized by RHS to sign the RHS contract for and on behalf of RHS.
The terms and conditions of the RHS contract was also approved by the members of RHS through a member's resolution at an EGM held on August 5, 1999.
DW1 attended the said EGM of RHS on August 5, 1999 as the duly appointed representative of the plaintiff pursuant to s 147(6) of the Companies Act.
DW1 was at all material times the duly appointed and authorized representative of the plaintiff to attend and to act on behalf of the plaintiff at all shareholders meeting of RHS - pursuant to s 147(3), based on the director's circular resolution of the plaintiff passed on September 11, 1997. DW1 signed both the RHC and RHS contracts on August 5, 1999 for and on behalf of the plaintiff and RHS respectively based on terms and conditions as approved by the respective boards.
In the matter of the defendant's retirement from RHS and approval for payment under the RHS contract, DW1 was invited and attended the RHS's board of director's meeting in his capacity as the finance director of RHB.
At that meeting, DW1 acted in his capacity as the finance director of the RHB Group of Companies because this was one of the financial obligations of RHS.
Subsequently at the plaintiff's board of directors meeting on January 28, 2003 DW1 as director, reminded the board that under the RHS contract, RHS had an obligation to pay the defendant a total of RM20 million, upon his retirement. This was noted by the board in its minutes.
The total sum of RM20 million, was calculated based on RM1 million for each year of service which the defendant rendered to RHS commencing 1983, in accordance with the terms and conditions of the RHS contract.
As this court had taken note of DW1's duties as finance director of the RHB group of companies, it is obvious that DW1 had clear authority to manage the movement of funds between the plaintiff and RHS, which amongst others, govern the inter-company loan agreements which had been approved by the board of directors of both the plaintiff and RHS.
As a corollary to those duties, DW1 was himself instructed by the board of directors of the plaintiff to set about making the payment to the defendant, which he dutifully executed.
However the troubling feature in this suit is, how could the plaintiff possibly construe that the RM20 million payment was under any circumstance, made by the plaintiff, flying in the face of facts and evidence to the contrary.
Even assuming on the off-chance, that the plaintiff is correct that it was the plaintiff which paid the RM20 million, the question is, why? Why should the plaintiff do so, when the RHC contract with the defendant makes no provision whatsoever for such payment to the defendant; when it is clear that the plaintiff is not obliged legally or morally nor duty bound nor under duress, to make such payment.
However the position clears up when one examines the terms of the RHC and RHS contracts with the defendant; when one critically analyses the collective significance of all the accounting entries, the Financial statements, the auditors reports and the annual reports admitted herein and the oral testimony of witnesses where it is clear that the sum total of all these, point unerringly to the fact that the plaintiff made out the RM20 million cheque to the defendant on behalf of RHS, and RHS bore the said payment in its books.
In the light of the above, it is time to now appraise s 137 of the Companies Act 1965.
A good starting point would be the explanatory statement to the Companies Bill 1965 which states:
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Clause 137 strictly limits the right of a company to make payments to a director on his retirement. Attention is drawn especially to the exemptions contained in sub-clause (5) and to the extension of the provisions of the clause contained in sub-clause (7). Greater disclosure to the shareholders is provided than in the existing legislation. [emphasis added] |
Quite rightly, the purpose of s 137(1 )(a) is to protect shareholders from those in management (directors) from utilising the company's assets in their favour when it involves compensation for loss of office or as consideration for or in connection with their retirement from any such office. The plaintiff's submission, based on the notion, as it were, that it was the plaintiff that made the payment ofRM20 million was therefore beyond comprehension. The plaintiff contends that the applicability of s 137 in this case admits of two rules of construction, both literal and purposive; that whichever rule of construction is applied, the payment of the RM20 million to the defendant is still a breach of s 137. In short, the plaintiff would have us believe in this that all roads lead to Rome. The plaintiff argues that this is because:
The board of directors of the plaintiff did not approve the RHS contract, (see p 39 of the plaintiff's submission).
The shareholders/members of RHB did not approve the RHS contract, (p 39 of the plaintiff's submission and PW1's witness statement p 12)
The plaintiff's board of directors did not approve that the RM20 million payment be made from the plaintiff's funds nor was there a request for an advance from RHS to pay the RM20 million to the defendant.
Neither did the plaintiff's board of directors approve that the RM20 million payment be made from the plaintiff's funds on behalf of RHS.
There was no request from RHS to the plaintiff to make the RM20 million payment to the defendant.
There was no relevant approval from the shareholders/members of the plaintiff for the RM20 million payment, to be made from the plaintiff's funds.
There was no approval from shareholders/members of the plaintiff for RM20 million to be made by RHS.
There was no approval obtained from the shareholders/members of the RHB for the RM20 million payment to be made by the plaintiff or by RHS.
There was no approval obtained from the shareholders/members of RHB Sakura for RM20 million payment to be made by RHS.
The essence of the plaintiff's lengthy diatribe is that, despite the internal accounting entries, nothing can change the fact that the RM20 million payment was made by the plaintiff out of the plaintiff's funds and therefore it was not made by RHS.
The plaintiff went on to say that this has the consequence that there was therefore no disclosure to and approval of the plaintiff's shareholders/members "in accordance with the purpose of s 137(1), otherwise the object and purpose of s 137(1) would not be met and can be circumvented."
The plaintiff also contends that the precise amount of the payment needed be made known to the shareholders before they could grant the approval; that the so called approval by the board of directors of the plaintiff (on the RHS contract) on. August 5, 1999 is insufficient approval vis-à-vis s 137(1).
The plaintiff further contends that the purposive construction of s 137(1) requires that even the plaintiff's shareholders should approve the payment at the time of the RHS contract. The plaintiff's shareholders at the time of the RM20 million payment, were RHB and members of the public.
Thus it is not sufficient for only the plaintiff's board of directors to approve the RHS contract without including the approval of the plaintiff's shareholders as well, i.e. RHB and members of the public.
The plaintiff continued in the same vein, when it said, ".... It would give rise to an absurd situation if the position in law is that if RHS was making the payment, the plaintiff's shareholders do not need to approve it but if the plaintiff was making the very same payment, they need approval from the plaintiff's shareholders." This court finds the plaintiff's contention above completely wide off the mark.
Whilst it is true that s 137(1) is to protect shareholders/members from directors and those in management from the shareholders fund being dissipated in compensation payments or "golden handshakes" and the like, it is clearly erroneous for the plaintiff to construe that it requires disclosure to and approval of the shareholder's shareholders i.e. the plaintiff's shareholders as well.
A plain reading of s 137(1)(a) would show that the intention of Parliament is clear. The legislative intent is clearly meant to provide "greater disclosure to the shareholders ...."
It is this court's view that it is certainly not the legislative intention to provide disclosure to the shareholder's shareholders, for to do so would mean that the plaintiff is going beyond the legislative intent, rendering a bizarre and tortuous construction to what Parliament had contemplated.
In fact if the literal meaning of an Act is clear and in accordance with the legislative purpose, it would be followed (see Tan Kim Chuan v Chandu Nair [1991] 1 MLJ 42). As Cockburn CJ said in R v Bishop of Oxford (1879) 4 QBD 245:
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.... That a statute ought to be so construed that, if it can be prevented, no clause sentence or word shall be superfluous, void or insignificant. |
It is this court's view that if one were to adopt the plaintiff's construction of s 137(1)(a) of the Companies Act 1965 requiring disclosure to and approval of the shareholder's shareholders as well, we would be over-stretching the language.
The plaintiff's attempt to make s 137(1) "clearer" as it were, as amplified in its submission, lends the construction of the section unnecessary surplusage and by imposing another meaning, one would not be construing the statute but actually enacting one!
Perhaps to bolster a bad case, the plaintiff was on record to contend that:
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.... It is indeed very strange that the compensation clause for loss of office in the whole group appears only in the RHS contract when logically it should appear in the holding company's contract .... [emphasis added] |
It is not without significance that the validity of the two contracts (RHC and RHS) is not in issue. To say that it is illogical that the compensation clause is in the RHS contract and not in the holding company's contract, is neither here nor there and is in fact irrelevant.
With regard to the plaintiff's contention that the precise amount of the payment must be disclosed, this court finds the contention otiose, as such requisite is absent in s 137(5)(b) since what is merely required therein is only that the particulars of the agreement is given.
At the risk of being repetitive, it must be said again that the RHS contract under which the RM20 million was provided for and which was paid by RHS to the defendant had the prior unanimous approvals of:
RHS's board of directors [see Exh Pl4; SPW1,Q&A29; SDW1 paragraph 12 & 13].
The plaintiff's board of directors [Exh P12; SPW1 Q & A 27; SDW1 paragraph 11].
RHS's shareholders in general meeting [Exh P13; SPW1 Q&A 28; SDW1 paragraphs 12 & 13].
These facts were confirmed and supported by the evidence from both the plaintiff and defendant.
Since the RM20 million was not paid by the plaintiff, it would mean that the company mentioned in s 137(1) of the Companies Act 1965 is RHS and certainly not the plaintiff. Regard must be had once again to the relevant clauses in the RHS contract, particularly clause 15(c) which describes the payment as being ".... In recognition of the past services rendered by [the defendant] to the company."
From the facts disclosed in this court, the event which triggered off the payment is the defendant's departure from the company upon completion of the sale of his shares in RHB.
This fact is crucial, since the RM20 million was clearly part of the remuneration package of the defendant and was not intended to be paid with the object of compensating the defendant for loss of his office or as consideration for or as consideration in connection with his retirement.
The crux of s 137(1) really is, what exactly, is the nature and circumstance of the payment? These must be scrutinised with a view to determining its true character.
If it can be determined on the facts that the payments do not come within the purview of s 137(1)(a), then one has to look at the exceptions as are found in the said section.
The fact that the payment coincided with the defendant's retirement does not alter the fact of the nature of the payment, insofar as s 137(1) is concerned.
The authority for this proposition may be found in the decision of the Supreme Court of Victoria in Lincoln Mills (Aust) Ltd v Gough [1964] VR 193 which is persuasive, as are the rest of the authorities on the equivalent provision of s 137 cited in the instant case.
Lincoln Mills v Gough was an action by the company against a managing director to recover sums of money paid to him by the company. These monies were paid as compensation to the managing director upon his retirement as provided for in a written service agreement the managing director had with the company.
Section 129(1)(a) of the Australian Companies Act 1961 refers to "Compensation for loss of office as a director and as consideration for or in connection with his retirement from such office."
The defendant's argument was accepted by the court, when it submitted that the payment to him was made pursuant to the express terms of a written contract on the occurrence of an event therein provided for. That event was the termination by the defendant of the agreement which provided for his servicing the company and the company employing him as the managing director and general manager of the company for a specified term.
The defendant contended that his ceasing to hold the office of director had nothing to do with payment to him of the sum in question. The defendant said that his right to receive it and the company's obligation to pay it was in no way dependant upon his loss of or retirement from the office of director.
Thus in Lincoln Mills, the Supreme Court in construing s 129 (which is almost in pari materia order with s 137) held:
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The question whether the section applies in any particular case must, in my view, be determined by inquiring as to the nature of the payment that has been made. Assuming it has been made to a person who has held and has ceased to hold office as a director by reason of removal or retirement, it cannot be postulated in every such case chat the payment falls into the category of those rendered unlawful by s 129(1)(a). The nature and circumstances of the payment must be looked at with a view to determining its true character. If as a result of investigation it becomes apparent chat it is a compensation for loss of office of director or a consideration for retirement benefit therefrom it will be unlawful unless the sanctions of a general meeting has been obtained. If, on the other hand, the payment appears to have been made as a result of other considerations then even though it may be coincident with the loss of or retirement from office as a director, the payment will not fall within those prohibited by the section. My view as to the payment in the present case is that it was not made with this intent or object of compensating the defendant for loss of his office as a director or as consideration for his retirement therefrom. It was a payment which the plaintiff company made and was liable to make to the defendant in the events that had happened on the termination of his office as managing director .... In my judgment therefore, the payment was not rendered unlawful by the section. |
It would be instructive to now make reference to authorities in other jurisdictions on the same subject (i.e. s 137(1)), even if the language of the equivalent provision may differ slightly. A comparative dimension would hopefully provide an in-depth perspective to the said provision.
The Singapore equivalent of s 137 (i.e. s 168) has been judicially considered as are determined in several case laws, such as Britannia Brands (Singapore) Pte Ltd v Sushil Premchand [1995] 1 SLR 128; Grinsted v Britannia Brands (Holdings) Pte Ltd [1995] 3 SLR 157; Grinsted v Britannia Brands (Holdings) Pte Ltd [1996] 2 SLR 97; Fasi v Specialty Laboratories Asia Pte Ltd (No 2) [1991] 4 SLR 503.
In fact, s 168 of the Singapore Companies Act (Cap 50 1990 edn) is in pari materia with our s 137, in that the payment in the section is not limited to compensation for loss of office as a director, but includes an officer of the company.
In Grinsted v Britannia Brands (Holdings) Pte Ltd [1996] SLR 97 the Singapore Court of Appeal in considering the ambit of s 168(1) of the Singapore Companies Act (Cap 50) approved the decision in Lincoln Mills. The court looked at the nature and circumstances of Grinsted's remuneration and held that the severance benefits were a part and parcel of the remuneration package, that the severance benefits were not intended to be paid with the object of compensating Grinsted for loss of office or in consideration for his retirement therefrom.
The payments were in fact payment which Britannia Brands agreed to make and were liable to make to Grinsted in the event that his employment was terminated in accordance with the terms in the agreement. In such a situation, the court found that the payment as severance benefit do not fall within s 168(1).
As is obvious, the emphasis placed in the cases mentioned above is on the object of the payment. Then again in the Singapore case of Fasi v Specially Laboratories Asia Pte Ltd (No 2) [1999] 4 SLR 503, it was held that not every The Privy Council held that the respondent was entitled to the money as s 191 of the New Zealand Companies Act 1935 did not apply to covenanted payments.
Payment made to a director upon cessation of his employment is caught by the section (s 168(1). Only payments aimed at compensating the director for loss of office are covered. Payments which are made due to other considerations, even if they may be coincidental with the loss of office, will not be prohibited under s 168.
In Fasi, it might be stressed that the true nature of the severance payment was not compensation for loss of office but rather a payment in exchange for a period of non-competition by the plaintiff.
The intent and object of the payment was consideration for the plaintiff's promise not to compete with the defendant's business for a specified period of time after leaving the company. Thus the court found that the severance compensation had not contravened s 168 and was not unlawful.
However, in view of this and in spite of the Singapore Court of Appeal decision in Grinsted v Britannia Brands (Holdings) Pte Ltd [1996] SLR 97 it is strange that the plaintiff should cite a Singapore High Court decision on the same point and on the same provision i.e. s 168, in support of its contention, (i.e. Britannia Brands (Singapore) Pte Ltd v Sushil Prernchand [1993] 1 SLR 128) when that particular point of law had been reversed by the Singapore Court of Appeal in Grinsted.
It would appear that regard to the doctrine of stare decisis seems to escape the plaintiff.
What is apparent is that in all these authorities, it is crucial to look at the intent and object of the payment.
Of equal interest is the New Zealand position and its equivalent section is found ins 191 of the Companies Act 1955, which was tested in the case of Taupo Totara Timber Co Ltd v Rowe [1978] AC 537.
In the Taupo case, an appeal from New Zealand to the Privy Council, the respondent entered into a service contract to serve as a managing director of the appellant. A clause in the service contract provided that in the event the appellant is taken over, he would be entitled to be paid by the appellant a sum equivalent to five times his gross annual salary upon his resignation in accordance with the clause. The company was taken over and the respondent resigned.
The Privy Council held that the respondent was entitled to the money as s 191 of the New Zealand Companies Act 1955 did not apply to covenanted payments.
Lord Wilberforce observed that:
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The respondent as well as being a director, was an employee, and as other employees with this company, had the benefit of a service agreement. He was described as an "employee" in it .... There was no obligation on them to seek approval of this agreement by the company in general meeting s 191 of the New Zealand Companies Act reads:
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What can be gleaned from Lord Wilberforce's judgment is that the words "proposed payment" indicate that the prohibition relates to unconvenanted payments as opposed to covenanted payments which the company is legally obliged to make.
It is interesting to note that the Singapore Court of Appeal in Grinsted v Britannia Brands (Holdings) Pte Ltd [1996] 2 SLR 97, did not indicate that a distinction should be made between covenanted and uncovenanted payments since emphasis in these circumstances is always placed on the purpose and object of the payment.
The position ins 137 of the Companies Act 1965 suggests that the prohibition of payment of compensation applies not only in connection with the office of director but also to any director for loss of office "as an officer", (note that the words "as an officer" are absent in the New Zealand statute as well as in s 312 of the English Companies Act 1985) unless the particulars of the proposed payments have been disclosed.
It would appear that s 137 applies to both covenanted and uncovenanted payment unless the particulars of the covenanted payment under the service contract had previously been disclosed to and approved by a special resolution of the company under s 137(5)(b).
As the court in Grinsted v Britannia observed in applying s 168 and which can be applicable too in s 137, and in the light of the authorities above mentioned, it is apparent that even if one is employed by the company in an executive position one is not necessarily caught by the sanction or prohibition in the section. One would also have to be a director of the company, since what is not lawful by the section is "for a company to make to any director any payment."
In short, one must be a director as well as being employed by the company in an executive position. The second point to note is that not every payment to a director upon the cessation of his employment with the company, would fall within the prohibition of s 137(1).
Though the word "compensation" in all these authorities is not fully explored, this court would take the view in the light of the rationale inherent in section s 137, that "compensation" generally refers to payment to "recompense" the director or officer concerned, following the loss of office. But if the payment has no connection with the loss of office and where it is shown that the true character and nature of the payment arises from other considerations, then the said compensation payable is not within the prohibition of the section.
In view of the foregoing facts, pleadings, evidence (both oral and documentary) and authorities cited by parties, it is this court's view that the RM20 million payment to the defendant was a legitimate payment under the terms of his service contract as part of his remuneration package. It was not paid with the object of compensating the defendant for loss of his office or as consideration for or in connection with his retirement.
It bears repetition that this fact is borne out in clause 15(c) of the RHC contract which describes the payment as being " .... in recognition of the past services rendered by the defendant to the company."
Even if the postulation is that the payment coincided with the defendant's retirement, it does not alter the nature of the payment so as to make it fall within s 137(1) of the Companies Act 1965. In other words, it was a payment which RHS had agreed and was liable to make to the defendant in the event that had happened upon his ceasing to hold his office (Lincoln Mills v Gough [1994] VR 193) under the terms of the RHS contract. This construction will not only attain the just ends of the section (s 137), it would also secure its manifest purpose.
As the payment of RM20 million to the defendant was in fact and in law, a payment by RHS and not the plaintiff, and since it attracts the exception in clause (3) (b) of s 137, the issue of approval as contemplated by the plaintiff under s 137(1) (a) falls by the wayside and is therefore irrelevant.
Consequently the plaintiff's entire claim is without basis and is hereby dismissed with costs.
On a final note, the defendant's counsel sought an order for a certificate for 2 counsel, pursuant to Order 59 r 19 of the Rules of the High Court 1980.
In view of the novel point of law raised in this suit (since s 137 has never been judicially determined in Malaysia) and the fact that in the course of the travaux prepatoire of this case, the legal complexity involved is heightened, and lastly, based on the principles expressed in cases such as Kamalam Roman v Eastern Plantation Agency (Johore) Sdn Bhd, Ulu Tiram Estate, Ulu Tiram Johore [1996] 4 MLJ 674 this court finds no good reason to deny the defendant obtaining a certificate for counsel pursuant to Order 59 r 19 of the Rules of the High Court 1980.
Cases
ABC Supermarket Pte Ltd v Kosma Handlings Pte Ltd (The Management Corporation Strata Title, 3rd party) (2004) SGDC 193; Britannia Brands (Singapore) Pte Ltd v Sushil Prernchand [1995] 1 SLR 128, HC; Fasi v Specialty Laboratories Asia Pte Ltd (No 2) [1991] 4 SLR 500, HC; Grinsted v Britannia Brands (Holdings) Pte Ltd [1995] 3 SLR 157, HC; Grinsted v Britannia Brands (Holdings) Pte Ltd [1996] 2 SLR 97, CA; Ho v Comptroller of Income Tax [1994] SGITBR 2, HK; Kamalam Raman v Eastern Plantation Agency (Johore) Sdn Bhd, Ulu Tiram Estate, Ulu Tiram Johore [1996] 4 MLJ 674, HC; Lincoln Mills (Australia) Ltd v Cough [1964] VR 193, SC Vic; R v Bishop of Oxford (1879) LR 4 QBD 245; Sim Siok Eng v Poh Hua Transport & Contractor Sdn Bhd [1980] 2 MLJ 72, FC; Tan Kim Chuan v Chandu Nair [1991] 1 MLJ 42, SC; Taupo Totara Timber Co Ltd v Rowe [1978] AC 537, PC.
Legislations
Companies Act 1965: s.137, s.147, s.169, s.174, s.174B
Evidence Act 1950: s.34
Rules of the High Court 1980: Ord.59 r 19
Companies Act 1961 [Australia]: s.129(1)(a)
Companies Act 1955 [NZ]: s.191
Companies Act (Cap 50 1990 edn) [S'pore]: s.168
Companies Act 1985 [UK]: s.312
Authors and other references
Annotated Statutes of Malaysia, The (Butterworths, 2000 Reissue) Companies Bill 1965
Representations
Ira Biswas, PF Vong & TS Lim (Chooi &L Co) for plaintiff
Darryl Goon, CK Ong & Raja Eileen Soraya (Lee Ong & Kandiah) for defendant
Notes:-
This decision is also being reported at [2006] 2 AMR 779.
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