It has been a long-accepted practice that a liquidator, especially the Director-General of Insolvency, could grant sanction, usually by way of a letter, to a contributory or creditor of a wound-up company, to enable them to commence or continue legal proceedings on behalf of the company.
For example, in Lai King Lung (practising as advocate and solicitor under the name and style of Messrs Chris Lai, Yap & Partners, advocates and solicitors) & Anor v Merais Sdn Bhd [2020] 5 MLJ 614, the Federal Court decided on the questions of law on the assumption that the liquidator could grant a sanction. The Court even recognised the long-standing practice for the liquidator to impose conditions (such as indemnities and guarantees) which must be satisfied by the creditor or contributory, before the sanction is given.
The same assumption was made by the Court of Appeal in Leopad Holdings Sdn Bhd v Asian Shield Warehousing Sdn Bhd and another appeal [2021] 2 MLJ 424. See also, Zaitun Marketing Sdn Bhd v Boustead Eldred Sdn Bhd [2010] 3 CLJ 785.
But uncertainty came recently, when the High Court in Small Medium Enterprise Development Bank Malaysia Bhd v Oren Venture Sdn Bhd & Ors and another case [2022] 12 MLJ 247 decided that such a sanction is invalid and inoperable as a liquidator does not have the power to delegate his statutory power to “bring or defend any action or other legal proceedings in the name and on behalf of the company” under the Companies Act 2016.
Among others, Azlan Sulaiman JC held that the sanction letter issued by the liquidator was, in effect and substance, a delegation of his powers under item (a) of the Twelfth Schedule to the contributory to prosecute and to defend the suits therein. However, such delegation of powers is not provided for under the Act. Instead, the Court took the position that the liquidator must decide whether he wishes to bring, continue with or defend the legal action on behalf of the wound-up company. If the liquidator refuses to do so, then the creditor or contributory of a wound-up company could apply to the winding-up court under section 486(2) of the Act regarding any exercise or proposed exercise of any of the powers exercisable by the liquidator in a winding up, including the power to bring an action on behalf of the wound-up company.
The decision in Small Medium Enterprise v Oren Venture indeed caused some uncertainty, especially to ongoing legal suits where the liquidator had granted such sanctions to creditor(s) or contributory(ies).
For instance, in KL Landmark Development Sdn Bhd v Jalex Sdn Bhd [2022] MLJU 2449, the defendant raised a preliminary objection that the plaintiff’s originating summons was defective on, among others, the ground that no proper sanction had been obtained by the plaintiff. The defendant relied on the findings in Small Medium Enterprise v Oren Venture and contended that the sanction which was issued by the Malaysian Department of Insolvency and signed by its Director, contravenes section 486(1) and the Twelfth Schedule of the Companies Act 2016. Having received the preliminary objection letter, the plaintiff’s counsel requested for an adjournment of the hearing to allow the plaintiff to regularise the sanction.
Aliza Sulaiman J decided not to postpone the hearing as Her Ladyship found that there was no justifiable reason for the plaintiff to be given the chance to regularise matters. Further, the Learned Judge found merit in some of the defendant’s preliminary objections and dismissed the plaintiff’s application on, among others, the following grounds:
- i. The affidavit evidence has established that it was one Tan Sri Yap (contended to be a contributory) who had applied for the sanction, but the sanction was issued to Messrs. CNL. The Learned Judge agreed that the liquidator’s power under item (k) of the Twelfth Schedule, e., to assist the liquidator in his duties, does not extend to appointing an advocate to assist a contributory to carry out a liquidator’s duties.
- ii. The Learned Judge found that the defendant had solid reasons to object to the application as the liquidator does not have the power to grant the sanction in the manner that it has been issued. As with the High Court in Small Medium Enterprise v Oren Venture, the Learned Judge held that the sanction was invalid as the liquidator has no power to grant such a sanction.
But it is interesting to note that the High Court in MKP Builders Sdn Bhd v Glocal Tech Engineering Sdn Bhd [2022] MLJU 2640 decided somewhat differently. In MKP Builders, the defendant raised an objection that the plaintiff was incompetent to carry on with the suit pursuant to section 486(1) and the Twelfth Schedule of the Companies Act 2016, following the decision in Small Medium Enterprise v Oren Venture. Nevertheless, Lim Chong Fong J (now JCA) found that the facts in Small Medium Enterprise v Oren Venture were distinguishable from those in MKP Builders by reason that the liquidator did not abdicate its responsibilities by surrendering them to a creditor or contributory, but merely allowed the plaintiff’s solicitors to continue representing the wound-up plaintiff on behalf of the liquidator.
Thus, one may contend that Lim Chong Fong J (now JCA) did not actually disagree with the High Court’s findings in Small Medium Enterprise v Oren Venture. His Lordship found the sanction to be valid as the sanction granted by the liquidator was only to allow the plaintiff’s solicitors (who was already acting for the plaintiff prior to it being wound up) to carry on representing the plaintiff in the suit.
However, the High Court has, in a recent decision in Ooi Kim Geik v Ng King Chong & Ors (Shah Alam High Court Post-Winding Up No. BA-28PW-114-06/2022)[1] decided not to follow Small Medium Enterprise v Oren Venture. In this case, the liquidator granted a sanction to a contributory of a wound-up company, to appoint solicitors to commence/ initiate a civil suit on behalf of and in the name of the wound-up company. Pursuant to the sanction, the contributory commenced the civil action in the Shah Alam High Court (“Civil Suit”). The defendant in the Civil Suit then filed a striking out application on, among others, the ground that the sanction granted is invalid. The defendant likewise relied on the decision in Small Medium Enterprise v Oren Venture. Following thereto, the contributory made an application to the Winding Up Court for, among others, a declaration that the said sanction is proper and valid.
Having heard parties’ submissions as well as having considered the findings in Small Medium Enterprise v Oren Venture, Azmi Bin Ariffin J allowed the contributory’s application and declared the sanction to be proper and valid. Among others, His Lordship (in His Lordship’s oral grounds) takes the position that the liquidator is empowered to grant the contributory the said sanction subject to the liquidator’s authority to impose conditions on such sanctions, pursuant to item (l) of the Twelfth Schedule of the Companies Act 2016 which provides that the liquidator has the power to “do all such other things as are necessary for winding up the affairs of the company and distributing its assets”. This decision is clearly in conflict with the High Court’s decision in Small Medium Enterprise v Oren Venture.
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Conclusion
Whilst the decision in Small Medium Enterprise v Oren Venture appears to be consistent with the Companies Act 2016, specifically section 486 and the Twelfth Schedule, one cannot deny that the granting of sanction by the liquidator has long been assumed to be proper and correct, and even accepted by the courts in previous cases. Further, it is pertinent to note that the Director-General of Insolvency (Malaysian Department of Insolvency) still takes the position that the sanctions granted are valid. The position is now even less certain with the High Court’s decision in Ooi Kim Geik.
Nevertheless, the case of Small Medium Enterprise v Oren Venture is currently pending appeal in the Court of Appeal, which will give the Court of Appeal the opportunity to give further clarification on this issue; of whether liquidators can grant such a sanction.
But until such further decision(s), litigants and liquidators are advised to seek clarification from the winding up court before proceeding, commencing, or continuing with legal proceedings.
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[1] There are no reported grounds as at the date of this article. The sections of this article discussing this decision is based on the oral grounds pronounced by the Learned Judge, and is therefore subject to any changes, amendments or amplifications that may be made in the written grounds.
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This article is intended to be informative and not intended to be nor should be relied upon as a substitute for legal or any other professional advice.
About the Author
Amy Hiew Kar Yi
Partner, Corporate Disputes, Construction, Projects & Energy
Harold & Lam Partnership
amy@hlplawyers.com
