Published June 16, 2020
The Malaysia Court of Appeal has delivered its Grounds of Judgment dated 12.6.2020 in the case of Litar Sistem Adilkap Sdn Bhd v Lee Teak Hock & Lee Soon Hong [Appeal No.: A-02(NCC)(A)-1508-08/2019]. This case mainly discusses on the ambit and applicability of Section 465(1)(j) of the Companies Act 2016 (‘CA 2016’) as a ground for winding up a company.
In essence, the Court of Appeal held that:-
(a) Section 465(1)(j) of the CA 2016 is only applicable to wind up a company which without a valid licence, is involved in banking business, insurance business or investment banking business under the Financial Services Act (‘FSA 2013’) and Islamic banking business, takaful business, international Islamic banking business or international takaful business under the Islamic Financial Services Act 2013 (‘IFSA 2013’);
(b) Section 465(1)(j) of the CA 2016 is inapplicable to wind up a company which does not possess a license to carry out money lending business under the Moneylenders Act 1951 (‘MA 1951’);
(c) Although a company may be wound up on the just and equitable ground under Section 465(1)(h) if the operation of such company is founded on illegality, whether such winding up is allowed depends on the circumstances of each case;
(d) The time it has taken the Petitioner to apply for the winding up of a company is an important consideration in whether the petition ought to be allowed or vice versa; and
(e) Winding up of a company should be a remedy of the last resort and a company should not be simply wound up when it is a going concern that is not running at a loss as it assists the economy of a nation and provides jobs for its employees especially in the present trying times.
The Respondent (‘the Company’) in the High Court was a company incorporated with the object of engaging in the business of a driving institute whereby the Petitioners were directors and shareholders of the Company. On the other hand, one Lee Tiak Kooy (“LTK”) was the biggest shareholder as well as the director of the Company. Both the Petitioners were removed as directors by the Company on 6 October 2017.
Three (3) crucial resolutions were passed by the Company as follows:-
(i) A resolution was passed on 12.1.2000 whereby a money lending license belonging to LTK in his own sole proprietorship called T.K. Lee Enterprise (“Enterprise”) was to be transferred to the Company without any payment (“Resolution 1”);
(ii) A resolution was passed on 10.3.2000 for the Company to take over the money lending business from Enterprise for the consideration of RM77,517.13 (“Resolution 2”); and
(iii) A resolution was passed on 23.6.2004 for RM171,272.24 to be transferred or paid to Enterprise (“Resolution 3”).
It is undisputed that the money lending license and business were never transferred to the Company despite Resolution 1 and Resolution 2, which were both signed by the 1st Petitioner while Resolution 3 was signed by LTK and another director.
On 24.11.2014, a sum of RM239,077.39 went to Enterprise and the same amount was returned to the Company by Enterprise two days later.
Dissatisfied by, amongst others, that the Company was engaging in the money lending business illegally, the Petitioners filed a Winding Up Petition to wind up the Company pursuant to Section 465(1)(j), Section 465(1)(f) and Section 465(1)(h) of the CA 2016.
High Court’s Decision
In summation, the High Court allowed the Winding Up Petition to wind up the Company on the following grounds inter alia:-
(a) The Company was involved in a licensed business (money lending) without being duly licensed;
(b) It is an abuse of the Company’s financial accounts by transferring the amount of RM171,272.24 from the Company to Enterprise without any valid reasons via Resolution 3; and
(c) The Company’s directors had acted in their own personal interests or acted in a manner which is unfair or unjust to its members.
Court of Appeal’s Decision
The Court of Appeal overturned the High Court’s Decision. First, the Court of Appeal examined on whether the definition of money lending business under the MA 1951 falls within the ambit of Section 465(1)(j) of the CA 2016.
Section 465(1)(j) of the CA 2016 reads as follows:-
“The Court may order the winding up if the company has carried on a licensed businesswithout being duly licensed or the company has accepted, received or take deposits in Malaysia, in contravention of the Financial Services Act 2013 or the Islamic Financial Services Act 2013, as the case may be.”
“Licensed business” is defined by Section 2 of the CA 2016 as having the meaning assigned to it in the FSA 2013 or the IFSA 2013.
The Court of Appeal took the stance that s.465(1)(j) of the CA 2016 must be read together with the respective Section 2 of the FSA 2013 and the IFSA 2013 and since the definitions of “licensed business” in both FSA and IFSA do not include money lending business under the MA, winding up of the Company cannot be premised on Section 465(1)(j) of the CA 2016.
In relation to the timing of filing, the Court of Appeal held that it took way too long (more than a decade) for both Petitioners to file the winding up petition in respect of matters arising from the 3 resolutions and it lends credence to the argument that the Petitioners had acquiesced to the resolutions and transfers of moneys to Enterprise.
It also tends to show on a balance of probabilities that the Petitioners only filed the petition only because they were removed as directors by the Company.
Crucially, the Court of Appeal held that the 1st Petitioner agreed to the passing of the resolutions and was complicit in the matters that arose from the first two resolutions. As such, the Petitioners could not seek the aid of the Court’s jurisdiction to wind up the Company as they did not come with clean hands.
Was Illegality Still Ongoing?
Even though the Court of Appeal took cognizance of the fact that the company search of the Company was showing that the Company’s type of business was not only a driving institute but also a licensed moneylender, it went on to hold that the timing of the petition is material in the sense that the alleged illegality must still persist at the time of presentation of the winding up petition. In this context, the Court of Appeal found no evidence to suggest that the Company was still engaged in money lending when the petition was filed.
Going Concern – Relevant Consideration?
The Court of Appeal takes the position that since the Company was a going concern with no evidence of it running at a loss, the Company should not then be wound up. Intriguingly, the Court of Appeal stresses the fact that a viable solvent company aids the economy of a nation and it provides jobs for its employees especially in the present trying times.
This decision is significant as it clarifies the position and boundary of Section 465(1)(j) of the CA 2016 in practice. However, one may beg the question on whether the winding up petition would be allowed in this case if the petition was instead premised on Section 465(1)(k) of the CA 2016.
Section 465(1)(k) of the CA 2016 reads as follows:-
“The Court may order the winding up if the company is being used for unlawful purposes or any purpose prejudicial to or incompatible with peace, welfare, security, public interest, public order, good order or morality in Malaysia.”
In other words, should the Company be wound up if it is undisputed that not only did the Company engage in money lending business, it also represented to the public that it was a valid moneylender when the fact remains that it does not have a money lending license, hence illegal.
OR, it is still incumbent on the Petitioners to tender evidence to show that the Company was still engaged in the alleged illegality at the time of presentation of the winding up petition.
Be that as it may, as the Coronavirus pandemic knocks the world economies (Malaysia included) on their heels, it seems that the Court is unlikely to simply lend its hand to wind up a “viable solvent” company as that would mean employees getting laid off.
Published by Chuar Kia Lin
Partner of Pierre Chuah & Associates