A. Introduction
The Federal Court had recently in its decision of N. Chanthiran v Kao Che Jen cleared the muddy waters on the issue of whether the Court’s leave is required before a party can commence proceedings against a court-appointed liquidator.
The long-standing position on this issue is that leave of Court is required prior to a party commencing proceedings against a liquidator. Confusion arose when the Court of Appeal had recently decided otherwise (See Kao Che Jen v N Chanthiran Nagappan [2015] 9 CLJ 295 (“Kao Che Jen“) – this is a separate proceeding commenced by the same contributory in this case against the same liquidator before the present proceedings).
Leave was granted for the following questions of law:
(i) Whether the prior leave of the winding up court is required in order for legal proceedings to be commenced against a court-appointed liquidator in respect of matters transacted by the liquidator in the course of the liquidation under Divisions 1 and 2 of Part IV of the Companies Act 2016.
(ii) If the answer to question (1) is in the negative, whether such proceedings are to be brought in the winding up court and/or within the winding up proceedings if, amongst others, an order against the liquidator in his official capacity is sought.
The Federal Court in this case answered the first question in the affirmative and held that it is unnecessary to answer the second question of law.
B. Background Facts
The respondent is a contributory and director of STM Transformers Sdn Bhd. Another contributory of the company filed a winding up petition and the company was wound up. The appellant was appointed as the company’s liquidator. Over the years, the respondent applied to remove the appellant liquidator and to compel him to produce certain documents.
(i) High Court’s decision
Having been unsuccessful in those proceedings, the respondent commenced the current proceedings against the appellant to compel the appellant to carry out certain liquidator duties. No prior leave of court was obtained. The appellant raised a preliminary objection in that no leave of court was obtained before this action was brought.
The High Court ruled in favour of the appellant and struck out the present case. This is premised upon the Court of Appeal’s decision in Chi Liung Holdings Sdn Bhd v Ng Pyak Yeow [1995] 3 MLJ 204 (“Chi Liung Holdings“) which held that leave of court is required before an action can be commenced against a court-appointed liquidator based on section 236(3) of the Companies Act 1965 (“CA 1965“) (which is in pari materia with section 486(2) of the Companies Act 2016 (“CA 2016“):
“The exercise by the liquidator in a winding up by the Court of the powers conferred by this section is subject to the control of the Court and any creditor or contributory may apply to the Court with respect to any exercise or proposed exercise of any of those powers.”
As will be shown below, the phrase “subject to the control of the Court” is the key phrase to which different interpretations have been given by the Courts.
(ii) Court of Appeal’s decision
Dissatisfied with the High Court’s decision, the respondent appealed to the Court of Appeal. The sole issue is whether leave of the winding up court is required under section 486(2) of the CA 2016 for the respondent to commence proceedings against the appellant. The Court of Appeal reversed the High Court’s decision and held that no leave is required. The Court of Appeal referred to its previous decision in Kao Che Jen and held that section 486(2) of the CA 2016 does not expressly stipulate that leave is required before any creditor or contributory may apply to the court for an order in respect of the exercise of the liquidator’s power.
C. Federal Court’s Reasoning
Leave was granted for the following questions of law:
(i) Whether the prior leave of the winding up court is required in order for legal proceedings to be commenced against a court-appointed liquidator in respect of matters transacted by the liquidator in the course of the liquidation under Divisions 1 and 2 of Part IV of the Companies Act 2016.
(ii) If the answer to question (1) is in the negative, whether such proceedings are to be brought in the winding up court and/or within the winding up proceedings if, amongst others, an order against the liquidator in his official capacity is sought.
(i) Long-standing position: Prior leave of court was required
The Federal Court traced the origins of the office of a liquidator and held that a liquidator represents the entire class of unsecured creditors and as such, it is crucial for the court to ensure that a liquidator in discharging his duties, does not face unwarranted interference.
This is the reason why the long-standing position on this issue is for leave to be obtained prior to commencing proceedings against a court-appointed liquidator. In Chi Liung Holdings, the Court of Appeal held that “a liquidator having been appointed by the court, is an officer of the court. It goes without saying leave of the court is needed before an action is commenced against him and officers like him“. The Court of Appeal held that in granting leave to sue a liquidator, the court must be satisfied to the “probable success” of the claim and the claim should not be vexatious or oppressive.
The position in Chi Liung Holdings has been adopted in a myriad of cases which we summarise as follows.
(i) TN Metal Industries Sdn Bhd & Ors v Ng Pyak Yeow [1996] 4 MLJ 567, High Court: Leave of court required. A liquidator ought to be protected against abuse and a party intending to sue a liquidator needs to show a strong prima facie case.
(ii) Chin Cheen Foh v Ong Tee Chew [2003] 3 MLJ 57, High Court: Leave of court required. A court appointed liquidator is an officer of the court and the court will protect him.
(iii) Sarawak Timber Industry Development Corporation v Borneo Pulp Plantation Sdn Bhd [2005] 2 MLJ 74, High Court: Leave of court required. The court will not allow the liquidator to be subjected to unnecessary litigation or for the winding up to be wrongfully impeded.
(iv) Abric Project Management Sdn Bhd v Palmshine Plaza Sdn Bhd & Anor [2007] 3 MLJ 571, High Court: Leave of court required. The liquidator is an officer of the court and the court will not permit its officer to be sued without investigation of the merits of the case. In granting leave, the applicant needs to show a prima facie case and pecuniary loss to the company.
(v) See Teow Guan & Ors v Kian Joo Holdings Sdn Bhd & Ors [2010] 1 MLJ 547, High Court: Leave of court required. The court has a duty to protect its officer from spurious and vexatious litigation and to prevent wrongful interference with a winding up process. In granting leave, the court should be satisfied that the proposed claim has sufficient merit. In determining sufficient merits, the court will take into account sufficiency of evidence adduced and likelihood of success of the proposed claim.
(vi) Ooi Woon Chee & Anor v Dato’ See Teow Chuan & Ors [2012] 2 MLJ 713 (“Ooi Woon Chee“), Federal Court: Leave of court required. The applicant must show a prima facie case against the liquidator and pecuniary loss suffered. This is to protect the court’s officer and the winding up process.
(vii) Tee Siew Kai v Machang Indah Development Sdn Bhd [2020] 6 MLJ 168, Federal Court: Leave of court required. The principles in Ooi Woon Chee are reaffirmed.
(ii) The Catalyst to the Divergence: Court of Appeal’s Decision in Kao Che Jen
The Court of Appeal in Kao Che Jen departed from the trite position above. This is followed by the Court of Appeal in the present case. The Court of Appeal in Kao Che Jen concerns an application to remove the liquidator under sections 232(1) and 266 of the CA 1965:
“232(1): A liquidator appointed by the Court may resign or on cause shown be removed by the Court.
266: The Court may, on cause shown, remove a liquidator and appoint another liquidator”.
The Court of Appeal in Kao Che Jen took a literal reading of sections 232(1) and 266 of the CA 1965 and held that there is no express requirement for leave to be obtained before removing a liquidator. This is contrary to several other sections in the CA 1965 which expressly set out circumstances in which leave of court is required. For instance, section 226(3) of the CA 1965 expressly requires leave of court before an action can be commenced against a company which has been wound up, or in which a provisional liquidator has been appointed. Another provision is section 181A of the CA 1965 which expressly requires leave of court before a complainant may bring, intervene in or defend an action on behalf of a company. The Court of Appeal’s reasoning in Kao Che Jen is followed in two subsequent Court of Appeal decisions, namely Shencourt Sdn Bhd v Shencourt Properties Sdn Bhd [2019] 12 MLJ 184 (“Shencourts“) and Jagdis Singh a/l Banta Singh v Return 2 Green Sdn Bhd [2020] MLJU 2193.
(iii) Clarity Provided by the Federal Court in the Present Case
The Federal Court in the present case disagreed with the Court of Appeal’s reasoning in Kao Che Jen. The Federal Court held that the comparison between different provisions which lack nexus with each other is an untenable one. Instead, the relevant provisions should be construed in the context of the purpose and object of the CA 1965. The Federal Court held that the predominant role of a liquidator is to safeguard the interests of unsecured creditors. As such, winding up courts maintain control and supervision over a liquidator to ensure that the winding up process is properly carried out.
The Federal Court held that the phrase “subject to the control of the Court” in section 236(3) of the CA 1965 means that a liquidator is answerable to the court in the performance of his duties and is equivalent to a requirement for leave of court to commence proceedings against the liquidator.
The Federal Court also held that the Court of Appeal in the present case had erred by adopting its previous reasoning in Kao Che Jen, where an overly simplistic interpretation is taken on the phrase “subject to the control of the Court” in section 486(2) of the CA 2016. More signficantly, the Federal Court held that the Court of Appeal in the present case had erred in omitting the trite principles set out by the apex court in Ooi Woon Chee, where it was held that leave was required.
D. Conclusion
There is no longer uncertainty on this legal issue. Prior to commencing an action against a court-appointed liquidator, an applicant must obtain leave of court. In granting leave, the Court must be satisfied that the applicant shows a prima facie case and pecuniary loss to the company must be proven. This serves as a safeguard for court-appointed liquidators where they will not be subjected to unnecessary and vexatious litigation which would impede the winding up process of a company.
What is more interesting in this case is that Federal Court Judge Rhodzariah Binti Bujang clarified the dichotomy in the judicial stand her Ladyship took on this issue. Her Ladyship first sat in the High Court in the Kao Che Jen case, where she dismissed the action as leave of court was not obtained. Her Ladyship subsequently took a different position when she sat in the Court of Appeal in the Shencourts case, where she held that leave of court is not required. Her Ladyship now clarifies that she reiterates the same stand she took in the High Court in the Kao Che Jen case, where leave of court is required before an action can be brought against a liquidator.
legalatte.com 