This article first appeared in The Edge Malaysia Weekly on May 13, 2024 - May 19, 2024
This monthly report is compiled and briefly summarised by a group of lawyers on a voluntary basis for the benefit of readers of The Edge.
Please consult your own lawyers if you need advice on the cases, issues and related matters highlighted here.
CONSTITUTIONAL LAW AND HABEAS CORPUS
Article 5 (1) of the Federal Constitution (‘Constitution’) guarantees that a person shall not be deprived of his life or personal liberty save in accordance with law. A Writ of Habeas Corpus may be applied for whenever this guaranteed constitutional right is infringed. It is a common law writ commonly used to command a person to produce a detainee in court for the purpose of judicial inquiry into the legality of the detention. The Dangerous Drugs (Special Preventive Measures Act) 1965 (‘Act’) provides for preventive detention.
Article 151 of the Constitution established an Advisory Board (‘AB’) for preventive detention and the AB shall give a detainee ‘opportunity of making representations’ against a detention order. Section 12 of the Act confers upon the AB powers of a court to summon witnesses, administer oaths and compel production of documents.
Issues
What are the dynamic legal qualities of the constitutional guarantee of personal liberty in Article 5(1) of the Constitution underlying the requirement of ‘opportunity of making representations’ in Article 151 in respect of hearings before the AB in preventive detention under the Act? There were several decisions in the past with judicial pronouncements that do not sit comfortably with each other. The issues again confronted the FC in Sugenthiran a/l Paramsivam v Deputy Minister of Home Affairs, Malaysia and 3 Ors (Judgment dated 27.3.2024), giving opportunity to the FC to resolve the issues and give certainty to the law.
Case summary
Sugenthiran (‘Appellant’) was arrested and informed that he was involved in drug smuggling activities. During investigations, the Appellant sought to speak in his mother tongue, Tamil. The investigating officer (‘IO’) ‘doubled up the role as a Tamil interpreter since he was Tamil speaking… asking questions and translating those same questions to and then the answers from the appellant’. A detention order was issued on the grounds that allowing him to be free would endanger public order. He applied for a Writ of Habeas Corpus on several grounds, including that his repeated requests to call several named material witnesses and where they might be found (detainees at the Taiping Prison and detention centre at Simpang Rengam, Johor) to support his representations of innocence to the AB pursuant to the requirements of s 12 of the Act were denied. In this connection, the written application of his solicitors to the AB to issue subpoenas against the witnesses also went unheeded. The Appellant’s representations took place in Kelantan. Accordingly, the Appellant claimed he was deprived of a fair hearing contrary to Articles 5, 8 and 151 of the Constitution. The FC (Nallini Pathmanathan, Mary Lim and Harminder Singh FCJJ) in a decision delivered by Mary Lim FCJ held that the detention was invalid, and a writ of habeas corpus was issued.
Decision
A. Summoning of detenu’s witnesses before the Board is a fundamental constitutional safeguard
The FC rejected (a) the justification of the AB that it acted in the way it did because no procedural rules had been made and it was for the Appellant ‘to summon the witnesses himself or deal with the relevant authorities to secure the attendance of potential witnesses’; (b) that s 12 of the Act applies only if the witnesses are able and willing to come and testify before the AB; and (c) the AB’s submissions that the Appellant did not impress upon the AB the materiality in the evidence to be offered by the potential witnesses, or the AB would not be able to reach a just and fair decision in the absence of the evidence. In this connection, the FC declined to follow two earlier decisions that the matter is one of ‘mere procedural review’, citing another decision of the FC which held that the two earlier decisions were ‘not good law’ and expressed concurrence that the two earlier decisions did not address and gave sufficient consideration to the object of the statute, which is ‘to preventively detain a person but only if it is the case that there is sufficient reason to do so under the preventive detention legislation promulgated under Art 149. And that in turn is because it adversely affects or negates the liberty of a person. As such it is not permissible to construe the statute without taking into effect this fundamental issue.’
From left: Nallini Pathmanathan, Mary Lim & Harminder Singh FCJJ
[35] For the present purpose, it would be reasonable to expect the Advisory Board to issue a letter to the relevant authorities or persons, summoning the attendance of identified persons for the purpose of the hearing …
[36] In matters of preventive detention where the fundamental liberties of a person are compromised, there must be in place, at the very least, the procedure upon which the detainees may exercise his rights, in this case, the right to have witnesses summoned. Since such procedure is yet to be expressly enacted, the Advisory Board should just get on with processing the request instead of pushing it back to the Appellant. The failure of the Board to accede to the Appellant’s request has, in our view, prejudiced the Appellant’s rights under the Federal Constitution.
B. Impartial interpreters are required by the rules of natural justice
The FC found that requests were made by the detenu for an interpreter and the HC’s finding that there was no such request was an error, for the fact the IO had functioned as an interpreter was powerful proof of the detenu’s request as there otherwise would have been no need for the IO to perform a function as an interpreter to begin with. Further, the IO’s double role as an IO and interpreter was unacceptable as an interpreter must be independent and ‘a mere conduit’ is incapable of distortion to the detriment of the accused. Such a rule comports with the adage ‘Justice must not only be done but also be seen to be done’. Ultimately, there must always be strict compliance with procedural rules where preventive detention is at issue.
CORPORATE GOVENANCE: PRE-EMPTIVE RIGHTS & ACQUISITION OF SUBSTANTIAL ASSETS
Federal Court (‘FC’) clarifies the law concerning members’ pre-emptive rights to shares, private placements and the power of directors to issue and allot shares
The business and affairs of companies are managed by the board of directors (‘BOD’): s 211(1) of the Companies Act 2016 (‘Act’). This general principle is limited by s 211(2), in that the BOD’s power is ‘subject to any modification, exception or limitation contained in the Act or the constitution of the company’. The former seeks to curtail unbridled powers in the BOD while the latter either contractually frees or subject certain of the BOD’s powers to limiting conditions as per the constitution.
Two powers feature prominently in practice — the BOD’s power to allot shares and to dispose of or acquire substantial assets. The former power requires approval in a general meeting as per s 75 (1) while s 75(2) provides for exceptions, one of which is where shares are offered as consideration or part consideration for an acquisition of assets (s 75(2)(d)). In relation to proposals to allot shares to third parties, the contractual restriction provision in the constitutions of companies is compulsorily imposed vide requirement 7.08 of the Main Board Listing Requirements (‘MMLR’) concerning pre-emptive right of members (‘Pre-emptive Right’) must be complied with. Requirement 7.08 opens with the words ‘Subject to any direction to the contrary… given by the company in general meeting, all new shares… before issue, be offered [to members] in proportion as nearly as the circumstances admit…’ (‘Opening Words’). Section 85 of the Act reinforces regulation 7.08 — ‘Subject to the constitution… shares shall first be offered to the holders of existing shares… [to] maintain the relative voting and distribution rights…’. Acquisitions and disposals of substantial assets require shareholders’ approval: s 223 of the Act.
Issues
In a business merger (‘Business Merger’) involving an allotment of shares by private placement (‘Private Placement’) to third parties to raise finance and the disposal of an undertaking to implement the Business Merger, several issues arise — (a) the proper construction of ss 75 and 85 and requirement 7.08 of the MMLR; (b) the requisite conditions constituting a waiver or disapplication of the Pre-emptive Right; and (c) the proper construction of s 223 as to when approval of the shareholders must be obtained. These issues came before the FC in Dato’ Azizan Abd. Rahman & ors v Concrete Parade and 5 Ors (Judgment dated 26.3.2024).
Case summary
Apex Equity Holdings Bhd (‘Apex’) sought to merge with Mercury Securities Sdn Bhd. To implement this, a Private Placement of shares in Apex to third parties was proposed to part-finance the Business Merger subject to several conditions — approval of Apex’s shareholders of the Business Merger and regulatory approvals. A Heads of Agreement (‘HOA’) containing mutual understandings of the parties; a business merger agreement (‘BMA’) providing it could not take effect unless approvals had been obtained and conditional subscription agreements (‘SAs’) were entered into for the Private Placement. In June 2019, Apex at a general meeting approved the proposed Business Merger and Private Placement (‘June Resolution’).
Concrete Parade Sdn Bhd (‘Concrete Parade’) and other minority shareholders filed an oppression action. They complained that the Private Placement breached s 85 of the Act because there was no resolution asking shareholders to waive their pre-emptive rights; the effect of article 11 of Apex’s constitution was not specified or explained in the circular to shareholders and the HOA, BMA and SA were entered into in breach of s 223 of the Act without the prior approval of the general meeting. The High Court (‘HC’) dismissed the action. The Court of Appeal (‘CA’) overturned the decision of the HC. On appeal to the FC (Tengku Maimum Tuan Mat CJ, Nallini Pathmanathan and Rhodzariah Bujang FCJJ), in a judgment delivered by Nallini Pathmanathan FCJ, the decision of the CA was reversed, restoring the decision of the HC.
Decision
A. The Pre-emptive Right and s 85 (1) of the Act are contractual in nature whether before and after the Act came into force. It is not an absolute right.
The FC dismissed Concrete Parade’s argument that Apex breached the Pre-emptive Right in article 11 and s 85 (1). Historically, the legislative framework did not provide for an unqualified statutory pre-emptive right provision. In the Companies Ordinance 1940 and the Companies Act 1965 (‘CA 1965’), pre-emption rights were contractual in nature: Regulation 35 of the Ordinance and Regulation 41 of the CA 1965. Requirement 7.08 of the MMLR reproduced Regulation 41 of the CA 1965 and this explains the existence of article 11 in Apex’s constitution with the Opening Words.
From left: Tengku Maimum Tuan Mat CJ, Nallini Pathmanathan and Rhodzariah Bujang FCJJ
[104] In legislation preceding the Act, there was no statutory provision relating to shareholders’ pre-emptive rights. Neither the Companies Ordinance 1940 nor [the CA 1965] provided any pre-emption rights to existing shareholders in respect of a new issue of shares.
[105] Accordingly, pre-emptive rights under the preceding legislation was contractual in nature, between:
(a) shareholders and those in management i.e. the directors, who represented the company; and
(b) shareholders inter se.
…
[112] In short, such pre-emption rights were a matter to be determined and governed domestically between the company and its members, as well as the members inter se. This then became a matter of the shareholders crafting the precise nature of such rights and negotiating for the requisite degree of pre-emption rights they wanted.
…
[140] Therefore in construing section 85(1) and Article 11 together, the legislative background to the Act provides significant background for inferring the intent of the legislature… It is apparent that it was not the intention of the legislature to:
(a) Reduce or limit directors’ powers to allot and issue shares, particularly where such shares are consideration or part consideration for the acquisition of an asset (see section 75(2)(d));
(b) Enlarge or expand pre-emptive rights so as to elevate such rights to a mandatory entitlement which overrides or supersedes the provisions of the constitution of a company which may allow for the disapplication or surrender of such pre-emptive rights at the behest of the shareholders at general meeting.
…
[153] If full effect had been given to the express words of section 85(1), the Court of Appeal would have recognised that the Act does not confer absolute mandatory pre-emptive rights in respect of the new issuance of shares… This is because of the express words, “Subject to the constitution” in section 85(1).
[154] As such, in this jurisdiction, the statutory protection in the form of pre-emptive rights accorded to shareholders under the second part of section 85(1), is dependent on how the shareholders, as investors, have contracted in their AA (or constitution), firstly with the company and secondly with other shareholders or members inter se.
…
[163] In the context of the constitution of Apex Equity, the shareholders enjoy pre-emptive rights but on a non-compulsory basis. The pre-emptive rights of the shareholders, as protected in the second part of section 85(1) can, by virtue of the constitution, namely Article 11, be disapplied, yielded or ceded by the shareholders of the company at a general meeting, if they so determine. Such a construction is further fortified by sections 75(1) and 75(2) of the Act.
B. Meaning of ‘Subject to any direction to the contrary…given by the company in general meeting…’
In the opinion of the FC, the CA erred in conclusion that (a) the June Resolution did not disapply the Pre-emptive Right for the resolution was not a ‘direction to the contrary’ given in general meeting; (b) the Private Placement could not displace
s 85(1) of the Act notwithstanding the words ‘Subject to the constitution’. The CA erred in relying on a decision of the High Court of India construing the meaning of the words ‘subject to any directions to the contrary’ for that decision was subsequently overruled by the Supreme Court, India. Further, the minutes of the June Resolution meeting showed that shareholders were aware of the dilutive effect on their shares by voting in favour of the June Resolution.
C. Section 85(1) is subject to the constitution, not subject to s 75 of the Act.
The two provisions deal with different subject matters and should be read harmoniously. The FC held that s 85 (1) ‘recognises the right of shareholders to contractually determine whether and if so how they may provide for the disapplication or surrender of their pre-emptive rights, by way of the constitution itself’. On the other hand, s 75(1) disenfranchises the BOD to allot or grant rights in respect of shares without the prior approval of a general meeting. This restraint is not applicable if that exercise falls within any one of the exceptions in s 75(2).
D. Construction of s 223 (b) (i) and (ii) of the Act: disposal and acquisition of substantial assets
Section 223 provides that acquisition and disposal of substantial assets cannot be carried out unless under s 223 (b) (i) the entering into is subject to approval of the company by way of resolution, or under s 223 (b) (ii) the carrying into effect has been approved by the company by way of resolution. The FC held that the aforesaid provisions must be read disjunctively and not conjunctively as held by the CA.
BANKS AND MAREVA INJUNCTIONS
Federal Court (‘FC’) rules that a bank with notice of a Mareva application (i) is not in breach of contract if it withholds financing; and (ii) a customer is not exonerated from repaying its debt or part thereof upon the bank’s breach, if any
A Mareva injunction operates to freeze the assets of a defendant from dissipation pending the final determination of legal proceedings. Its purpose is to prevent the applicant from being left with a ‘paper judgment’ when it finally proves its claim against the defendant.
Issues
Security and contractual arrangements are usually made between a customer and a bank. In construction finance, banks commonly grant financing facilities to the contractor/customer and as security, the contractor/customer assigns the payments due to themselves into a project account established with the bank. The bank, after deducting sums towards repayment of the facility, will release the balance proceeds to the contractor/customer and where applicable, to sub-contractors of the contractor/customer. If the bank is given notice of an Mareva injunction over the account of the contractor/customer, is the bank bound to freeze the account?
Case summary
Sunshine Fleet (‘SF”), the main contractor, was awarded a contract to construct a hospital by Jabatan Kerja Raya (‘JKR’). Bank Kerjasama Rakyat Malaysia Berhad (‘Bank’) granted approximately RM64 million to GM Healthcare Sdn Bhd (‘GMH’), SF’s sub-contractor. An assignment was obtained to which monies paid by JKR to SF would be paid into a designated account. The Bank would then deduct amounts towards repayment of the facility. Disputes arose between SF and GMH. The Bank was made aware of the disputes but nonetheless took the position that it would not get involved in the dispute and would continue payments.
Subsequently, SF sued GMH and the Bank and sought a Mareva injunction. The Mareva application was served on the Bank who then decided it had ‘no choice’ but to withhold further payments. Matters got worse — SF terminated its contract with GMH, for the Bank was no longer financing the project and JKR terminated its contract with SF for poor performance. SF sued the Bank for failure to pay and alleged breach of the facility. GMH counterclaimed against the Bank for breach and failure to release surplus funds to its sub-contractors. In turn, the Bank counterclaimed against GMH for termination of the project by JKR was an event of default and GMH was obliged to repay the outstanding amounts. The High Court held that the Bank had breached the facility and GMH was discharged from their obligations to the Bank. The Court of Appeal affirmed this. On appeal to the FC (Nallini Pathmanathan, Hasnah Hashim and Rhodzariah Bujang FCJJ), Nallini FCJ delivering an ex-tempore judgment reversed the decisions of the courts below.
Decision
(1) The alleged breach by the Bank did not exonerate the borrower from liability to repay the loan.
The FC rejected GMH’s proposition that every time a bank had breached its obligations, the customer is then exonerated from repaying its debt. The correct position in law is that if there is a breach, the borrower has a claim in damages, which is separate and distinct from the borrower’s overriding obligation to make repayment.
From left: Nallini Pathmanathan, Hasnah Hashim and Rhodzariah Bujang FCJJ
[25] [The findings of the courts below mean] that every time a Bank is found to have breached its ‘obligations’ under the agreement lending monies to a customer, the customer is then exonerated, absolved, exculpated, cleared and freed of repaying any part of the debt, notwithstanding that millions of ringgit may have been disbursed by the banking institution to the customer. Needless to say, the effect on the banking industry and the commercial field as a whole would be disastrous. Taken to its logical end, it means that when banks lend money requiring repayment with interest over a certain period and on certain terms, the minute there is a breach of the Bank’s obligations, there can be no question of recovery of monies whatsoever from that customer...
…
[30] On the occurrence of a breach the aggrieved party can elect to terminate the contract and sue for damages to reinstate him to his original position. Alternatively, the aggrieved party, here GMH can affirm the contract and sue for damages at the end. In the instant case, GMH did not immediately call upon the breach and terminate the agreement. So it follows that GMH effectively affirmed the contract. Its claim, if breach was established, was to make a claim for damages to be assessed. This does not entitle GMH to be exonerated from making repayment on the express terms of the [facility agreement].
(2) Effect of the Bank’s notice of a Mareva application
The FC held that the Bank was not wrong to withhold payment upon being notified of the Mareva application, for a deliberate act of a bank choosing to instead disburse monies despite having notice may amount to an interference with the adjudication of the matter. Therefore, it could not be said that the Bank had breached the facility agreement.
COMPANY LAW: WINDING UP FAMILY COMPANIES
Court of Appeal (‘CA’): The just and equitable jurisdiction to wind up companies is not confined to quasi-partnership companies (‘QPC’) but also to family companies in appropriate cases.
Section 465(h) of the Companies Act 2016 empowers the court to wind up a company ‘if the Court is of the opinion that it is just and equitable’ to do so. Ordinarily, companies are structured strictly as business enterprises in which the relationship of the members are commercial in nature, or where relationship fairness is judged on commercial terms as per the company’s constitution. The term QPC is a convenient label invented by courts in equitable jurisdiction to characterise a company not strictly governed by the commercial terms contained in a constitution. There is ‘something more’ than just the articles of the constitution and partaking of a personal nature assumed by the parties, which binds their conscience. If that ‘something more’ exists and is broken, it is just and equitable to wind up the QPC.
In law, family companies are a sub-set of companies that straddle the line between QPC and companies organised on a commercial basis. Typically, the management and relationship between members of a family company is based on mutual trust and confidence instead of merely by the company’s articles or other formal rules. Equity recognises what might be fair between competing businessmen may be unfair as between family members, for family companies are often founded upon mutual trust and confidence, and the pursuit of commercial gains is not its raison d’etre.
Issues
Where a family company suffers from an irretrievable breakdown of family relations yet has remained a profitable company, what are the relevant characteristics or equitable considerations that a Court takes into consideration to wind up the company on grounds that it is just and equitable to do so notwithstanding that the company may not be categorised in law as a QPC?
Case summary
WTK Realty Sdn Bhd (‘WTK Realty’) was founded by the late Datuk Wong Tuong Kwang in 1981 (‘WTK’). It is the flagship company of the Wong family with many subsidiaries (‘WTK Group’). WTK suffered a stroke in 1993 and he handed over management of the WTK Group to his three sons (WKN, WKY and WKC). WTK passed away in 2004. From 1993 up until 2013, the WTK Group was managed by WKN. In 2013, WKN passed away and left his wife, Kathryn Ma (‘KM’), as executrix with substantial shareholdings in WTK Realty. The three brothers had passed down and gifted shares to their respective children, the third generation, and their children were appointed as directors of the WTK Group, including WTK Realty. It was admitted that WKC passed some of his shares to his son, as part of succession planning. After the demise of WKN, the Wong family was divided into two rival factions — WKN/KM’s faction and the faction led by WKY and WKC. More than 43 actions were filed in Sarawak alone involving the WTK Group, demonstrating the bitter feuds between the two factions. KM filed a petition to wind up WTK Realty on the just and equitable ground, citing irretrievable breakdown of mutual trust and confidence and of good faith between the members of the Wong family. However, KM did not claim that WTK Realty was a QPC. The rival faction led by WKY and WKC denied that WTK Realty could be wound up on the just and equitable ground because (a) WTK Realty is not a QPC; (b) mutual trust and confidence existed only between the three brothers and no further; and (c) WTK Realty should not be wound up as it is a profitable company. The High Court wound up WTK Realty on the just and equitable ground. On appeal to the Court of Appeal (‘CA’) by WTK Realty, the CA (Yaacob Haji Md Sam, Ravinthran Paramaguru and Haji Ghazali bin Haji Cha JJCA) in a decision delivered by Ravinthran Paramaguru affirmed the decision of the High Court.
Decision
(1) Just and equitable ground for winding up not confined to QCP
The CA observed that WTK Realty was not made out to be a QCP in KM’s petition, but instead a family company. The factual characteristics of WTK Realty as a family company included several elements: (a) no person outside of the Wong family (‘Outsider’) had ever been admitted as a member of the company; (b) shares were passed down from one generation of the Wong family to the next generation as part of succession planning; (c) no Outsider had ever been appointed as a member of the board of directors; (d) the purpose of WTK Realty was for profitable distribution of family wealth; and (e) the patriarch, the late WTK, had put the equal shareholdings to ensure equal distribution of wealth to the three brothers and their respective families. In rejecting the arguments that the just and equitable grounds exclusively applied to QCPs, the CA referred to several decisions, including that of the Federal Court, which have held there are no compulsory pre-conditions to the exercise of such jurisdiction and ‘it is impossible, and wholly undesirable, to define all the circumstances in which a company should be wound up on equitable considerations’ and ‘the just and equitable principle is a dynamic concept’.
From left: Yaacob Haji Md Sam JCA (retired), Ravinthran Paramaguru JCA and Haji Ghazali bin Haji Cha JCA (retired)
[33] Although, the three brothers had been working closely since the time of passing of the founder, well before the passing of WKN, it must be recalled that members of the third generation had already been appointed to the board of directors… The children of WKC… were appointed not too long after the death WKN. The brothers also passed shares down to the children. WKC in fact said that he was planning for succession when he gave his shares to his son. It must also be noted during the lifetime of WKN and even after his death, no individual outside the Wong family was admitted to the board. It is still a company that is very much in the hands of the Wong family exclusively. Thus, there appeared to be gradual passing down of ownership and control of the respondent company from one generation to the succeeding generation in keeping with the nature of family companies that do not admit outsiders.
…
[37] We are mindful that [KM] did not plead that [WTK Realty] was a quasi-partnership company. She could not have taken such a position given the history of the company. The company was not started by the three brothers acting as partners. It is a traditional Chinese rag to riches story where an entrepreneurial patriarch created wealth and bequeathed it to the succeeding generation who vastly expanded it. However, we are in agreement with the view of [the High Court] that the just and equitable ground to wind up a company cannot be limited to companies that are incorporated partnerships or are akin to a quasi-partnership. Depending on the justice of the case that calls for the superimposition of equitable principles on formal company rules, it can also be applied to a strictly family company which had operated with a measure of mutual trust and confidence amongst its shareholders…
…
[51] … it must be appreciated that the “just and equitable” ground has been broadly applied in many cases and is not limited to quasi partnership cases.
(2) Just equitable to wind up a family company notwithstanding company is profitable and there exists no management deadlock.
The CA held the existence of a complete breakdown between the different branches of family members in WTK Realty ‘was a major reason that sealed the fate of the company’ to justify the invocation of a just and equitable winding up. This was notwithstanding that WTK Realty was a profitable company and there was an absence of deadlock in the company’s management.
CORPORATE INSOLVENCY: COMPOSITION/ARRANGEMENT WITH CREDITORS
High Court strikes down KNM Group’s proposed scheme of arrangement with creditors (‘SOA’)
A SOA is a statutory mechanism provided under the Companies Act 2016 (‘CA’) enabling financially distressed companies to apply to court to restructure their debts. This statutory mechanism was recently amended and came into force on 1.4.2024. Nonetheless, the basic procedural steps, the duty and conduct on the part of the proponent of an SOA and the supervisory functions of the court remains substantially the same when the court is asked ex parte to order a creditors’ scheme meeting (‘Scheme Meeting’) as well as the restraining of proceedings against the financially distressed company (‘RO’) before the SOA is put to vote at the Scheme Meeting. A RO is usually granted for a defined period (3 months each up to a maximum period of 12 months in aggregate).
Issues
When the court orders a Scheme Meeting and grants a RO on an ex parte basis, what are the principles and circumstances in which the court will set aside such ex parte orders upon the application of opposing scheme creditors? Recently, KNM Group Berhad and KNM Process Systems Sdn Bhd (‘KNM Group’) proposed two SOAs one after another and before two different High Courts. The High Court in each instance examined the SOAs and clarified and reemphasised the guiding principles and the circumstances ex parte orders granted will be set aside. In short, a court will not rubber stamp a proposed SOA filed in abuse of process or one that is bound to fail.
Case summary
In early 2022, KNM obtained ex parte orders before Liza Chan J (now retired) for a Scheme Meeting and a RO (‘1st SOA’). The proposed 1st SOA involved ‘monetization of selected assets’ to provide sufficient funds for KNM Group to repay creditors. Assets monetisation included the floatation (‘IPO track’) and disposal (‘M&A track’) of Borsig GmbH (‘Borsig’); disposal of interests in a bio-ethanol plant in Thailand (‘the Thai Assets’); the disposal interests in a waste-to-energy plant in Peterborough (‘the UK Assets’); and a disposal of FBM Hudson Italiana S.p.A (‘the Italian Assets’). In the Explanatory Statement to the Scheme Creditors (‘ES’), forward-looking without reasonable bases or speculative statements were made.
In November 2023, Liza Chan J set aside her ex parte orders. An Erinford injunction was thereafter orally applied for pending appeal by KNM Group. An interim RO was granted pending the formal application for an Erinford injunction. KNM Group filed an appeal to the Court of Appeal. During the interim RO period, KNM Group filed a second SOA (‘2nd SOA’) on substantially the same terms as the 1st SOA and obtained an RO before Atan Mustaffa J. On the date fixed for hearing of the formal application for the Erinford injunction, KMN accordingly informed the Court that it was withdrawing the Erinford application and the notice of appeal notwithstanding its earlier statements to the court which led her Ladyship to grant the interim RO outstanding. Liza Chan J refused KNM Group’s application to withdraw its Erinford injunction and withheld from deciding whether there was an abuse of court process before her Ladyship as the issue was before Atan Mustaffa J.
Decision of Liza Chan J
Her Ladyship held there was insufficient information in the ES for creditors to make an informed decision and that the material deficiencies in the 1st SOA made it in ‘real terms and effect… a pie in the sky’ SOA.
Decision of Atan Mustaffa J
(1) Abuse of process: res judicata and issue estoppel
Atan Mustaffa J declined KNM Group’s argument that there was no abuse of process as ‘the [2nd SOA] was a fresh application’ and that the 1st SOA was ‘spent’.
Atan Mustaffa J emphasised that the considerations of res judicata and issue estoppel apply in greater force to SOAs as creditors ought not to be vexed repeatedly by unmeritorious SOAs.
(2) No genuine changes in the 2nd SOA
The learned Judge rejected arguments that there were genuine changes between KNM Group’s 1st SOA and 2nd SOA by reference to two new offers for the Italian Assets, observing that the new offers were lower in value than the initial offer of EUR22 million and there were no changes to the method of monetisation to make the 2nd SOA more feasible. Further, the change in classification of creditors and the change in financial advisor were not substantive changes.
(3) No prospect of success at the creditors meeting
The learned Judge took note of the objections by a Class B creditor commanding more than 25% in total value of Class B creditors and held it was ‘a foregone conclusion that [KNM Group] will not be able to garner the requisite special majority’. As such, a court should not act in vain by permitting a company to propose a scheme that had no prospects of success in a Scheme Meeting. The High Court also dismissed the argument that the composition of Class B creditors could later change, citing it as a mere afterthought and ‘a calculated move to dilute [a dissenting creditor]’.
(4) Proposed scheme doomed to fail
The Judge found merit in the dissenting creditors’ contention that even if Borsig, the Thai Assets and the UK Assets were successfully monetised, it was unlikely that KNM Group could realise their promises under the 2nd SOA.
The proceeds from the disposal of the Thai Assets and the UK Assets, it was held, would unlikely generate any funds for the 2nd SOA, as the subsidiaries within KNM Group holding those assets were themselves ‘hopelessly insolvent’ and any proceeds generated would first have to be paid to their respective debtors.
The learned Judge further held there was insufficient evidence to show real and tangible process of the monetisation of Borsig, for ‘more than a year later, there [was] hardly any progress, let alone completion of the disposal of Borsig’.
On dismissal of the 2nd SOA, upon the court being informed that an appeal was intended, and a formal application would be made for an Erinford injunction pending appeal, Atan Mustaffa J granted an interim RO pending disposal of the formal application for the Erinford.
Postscript: On April 26, it turned out that KNM Group had not appealed against the decision, and neither had a formal application been made for the Erinford injunction. Instead, it was announced that KNM Group had applied for a 3rd SOA.
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