Introduction

A recent decision of the Federal Court, Tee Siew Kai v Machang Indah Development Sdn Bhd (in liquidation) [2020] 4 CLJ 841 (“Tee Siew Kai”) dated 07.02.2020 was delivered by Nallini Pathmanathan FCJ where the Federal Court addressed the following Question of Law:-

“Whether a party who is neither a creditor nor a contributory of a Wound-Up company is entitled to obtain leave to sue the liquidator of the Wound-Up Company, in his personal capacity, for losses allegedly suffered by the said party arising from an alleged breach of the joint venture agreement and/or power of attorney entered into between the said party and the Wound-Up Company.”

Brief Facts

On 25.09.1995, Merger Acceptance Sdn Bhd (“Merger”) owned 17 acres of lands in Pulau Pinang (“the lands”) and appointed Machang Indah Development Sdn Bhd (“Machang”) as its attorney vide an irrevocable power of attorney (“PA”). On the same day, Merger and Machang entered into a Joint Venture Agreement (“JVA”) to develop and complete an industrial estate project (“the project”) and vide a project management agreement (“PMA”), appointed Machang as the project manager.

The lands were charged to Bank Rakyat in 1999 for a sum of RM10 million for the development of the project. However, the project was abandoned by Machang but the lands were already subdivided.

Merger was wound up in 2002 and Machang was wound up in 2009. In 2013, Tee Siew Kai was appointed the Liquidator for Merger (“Merger’s Liquidator”). Bank Rakyat tried selling the lands thrice via auction to recover the repayment of the facilities but were unsuccessful. Merger’s Liquidator subsequently took possession of the lands for the purposes of realizing the assets and distributing the proceeds for repayment of the creditors of Merger.

On 12.05.2014, Kelana Estet Sdn Bhd (“Kelana Estet”) offered to purchase the lands for RM9 million and paid the 10% earnest deposit on 16.05.2014.

In June 2014, Merger’s Liquidator obtained a residual method valuation report for the lands, valuing it at RM9.5 million. Machang obtained a comparison method valuation report, valuing the lands at RM16.5 million. Despite accepting the offer to purchase, the Sale and Purchase Agreement (“SPA”) could not be executed as Machang insisted that it enjoyed contractual obligations under the JVA and PA, and threaten to sue the Merger’s Liquidator personally, for causing Merger to breach the JVA and PA, if he proceeded with the sale.

Merger’s Liquidator executed the SPA in February 2015 and paid the full redemption sum to Bank Rakyat for the said RM10 million charge. A total of RM6,792,043.00 was owed by Machang and accordingly Merger demanded the sum from Machang.

Machang continued to argue that the JVA and PA survived the winding up of both Machang and Merger. Machang’s consent was necessary to effect the sale. As such, the Liquidator had caused Merger to breach the JVA and PA. It was further alleged that Machang suffered loss and damage of RM3,300,801.58 based on the RM16.5 million valuation and the redemption sum. Also, it was contended that the sale caused loss to the creditors of Merger in the sum of RM4,951,202.37 as a result of the undervalued sale. However, at no point, such figures took into account Bank Rakyat’s failure to sell the lands via auction thrice.

Leave Application - To Commence Proceedings Againts Liquidator Personally

In its application for the grant of leave for the commencement of proceedings against a liquidator in his personal capacity, Machang attributed the breaches of JVA and PA to Merger, but liability to the Liquidator, personally. The claim suggested that the Liquidator acted wrongfully and unlawfully by not obtaining Machang’s consent and failing to acknowledge and accept that the JVA and the PA remained valid and binding.

However, these allegations were made despite the following:-

1. The two companies being wound up, resulting in the cessation of the PMA and accordingly PA and JVA;
2. Bank Rakyat initiated foreclosure proceedings in relation to the lands;
3. Third Party Charge took precedence over any contractual obligation between Machang and Merger;
4. Any breach could only subsist between Machang and Merger, both in liquidation.

Role of Liquidator as an Agent of Company in Liquidation

Machang failed to appreciate that the Liquidator was an agent of Merger and treated the Liquidator as a separate and distinct entity. The Liquidator was merely carrying out his statutory duties under Section 236 and Section 237 of the Companies Act 1965. Furthermore, the proposed statement of claim did not plead how the Liquidator became personally liable for Merger’s breaches. Neither could such liability, on the present facts, devolve in law upon the liquidator personally.

It was clear that the proposed statement of claim was flawed and lacked merit as the wrong party was sued, there was no cause of action on the face of the claim, the claim relies on proof of the subsistence of the JVA and PA (an untenable proposition on the face of the claim) and no legal basis to attribute any liability to the liquidator. The basis for damages was unfounded.

Decision of the Federal Court

It is paramount to appreciate that the Liquidator is a statutory creature who has custody and control of all of the assets of the company in liquidation and is the agent of the company.

The Federal Court ruled that as an agent of the company in liquidation, the acts of the liquidator are binding on the company. The liquidator is not personally liable for those acts that he carries out in his capacity as liquidator, even though his principal, the company, may be liable. As such, a third party cannot sue the liquidator for negligence, save for misfeasance or personal misconduct on his part.

For clarity, the Federal Court reiterated the functions of a Liquidator upon a winding up as follows:-

1. First, the custody and control of all property and choses in action are transferred from the directors to the liquidator;
2. The duty of the Liquidator is to collect the assets of the company and apply them in the discharge of the company’s liabilities such surplus as subsists is to be distributed amongst the members;
3. All powers of dealing with the company’s assets are exercisable by the liquidator for the benefit of those who are entitled to share in the proceeds of realization of the assets under the statutory scheme.

Under Section 236 of the Companies Act 1965, the Liquidator has the power to sell immoveable property of a company in liquidation, much like the present situation. As such, the Liquidator could not have abused his office and committed misfeasance as alleged.

The Federal Court further stated that only creditors and contributories of the company in liquidation had the ability to allege any undervalue sale of property and as such in the matter before the Court, Machang was not a creditor or contributory.

Machang’s grievance was against the alleged breach of contract by Merger. Any remedy it seeks must be obtained from Merger. The Federal Court was baffled that Machang premised a claim for damages on an alleged breach of contract by Merger, by bringing an action against the Liquidator personally.

As a third party, Machang lacked the locus standi to bring an action against the liquidator personally and any claim for damages ought to be taken by way of a proof of debt claim. Machang had no basis in law to invoke the court’s inherent jurisdiction to bring an action against the Liquidator personally as the Companies Act 1965 (now Companies Act 2016) provides sufficient statutory remedies for any alleged acts of misconduct or misfeasance by the liquidator.

In relation to how leave ought to be granted to proceed against a court- appointed liquidator personally, the Federal Court reiterated the probable success test where a consideration of the factual matrix of the case before concluding that whether there is a prima facie case. In essence, it was held that in order to succeed in an application for the grant of leave, the party seeking such leave must make out a prima facie case. In such instances, the Court is compelled to evaluate the evidence led.

Conclusion

Tee Siew Kai had in fact echoed what was already decided by the Federal Court in the case of Ooi Woon Chee & Anor v Dato’ See Teow Chuan & Ors And Other Appeals [2012] 2 CLJ 501 whereby it is trite law that only a creditor and contributory shall have the locus standi to seek the leave to commence action as against the Liquidator. A third party does not possess that locus standi to sue the Liquidator personally.

The decision of Tee Siew Kai is welcomed as it brings about greater clarity on the proposition of law that a Third Party shall not have the locus standi to sue a Liquidator personally for Negligence. There is then the important qualification that a Third Party may have a cause of action for misfeasance and personal misconduct as against the Liquidator as per the crucial words ‘save for’ in the said Judgment.