When Can a Liquidator Be Removed?

RWY Intern, Caroline Leong trying to make sense of the principles governing the laws when applying to remove a Liquidator

What Is a Liquidator and What Does a Liquidator Do?

A liquidator is a person who manages a company’s assets in the event that the company gets wound up. It should be noted that a company can be wound up in two ways, voluntarily or involuntarily. Involuntary winding up can also be described as the winding up of a company by the Court. When a company is wound up, only an approved liquidator or the Official Receiver may be appointed as the liquidator. Section 227 of the Companies Act 1965 lays out the process of the appointing a liquidator.

A liquidator’s responsibility is to sell the assets and use the proceeds to pay the company’s creditors. Basically he collects all the assets belonging to the company in liquidation before cashing it out to settle all the creditor’s claims. In the event that there are any surplus assets, he will distribute them to the company’s shareholders according to their entitlement.

This article will attempt to answer two questions. Can we remove a liquidator who is appointed by the court and if so, in what circumstances?

Section 232(1) of the Companies Act 1965 states as follows: -

(               " A liquidator appointed by the Court may resign or on cause shown be removed by the Court."

Ng Yok Gee & Anor v CTI Leather Sdn Bhd; Metro Brilliant Sdn Bhd & Ors (Interveners) (2006) 3 CLJ 360 is a case which sets outs the principles of law whereby a liquidator can be removed, which include:-

“The normal ground for removal is that the liquidator has a personal unfitness, has failed to act impartially or is in a position where his duty and interest are in conflict.”

“A liquidator who fails to investigate the affairs of the company to the prejudice of an applicant is in neglect of his duty and can be removed. (In re Sir John Moore Gold Mining Company (supra))”

The court will take into account certain factors such as the majority of creditors being unsatisfied with the liquidator (Re Oxford Building and Investment Co [1883-1884] 49 L.T 495) or whether it would be in the interest of the liquidation for him to be replaced (Chua Boon Chim v JM MacCormack [1979] 2 MLJ 156). In a recent local case, the court stated that it “must be shown that the liquidator can no longer act impartially and objectively to protect” the interest of the liquidation (Wong Sin Fan & 2 Ors v Ng Peak Yam @ Ng Peak Yeow & Anor (2012) 1 AMR 818, CA). 

Therefore, the above Section 232(1) can be understood to mean that the court can remove a liquidator if it can be shown that his removal would be generally advantageous for those interested in the company’s assets (Re Adam Eyton, Limited, Ex Parte Charlesworth (1887) 36 Ch. D 229).

What about a situation where a liquidator faces a vote of no confidence?

As a result, this author feels that a vote of no confidence from the creditors should certainly be a factor to take into account. The judge in the case of Ng Yok Gee & Anor (2006) 3 CLJ 360 felt that it was “not a sufficient ground for removal of a liquidator that a substantial minority or even the majority of shareholders want the liquidator to be removed.” However, this was clarified when the judge in Bina Puri Sdn Bhd v Jambulingam Sethuraman-Raki [2012] 8 MLJ 141 reasoned that if the applicant had shown that “all the creditors and/or contributories play a significant role, the overriding consideration is that the court must be satisfied that it is against the interest of the liquidation.”

What if there is no personal misconduct on the part of the liquidator?

This brings us to the issue of how to define “cause shown”. There are several cases which can be referred to with regards to this. The English Court was of the opinion that the phrase “on due cause shewn” does not have to be confined to “personal unfitness in the liquidator” (Re Adam Eyton (1887) 36 Ch. D 229). In another case, the court was seen as having “a discretionary power to remove the liquidator appointed by a company without any proof of misconduct or unfitness on their part if, having regard to all the circumstance, it is of opinion that their removal will conduce to the more efficient winding up of the company” (Re Marseilles Extension Railway and Land Company [1867] L.R. 4 EQ 692). Furthermore, the court in Re Buildlead Ltd Quickson (South and West) Ltd v Katz and Another [2004] EWHC 2432 (Ch) interpreted a similar phrase, found in Section 108(2) Insolvency Act 1986, to mean:-

                     “The burden is on the applicant to show a good cause for removal of a liquidator, but it is well established that the statutory provision confers a wide discretion on the court which is not dependent on the proof of particular breaches of duty by the liquidator.”

Chi Liung Holdings Sdn Bhd v Soon Kok Seng (liquidator) Chi Liung & Sons Sdn Bhd [1996] 2 BLJ 9 is a Malaysian case stating that there need not be misconduct on the part of the liquidator to enable removal as long as it is “in the best interest of the company being liquidated”. If a liquidator acts “outside the scope of his appointment” or fails to “protect the interest of the creditors and/or contributories”, then he can be removed as well.

The judge in TR Hamzah & Yeang Sdn Bhd v City Centre Sdn Bhd [2012] 1 MLJ 383 clearly explains in his judgment that “cause shown” is to be interpreted in a manner that does not insist on personal misconduct for the removal of a liquidator:-

“There is no specific methodology or formula attached to the word 'cause shown'. The court is obliged to remove the liquidator in limine if he has failed to act within the spirit and intent of the several provisions of the CA 1965 and more importantly when he acts outside the scope of his appointment or order of court or failed to protect the interest of the creditors and/or contributories or is not justly, expeditiously and economically pursuing to conclude the liquidation process as it must not be forgotten that he is an officer of court and his acts or omission must not place the administration of justice to disrepute.”

However, there have been cases where the court takes a different stance. In the recent case of Wong Sin Fan & 2 Ors v Ng Peak Yam @ Ng Peak Yeow & Anor [2012] 1 AMR 818, the Court was seen to be of the opinion that “some unfitness in the liquidator must be shown in order to justify his removal”.

In conclusion there are conflicting authorities as to whether a liquidator can be removed in certain circumstances. However, this author sees this as an opportunity for common law in this area to expand and evolve but of course, it will take time. A judgment which can clarify the law once and for all will certainly be welcomed.

Caroline Leong

22nd August 2012

Section 218 Companies Act 1965

The Companies Act 1965 (CA 1965) includes a provision which allows a party to file a Petition in High Court to wind up a Company. Today we look at one of the few provisions related to this issue, Section 218 of the CA 1965. 

We re-produce Section 218 below

218.  Circumstances in which company may be wound up by Court.

(1) The Court may order the winding up if -

(a) the company has by special resolution resolved that it be wound up by the Court;

(b) default is made by the company in lodging the statutory report or in holding the statutory meeting;

(c) the company does not commence business within a year from its incorporation or suspends its business for a whole year;

(d) the number of members is reduced in the case of a company (other than a company the whole of the issued shares in which are held by a holding company) below two;

(e) the company is unable to pay its debts;

(f) the directors have acted in the affairs of the company in their own interests rather than in the interests of the members as a whole, or in any other manner whatsoever which appears to be unfair or unjust to other members;

(g) an inspector appointed under Part IX has reported that he is of opinion -

(i) that the company cannot pay its debts and should be wound up; or

(ii) that it is in the interests of the public or of the shareholders or of the creditors that the company should be wound up;

(h) when the period, if any, fixed for the duration of the company by the memorandum or articles expires or the event, if any, occurs on the occurrence of which the memorandum or articles provide that the company is to be dissolved;

(i) the Court is of opinion that it is just and equitable that the company be wound up;

(j) the company has held a licence under the Banking and Financial Institutions Act 1989 (Act 372) or the Islamic Banking Act 1983 (Act 276) and that licence has been revoked or surrendered;

(k) the company has carried on Islamic banking business, licensed business, or scheduled business, or it has accepted, received or taken deposits in Malaysia, in contravention of the Banking and Financial Institutions Act 1989 or the Islamic Banking Act 1983, as the case may be;

(l) the company has held a licence under the Insurance Act 1996 and-

(i) that licence has been revoked;

(ii) Bank Negara Malaysia has been petitioned for its winding up under

subsection 58(4) of the Insurance Act 1996; or

(iii) an order under paragraph 59(4)(b) of the Insurance Act 1996 has been made in respect of it;

(m) the company is being used for unlawful purposes or any purpose prejudicial to or incompatible with peace, welfare, security, public order, good order or morality in Malaysia; or

(n) the company is being used for any purpose prejudicial to national security or public interest.

[Am. Act A1022]

DEFINITION of inability to pay debts.

(2) A company shall be deemed to be unable to pay its debts if -

(a) a creditor by assignment or otherwise to whom the company is indebted in a sum exceeding five hundred ringgit then due has served on the company by leaving at the registered office a demand under his hand or under the hand of his agent thereunto lawfully authorized requiring the company to pay the sum so due, and the company has for three weeks thereafter neglected to pay the sum or to secure or compound for it to the reasonable satisfaction of the creditor;

(b) execution or other process issued on a judgment, decree or order of any court in favour of a creditor of the company is returned unsatisfied in whole or in part; or

(c) it is proved to the satisfaction of the Court that the company is unable to pay its debts; and in determining whether a company is unable to pay its debts the Court shall take into account the contingent and prospective liabilities of the company.

As you may see, Section 218 gives you a list of instances where one may file such a Petition. This is a popular method used by debtor to Petition the winding up of a Company which owes the debtor. 

In some instances, the very service of a Notice under that Section 218, would trigger the essential response to report to the Stock Exchange, if the Company targeted is a Public listed Company. 

There have also been a mixed responses from Judges whether the provision can be used if the Debtor has yet to attain Judgment against the owing Company. There have been cases where Debtors file this Petition to pressure the Company to settle the outstanding amount, even though that Debtor has not crystalized that debt into a Judgment. The case laws are split in the sense that some Judges opine that one must attain a Judgment first before proceeding to the Petition; whilst another line of authority felt that it is all right to file such a Petition, with or without a Judgment.

COMPANY LAW : Forcing Suffrage to End Suffering (By Lee Shih)

Below is an article written by a friend of RWY, Mr Lee Shih, a lawyer in Malaysia. This article was originally featured in Skrine's Legal Insights : Issue 1/2010.

You may find the same at this link:-

http://shih.blogspot.com/2010/04/forcing-suffrage-to-end-suffering.html

RWY wish to thank Mr Lee for graciously allowing us to reproduce his article here.

One of the important ways in which the members of a company can express their views and concerns about the management of the company is at the general meetings of a company. Ordinarily however, the power to convene an extraordinary general meeting ("EGM") vests in the directors of the company (for instance, Article 44 of Table A of the Fourth Schedule of the Companies Act 1965 (“Table A”) allows any director to convene an EGM). The members themselves do not have a common law right to compel the directors to convene an EGM.

Sections 144, 145 and 150 of the Companies Act 1965 (“the Act”) provide different mechanisms for the members to convene an EGM. In a majority of cases, such an EGM is convened to allow the members to vote on the removal and replacement of the directors. As a riposte, whether by an opposing shareholder faction or the directors themselves, legal challenges may then be made based on whether the procedural requirements have been adhered to.

This article therefore analyses the three different modes and their requirements for convening an EGM as provided for under sections 144, 145 and 150 of the Act.

SECTION 144 – SHAREHOLDERS REQUISITION DIRECTORS TO CONVENE AN EGM

Section 144 of the Act allows members, holding not less than 10% of the voting rights, to requisition the directors to convene an EGM of the company. Section 144(1) of the Act makes it clear that this statutory right of the members is preserved notwithstanding anything in the Articles of the company. The reason for the 10% shareholding threshold under section 144 of the Act, which is also present in section 145 of the Act, is necessary to prevent frivolous convening of meetings which would disrupt the administration of the company.

(i) “Members”

It is likely that notwithstanding the term “members” under section 144 of the Act, even a single member, holding not less than 10% of the voting rights, can rely on the provision. The High Court in Granasia Corporation Bhd & Ors v Choong Wye Lin & Ors and another case [2008] 4 CLJ 893 held that a single member could requisition under section 144 of the Act and the Court referred to the Australian decision in South Norseman Gold Mines No Liability v MacDonald [1937] SASR 53.

(ii) Requisition Requirements

Section 144(2) of the Act lists the requirements of the requisition notice in that it must state the objects of the meeting, it must be signed by the requisitionists and deposited at the registered office of the company. It is sufficient if the requisition is sent by post to the registered office of the company (Hup Seng Co Ltd v Chin Yin [1962] MLJ 371).

Upon the deposit of the requisition notice, the directors have 21 days from that date to issue a notice to convene the EGM (section 144(3) of the Act). Further, the EGM must be held within 2 months from the date of the deposit of the requisition notice (section 144(1) of the Act).

It is likely that a meeting requisitioned by the members cannot deal with a resolution not included in the objects for which the meeting was requisitioned (Scottish authority of Ball v Metal Industries 1957 SC 315). However, there is the alternative view that any business can be transacted at such a requisitioned meeting if sufficient notice of the necessary resolutions is given (Holmes v Life Fund of Australia Ltd [1971] 1 NSWLR 860).

(iii) Directors Fail to Convene EGM

In the event the directors fail to convene the EGM within the 21-day period from the date of requisition, then section 144(3) of the Act gives the requisitioning members a remedy of self-help in that the requisitionists themselves can convene the EGM.

Nonetheless, if the directors were to issue the notice to convene the EGM after the 21-day period and the EGM were to be held after the 2-month period from the date of requisition (without objection from the requisitionists), such an EGM would not be void. Such was the case in the High Court decision of Dato’ Hamzah Abdul Majid & Anor v Wembley Industries Holdings Bhd [1998] 4 CLJ Supp 471 where the directors who had been removed at such an EGM had tried to seek a declaration that the EGM was void for breach of section 144 of the Act. It was held that the duty on the directors to convene an EGM under section 144 of the Act was owed to the requisitionists. If the meeting was held on a late date, and the requisitionists had not sought to convene one on an earlier date, it would be because it still suited the requisitionists’ purposes. Nonetheless, holding a late EGM would still expose the directors to the general penalty provisions under section 369 of the Act.

(iv) Members Convene the EGM

In exercising their right to convene an EGM under section 144(3) of the Act, the requisitionists also face a deadline in that the EGM must be held within a period of 3 months from the date of the requisition (Court of Appeal decision of HL Nominees (Tempatan) Sdn Bhd v SJA Bhd & Anor and Another Appeal [2005] 1 CLJ 23).

The rationale for this time limit is to maintain good order in a company. The requisitionists having been conferred the power to convene the EGM, must not delay in holding the meeting (Dato’ Hamzah Abdul Majid & Anor v Wembley Industries Holdings Bhd [1998] 4 CLJ Supp 471).

As long as requisitionists holding one-half of the total voting rights of the original requisitionists convene the EGM, it is valid (section 144(3) of the Act). Therefore, the withdrawal of some of the requisitionists does not affect the right of the others to call the EGM (Canopee Investments Pte Ltd v Landmarks Holdings Bhd [1989] 2 MLJ 469).

(v) Expenses

An advantage of requisitioning a meeting under section 144 is that if the requisitionists convene the EGM, then all reasonable expenses they incur shall be paid to them by the company (section 144(4) of the Act).

SECTION 145 – MEMBERS CONVENING MEETING THEMSELVES

Section 145 of the Act allows two or more members, holding not less than 10% of the issued share capital (or if the company has no share capital, not less than 5% in number of members) to directly convene a meeting of the company.

Instead of relying on the section 144 mechanism which necessitates waiting for the directors to decide to call an EGM, section 145 of the Act gives the advantage of allowing the members to call for such a meeting themselves and this route can be a lot faster. However, section 145 of the Act does not give the members a right to be repaid any expenses incurred by them in holding such a meeting.

(i) “Two or more members”

While it is likely that a single member can rely on section 144 of the Act, section 145 makes it clear that two or more members are required in order to convene a meeting under this provision.

(ii) Statutory Right?

Section 145 of the Act does not contain the wording “notwithstanding anything in its articles” which is present in section 144 of the Act. A question arises as to whether there can be a contracting out of section 145 of the Act i.e. whether the Articles can exclude members relying on section 145 of the Act.

The Court of Appeal in Indian Corridor Sdn Bhd & Anor v Golden Plus Holdings Bhd [2008] 3 MLJ 653 (“Indian Corridor”) had to deal with a question related to such an issue. The facts involved the two appellant-shareholders convening an EGM pursuant to section 145 of the Act and the respondent-company challenging the convening of the EGM. Article 55 in the respondent’s Articles provided that the directors may convene an EGM and that EGMs “shall also be convened on such requisition, or, in default, may be convened by such requisitionist, as provided by Section 144 of the Act.” One of the main issues in the appeal was whether Article 55 had the effect of contracting out of section 145 of the Act.

The Court of Appeal held that on a construction of Article 55, there had been no contracting out of section 145 of the Act. The wording of Article 55 did not state that the shareholders shall not resort to their right under section 145 of the Act.

Nonetheless, the decision leaves open the question if the Articles of a company expressly exclude members from seeking recourse to section 145 e.g. the inclusion of a phrase along the lines of “EGMs may be convened by such requisitionist only by way of section 144 of the Act and section 145 of the Act is expressly excluded.”

The Court of Appeal in Indian Corridor distinguished the equivalent Australian provision (section 242(1) of the Australian Companies Code) as that section has the wordings “so far as the articles do not make other provision” which the Australian courts have held allow for the contracting out of the statutory provision (LC O’Neil Enterprise Pty Ltd v Toxis Treatments Ltd [1986] 10 ACLR 337). The Court of Appeal found that while the Australian provision permits a contracting out of its provisions, section 145 of the Act has no equivalent. This question may therefore still be open to interpretation by the courts.

(iii) Notice Period

Section 145(2) of the Act makes clear that in relation to a meeting of a company, the minimum notice in writing must be not less than 14 days or such longer period as provided in the Articles. In the specific case of the convening of an annual general meeting of a public company, section 145(2A) of the Act requires that notice in writing of not less than 21 days or such longer period as provided in the Articles.

(iv) Service of Notice

Section 145(4) of the Act also requires that if the Articles do not make provision for service of the notice on every member having a right to attend and vote at the meeting, then the notice must be served in accordance with Table A.

Unlike under section 144 of the Act, where the primary obligation is on the directors to issue the notices to call for the EGM, the members relying on section 145 of the Act must carry out the issuance of the notices themselves. In planning the calling of a meeting under section 145, the members can rely on section 160 of the Act to inspect or to obtain a copy of the register of members of the company to obtain the names and addresses of all the members.

SECTION 150 – COURT ORDERED EGM

There may be situations where it is difficult or almost impossible to hold a meeting of the company, even if there is reliance on sections 144 or 145 of the Act. For example, an opposing shareholder may refuse to attend the meeting and the quorum requirement under the Articles cannot be met. The Court is empowered under section 150 of the Act to order a meeting of a company to be called where it is impracticable to call or to conduct a meeting in the manner prescribed by the Articles or the Act.

(i) Applicant

The Court may make an order to convene a meeting on its own motion or on the application of a director or any member who is entitled to vote or the personal representative of such a member.

(ii) “Impracticable”

The onus is on the applicant to show that it is impracticable to call for a meeting of the company in any manner whatsoever or to conduct the meting in the manner prescribed by the Articles or the Act. The word ‘impracticable’ is not synonymous with impossible (Re El Sombrero Ltd [1958] Ch 900 at 904).

The Court can also exercise its power under section 150 if the meeting cannot be conducted properly, even though it may be called. In both the High Court cases of Low Son Siang v Lee Kim Yong [1999] 1 CLJ 529 andPhuar Kong Seng v Lim Hua [2005] 2 MLJ 338, there were only two shareholders and the quorum requirement for a meeting was two. There had been a failure on the part of one of the shareholders to attend the EGM and the Court allowed the application under section 150 of the Act to call for an EGM and directed that the quorum at the meeting be one member.

(iii) Requirement to Attempt to Requisition Meeting under Section 144 or Section 145 first?

Before applying to the Court under section 150 of the Act, members who wish to convene a meeting of the company may have to try to resort to section 144 or section 145 of the Act first. In the High Court case ofKemunting Tin Dredging (M) Bhd & Ors v Baharuddin Ma’arof & Ors [1985] 1 CLJ 442, the Court dismissed the application under section 150 and held that it was not impracticable for the members to call a general meeting. It was held that the members still had two avenues open to them, either in reliance of the procedures under section 144 or section 145 of the Act.

CONCLUSION

The statutory right for members to call for meetings allows members to express their views and to influence corporate governance. Where the members wish to replace the directors, they then need not rely on those same directors to call for the necessary meeting. The right to call for meetings is therefore a safeguard to corporate democracy in allowing members the opportunity to vote on company matters.

By : Lee Shih