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Presenting a Winding Up Petition for a Collateral Purpose is an Abuse of Court Process

posted 8 months ago

A Case Summary on Le Apple Boutique Hotel Sdn Bhd v Keen Solution Sdn Bhd (Civil Appeal No. W-02(NCC)(A)-1004-06/2022) and another Appeal.

Salient Background Facts

The appeals are in relation to a winding up petition filed by Keen Solution Sdn Bhd (“Petitioner”) against Le Apple Boutique Hotel (KLCC) Sdn Bhd (“Respondent”), which was allowed by the Kuala Lumpur High Court.

The relationship between the parties are as follows:

Respondent

a. Le Apple Boutique Hotel Sdn Bhd (LABHSB) (55% shares)

b. Petitioner (45% shares)

The Respondent had entered into a tenancy agreement with PGCG Assets Holdings Sdn Bhd (PGCG), a company related to the Petitioner. Disputes arose between the parties, and the Respondent sued PGCG for a total of RM19,644,322.00. Out of this amount claimed, the Respondent had successfully obtained a Summary Judgment for the sum of RM1.65 million, and the remaining sums would go to trial (“Tenancy Agreement Suit”).

However, against its own interest, the Petitioner went on to present the Winding Up Petition, effectively ‘foregoing’ the opportunity to fight for almost RM20,000,000.00 in the Tenancy Agreement Suit. By doing so, the Petitioner would effectively be foregoing its potential financial gain from the Tenancy Agreement Suit (by way of its 45% shares in the Respondent), while PGCG was ‘saved’ from the potential liability of approximately RM20,000,000.00. This conduct by the Petitioner and its relationship with PGCG were paramount in the High Court’s Decision in lifting the corporate veil.

The High Court in allowing the Winding Up petition, found that:

a) It was not necessary to pierce the corporate veil to identify the alter egos of the Petitioner and PGCG as it was a bona fide Winding Up Petition;

b) There was no evidence tendered to the High Court to prove / disprove the Tenancy Agreement Suit;

c) It was just and equitable to wind up the Respondent as the Respondent’s sole purpose and business had ceased, and that there was also a breakdown of confidence and trust within the management of the Respondent.

The Court of Appeal overturned the High Court’s decisions and decided the appeal as follows:

ISSUE 1 (ANSWERED IN THE NEGATIVE) – Whether the High Court was right in refusing to lift the corporate veil and finding that the Petition was a bona fide petition without any ulterior motive.

a) The Petitioner was willing to act against its own interest for the sake of PGCG because any monies lost and paid by PGCG to the Respondent would have to be shared between the Petitioner and LABHSB. Thus, if PGCG were to lose the Tenancy Agreement Suit, the monies PGCG had to pay the Respondent would no longer be held by PGCG and the Petitioner (as related companies) but instead be diluted into LABHSB via LABHSB’s majority shareholding in the Respondent.

b) In lifting of the Petitioner’s corporate veil, the Court of Appeal found that:

(i) The Petitioner and PGCG shared the same business and registered address;

(ii) The majority shareholder of the Petitioner is also a director and shareholder of PGCG;

(iii) The Petitioner’s Majority Shareholder is the wife of PGCG’s Director;

(iv) PGCG Group derives rental income from the Petitioner; and

(iv) The Petitioner had in another Industrial Court Suit involving the Respondent, appointed a PGCG Group’s Director (a solicitor) to defend the Respondent.

c) With reference to the Federal Court case of Gurbachan Singh s/o Bagawan Singh & Ors v Vellasamy s/o Pennusamy & Ors (on their behalf and for the 213 sub-purchasers of plots of land known as PN35553, Lot 9108, Mukim Hutan Melintang, Hilir Perak) and other appeals [2015] 1 MLJ 773, the Court of Appeal stated that the corporate veil of a company ought to be lifted, if the corporate veil is abused for improper purpose:

“the court would lift the corporate veil of a corporation if such corporation was set up for fraudulent purposes, or where it was established to avoid an existing obligation or even to prevent the abuse of a corporate legal personality.

As to what constitutes fraudulent purposes it has been described as to include actual fraud in equity. And fraud in equity occurred in “…cases where there are signs of separate personalities of companies being used to enable persons to evade their contractual obligations or duties, the court would disregard the notional separateness of the companies….”

d) the Petition was an abuse of process for the Petitioner to achieve the collateral purpose of stifling the Respondent’s suit against PGCG, (which is the Petitioner’s related company).

ISSUE 2 (ANSWERED IN THE NEGATIVE) – Whether the High Court was right in deliberating on matters which were still live issues in the Tenancy Agreement Suit

e) It was improper and too far reaching for the High Court to decide on the Winding Up Petition by dwelling into the merits of the Tenancy Agreement Suit which are still subjudice.

f) This is further so when evidence (in relation to the Tenancy Agreement Suit) was not in the Winding Up Court.

ISSUE 3 (ANSWERED IN THE NEGATIVE) – Whether the High Court was right in making a finding of the existence of a Joint Venture (JV) and the subsequent ceasing of business under the JV and breakdown of management under the JV

g) In the absence of any JV Agreement or any shareholders’ agreement between the Petitioner and LABHSB, then the relationship between the two shall be that of co-shareholders who are bound by the company’s Memorandum and Articles of Association (M&A).

h) The purpose and business of the Respondent must be examined based on the clear stipulations of the Respondent’s M&A.

i) Merely because a commercial trade is stultified or stagnated due to litigation does not automatically mean that the company is no longer in business.

CONCLUSION

It is not uncommon for companies to attempt to misuse the machinery provided by the law to achieve an improper end, so as to protect and advance its own financial interest – in this case by the filing of a winding up Petition by a related company. As such, the Court of Appeal’s decision is a reminder for companies that the Courts will not condone such abuse of the court’s process, and would not hesitate to dismiss and reprimand such actions.


About the author

Lim Ren Wei
Associate
Construction & Energy
Harold & Lam Partnership
[email protected]

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