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09 April 2024

Commencing proceedings against liquidators in a compulsory liquidation – Is leave of court required?

Introduction

A liquidator of an insolvent company is required to amongst others, wind up the affairs of the company, realise and distribute its assets and examine the circumstances which precipitated the liquidation. In the discharge of these duties, the actions of a liquidator will invariably come under scrutiny and in some cases, lead to the termination of his appointment. Where proceedings are commenced against court-appointed liquidators, including actions seeking their removal, one of the issues that often falls to be considered is whether leave of court is required.

This issue recently came to fore and was explored by the Federal Court in the case of N Chanthiran a/l Nagappan v Kao Che Jen [2023] 5 MLJ 284 (‘N Chanthiran’). There, an action was brought by a contributory against the liquidator for breach of duty. At the hearing of the Originating Summons, a preliminary objection was taken by counsel for the liquidator on the basis that the contributory had failed to obtain leave of the winding up court to commence the action. The High Court upheld the said objection relying on the decisions of the Court of Appeal in Chi Liung Holdings Sdn Bhd v Ng Pyak Yeow [1995] 3 MLJ 204 (‘Chi Liung Holdings’) and the High Court in TN Metal Industries Sdn Bhd & Ors v Ng Pyak Yeow [1996] 4 MLJ 567 (‘TN Metal Industries’) which held that leave of court was a prerequisite to such an action. The High Court judge noted that the Court of Appeal in Chi Liung Holdings had referred to section 236(3) of the Companies Act 1965 which is in pari materia with section 486(2) of the Companies Act 2016, which provides as follows:

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.” (emphasis added)

On appeal, the decision of the High Court was reversed. The Court of Appeal reasoned that its function was not to read words into a statute, but rather to give effect to the plain and ordinary language employed in the relevant legislation. In support of this proposition, the Court of Appeal cited its previous decision in Kao Che Jen v N Chanthiran a/l Nagappan [2015] 9 CLJ 295 (‘Khao Che Jen’), which interestingly, arose from a related action initiated by the contributory to remove the liquidator. In light of the two conflicting lines of authority, the Federal Court was invited to clarify the issue of whether prior leave of the winding up court was required before proceedings can be initiated against a court-appointed liquidator.

The office of a liquidator

Before we dovetail into the reasoning of the apex court, it is important to appreciate what the office of a liquidator entails. Broadly, a liquidator’s duties are either administrative or quasi-judicial in nature. For example, when pursuing legal proceedings against delinquent directors, the liquidator performs an administrative function in appointing solicitors to act on his behalf in Court. Conversely, when deciding to admit or reject a proof of debt, the liquidator is required to act as an adjudicator or a judge in performing this exercise. It is for this reason that liquidators are often described as officers of the court and are subject to its control. Whilst they owe their duties to the contributories and creditors of the company, it is imperative for the court to ensure that liquidators do not face unwarranted interference in the discharge of their duties. The High Court in TN Metal Industries described the office of a liquidator in the following manner:

His task is an onerous one. He is charged with a number of statutory duties and he has a right to apply to court for directions and guidance. He is an officer of the court. He is open to accusations of impropriety, unfairness, and any label that a disgruntled party might seek to level at him. He ought to be protected against such abuse unless there is sufficient prima facie evidence to support such allegations. If any dissatisfied litigant is allowed to merely raise some issue and insist that on such mere allegations he be given leave to bring an action against a liquidator, then the wheels of justice, which at the moment grind extremely slowly, will in such circumstances come to a halt. No one will venture towards this task. A liquidator will spend all his time defending every action filed against him. He will then have to have professional indemnity insurance cover to protect himself against multifarious actions. Costs will escalate and his fees will have to be fixed.” (emphasis added)

Test for granting leave

The Court of Appeal in Chi Liung Holdings laid down the test for granting leave to sue a liquidator, namely that the court should be satisfied as to the probable success of the proposed claim and that the proposed claim should not be vexatious or oppressive in nature. This is necessary to ensure that no unnecessary or frivolous claim is initiated against the liquidator. It bears highlighting that the decision of Chi Liung Holdings was later followed by the High Court in a series of cases namely:-

  • Chin Cheen Foh v Ong Tee Chew [2003] 3 MLJ 57;
  • Sarawak Timber Industry Development Corporation v Borneo Pulp Plantation Sdn Bhd [2005] 2 MLJ 74;
  • Abric Project Management Sdn Bhd v Palmshine Palza Sdn Bhd & Anor [2007] 3 MLJ 571; and
  • See Teow Guan & Ors v Kian Joo Holdings Sdn Bhd & Ors [2010] 1 MLJ 547.

These cases all stand for the proposition that supervision by the courts is necessary and acts as a filter against vexatious, frivolous and improperly motivated proceedings.

In See Teow Guan it was held that in granting leave to sue a liquidator, the court should be satisfied that the proposed claim has “sufficient merit”. In undertaking this assessment, the court has the discretion to take into account a variety of factors, including the sufficiency of the evidence adduced and the likelihood of success of the proposed claim. The Court in Abric Project Management further held that pecuniary loss suffered by the wound-up company should be shown in an action for misfeasance against the liquidator.

Prior to the instant case of N Chantiran, the Federal Court had occasion to consider this issue in Ooi Woon Chee & Anor v Dato’ See Teow Chuan & Ors [2012] 2 MLJ 713 and more recently in Tee Siew Kai (liquidators for Merger Acceptance Sdn Bhd (in liquidation)) v Machang Indah Development Sdn Bhd (in liquidation) (previously known as Rakyat Corp Sdn Bhd) [2020] 6 MLJ 168. The apex court cited the above line of authorities with approval and reaffirmed that leave of the winding up court is indeed required before proceedings can be commenced against a liquidator.

The errors of the Court of Appeal

As explained above, the Court of Appeal in N Chanthiran took a contrasting approach to this issue by relying on its previous decision in Kao Che Jen. It is therefore pertinent to examine the reasoning and comprehend the Court of Appeal’s decisions in both cases.

The rationale behind the Court of Appeal decision in Kao Che Jen rested primarily on the interpretation of the statute. The Court of Appeal held that a cursory reading of section 232(1) of the Companies Act 1965 does not disclose, on the face of it, any requirement for leave as a prerequisite to any application to remove a liquidator. When compared to section 226(3) and section 181A of the 1965 Act, those provisions expressly state that leave of court is required. The Court of Appeal went on to hold that ultimately, it is the duty of the court, when interpreting a statute, to construe it according to the intention of the legislature.

The Federal Court disagreed with the above reasoning. At paragraph 50 of its written grounds, Nallini Pathmanathan FCJ said this:

However, with the greatest of respect, it is not tenable to draw an analogy between s 232(1) of the 1965 Act, which provides a power of appointment and removal to the court in relation to a liquidator in a compulsory winding up situation, with s 226(3) of the 1965 Act, which deals with the initiation of an action or continuation of proceedings against the company in liquidation. They are two completely disparate issues. The only similarity that may be gleaned is if the two statutory provisions are read in a literal and grammarian fashion. Similarly, s 181A of the 1965 Act deals with a statutory derivative action which again has no nexus with the appointment and removal of a liquidator in a winding up by the court. In order to comprehend the true intent of Parliament in relation to whether or not leave is required, it is necessary to construe ss 232(1) and 277(2) in the context of the purpose and object of the 1965 Act.”

Adopting a purposive construction of the Act, the Federal Court held that in seeking leave of court, a prospective litigant informs the court regarding a proposed step to be taken in a proceeding. Since a liquidator is “subject to the control of the court” as provided under ss 236(3) and 277(2) of the 1965 Act, the court should be advised in the event any action, including an application to remove the liquidator, is proposed to be initiated against the liquidator.

Concluding remarks

It is evident from the cases above that the grant of leave in respect of actions against liquidators is indeed a requirement under the Companies Act 2016. Its importance cannot be understated. The winding up court when confronted with such an application must analyse the merits of the proposed action against the liquidator of a company. This in turn involves a consideration of whether the evidence in support of such claims is credible and whether pecuniary loss has been suffered. We conclude by observing that the requirement of leave accords with the position across the Commonwealth [See: Re Magic Aust Pty Ltd (in liq) (1992) 7 ACSR 742 (AUS); McGowan v Chadwick [2002] All ER (D) 45 (UK)]. In short, courts have a duty to protect its officers from spurious or vexatious litigation and to prevent wrongful interference with the winding up process.

This article is authored by Mavin Thillainathan (Partner) and Afiqah Aina Zakirah (Pupil-in-Chambers) of the Commercial Litigation Practice of Lavania & Balan Chambers. It contains general information only. The contents are not intended to constitute legal advice on any specific matter nor is it an expression of legal opinion and should not be relied upon as such.