Tan Keen Keong @ Tan Kean Keong V Tan Eng Hong Paper & Stationery Sdn Bhd&4lagi


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CIVIL APPEAL NO: P-02(IM)-2102-2009


















[In the Matter of Companies (Winding-Up) No: 28-68-2009 In the High Court of Malaya at Penang]


In the Matter of section 218(1)(f) and (i) of the Companies Act 1965




In the Matter Tan Eng Hong Paper & Stationery Sdn. Bhd. (Company No. 95222-A)




In the Matter of Companies (Winding-Up) Rules 1972






Tan Keen Keong @ Tan Kean Keong – Petitioner




1. Tan Eng Hong Paper & Stationery Sdn. Bhd.


(Company No: 95222-A)


2. Tan Seng Choo


3. Tan Seng Kiat


4. Tan Seng Kow


5. Tan Kin Seng – Respondents




Suriyadi Halim Omar, JCA Jeffrey Tan Kok Wha, JCA Abdul Wahab Patail, JCA


Date of Judgment: 7th June, 2011 JUDGMENT OF THE COURT


[1] This is an appeal by Tan Keen Keong @ Tan Kean Keong, the petitioner (“the appellant”) for winding up under Companies Winding Up Petition No: 28-68-2009. He is dissatisfied with the decision on 9/9/2009 by the High Court in Penang which allowed with costs an application by the respondents for validation orders under section 223 of the Companies Act 1965 (“the CA 1965”).




[2] The respondents’ application for a validation order was made for the reason that section 223 of the CA 1965 provides that any disposition of the property of the company including things in action and any transfer of shares or alteration in the status of the members of the company made after the commencement of the winding-up by the Court shall, unless the Court otherwise orders, be void. It is provided by section 219 (2) of the CA 1965 that the winding-up of the company is deemed to have commenced at the time of the presentation of the petition for the winding-up.


[3] Section 223 deals with the prohibition of disposition of the property of a company against which a winding-up petition is presented. The general principles applicable to the making of validation orders may be found in Re Burton & Deakin Ltd (1977) 1 All ER 631; Denney v John Hudson & Co Ltd (1992) BCLC 901; BSN Commercial Bank (M) Bhd v River View Properties Sdn Bhd (1996) 1 MLJ 873; Tan Kah Hoe & Anor v Budaya Adil Sdn Bhd (2000) 7 MLJ 530 and Dato’ Tan Toh Hua & Ors v Tan Toh Hong & Ors (2001) 1 CLJ 733. The onus is on the applicant for the validation orders to satisfy the court of circumstances which would justify the judicial exercise of the discretion to sanction the disposition. We examined the respondents’ application accordingly.




[4] The appellant had objected to the respondents’ application. Having heard the parties, the High Court on 9/9/2009 made the validation orders that the appellant is dissatisfied with and forms the subject of the appeal now before this Court.


[5] Written submissions were put before this Court. Oral submissions for the appellant were heard for about an hour on 10/5/2011.


[6] The basic submission by the appellant before this Court was that there was a wrongful exercise of discretion by the High Court Judge in granting the validation order and this Court can therefore interfere with his decision. We would caution that the use of the term “to interfere” is not quite right as it implies doing something wrong. The correct term is “to intervene”. An appellate court intervenes to correct an error of principle, law or of fact other than a finding of fact based upon a trial judge’s assessment of the credibility of a witness heard and tested before him.


[7] Upon that foundation that this court can intervene was constructed, the submission that the transactions involved in the validation exercise are contrary to, inter alia, the provisions of s.132C




as they are illegal and void transactions which cannot be validated. The Court was informed that the petitioner had, in another Penang High Court, obtained an injunction against the respondents to restrain them from approving/confirming/ratifying the said transactions by way of resolutions.


[8] We examined the validation order appealed against as to whether it contradicts the said injunction. The validation order is as follows:


“It is hereby ordered that:


(a) banking facilities granted by the banks to and/or utilized by Tan Eng Hong Paper & Stationery Sdn Bhd (hereinafter referred to as “the Company”) and payments made into or out of the bank accounts of the Company in the ordinary course of the business of the Company (which shall include but not limited to reconstruction of factory buildings on the original burnt site and construction of new factory, purchase of plant and machinery as well as purchase of raw materials); and




(b) dispositions of the property of the Company made in the ordinary course of its business for proper value between the date of presentation of the Petition and the date of judgment on the Petition or further order in the meantime shall be valid and shall not be void by virtue of the provisions of section 223 of the Companies Act 1965 in the event of an order for the winding up of the Company being made on the said Petition provided that the banks shall be under no obligation to verify for themselves whether any transaction through the Company’s bank accounts is in the ordinary course of business or that it represents full market value for the relevant transaction; and


(c) costs of the application are to be paid by the petitioner.”


[9] We must nevertheless observe that the validation order is confined to:


(a) the use of banking facilities and payments in and out of banking accounts in the ordinary course of business, including for the reconstruction of factory buildings on the




original burnt site and construction of new factory, and purchase of plant and machinery and raw materials; and


(b) the disposition of property of the company in the ordinary course of business shall be valid, with no obligation being imposed upon the banks to verify for themselves whether any transaction was in the ordinary course of business or represented the full market value.


[10] Thus, the order is confined to restraining the respondents from approving, confirming or ratifying certain impugned transactions by way of resolutions in the company. The order by its terms does not prevent the respondents from making an application to the winding-up court for the issue by it of validation orders under section 223. Neither does the order purport to prevent the winding-up court itself from making a validation order under section 223.


[11] Clearly the validation order appealed against does not affect the status quo which the appellant sought to maintain by the injunction in respect of the alleged breach of section 132C by impugned transactions vis-a-vis the respondents. Essentially the transactions could proceed, the business of the company remain unaffected, and in




the event the winding-up court allowed the petition by the appellant to wind-up, the 1st respondent, the 2nd to the 5th respondents may be held responsible for any misconduct in respect of the impugned as well as other subsequent transactions.


[12] With regard to the consideration to be given, the elucidation by Lord Cairns, LJ in Re Wiltshire Iron Company, ex p Pearson [1868] 3 Ch App 443, is instructive:


“The 153rd section no doubt provides that all dispositions of the property and effects of the company made between the commencement of the winding-up (that is the presentation of the Petition) and the order for the winding-up, shall, unless the court otherwise orders, be void. This is a wholesome and necessary provision, to prevent, during the period which must elapse before a Petition can be heard, the improper alienation and dissipation of the property of a company in extremis. But where a company is actually trading, which it is in the interest of everyone to preserve, and ultimately to sell, as a going concern, is made the object of a winding-up Petition, which may fail or may succeed, if it were to be supposed that transactions in




the ordinary course of its current trade, bona fide entered into and completed, would be avoided and would not, in the discretion given to the court, be maintained, the result would be that the presentation of a Petition, groundless or well-founded, would, ipso facto, paralyse the trade of the company and great injury, without any counter balance of advantage, would be done to those interested in the assets of the company.”


[13] Section 153 of the United Kingdom legislation is in pari materia with section 223 CA 1965. While acknowledging the need to place all dispositions under the supervision of the winding-up court once a winding-up is commenced, it must also be recognised that there is an obvious need to allow companies that are going concerns to maintain the ordinary course of business. Not only would it be in the best interests of both creditors and members to maintain the value of the company in the event the petition to wind-up is allowed, but it would also ensure that no loss would be suffered by the subject company and its members in the event the petition to wind-up is dismissed.


[14] It was submitted for the appellant that the respondents have not shown that the transactions in respect of which validation was sought




were genuine transactions and for the benefit of the company, and not for their own benefit, that the 2nd to 5th Respondents’ reason to get a validation order was to gain further advantage by involving in under counter activities, and that if the validation order were given, they would continue with their wrongdoing to strip the company of its funds and delay by all means the hearing of the Petition, meaning that the huge amount of insurance money may well be dissipated and there will be nothing left for the shareholders.


[15] On the face of it, the submission that the respondents had not shown that the transactions were genuine transactions and for the benefit of the company appear to have much to recommend it. The assertions that followed, that the reasons for the 2nd to the 5th respondents being to continue with their wrongdoing and, to put it bluntly, to loot and to gain more time to loot the company, however show that the appellant assumes that his assertions of facts are made out and that his petition would be granted. While that he believes in his case is laudable, it must equally be appreciated that section 223 provides for contingencies during the period from the presentation of the petition and before a winding-up order is made or dismissed on its merits. The grant of a winding-up order is not a certainty.




[16] So as not to dilute the vigour with which the Appellant’s cause was pursued, we reproduce in part the written submission for the appellant. It was submitted that the learned Judge failed to consider:


a. the main assets of the Company had been destroyed in a fire in March 2009 and that the sub-stratum of the Company has been destroyed;


b. any re-investment will only benefit the majority and will be to the disadvantage of the minority in view of the fact that they had engaged in under-counter activities, had acted in breach of trust, had channelled most of the Company’s funds into various under-counter bank accounts and had not declared dividend because of the benefits derived by them from the said under-counter activities. The funds channelled to under-counter accounts have not been audited and the majority have dot accounted for it The fact that the Inland Revenue Department had imposed a penalty of RM5.0 million confirms the existence of rampant under-counter activities and that the financial affairs of the Company has not been conducted in a transparent manner;




c. the majority are attempting to validate the transactions which have been carried out in contravention of, inter alia, section 132C of the CA 1965, especially when no general meeting had been held to sanction the impugned transactions;


d. to allow the illegal activities to be continued will tantamount to assisting/condoning malpractices and wrongdoings committed by the majority and if they are allowed to continue the same, they will strip the Company of its funds and delay the hearing of the winding-up Petition. In fact, the Petitioner’s objections go to the root of his complaints as contained in his Petition;


e. the very dispositions which the respondents want to validate have not been done in the ordinary course of business, are not bona fide, not done with honest intention and are illegal, null and void, tainted with self-interest, against public policy and against the intention or the amendments to the CA 1965 in respect of sections 132C and 132E which is to safeguard and protect the interests of shareholders and any contravention of such provisions will




amount to criminal offences and defeat the purpose and intention of the amendments;


f. the respondents have suppressed information, have made general and unsubstantiated statements, have created fictitious documents for the purpose of obtaining the validation order and have not condescended to particulars, and


g. importantly, there is no rebuttal evidence to show that what they have done had complied with the provisions of section 132C and other relevant provisions of the CA 1965.


[17] It was submitted that the learned High Court Judge had applied the wrong test:


“5.3 The Learned Judge had erred in applying the wrong test in holding that the


a. “principles of fairness and justice demand the common sense approach and that the sensible elements come




into play. Looking at any angle, it looks very clear to me that the balance of justice tilt towards the granting of the validation order; and


b. issuance of a validation order would seem to be the most appropriate and timely measure in order to safeguard the interests of all parties, be it the creditors, the unsecured creditors, the employees and the company’s goodwill as a whole. The validation order is also needed in order to preserve the Company as a going concern.”


[18] The matters raised in the submissions are matters that concern the merits of the petition to wind-up. That is yet to be heard. To our minds, proceeding directly to a hearing of the petition to wind-up on the grounds raised as relevant and material to the merits of the winding-up petition is a much more convincing approach. Using such grounds instead on a collateral course with objections to validation orders and appealing thereon merely exhibits a desire to delay by a party who has no belief in the merits of his case. It cannot be entertained. Clearly if the winding-up petition is bona fide and soundly based, the appellant’s interest is better and best served by proceeding




to a hearing of the winding-up petition on its merits as soon as possible.


[19] With regard to the submission that the respondents have not shown that the transactions were genuine and for the benefit of the company, we came to the conclusion that, to do so in the case of a company that is a going concern with many daily transactions, and which is also in the process of reconstruction of a burnt factory building and construction of new facilities, would be an exercise of both in futility and vexation. The purpose of validation orders for companies under judicial supervision that are going concerns is to protect their value in the best interests of all parties before a petition to wind-up is disposed off on its merits. To impose supervision as would be required if the submission were adopted would defeat the ability to prevent use of the winding-up process for a party’s own purposes or to damage its business without regard to the interest of other members and the creditors.


[20] From this perspective, it becomes clear that the learned High Court Judge had necessarily used broad but adequate language to authorise transactions in the ordinary course of business. It was not inappropriate in the circumstances. In the event the appellant’s petition




succeeds, the transactions can be verified, and the respondents can be called to account for any transaction that is not in the ordinary course of business, for reconstruction or construction of new facilities. To require itemisation of every transaction would incur heavy cost in time and expense that would not only be a waste in the event the petition fails, but the expenditure to do so would also cause further diminution of the assets of the company. The application for a validation order is not the occasion to decide if the factory building plans and the plant and machinery are suitable or not. The appropriate occasion would be, if the petition to wind-up succeeds, when the liquidator verifies the transactions as to whether they were in the ordinary course of business. Broad language is sufficient to provide a guideline of what is and is not validated. The broad language does not diminish the appellant’s cause or interest. Indeed it is the 2nd to the 5th respondents who are left with the risk of being held responsible if any transaction is subsequently held by the liquidator to be not in the ordinary course of business.


[21] Having heard the oral submissions for the appellant, the Court suggested that the parties work out terms to enable the company, an otherwise going concern with substantial assets, to continue to operate and to rebuild its facilities which had earlier been burnt down




and for which a substantial sum of RM40 million of insurance payment had been received, whilst at the same time address the appellant’s concerns. We discussed this in much detail with counsel for the appellant as well as the respondents. It spanned the matters addressed in the written submissions. It included the suggestion of listing out of what payments in the ordinary course of trade, and for salaries, EPF payments and for rebuilding that would be allowed. Counsel for the Respondents readily came up with a list of such payments. But the parties were unable to reach agreement. After further discussion, and reminding parties it is in the interests of all parties to maintain the value of the company by keeping it as a going business concern, the hearing was adjourned to 12/5/2005 to give time to the parties to attempt to reacha mutual agreement.


[22] On the date adjourned to, the Court was informed the parties were still unable to come to an agreement. After further discussion, the appeal was further adjourned for decision unless parties could come to an agreement. The appeal was further adjourned to 7/6/2011 as there were no earlier dates suitable to all parties.




[23] On 7/6/2011, the Court was informed by learned counsel for the appellant that the parties had not been able to reach an agreement. Learned counsel for the respondents confirmed the position.


[24] Well written submissions and counsel’s fluent mastery of the facts and their argument assisted us in no small part to understand the issues before the Court. The discussions with counsel in the attempt to enable the parties to reach an accommodation gave the Court a much keener appreciation of the issues than any formal, turn by turn submissions would have done. We needed no further submissions. Nor was there any request by either counsel for further submissions.


[25] Having concluded on the basis of the foregoing that the learned High Court Judge had exercised his judicial discretion without error of principle or in his appreciation of the facts and to balance the interests of all parties, this Court proceeded to deliver its unanimous decision to dismiss the appeal with costs fixed at RM10, 000.00.








Court of Appeal, Malaysia Putrajaya


Dated: 9th April, 2012






for the appellant:


for the respondents:


Dato’ Dr. Cyrus Das, Karin Lim,


A. Suppiah & Lim Hock Siang Messrs Presgrave & Matthews


Kamar Standard Chartered Bank No. 2 Lebuh Pantai 10300 PULAU PINANG


Tel: 04-2626155/Fax: 04-2626160/2628373


Dato’ Bastian Pius Vendargon. Y.C. Wong, Tay Hong Jin & Anne Vendargon Messrs Y.C. Wong


No. 2 (Tingkat 1 & Tingkat 2)


Lorong Abu Siti 10400 PULAU PINANG


Fax: 04-2280332



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