TAN POH LEE v TAN KIM CHOO HOLDINGS SDN BHD & ANOR

CaseAnalysis
| [2018] MLJU 1014

Tan Poh Lee v Tan Kim Choo Holdings Sdn Bhd & Anor
[2018] MLJU 1014
Malayan Law Journal Unreported

HIGH COURT (KUALA LUMPUR)

WONG CHEE LIN JC
COMPANIES (WINDING UP) NO WA-28NCC-173-03 OF 2016
6 June 2018

Michael Chow (Sunita Sankey and Wendy Yeong with him) (Mohd Zain & Co)
for the petitioner.
Pavendeep Singh (David Lai & Tan) for the first respondent.
Malik Imtiaz (K Shanmuga, Priscilla Chin and Dinesh Kumar with him) (David
Lai & Tan) for the second respondent.

Wong Chee Lin JC:

GROUNDS OF JUDGMENT

[1]This is an application by the 2nd Respondent for a validation order pursuant to

section 223 of the Companies Act 1965 to validate the payment of a sum of
RM4,798,200.00 in the 1st Respondent’s current account with Public Bank Berhad
(“PBB?) towards the overdraft granted by United Overseas Bank (M) Bhd (“UOB?)
to the 1st Respondent. I have dismissed the validation application. These are the
reasons for my decision.

Salient Background Facts

[2]The Petitioner, a contributory and contingent creditor and director of the 1st
Respondent has filed the winding up petition to wind up the 1st Respondent on the
just and equitable ground.
 Tan Poh Lee v Tan Kim Choo Holdings Sdn Bhd & Anor
....

[3]The Petitioner (Tan Poh Lee), the Supporting Contributories (Tan Poh Hui and
Tan Poh Yee) and the 2nd Respondent (Tan Boon Thien) are the children of the
Contributory, Tan Kim Choo @ Tan Kim Choon (“TKC?) and one Madam Chang
Ying (deceased).

[4]The particulars of the Company’s shareholdings are as follows:

Name of Shareholders Number of Shares Held

Tan Kim Choo @ Tan Kim Choon (Contributory) 466,785 (40%)

Tan Poh Lee (the Petitioner) 175,045 (15%)

Tan Poh Hui (Contributory) 175,045 (15%)

Tan Poh Yee (Contributory) 175,045 (15%)

Tan Boon Thien (the 2nd Respondent) 175,045 (15%)

[5]The particulars of the Company’s current board of directors are as follows:

Name of Directors Date of Appointment

Tan Kim Choo @ Tan Kim Choon (Contributory) 21.06.1989

Tan Poh Lee (the Petitioner) 15.09.1994

Tan Boon Thien (the 2nd Respondent) 08.07.2013

[6]The 1st Respondent owns a hotel known as Cairnhill Hotel together with the
land on which it is situated. Pursuant to a tenancy agreement, the 1st Respondent
collects rent from Cairnhill Hotel (M) Sdn Bhd (“Cairnhill Hotel?) as its primary
source of income. The 1st Respondent’s only long-term liability is the RM10 million
financing facilities from UOB which comprises a RM5 million overdraft and a RM5
million fixed loan.

[7]The guarantors for the UOB financing are Tan Kim Choo and the Petitioner.
The facilities were to be utilised for the construction and renovations carried out to

Page 2 of 10
 Tan Poh Lee v Tan Kim Choo Holdings Sdn Bhd & Anor
....

the land and Cairnhill Hotel.

[8]The 1st Respondent is solvent and had previously been using the rental income
from Cairnhill Hotel to service the UOB outstanding loans and the monthly
expenses of the company.

[9]The 1st Respondent was the registered and beneficial owner of a piece of land
held under Lot 47-41 GM 5204 Mukim Batu which was the subject of compulsory
acquisition on 21.2.2017. The compensation sum payable to the 1st Respondent
for that acquisition was RM4,798,200.00 which was credited into the PBB current
account on 17.5.2018.

[10]A letter from PBB dated 19.5.2017 informed the 1st Respondent that the PBB
current account has been frozen on the basis of the pending winding up petition
against the company, based on a letter sent to PBB dated 18.5.2017 by the
Petitioner’s solicitors.

[11]On 28.11.2017, this Court allowed an application filed by Tan Kim Choo to
stay the winding up proceedings in its entirety pending disposal of an action vide
Kuala Lumpur High Court Suit No. WA-22NCVC-58-01/2017 (“Suit 58?) also filed
by Tan Kim Choo. The stay order granted any party liberty to apply for a validation
order or other relief from time to time as may be necessary.

[12]Despite the 2nd Respondent’s solicitors’ letter to PBB dated 9.2.2018

requesting it to unfreeze the account in light of the stay order, PBB vide their letter
dated 21.2.2018 had refused to entertain any such request unless there was a
validation order granted by the Court.

[13]On or about 19.3.2018, vide a legal demand letter, UOB demanded for

Page 3 of 10
 Tan Poh Lee v Tan Kim Choo Holdings Sdn Bhd & Anor
....

payment from the 1st Respondent of the outstanding loan as at March 2018 in the
sum of RM270,344.05.

[14]Due to the above facts, the 2nd Respondent has filed the application herein for
a validation order to validate the payment of the compensation sum towards the
UOB overdraft, to part settle the overdraft and reduce interest payments by the 1st
Respondent.

[15]The application is made on the basis that it is for the benefit of the 1st
Respondent to reduce interest payments for the UOB overdraft facilities.

[16]The application is opposed by the Petitioner and Tan Poh Yee. The main
ground of the objection is that the actions and/or intention of the 2nd Respondent
are mala fide and not bona fide in nature and that the validation order sought is
couched on the basis to allow Cairnhill Hotel not to pay rental to the 1st
Respondent in part or in full.

The Law

[17]This application is made pursuant to section 223 of the Companies Act 1965
which 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.

[18]In Wong Wee Kheong & Anor v Daya Bersama Sdn Bhd [2013] 3 CLJ 969,
the Federal Court at pg 18 cited the following considerations when faced with a
validation application:

“[13] It is to be noted that s 223 of the Act makes no mention as to time. It is our view validation can be made by the court at
any time. We are in agreement with the submission of learned counsel for the appellants that to insist that the purchasers
must have applied for a validation after the company was wound up, there must be knowledge. Here the purchasers had no
knowledge at all of the winding up order at the material time. It is also noted that the Act does not prescribe as to how the
discretion under s. 223 of the Act is to be exercised. However there are case laws that have distilled the principles involved

Page 4 of 10
 Tan Poh Lee v Tan Kim Choo Holdings Sdn Bhd & Anor
....

in validating transactions after the commencement of winding up, and even after a winding order has been granted based
on two broad considerations:

(a) if the transaction(s) are beneficial to the general body of creditors; or

(b) if it was just and fair to allow the transaction(s) with particular regard to the good and honest intention of the
persons concerned.

[14] The general rule in s. 223 of the Act is that it does not shut out bona fide transactions. In Lian Keow Sdn Bhd (in
liquidation) & Anor v Overseas Credit Finance (M) Sdn Bhd & Ors [1988] 1 LNS 44;; [1988] 2 MLJ 449, Seah, SCJ made
reference to a passage by Vaisey J in Re Steane’s (Bournemouth) Ltd which states:

“that each case must be dealt with on its own facts and a particular circumstances (special regard being had to the question
of the good faith and honest intention of the persons concerned), and that the court is free to act according to the judge’s
opinion of what would be just and fair in each case.?

[19]The English High Court decision of Re Burton & Deakin Ltd [1977] 1 WLR 390
involved a shareholder’s dispute. The company in that case sought for a validation
order under the equivalent provision of the English Companies Act and the
petitioners therein opposed the application. Slade J allowed the validation and
held the following (at page 30):

“At least so long as a winding up petition has not been presented, the court will not generally, save in the case of proven
bad faith or other exceptional circumstances, interfere with the exercise of the discretion conferred on the directors by a
company’s articles of association at the instance of a shareholder.

I can see no good reason why the rights of interference by a shareholder vis-a-vis the company or its directors should, in
this kind of situation, for practical purposes be drastically improved during the interim period, merely because he happens
to have presented a winding up petition which is not demurrable and which has not yet been heard.

Page 5 of 10
 Tan Poh Lee v Tan Kim Choo Holdings Sdn Bhd & Anor
....

If on an application under section 227 relating to a solvent company, (a) evidence is placed before the court showing that
the directors consider that a particular disposition, falling within their powers under the company’s constitution, is necessary
or expedient in the interests of the company, and (b) the reasons given for this opinion are reasons which the court
considers that an intelligent and honest man could reasonably hold, it will in the exercise of its discretion normally sanction
the disposition, notwithstanding the opposition of a contributory, unless the contributory adduces compelling evidence
proving that the disposition is in fact likely to injure the company.?

[20]In the case of BSN Commercial Bank (M) Berhad v River View Properties Sdn
Bhd and another action [1996] 1 MLJ 872, page 30 and 31, the Court held that:

“Dispositions are said to be void under s 223 of the Companies Act 1965 ‘unless the Court otherwise orders’.

Thus each case must be approached and dealt with on its own facts and circumstances. No two cases are the same. It
revolves on the good faith and honesty of the personalities, and it is here that the judge’s common sense opinion of what is
just and fair prevails. ... It is my judgment that the Court will always have regard as to whether the disposition was made
bona fide in the course of the company’s current trade, and if not validated, the trade of the company would be paralysed
without any advantage as envisaged in Re Clifton Place Garage Ltd.?

[21]Based on the authorities cited above, the power of Court under section 223 of
the Companies Act is to be exercised discretionarily by taking into consideration
the facts and circumstances of each case. In this regard, it is respectfully
submitted that there are two factors in which this Court ought to take into account,
namely:

(a) whether the proposed validation order sought by the 2nd Respondent is
made in good faith and honest intention; and
(b) whether the proposed validation order is for the benefit of the Company.

Findings Of The Court

Page 6 of 10
 Tan Poh Lee v Tan Kim Choo Holdings Sdn Bhd & Anor
....

[22]Prima facie, it would appear that the application is in the interest of the 1st
Respondent and for its benefit. It must be for the benefit of the 1st Respondent to
reduce its interest payments, especially when the 1st Respondent is solvent and
there is no question of some other creditor not being paid in the event the 1st
Respondent were to be wound up subsequently.

[23]However, there are facts which suggest that the 2nd Respondent is not acting
in good faith and honestly in bringing this application.

[24]All along, the loans given by UOB have been served through the rentals paid
by Cairnhill Hotel of which the 2nd Respondent is the a shareholder and a director.
However, it appeared that the 2nd Respondent and Tan Kim Choo (whose mental
capacity has been brought into question although there has been no finding of any
court that he is mentally incapacitated) had permitted Cairnhill Hotel to not pay
rental to the 1st Respondent but instead, they alleged, they have asked Cairnhill
Hotel to pay some of the obligations of the 1st Respondent instead of paying the 1st
Respondent.

[25]The 2nd Respondent has not given any particulars of the debts owed by the 1st
Respondent or the obligations which Cairnhill Hotel has been asked to pay on
behalf of the 1st Respondent despite being asked to do so, on affidavit by those
contributories opposing this application.

[26]It is to be noted that by asking Cairnhill Hotel to pay the obligations of the 1st
Respondent without any validation order from the court pursuant to section 223 of
the Companies Act 1965, the 2nd Respondent and Tan Kim Choo as directors of
the 1st Respondent are responsible for making void payments and they are liable
to indemnify the 1st Respondent and are in breach of their duties as directors.

[27]In the case of CIMB Bank Bhd v Jaring Communications Sdn Bhd [2017] 4

Page 7 of 10
 Tan Poh Lee v Tan Kim Choo Holdings Sdn Bhd & Anor
....

CLJ 465, Mohd Nazlan Ghazali JC (as he then was) held that a transgression of
section 223 of the Companies Act alone is sufficient basis to premise an action
against the miscreant director for misfeasance under section 305 of the
Companies Act 1965 and action may be taken against the director for being
responsible for making the void payments. (see also Re Neath Harbour Smelting
and Rolling Works (1887) 56 LT 727)

[28]Section 305 of the Companies Act 1965 provides inter alia that if in the course
of winding up it appears that any person who has taken part in the formation or
promotion of the company or any past or present liquidator or officer has
misapplied or retained or become liable or accountable for any money or property
of the company or been guilty of any misfeasance or breach of trust or duty in
relation to the company, the Court may on the application of the liquidator or of
any creditor or contributory examine into the conduct of that person, liquidator or
officer and compel him to repay or restore the money or property or any part
thereof with interest at such rate as the Court thinks just, or to contribute such sum
to the assets of the company by way of compensation in respect of such
misapplication, retainer, misfeasance or breach of trust or duty as the Court thinks
just.

[29]Although they can only be liable pursuant to section 305 of the Companies Act
1965 in the event of winding up of the company, it does not detract from the fact
that the 2nd Respondent and Tan Kim Choo, by disposing of the property of the 1st
Respondent using Cairnhill Hotel without seeking any validation order from the
Court, were guilty of misfeasance and breach of duty as directors of the 1st
Respondent. That would be the case if Cairnhill Hotel has been paying creditors of
the 1st Respondent on behalf of the 1st Respondent and deducting the payments
from the rental but it is emphasised that no particulars of the 1st Respondent’s
obligations has been provided by the 2nd Respondent.

[30]If the Court were to permit the validation order sought by the 2nd Respondent,
the Court will be condoning the breach of duty on the part of the 2nd Respondent
and Tan Kim Choo, by not enforcing the obligation of Cairnhill Hotel to make
payment of rental to the 1st Respondent and instead allowing Cairnhill Hotel to
make payment for the obligations of the 1st Respondent though failing or refusing

Page 8 of 10
 Tan Poh Lee v Tan Kim Choo Holdings Sdn Bhd & Anor
....

to provide particulars of the payments made by Cairnhill Hotel, if really such

payments have been made.

[31]If Cairnhill Hotel has duly made payment of rental to the 1st Respondent, the
1st Respondent should have more than enough money to service the UOB loan
repayments every month and would not have been in this position where it is
indebted to UOB. If there are other obligations of the 1st Respondent which are
properly due and payable which Cairnhill Hotel are asked to pay, they should be
particularised by the 2nd Respondent and a validation order sought to pay such
expenses on a monthly basis. The 2nd Respondent should not have made those
payments without first seeking a validation order from the court.

[32]In the premises, I find that the proposed validation order sought by the 2nd
Respondent is not made in good faith and honest intention as it amounts to a
condonation of the breach of duty on the part of the 2nd Respondent and Tan Kim
Choo in not collecting the rental from Cairnhill Hotel but instead asking Cairnhill
Hotel to purportedly make payments on behalf of the 1st Respondent without
providing particulars of such payments to the Court and the other contributories.

[33]Accordingly, I dismiss the validation application with costs of RM3,000.00 to

the Petitioner and Tan Poh Yee subject to allocator. I had proposed that I should
make a validation order validating payments to UOB out of the rental payments
received from Cairnhill Hotel but none of the parties wished to make an application
for such an order so I cannot make it. If the 2nd Respondent had ensured that
Cairnhill Hotel duly makes payment of its rental, I would have allowed the
validation application.

My decision is in line with an earlier decision of this same Court which also
dismissed a validation application by the 2nd Respondent on similar grounds. In
Tan Poh Lee v Tan Kim Choo Holdings Sdn Bhd & Anor [2016] 1 LNS 1049
Khadijah Idris (JC) said :-? …This point in turn relate to the obligation of Cairnhill
Hotel which is under the control of the 2nd Respondent to pay the Hotel Rental. If
the Hotel Rental is duly and fully paid by Cairnhill Hotel, the issue of an event of

Page 9 of 10
 Tan Poh Lee v Tan Kim Choo Holdings Sdn Bhd & Anor
....

default being triggered under the UOB Loan does not arise. Therefore the
proposed validation order is not necessary in the first place. The Court is incline
(sic) to agree with the Contributory’s submission that the proposed validation order
if granted will essentially mean dissipation of the 1st Respondent assets without
accounting the same to the 1st Respondent. Under the circumstances, the
proposed validation order is not to the benefit of the 1st Respondent.?

End of Document

Page 10 of 10