Arah Cipta Sdn. Bhd. (Company No : 228686-V) v Piala Gagasan (M) Sdn. Bhd. (Company No : 492251-D), 27-10-2010

• Judge: Hanipah binti Farikullah
• Judgment Date: 27 October 2010
• Court: High Court (Malaysia)
• Record Number: SUIT NO. D5-22-1754-2005

IN THE HIGH COURT OF MALAYA AT KUALA LUMPUR

(COMMERCIAL DIVISION)

SUIT NO. D5-22-1754-2005

BETWEEN

ARAH CIPTA SDN BHD

(Company No : 228686-V) … PLAINTIFF

AND

1. PIALA GAGASAN (M) SDN BHD

(Company No : 492251-D)

2. ARCH SCRAPER (M) SDN BHD

(Company No : 498003-D) … DEFENDANTS

GROUNDS OF DECISION

Introduction

1. The plaintiff, Arah Cipta Sdn Bhd has claimed against Piala Gagasan (M) Sdn Bhd (“the first defendant”) for the return of RM4,678,391.97 paid to the first defendant for the purpose of redeeming the redeemable preference shares (“RPS Shares”) held by the first defendant in the plaintiff’s company.

2. The plaintiff’s position is that the money received by the first defendant is in breach of section 61(3) of the Act because the defendant was not making profit and also undue preference committed by the first defendant under section 365(1) of the Companies Act 1965 (“the Act”). However in the course of the trial learned counsel for the plaintiff informed the court that the plaintiff’s claim is only in respect of the breach of section 61(3) of the Act.

3. In disputing the plaintiff’s claim, the first defendant contend that it is entitled to legitimately demand for the redemption of the RPS Shares and it is mandatory for the plaintiff to redeem the shares on the maturity dates.

Agreed Facts

4. It is an agreed fact that on 13.10.1999, the plaintiff entered into a consent order with the creditors of Perumahan Lanchang Sdn Bhd (“Perumahan Lanchang”) in a winding up petition filed by Air Terang Sdn Bhd (“Air Terang”) against Perumahan Lanchang in the Kuala Lumpur High Court Companies Winding Up No 42-197-1986 (“Consent Order”). Under the terms of the Consent Order, the plaintiff is to pay RM9,615,500 to Air Terang and RM31,306,928 to contributories of Perumahan Lanchang.

5. Air Terang had by virtue of two Sale and Assignment of Debt Agreements dated 8.12.1999, assigned its rights to the debt of RM9,612,500.00 owed by Perumahan Lanchang to the first defendant and the debt of RM6,387,500.00 to Arch Scraper (“the second defendant”).

6. Out of the sum of RM9,612,500.00, the plaintiff has paid in cash a sum of RM2,403,125.00 to the first defendant. The plaintiff has also issued and delivered the following Class A RPS Shares in favour of Air Terang which were subsequently issued and delivered to the first defendant as instructed by Perumahan Lanchang :

1. Share Certificate A001 for 2,403,125 Class A RPS Shares of the plaintiff (RPS-A001) mature on 25.2.2001;

2. Share Certificate A002 for 2,403,125 Class A RPS Shares of the plaintiff (RPS-A002) mature on 25.2.2002; and

3. Share Certificate A003 for 2,403,125 Class A RPS Shares of the plaintiff (RPS-A003) mature on 25.2.2003.

7. The plaintiff also issued and delivered Share Certificate B001 for 6,387,932 Class B RPS Shares maturing on 25.2.2004 in favour of the second defendant.

8. Together with the issuance of the RPS Shares, the plaintiff’s Managing Director, Firuz Bin Saidin (“Firuz”) provided the following documents to the plaintiff and the first defendant :

(a) Two Letters of Undertaking both dated 26.2.2000 stating that Firuz will subscribe the Shares RPS-A001, RPS-A002, RPS-A003 and RPS-B001 on or after the maturity date should the plaintiff fails in doing the same and

(b) Two Letters of Put Option and Negative Pledge both dated 26.2.2000 requiring Firuz to purchase the matured RPS Shares from time to time upon notice given by the plaintiff and the first defendant to Firuz.

9. When the Class A RPS Shares held by the first defendant became mature on 25.2.2001, 25.2.2002 and 25.2.2003, the first defendant requested the plaintiff to redeem the Class A RPS Shares.

10. In view of the plaintiff’s failure to fulfill its obligation to fully redeem the Class A RPS Shares, the first defendant filled a winding up petition against the plaintiff on 26.5.2004.

11. On 23.7.2004, the plaintiff and the first defendant entered into a settlement agreement to settle the debts owed by the plaintiff to the first defendant (“Settlement Agreement”). After the Settlement Agreement, the first defendant withdrew its winding-up petition against the plaintiff on 18.3.2005.

12. When the Class B RPS Shares issued to the first defendant became mature on 25.2.2004, the second defendant requested the plaintiff to redeem the Class B RPS Shares.

13. In view of the plaintiff’s failure to fulfil its obligation to fully redeem the Class B RPS Shares, the second defendant filed a winding-up petition against the plaintiff on 30.8.2005.

14. To oppose the winding up petition filed by the second defendant, the plaintiff applied to strike it out (“Striking Out Application”) under Order 18 rule 19 of the Rules of the High Court 1980 (RHC). The plaintiff Striking Out Application was dismissed on 20.12.2006, and the plaintiff did not appeal against the decision.

15. Altogether the plaintiff paid the sum of RM4,678,391.97 by way of 39 payments from 2001 to 2005 to the first defendant.

16. On 13.4.2007, the plaintiff was wound up as a result of a winding up petition filed by Mohd Yousuf Boo Yong Chong in the Johor Bahru High Court. After the winding up of the plaintiff on 13.4.2007, the second defendant withdrew its winding up petition against the plaintiff.

17. The Liquidator has now decided to continue with this suit against the first defendant.

Preliminary

18. At the outset of the trial, learned counsel for the plaintiff informed the court that the plaintiff is not continuing its action against the second defendant.

The plaintiff’s case

19. The Liquidator’s position is that the money received by the first defendant is in breach of section 61(3) of the Act. As such, the Liquidator is duty bound to recover the said sum for the benefit of all creditors of the plaintiff.

20. The plaintiff called a total of three (3) witnesses. The plaintiff’s first witness, Mr. Lean Chee Seng (“PW1”) is the Liquidator appointed by the court to manage the affairs of the plaintiff since 13.4.2007. He is a Chartered Account by qualification and has 35 years experience as an auditor and liquidator. He is a partner of Lean Oh & Associates since 1976.

21. PW1 who has access to the financial and accounting records of the plaintiff testified as to the financial position of the company for the financial years 1999 to 2005. PW1 make reference to the Financial Statements of the plaintiff for the year ending 31.12.1999, 31.12.2000 and 31.12.2001 lodged with the Companies Commission of Malaysia (“CCM”) (Exhibit P1). He informed the court that the audited accounts show that the company suffered increasing losses from year to year. The last filed audited accounts for the financial year ending 31.12.2001 (pg 44 of Bundle B) shows an accumulated losses over the years of RM4,571,472.00. According to PW1, as of 30.6.2003 when the last audited account was tabled and approved by the shareholders, the plaintiff did not make any profit but accumulated losses as can be seen in Exhibit P1.

22. Further, Pw1 testified that vide a letter dated 8.10.2002, KPMG, the external auditor of the plaintiff, informed the Managing Director of the plaintiff, Firuz Saidin that the redemption of shares by the company was in breach of Section 61(3) of the Act due to non-profitability of the plaintiff at the material time. According to PW1, the company is prohibited under the Act to redeem any shares by using the company’s capital.

23. PW1 explained to the court that for a company to redeem preference shares or distribute dividend, it must make a profit before creating such an account and put the money aside for such purpose. PW1 said that without a proper audit and/or account in place before a general meeting of shareholders there can never be a declaration of profit or loss which would enable shareholders to decide whether dividend to be paid or to redeem the shares. In effect, according to PW1, there is no declaration of profit by the company which would be capable in fulfilling the requirement under section 61(3) of the Act.

24. In his evidence, PW1 explained :

“Distinction must be drawn between profit made by the company and distributable profit declared by a company for the payment of redemption of shares or dividend. In the case of the plaintiff, as of the audited account for the year ending 31.12.2001, there is accumulated loss of RM 4,571,472. Even if in 2001, a small profit is made by the company, it does not means that the profit is distributable because it will be used to set off the accumulated losses. For fhe plaintiff in 2002 to prudently distribute any dividend or redeem shares, they must make profit in excess of the accumulated losses and only after that profits may be prudently distributed.”

25. Further PW1 informed the court that it took years to build up the accumulated losses and it would therefore take years to set-off those losses before any distributable profits are available for dividend or for redemption of shares. If one looked at the progressive of the payments made, such payments cannot be from distributable profits as envisaged by the Act. PW1 also explained that profits for redemption...