Yui Chin Song & Ors v Lee Ming Chai & Ors [2019] 6 MLJ 417

 

YUI CHIN SONG & ORS v LEE MING CHAI & ORS [2019] 6 MLJ 417

Federal Court (Putrajaya)

Transfer of shares by a person who is adjudged bankrupt and financial assistance given by a company to its directors

Facts

1.     In this present appeal, the Appellants are the shareholders in the Sixth Respondent’s company (Tampin Theme Park) (“the Company”).  The First, Second and Fourth Appellants were directors there.

2.     The Appellants were the Plaintiffs in the action at the High Court.  For the pupose of this case, the parties will be referred to as they were in the High Court.

3.     The Company was originally founded by Yui Cha Bok (“Cha Bok”) and his wife, Lee Tui Eng (“Tui Eng”), dealing with investment and property development.  The dispute arose in this case is regarding the issue of shares and directorship in a family Company.

4.     In 2002, Cha Bok and Tui Eng transferred their shares in the Company to his son, Yui Chin Chau (“Chin Chau”) and his wife, Tew Su Keow (“Su Keow”).  Both of them were made directors at the Company.

5.     On 9 November 2006, Cha Bok was declared bankrupt and Tui Eng was declared bankrupt on 23 August 2007.  Chin Chau was also declared bankrupt on 25 March 2007.

6.     Before his bankruptcy, Chin Chau transferred all his shares (including the shares transferred by Cha Bok and Tui Eng) to the First, Second and Third Plaintiffs.  Meanwhile, Su Keow also transferred part of her shares (comprising shares transferred earlier to her by Cha Bok and Tui Eng) to the First, Second and Third Plaintiffs.

7.     The primary complaint by the Plaintiffs was against the First Defendant (“Ming Chai”).  The Plaintiffs claimed that Ming Chai, was an unlicensed money lender, had been offering loans to Cha Bok since 2003.  The Plaintiffs also contended that Ming Chai, by undue influence had convinced the Plaintiffs and Cha Bok to appoint his as one of the directors in exchange for a promise to secure a bank loan for the Company, which was having financial difficulties at the time, and to discharge Cha Bok of his debts.

8.     According to the Plaintiffs, when Ming Chai became the director of the Company, he took control of the management of the Company by fraud and undue influence and moved the secretarial office from Seremban to Setiawan, Perak and appointed a new secretary (“the Fifth Defendant”).

9.     Additionally, the Plaintiffs claimed that Ming Chai had coerced them and Cha Bok into going to Setiawan, Perak (the new secretary’s office) to sign various documents in blanks which were allegedly for the preparation of papers for the appointment of a new secretary and as well as to obtain bank loan facilities and appointing Ming Chai as the new director.

10.  On 2006, the Company obtained a loan from HSBC Malaysia (Melaka branch) amounting to RM4.2 million.  However, Ming Chai failed to discharge Cha Bok of his debts and failed to surrender the shares in the Company to the Plaintiffs and resign as a director as promised earlier.

11.  The Plaintiffs later found that they were no longer the directors of the company and Ming Chai had fraudulently transferred their shares with the assistance of the Fifth Defendant to the First, Second, Third and Fourth Defendants without their knowledge.  The Plaintiffs claimed that the relevant form 32A for the alleged transfer of shares were forged.

12.  The learned High Court judge made the following findings, among others:

(a) the transfer of shares from Cha Bok to Chin Chau; from Tui Eng to Su Keow; and subsequently from Chin Chau to the Plaintiffs were void and therefore the Plaintiffs has no legal rights to claim over the ownership of the shares;

(b) the subsequent transfer of shares from the Plaintiffs to the First, Second, Third and Fourth Defendant, contravenes Section 67 of the Companies Act 1965 (“Act 125”);

13.  The Court of Appeal upheld the judgment made by the High Court and dismissed the appeal filed by the Plaintiffs.

Issue

1.    Whether the transfers of movable property i.e. the shares of the Company by the transferors were void by reason of the insolvency of the transferors, and if so were the transfer by the said transferees to subsequent transferees also void for want of title?

2.  Whether there is a security provided by the Company to the Defendants?

3.   Whether the shares acquired by the Defendants were conditional, implying a form of financial assistance by the Company to deal with its own shares?

Ratios

1.    The transfer of shares

(a) Section 52 of Insolvency Act 1967 (“Act 360”) provides-

“Avoidance of voluntary settlement

52. (1) Any settlement of property, not being a settlement made before and in consideration of marriage or a settlement made in favour of a purchaser or incumbrancer in good faith and for valuable consideration, or a settlement made on or for the wife or children of the settlor of property which has accrued to the settlor after marriage in right of his wife, shall, if the settlor becomes bankrupt within two years after the date of the settlement, be absolutely void against the Director General of Insolvency, and shall, if the settlor becomes bankrupt at any subsequent time within five years after the date of the settlement, be void against the Director General of Insolvency, unless the parties claiming under the settlement can prove that the settlor was at the time of making the settlement able to pay all his debts without the aid of the property comprised in the settlement, and that the interest of the settlor in such property had passed to the trustee of such settlement on the execution thereof.

(2) Any covenant or contract made in consideration of marriage for the future settlement on or for the settlor’s wife or children of any money or property wherein he had not at the date of his marriage any estate or interest, whether vested or contingent, in possession or remainder, and not being money or property of or in right of his wife, shall, on his becoming bankrupt, before the property or money has been actually transferred or paid pursuant to the contract or covenant, be void against the Director General of Insolvency”.

(b) Under the ambit of Section 52 of Act 360, the transaction that is considered void is the transactions between the bankrupt and the immediate transferees.  Thus, the subsequent transferees, i.e the Defendants do not fall within the ambit of Section 52.

(c)  In this case, the transfers of shares by Cha Bon and Tui Eng took place in 2003.  Cha Bok was adjudged bankrupt on 9 November 2006 and Tui Eng was adjudged bankrupt on 25 March 2007.  Therefore, the transfers occurred within the period of 5 years as stipulated under Section 52(1) of Act 360.

(d) However, the learned judge has erred in her findings that the transfers of shares by Cha Bok and Tui Eng to Chin Chau and Su Keow was within the stipulated period under Section 52(1) of Act 360.

(e)  Section 52 of Act 360 is not meant to avoid all transaction or settlement of property executed by the settlor within the stipulated period.

(f)   It is to be noted that Section 54 of Act 360 provides protection for bona fide transactions without notice –

“54. (1) Subject to the foregoing provisions of this Act with respect to the effect of bankruptcy on an execution or attachment, and with respect to the avoidance of certain settlements and preferences, nothing in this Act shall invalidate in the case of a bankruptcy– (a) any payment by the bankrupt to any of his creditors; (b) any payment or delivery to the bankrupt;

(d) any contract, dealing or transaction by or with the bankrupt for valuable consideration:

if–

(i) the payment, delivery, conveyance, assignment, contract, dealing or transaction, as the case may be, takes place before the date of the receiving

order; and

(ii) the person other than the debtor to, by, or with whom the payment, delivery, conveyance, assignment, contract, dealing or transaction was made, executed or entered into has not, at the time of the payment, delivery, conveyance, assignment, contract, dealing or transaction, notice of any available act of bankruptcy committed by the bankrupt before that time”.

(g) A similar protection is also provided under Section 53B(3) of Act 360-

“53B. (3) Notwithstanding subsections (1) and (2), where any person, (not being the person who acquired the property from bankrupt) to whom the property was sold, resold or otherwise disposed of, had paid or given therefor valuable consideration and acted in good faith such person shall not be subject to the operation of this section and the Director General of Insolvency’s recourse for recovery of the consideration so paid or given or its value shall be solely against the person who entered into the transaction with the bankrupt”.

(h)  Based on the above provision, the right or title of any subsequent transferee of the property is saved from the effect of Section 52 of Act 360 and it cannot be challenged by the Director General of Insolvency (“DGI”)

(i)    In this current case, the title or rights on the transferred shares passed to and remained with the Defendants who had given valuable consideration in the form of money for a value of RM60,000.00 for the 60,000 shares and had acted in good faith.

(j)    Therefore, the Court held that the transfer of the shares by a transferor who is adjudged bankrupt to a transferee is void.  However, the transfer of shares to subsequent transferees is not void for want of title if the subsequent transferee has acted in good faith and has given valuable consideration.

2.     Loans to a person connected with directors

(a) The learned judge ruled that the transaction where a company provided security in connection with a loan made to Cha Bok (who is connected to the First, Second and Fourth Defendants) by the bank is prohibited under Section 133A of the Companies Act 1965 (“Act 125”).

(b) Section 133A of Act 125 provides-

“Prohibition of loans to persons connected with directors

 (1)  Subject to provisions of this section, a company (other than an exempt private company) shall not-

(a) make a loan to any person connected with a director of the company or of its holding company; or

(b) enter into any guarantee or provide any security in connection with a loan made to such person by any other person”.

(c)  According to the above provision, there must be evidence that the Company is the one who is making the loan to prohibited person, i.e. any person associated with its director or a director of its holding company.  The evidence must show that it was the Company itself that entered into ‘any guarantee’ or ‘provided’ any security in connection with a loan made to such person by any other person.

(d) In this current case, the loan was granted by HSBC Malaysia Bhd, as the lender to the Company, as the borrower.  The loan provided was for the Company itself, and not for others.

(e)  Therefore, the learned judge has erred in ruling that there is a loan provided to Cha Bok.  The question of prohibition under Section 133A of Act 125 does not arise at all.

3.     Financial assistance by the company for the purpose of acquiring shares

(a) It was held by the learned judge that the shares acquired by the First, Second, Third and Fourth Defendants in the Company were conditional upon procurement of banks borrowing with the assets of the Company as security, implying a form of financial assistance by the Company to deal with its own shares.

(b) Section 67 of Act 125 provides-

“(1) Except as is otherwise expressly provided by this Act no company shall give, whether directly or indirectly and whether by means of a loan, guarantee or the provision of security or otherwise, any financial assistance for the purpose of or in connection with a purchase or subscription made or to be made by any person of or for any shares in the company or, where the company is a subsidiary, in its holding company or in any way purchase, deal in or lend money on its own shares”.

(c)  The above provision prohibits inter alia the giving of any financial assistance for the purpose of or in connection with the purchase or subscription made or to be made by any person for any shares in the company.

(d)  In this case, the loan was given by HSBC Malaysia Bhd to the Company itself and not to the First, Second, Third and Fourth Defendants.

(e)  Additionally, there was also no evidence to support the claim that any of the Defendants, who were the subsequent purchasers of the shares, received a loan or other financial aid from the Company.  Hence, the learned judge erred in her findings on this issue.

Decision 1.    The appeal was dismissed with costs.
Key Take Away

1.      Section 52 of Act 360 grants the DGI exclusive right to treat any settlements or transfer of shares as void only against the DGI and not against any other party.  Under this section, any transfer of the property shall be absolutely void against the DGI if the transferor becomes a bankrupt 2 years but within 5 years after the date of transfer.  However in the event the transferor become a bankrupt within 5 years after the date of transfer, then such transfer becomes voidable.

2.      Generally, a director is not allowed to take loans from the company as encapsulated in Section 224 of the Companies Act 2016 (“Act 777”).  This provision is enacted to protect the company from any misappropriation of funds and assets of the company.

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