Kang Hai Holdings Sdn Bhd & 1 Lagi v Lee Lai Ban (02(f)-65-09/2016(J))

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1 DALAM MAHKAMAH PERSEKUTUAN MALAYSIA (BIDANG KUASA RAYUAN) RAYUAN SIVIL NO.: 02(f)-65-09/2016 (J)

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(1) Can the Rule in Turquand’s case apply to a situation where an outsider dealing with the company is deemed to have constructive notice of the identity of the directors and Managers of a company as shown in the Form 49 of the Company? [10] “The outsider” by terms of reference in this appeal would be Lee. The Tenancy Agreement in question is dated 8.9.2009 (Tab 26 Common Bundle of Document). The Tenancy Agreement describes the Landlord as one Lim Thian Hock (LTH) not KHH who is the Registered Owner of the Land in question. Looking at the position of the companies at the time of the said Tenancy Agreement i.e. 8.9.2009, in respect of Kang Hai Holding Sdn Bhd (KHH) as at 13.9.2008, Siva had ceased to be a director whilst Lim Thian Hock @ Lim Thiam Hock (LTH) continued to remain a Director. In the case of Kang Hai Realty Sdn Bhd (KHR), whilst LTH was a Director, Siva was not a Director. [11] The plea of KHR was that Siva had represented and/or held himself out to be Managing Director (MD) and a director of the plaintiffs (see paragraphs 3, 4, 8, 9 and 10 of the Statement of Claim). KHH and KHR’s plea of representation of authority was against Siva and the specific representation that Siva was the MD/Director of both Companies 9 at the execution of the Tenancy Agreement and the extraction of sand from the Plaintiffs’ Land. [12] The searches clearly reveal that Siva was not a director nor MD of the plaintiff companies and that fact, Lee is deemed to have constructive knowledge of, and it did not matter whether he believed, by reputation or otherwise, Siva was. It is also abundantly clear that Lee did not make any company searches nor searches on the land. [13] The defence of Lee is based essentially on the locus classicus in this area of the law i.e. the Rule in Turquand derived from the case of Royal British Bank v Turquand [1843-60] ALL ER Rep 435 which is etched in almost every major text on company law. The case held and we quote: “Persons dealing with the company were bound to make themselves acquainted with the statute and the deed of settlement of the company, but they were not bound to do more; a person, on reading the deed of settlement, would find, not a prohibition against borrowing, but a permission to borrow on certain conditions, and, learning that the authority might be made complete by a resolution, he would have a right to infer the fact of a resolution authorising that which on the face of the document appeared to be legitimately done; and, therefore, the company was liable whether or not a resolution had been passed”. [Emphasis ours] 10 [14] This principle has been adopted by this Court with the necessary modifications in the case of Pekan Nenas Industries Sdn Bhd v. Chang Ching Chuen & Ors [1998] 1 MLJ 465 and to a whole plethora of cases that deal with the point. With the rapid development of modern technology, and the access to information available in the database of the Companies Commission of Malaysia, the law in our view imposes a minimum duty on the “outsider” to, at the very least, make this minimum check to afford the outsider the protection of the Rule in Turquand. We refer to the decision of this Court in Pekan Nenas Industries Sdn Bhd Case [supra] where it was held: “(2) The rule in Turquand's case cannot be invoked if the outsider relying on the rule knows or ought to have known that there is an irregularity. The material time at which there must be knowledge or the means of knowledge is the time of entry into the transaction, in this case, 3 December 1990. The outsider thus bears the burden of showing that he is not disqualified from invoking the rule. The Court of Appeal, in deciding the rule in Turquand's case did not apply, relied on certain circumstances which it considered must have put Dato Tan, who represented the Purchaser/Intervener, 'on inquiry' and thus wrongly concluded he failed to make the necessary inquiries. In this case, the evidence supported the Purchaser/Intervener's contention that it was entitled to rely on the rule in Turquand's case”. [Emphasis ours] 11 [15] We also refer to the illuminating judgment of Edgar Joseph JR FCJ from para (F) at pg 507 to para (G) at pg 5 08 and we quote: “To put it another way, such an outsider may rely on the rule in Turquand's case which, when it applies, gives rise to an irrebutable presumption, so that the company concerned is debarred from establishing or relying on the fact that the proceedings were irregular and unauthorized. The rule in Turquand's case cannot, however, be invoked by an outsider who knows or ought to know that there is an irregularity. More particularly, outsiders dealing with a company who know that some relevant procedure internal to the company has not been followed cannot invoke the benefit of the indoor management rule (see Howard v Patent Ivory Manufacturing Co (1888) 38 Ch D 156). This is an exception to the rule in Turquand's case and the burden of establishing it lies on the party invoking the exception and in this case, that would be the Father and his faction. Furthermore, outsiders dealing with a company could also be affected by knowledge of facts which would put a reasonable person on inquiry; in other words, they would be deemed to know what a reasonable person would infer from known facts. So, for example, in B Liggett (Liverpool) Ltd v Barclays Bank Ltd [1928] 1 KB 48 at pp 56-56, Wright J (as he then was) said: … Whatever may be the exact scope of the rule in Turquand's case, I think it is quite clear on principle and on the authorities I have already referred to that it can never be relied upon by a person who is put on inquiry. The rule proceeds on a presumption that certain acts have been regularly done, and if the circumstances are such that the person claiming the benefit of the rule is really put on inquiry, if there are circumstances which debar that person from relying on the prima facie presumption, 12 then it is clear, I think, that he cannot claim the benefit of the rule... And, in Morris v Kanssen & Ors [1946] AC 459, Lord Simonds made it clear that an outsider cannot invoke the benefit of the Turquand rule if he is put upon inquiry. Here is what his Lordship said on this point (at p 475): … He cannot presume in his own favour that things are rightly done if inquiry that he ought to make would tell him that they were wrongly done. So also, an outsider dealing with a company cannot invoke the benefit of the Turquand rule if he could or should in the circumstances have discovered the defect by inspecting the compulsory documents filed at the Registry of Companies which are open to public inspection. (See Irvine v Union Bank of Australia (1877) 2 App Cas 366.) The material time at which there must be knowledge or the means of knowledge is the time of entry into the transaction. (See Kanssen v Rialto (West End) Ltd & Ors [1944] Ch 346; Morris v Kanssen & Ors [1946] AC 459.) We need hardly add that the rule in Turquand's case is designed to protect not the company itself but persons dealing with the company. It follows that there is no reason why persons, including outsiders, who enter into transactions with a company, and who are sued should not invoke the benefit of the rule as a defence. (See Howbeach Coal Co Ltd v Teague (1860) 5 H & N 151, 157 ER 1136; Garden Gully United Quartz Mining v McLister (1875) 1 App Cas 39.) So far as the burden of proof is concerned, when the doctrine of the bona fide purchaser for value without notice is invoked, we are inclined to the view that the burden of showing lack of notice is on the person invoking the doctrine. (See Ninety-Five Pty Ltd v Banque Nationale de Paris (1988) WAR 132; cf Re Dover Pty Ltd (1981) 6 ACLR 307 at p 310.) 13 Whether or not the outsider was put on notice is a question of fact on which other cases are of no assistance.’’ [Emphasis ours] [16] Lee in this case on the facts did not verify the position of Siva in the plaintiffs’ companies by way of a search. Lee did not check on the status of the land and all payments were made to Siva. (See Notes of Evidence Tab 28, pages 197-209) [17] The learned judge in paragraphs 43, 44 to 48 of his grounds of judgment made findings of fact in relation to the authority of Siva to act on behalf of the plaintiffs which the learned judge held he had not. The Court of Appeal particularly in paragraphs 30 and 31 of their grounds of judgment found there was no evidence to impute Lee with a need to be put on an enquiry, despite the fact that Lee had failed to make any company or land searches. We found the Court of Appeal had misdirected itself on its reversal of the High Court finding of facts and curial intervention is called for. [18] Reference is drawn also to the case of Criterion Properties v Stratford UK Properties [2004] UKHL 28 and we quote at paragraph 31 the judgment of Lord Scott: 14 “[31] Both Hart J and the Court of Appeal thought that the SSA was clearly contrary to the commercial interests of Criterion. Hart J thought that Oaktree must have known, or be taken to have known, that that was so. I do not wish to be taken to be saying that knowledge of this sort on the part of Oaktree, or knowledge by Oaktree that Mr Glaser and Mr Palmer were, in signing the SSA, in breach of the duty they owed to Criterion, would be irrelevant to the authority issue. If a person dealing with an agent knows that the agent does not have actual authority to conclude the contract or transaction in question, the person cannot rely on apparent authority. Apparent authority can only be relied on by someone who does not know that the agent has no actual authority. And if a person dealing with an agent knows or has reason to believe that the contract or transaction is contrary to the commercial interests of the agent's principal, it is likely to be very difficult for the person to assert with any credibility that he believed the agent did have actual authority. Lack of such a belief would be fatal to a claim that the agent had apparent authority”. [Emphasis ours] Siva’s plea of actual authority had been rejected by both the High Court and Court of Appeal. It therefore follows Siva acted on a frolic of his own. We find the High Court judge was correct in rejecting a plea of ostensible authority as the evidence clearly shows Lee could have ascertained the actual position by making the relevant searches. [19] What is the effect of the particulars of Form 49 on an “outsider”? We refer to the decision of this Court in KL Engineering Sdn Bhd & Anor v Arab Malaysian Finance Bhd [1994] 2 MLJ 201. 15 “(1) The common law doctrine of constructive notice should apply to Form 49 which is a public document containing particulars of directors who are the mind and will of the company as well as managers and secretaries who are responsible for the day-to-day running of the company. Therefore, persons dealing with the company should check with the Registrar of Companies who its directors, managers and secretaries are at any time.

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(2) As Form 49 is a public document to which the common law doctrine of constructive notice applies, the respondent, who had been put upon inquiry of its contents, but failed to check, must be presumed to have known that Kow Yuen Wah was not a director of the first appellant and was therefore, not authorized to sign the hire-purchase agreement on the company's behalf. Accordingly, as the hire-purchase agreement was signed by an unauthorized person on behalf of the first appellant, the latter could not be made liable under the hire-purchase agreement.” and to the judgment of Mohamed Dzaiddin SCJ delivering judgment of the Court particular at page 208 paragraph (B) to page 209 para (E), which we quote in agreement: “However, the next important question is whether Form 49 comes within the category of public documents upon which persons dealing with the company is deemed to have notice of its contents. The learned author of Charlesworth & Cain on Company Law is of the view that the doctrine applies presumably to the list of directors because it is a public document which is open to public inspection at the Registry of Companies. On the other hand, the learned author of 1 Palmer's Company Law (24th Ed) discussed the issue in more detail at para 21-02: It is sometimes not easy to determine which of the company's documents are public documents and which concern only its internal 16 management. In principle only documents which are registered with the Registrar can be public documents, but, as we shall see, not all of them have this character. Obviously the memorandum and the articles are public documents. Special resolutions, if duly registered in accordance with s 380, likewise become public documents. The same would appear to apply to other resolutions required to be registered under s 380. It would further appear that charges on the undertaking of the company or on specific property belonging to it, if registered according to s 395 et seq, are likewise public documents, but this applies only to the registered particulars and not to 'special provisions contained in that charge restricting the company from dealing with their property in the usual manner when the subsisting charge is a floating security'. Beyond this no guidance can be obtained from decided cases on what are public documents of registered companies. It is thought that not all documents which a company has to register fall within that category. A distinction has to be drawn between documents affecting the powers of the company and its agents and other documents. Only documents which fall into the former category are public documents, eg the other resolutions – other than special resolutions – requiring registration under s 380 and particulars relating to the directors (see s 288), but documents falling within the second category, such as balance sheets or entries in the register of directors' interests (see s 325), are not, it is thought, 'public documents' because their purpose is merely to provide information of the financial position of the company or the interest of its managers in the company. The conclusion that follows from the above opinion, with which we respectfully agree, is that the common law doctrine of constructive notice should apply to Form 49. To reiterate, Form 49 is a public document which contains particulars of directors who are the mind and will of a company, as well as managers and secretaries who are responsible for the day-to-day running of the company. It is a document which affects the powers of the company and its agents. Certainly, its purpose must be more than just to provide information about the company's directors, managers and secretaries. Therefore, persons 17 dealing with the company should check with the Registrar of Companies who its directors, managers and secretaries are at any given time. Cik Jennifer Tay has urged us to treat Form 49 as an 'indoor management' document so that the respondent could take advantage of the rule in Turquand's case. This rule was stated by Lord Simonds in Morris v Kanssen as follows (at p 474): But persons contracting with a company and dealing in good faith may assume that acts within its constitution and power have been properly and duly performed and are not bound to inquire whether acts of internal management have been regular. According to his Lordship (at p 475): It is a rule designed for the protection of those who are entitled to assume, just because they cannot know, that the person with whom they deal has the authority which he claims. This is clearly shown by the fact that the rule cannot be invoked if the condition is no longer satisfied, that is, if he who would invoke it is put upon his inquiry. He cannot presume in his own favour that things are rightly done if inquiry that he ought to make would tell him that they were wrongly done. Based on Lord Simond's dictum, we say with confidence that the rule in Turquand's case does not apply here. We hasten to add that as Form 49 (D14) is a public document to which the common law doctrine of constructive notice applies, the respondent, having been put upon inquiry of its content, but failed to check, must be presumed to have known that at the material time, James Kow Yuen Wah was not a director of the first appellant and was, therefore, not authorized to sign P7 on the company's behalf. Accordingly, as P7 was signed by an unauthorized person on behalf of the first appellant, the latter cannot be made liable under the hire-purchase agreement, P7”. [Emphasis ours] [20] It is no longer a question of whether the “outsider” had been put on enquiry, but the “outsider” had imputed to him particulars of Form 49 and 18 should have taken steps to enquire further to come within the Rule of Turquand. By way of further illustration of the point, we refer to the decision of the High Court of Australia in Northside Developments Pty Ltd v Registrar General and others 83 Australia Law Right pg. where it was held:

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(ii) Per Mason CJ, Dawson and Toohey JJ: There was no representation by the directors that the seal was affixed with their authority or that they had approved the transaction. The transaction was completed without the actual or apparent authority of the appellant” [21] We also refer to the judgment of Mason CJ at paragraph 40 to pg. 395 – pg. 396 which we now quote: “What is important is that the principle and the criterion which the rule in Turquand’s case presents for application give sufficient protection to innocent lenders and other persons dealing with companies, thereby promoting business convenience and leading to just outcomes. The precise formulation and application of that rule call for a fine balance between competing interests. On the one hand, the rule has been 19 developed to protect and promote business convenience which would be at hazard if persons dealing with companies were under the necessity of investigating their internal proceedings in order to satisfy themselves about the actual authority of officers and the validity of instruments. On the other hand, an overextensive application of the rule may facilitate the commission of fraud and unjustly favour those who deal with companies at the expense of innocent creditors and shareholders who are the victims of unscrupulous persons acting or purporting to act on behalf of companies Agency principles aside, to hold that a person dealing with a company is to put upon inquiry when that company enters into a transaction which appears to be unrelated to the purposes of its business and from which it appears to gain no benefit is, in my opinion, to strike a fair balance between the competing interests”. [Emphasis ours] We are in consonant with the views expressed by Mason CJ, that the contemporary approach to the Rule in Turquand, should be the approach as suggested by Mason CJ. We therefore answer Q1 in the negative. Question (ii) approved by the Court (See AR pg. 2-4) is as follows: Can an outsider rely on the rule in Turquand’s case and the principles of ostensible authority of a person to bind a company where the ‘holding out’ or representation of authority is made solely by the person with no authority? 20 [22] Siva had no authority to act for the companies. There were no resolutions produced to testify to that fact. The purported letters of authority remained as ID and were never tendered as exhibits and LTH was never called to testify. There had been extensive submissions as to the plaintiffs infringing section 114 illustration (g) of the Evidence Act 1950 but the burden to show authority rested with Siva. At any rate, his plea of authority had failed both in the High Court and in the Court of Appeal. Upon observation of the Tenancy Agreement (see Tab 26 CCB), it is noted that LTH and not Siva had signed the Tenancy Agreement as the Landlord. In fact the only representation of ostensible authority had been made by Siva and that is the plea of Lee. Under those circumstances can the respondent plead the Rule in Turquand? The answer is most certainly no. [23] We refer to the often quoted case of Freeman and Lockyer (a firm) v Buckhurst Park Properties (Mangal) Ltd & Another [1964] 1 AER 630 and to the judgment of Lord Diplock at pg 645 para E to H and pg 646 para A to C and we quote: “The second characteristic of a corporation, viz, that unlike a natural person it can only make a representation through an agent, has the consequence that, in order to create an estoppel between the corporation and the contractor, the representation as to the authority of the agent which creates his “apparent” 21 authority must be made by some person or persons who have “actual” authority from the corporation to make the representation. Such “actual” authority may be conferred by the constitution of the corporation itself, as, for example, in the case of a company, on the board of directors, or it may be conferred by those who under its constitution have the powers of management on some other person to whom the constitution permits them to delegate authority to make representations of this kind. It follows that, where the agent on whose apparent” authority the contractor relies has no “actual” authority from the corporation to enter into a particular kind of contract with the contractor on behalf of the corporation the contractor cannot rely on the agent’s own representation as to his actual authority. He can rely only on a representation by a person or persons who have actual authority to manage or conduct that part of the business of the corporation to which the contract relates”. “If the foregoing analysis of the relevant law is correct, it can be summarised by stating four conditions which must be fulfilled to entitle a contractor to enforce against a company a contract entered into on behalf of the company by an agent who had no actual authority to do so. It must be shown: (a) that a representation that the agent had authority to enter on behalf of the company into a contract of the kind sought to be enforced was made to the contractor; (b) that such representation was made by a person or persons who had “actual” authority to manage the business of the company either generally or in respect of those matters to which the contract relates; (c) that he (the contractor) was induced by such representation to enter into the contract, i.e. that he in fact relied on it; and (d) that under its memorandum or articles of association the company was not deprived of the capacity either to enter into a contract of the kind sought to be enforced or to delegate authority to enter into a contract of that kind to the agent. 22 The confusion which, I venture to think, has sometimes crept into the cases is, in my view, due to a failure to distinguish between these four separate conditions, and in particular to keep steadfastly in mind (first) that the only “actual” authority which is relevant is that of the persons making the representation relied on, and (second) that the memorandum and articles of association of the company are always relevant (whether they are in fact known to the contractor or not) to the questions (i) whether condition (b) is fulfilled, and (iii) whether condition

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(ii) The order of the Court of Appeal is set aside.

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(iii) The order of the High Court is restored.

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(iv) Deposit is refunded. Dated: 19th December 2017 Signed [DATUK DR PRASAD SANDOSHAM ABRAHAM] Judge Federal Court of Malaysia 24 Counsel for the Appellant David Matthews Harvinderjit Singh Malarvily Perumal Messrs Vin Partnership Suite 6.05, Level 6, Wisma E & C, No. 2, Lorong Dungun Kiri, Damansara Heights 50490 Kuala Lumpur Counsel for the Respondent Hy Lee Messrs Lee Han Yen & Co No. 114-A, 1st Floor Jalan Peng Kai 83000 Batu Pahat JOHOR Cases Referred To: