Kenanga Investors Berhad v 1. ) Impiana Sdn Bhd (WA-22NCC-528-10/2022)

IMPIANA SDN BHD [NO. PENDAFTARAN: 199001007813 (199383-V)]

ISMAIL @ FAROUK BIN ABDULLAH (NO. K/P: 460315-01-5301) … DEFENDAN-DEFENDAN GROUNDS OF JUDGMENT A. Introduction [1] This plaintiff filed this action for breach of subscription agreements that it had entered with the defendants. 2! ! [2] After a full trial, the court allowed the plaintiff’s claim. The reasons for the decision are set out below. B. Background Facts [3] The plaintiff and the defendants entered into a subscription agreement dated 5 March 2019 (“SA”) and a supplemental subscription agreement dated 13 March 2019 (“First Supplemental SA”), pursuant to which the 1st defendant agreed to allot and issue to the plaintiff, and the plaintiff agreed to subscribe to 17,640,000 redeemable preference shares (“RPS 1”) at an issue price of RM1 per RPS. [4] The parties thereafter entered into the following supplemental agreements, to vary the terms of the SA and the First Supplemental SA: a. A second supplemental subscription agreement dated 13 March 2020 (“Second Supplemental SA”); b. A third supplemental subscription agreement dated 23 April 2020 (“Third Supplemental SA”); and c. A fourth supplemental subscription agreement dated 25 March 2021 (“Fourth Supplemental SA”). The SA, the First Supplemental SA, the Second Supplemental SA, the Third Supplemental SA and the Fourth Supplemental SA are collectively referred to as “SA 1”. 3! ! [5] On 3 May 2021, the plaintiff and the defendants executed a further subscription agreement (“SA 2”), pursuant to which the 1st defendant agreed to allot and issue to the plaintiff, and the plaintiff agreed to subscribe to 2,360,000 redeemable preference shares (“RPS 2”) at an issue price of RM1 per RPS. [6] As security for their obligations under SA 1 and SA 2, the defendants executed various security documents, including letters of undertaking, a deed of subordination, a third party charge over land and a third party pledge over shares. [7] The terms of SA 1 and SA 2 provide that the 1st defendant is required to redeem RPS 1 and RPS 2 together with dividends at a pre-determined rate on 25 December 2021 (“Maturity Date”). The agreements also provide that liquidated and ascertained damages (“LAD”) shall be imposed monthly on the outstanding RPS 1 and RPS 2 principal and accrued dividends, until the date of redemption of RPS 1 and RPS 2 with dividends. [8] The 1st defendant failed to redeem RPS 1 and RPS 2 on the Maturity Date. The plaintiff’s former solicitors, Messrs. Wei Chein & Partners (“WCP”) issued letters demanding the defendants to remedy the breaches of SA 1 and SA 2. The 1st defendant responded through various letters, including letters dated 21 January 2022 and 18 February 2022 (“1st Defendant’s Letters”), proposing payment terms to the plaintiff. [9] The proposals were not accepted by the plaintiff, and this action was filed to seek an order for the defendants to perform their obligations under SA 1 and SA 2. 4! ! C. Issues [10] The fact that the plaintiff and the defendants had entered into SA 1 and SA 2 is not in dispute. Neither is the fact that the 1st defendant had not redeemed RPS 1 and RPS 2 together with dividends, on the Maturity Date. [11] The issues in dispute arise from the following defences raised by the defendants: a. The defendants were unable to redeem RPS 1 and RPS 2 and pay dividends because this would contravene the provisions of the Companies Act 2016 (“CA 2016”); b. Following the first defence, the plaintiff would not be entitled to the LAD, which is imposed on outstanding RPS 1 and RPS 2 principal and accrued dividends; and c. The 1st Defendant’s Letters were issued on a without prejudice basis, and are therefore not admissible in court. The letters cannot constitute admissions of liability by the 1st defendant, as claimed by the plaintiff. [12] The court considered these issues in the determination of this action. 5! ! D. Issue 1: Can The Defendants Argue That The Redemption Of RPS 1 And RPS 2 And The Payment Of Dividends Contravene The CA 2016? The relevant provisions [13] The defendants relied on sections 72, 131 and 132 of the CA 2016, and claimed that the redemption of RPS 1 and RPS 2 together with dividends would contravene these provisions of the CA 2016. [14] Section 72 which deals with preference shares, provides that: “(1) Subject to its constitution, a company having a share capital may issue preference shares.

Subject to this section and if authorized by its constitution, a company may issue preference shares which are liable, or at the option of the company are to be liable, to be redeemed in accordance with the constitution. …

Subject to subsections (5) and (6), the shares shall be redeemable only if the shares are fully paid up and the redemption shall be out of –

profits;

a fresh issue of shares; or 6! !

capital of the company. …” (emphasis added) [15] It is the defendants’ contention that under this provision, the redemption of RPS 1 and RPS 2 would be unlawful and/or illegal, as the 1st defendant did not make any profit in the years 2020 to 2023, there was no fresh issue of shares by the 1st defendant, and the 1st defendant does not have any capital to redeem RPS 1 and RPS 2. [16] The defendants also contend that the payment of dividends for RPS 1 and RPS 2 contravenes sections 131 and 132 of the CA 2016. Sections 131 and 132, which deal with dividends, provides that: “131 Distribution out of profit

Subject to section 132, a company may only make a distribution to the shareholders out of profits of the company available if the company is solvent.

The company, every officer and any other person or individual who contravene this section commits an offence and shall, on conviction, be liable to imprisonment for a term not exceeding five years or to a fine not exceeding three million ringgit or to both. 7! ! 132 Distribution only if company is solvent

Before a distribution is made by a company to any shareholder, such distribution shall be authorized by the directors of the company.

The directors may authorize a distribution at such time and in such amount as the directors consider appropriate, if the directors are satisfied that the company will be solvent immediately after the distribution is made.

For the purposes of this section, the company is regarded as solvent if the company is able to pay its debts as and when the debts become due within twelve months immediately after the distribution is made.” (emphasis added) [17] Similar to the defendants’ argument on the redemption of RPS 1 and RPS 2, the defendants claimed that the payment of dividends would contravene sections 131 and 132 of the CA 2016, as the 1st defendant did not make any profit at the material time. [18] The fact that the 1st defendant did not make any profit in the years 2020 to 2023 has been proven by the defendants by way of the following documentary evidence: 8! ! a. The 1st defendant’s audited accounts for the year ended 31 December 2020, which show that the 1st defendant incurred losses of RM164,787,608; b. The 1st defendant’s audited accounts for the year ended 31 December 2021, which show that the 1st defendant incurred losses of RM5,720,109; and c. The 1st defendant’s management accounts as at 30 November 2023, which show that the 1st defendant incurred losses of RM10,149,164.25 for the year ended 2022 and losses of RM6,209,011.40 for the year ended 2023. [19] From the above, the court accepts that the 1st defendant did not make any profit at the material time. However, the court finds the defendants’ argument that the redemption of RPS 1 and RPS 2 and payment of dividends for RPS 1 and RPS 2 are illegal to be fundamentally flawed, for the following reasons: a. The relationship between the parties is contractual, and is specifically based on the terms and conditions of SA 1 and SA 2; b. There are other options on the redemption of preference shares in section 72(4) of the CA 2016; and 9! ! c. The defendants were aware of the provisions of sections 72, 131 and 132 of the CA 2016 prior to the execution of SA 1 and SA 2. The relationship between the parties is contractual [20] The relationship between the plaintiff and the defendants is ultimately a contractual relationship, premised on the terms of SA 1 and SA 2. SA 1 and SA 2 provide that: a. The reason behind the issuance of RPS 1 is to seek funding for the 1st defendant (recital (C) of the SA); b. The proceeds raised from the issuance of RPS 1 are intended to be used, amongst others, to settle shareholder’s advances of the 2nd defendant, to part-finance the acquisition of lands, and as working capital of the 1st defendant (clause 3.4 of the SA); and c. The proceeds raised from the issuance of RPS 2 are intended, amongst others, for dividend payments for RPS 1 (clause 3.1 of SA 2). [21] Under SA 1 and SA 2, the 1st defendant is required to redeem RPS 1 and RPS 2 with dividends on the Maturity Date (Schedule 1). [22] SA 1 and SA 2 provide for the consequences of default of the agreements. Clauses 8 of the SA and SA 2 state that if the defendants commit events of default, including breaching the provisions of the 10! ! agreements, failing to redeem RPS 1 and RPS 2 at the Maturity Date, or failing to pay dividends for RPS 1 and RPS 2, the plaintiff is entitled to the following remedies: a. The 2nd defendant shall provide the necessary funds to the 1st defendant for the redemption of RPS 1 and RPS 2; and b. The 2nd defendant shall provide the necessary funds to the plaintiff for the payment of dividends for RPS 1 and RPS 2. [23] Further, by clauses 9.1 of the SA and SA 2, the defendants have undertaken to jointly and severally indemnify the plaintiff from and against: “… all losses, liabilities, obligations, damages, judgments, deficiencies, claims, demands, suits, proceedings, arbitration, assessments, costs and expenses (including expenses of investigation and enforcement of this indemnity and reasonable solicitors' fees and expenses), suffered, incurred or sustained by the Investor as a result of or arising out of: …

breach of any term or condition of this Agreement.” [24] In clauses 7.2(f) of the SA and SA 2, the defendants have undertaken to comply with all laws and regulations relating to their business and operations. 11! ! [25] Reading the agreements as a whole, the court finds that the obligations imposed on the defendants under SA 1 and SA 2 are ultimately obligations of repayment of the investment sums provided by the plaintiff to the 1st defendant, by way of subscription of RPS 1 and RPS 2. [26] The redemption of RPS 1 and RPS 2 and the payment of dividends for RPS 1 and RPS 2 must relate back to the defendants’ repayment obligations under the agreements. In this regard, it is the defendants’ obligation to repay the plaintiff by redeeming RPS 1 and RPS 2 together with dividends on the Maturity Date, and it is also the defendants’ obligation to ensure that the redemption is carried out in accordance with the law, including requirements under the CA 2016. [27] If RPS 1 and RPS 2 are not redeemed on the Maturity Date, the 2nd defendant is required to provide funds to redeem RPS 1 and RPS 2 together with dividends, and the defendants are required to jointly and severally indemnify the plaintiff from and against all losses and expenses arising from the breach of the agreements. [28] With these clear contractual obligations agreed to between the parties, the court finds that it is not open for the defendants to claim that the redemption of RPS 1 and RPS 2 is unlawful or illegal, as the obligation remains with them to ensure that the steps to redeem RPS and RPS 2 and to pay dividends can be carried out in accordance with the law. 12! ! There are other options on the redemption of preference shares in section 72(4) of the CA 2016 [29] It is also important to note that under section 72(4) of the CA 2016, there are three options for the redemption of preference shares, namely out of profits, by a fresh issue of shares or by the capital of the company. There is no evidence put forth by the defendants to show that the 1st defendant had taken steps to pursue the other options to redeem RPS 1 and RPS 2, whether by raising funds to issue fresh shares or to raise the capital of the 1st defendant. [30] In Salim Investments Pte Ltd v Sutrasegi Sdn Bhd & Ors [2016] 10 MLJ 496, the plaintiff subscribed to preference shares issued by the 1st defendant. The 2nd and 3rd defendants are the directors of the 1st defendant. The 1st defendant was required to pay dividends to the plaintiff, and did so in part for the first dividend payment. The plaintiff however claimed the 1st defendant was in breach of the subscription agreement. The defendants raised a few defences, including that of section 61 of the then-Companies Act 1965, which is similar to section 72(4) of CA 2016. The High Court allowed the claim, finding that the defendants, who had submitted a no-case to answer, had not produced or explained the absence of profit for the purpose of redemption of the preference shares. [31] Similarly, in the present case, the is no evidence provided by the defendants to show that the 1st defendant had attempted to issue fresh shares, or to utilise its capital to redeem RPS 1 and RPS 2 and pay the dividends for RPS 1 and RPS 2. 13! ! [32] As such, the court finds that it is not open for the defendants to capitalise from their own inaction, to argue that RPS 1 and RPS 2 could not be redeemed as the redemption would breach section 72(4) of the CA

The defendants were aware of the provisions of sections 72, 131 and 132 of the CA 2016 [33] The existence of sections 72, 131 and 132 of the CA 2016 was known by the parties prior to the execution of SA 1 and SA 2. [34] Specifically, clause 5.2 of the SA and clause 4.1(a)(ii) of SA 2 provide that the 1st defendant shall ensure that the 1st defendant’s constitution is amended to provide for the terms of RPS 1 and RPS 2 in accordance with section 72(4) of the CA 2016. It should also be noted that the defendants have undertaken to comply with all laws and regulations relating to their business and operations. [35] In UOB Venture Investments Ltd v Tong Garden Holdings Pte Ltd [2001] 1 SLR 362, the plaintiff subscribed to redeemable convertible preference shares in the defendant company. The investment agreement provides that the preference shares shall be redeemed at the plaintiff’s absolute discretion if the defendant company did not list on the Stock Exchange of Singapore. The defendant company did not list, and the plaintiff sought an order for the defendant company to take the necessary steps to complete the redemption. The argument put forth by the defendant company and its shareholders is that the plaintiff had no claim against them because the defendant company did not have profits to 14! ! redeem the preference shares in accordance with section 70(3) of the Singapore Companies Act. [36] The court found as follows: “[20] In my judgment, there is a fundamental flaw in the company defendants’ argument. The plaintiffs’ claim is in contract. The contract provides that if the company defendants fail to secure a listing within the stipulated time, the plaintiffs may call for a redemption. Under the contract the obligation to redeem on notice is absolute. When the first defendants contracted for that obligation they were fully aware of s 70(3) of the Companies Act. They must therefore be presumed to have contracted on the basis of s 70(3) of the Companies Act. In the context of s 70(3) of the Companies Act, the company defendants’ contractual obligation to redeem implies that they must bustle about to bring in the funds. They must expend all their energy in their veins to find the funds in the manner permitted by s 70(3) of the Companies Act. The defendants are not allowed to call in aid their own indolence and inaction. Nor can they seek shelter under s 70(3) of the Companies Act. Their contractual obligation implies that they will see to it that their subsidiary and related entities and persons will put them in sufficient profits or take up new shares to produce sufficient funds. Finding the funds by those two options, I repeat, is an absolute obligation. If they fail there are three remedies to the preference shareholder: equity can compel them to do so by an order for specific performance; common law can award damages; and company law can order them to be wound 15! ! up. If damages are awarded they must come from profits or fresh share issue. In the event of liquidation the shareholders’ claim would rank after the claims of creditors.” (emphasis added) [37] Similarly, in the present case, the plaintiff’s claim is contractual, based on SA 1 and SA 2. These agreements provide that the 1st defendant shall redeem RPS 1 and RPS 2 on the Maturity Date. At the time the defendants entered into SA 1 and SA 2, they were or should have been fully aware of the existence of sections 72(4), 131 and 132 of the CA 2016. As such, they are obligated to ensure that the terms of SA 1 and SA 2 could be complied with in accordance with the law, including in accordance with sections 72(4), 131 and 132 of the CA 2016. [38] After failing to take steps to ensure that their obligation to redeem RPS 1 and RPS 2 could carried out in accordance with the law, I am of the view that the defendants cannot rely on sections 72(4), 131 and 132 of the CA 2016, to evade their obligations under SA 1 and SA 2. E. Issue 2: Is The Plaintiff Entitled To The LAD? [39] The right to impose the LAD on the outstanding RPS 1 and RPS 2 principal and accrued dividends is set out in clause 8(E) of the SA. The clause provides that if an event of default (which includes failure to redeem RPS 1 and pay dividends for RPS 1) is not remedied, the plaintiff shall be entitled to: 16! ! “impose a liquidated ascertained damages which shall accrue and be paid monthly at the rate of 1.00% per month on the outstanding RPS principal and the accrued RPS Dividends until the date of redemption of the RPS and payment of the RPS Dividends. For avoidance of doubt, the annual rate of the RPS Dividends shall remain in force and payable during an Event of Default …” (emphasis added) [40] Clause 8(E) of the SA was amended by clause 2.02(ii) of the Third Supplemental SA, by increasing the rate of the LAD to 2%. [41] Clause 8(D) of SA 2 contains a similar provision, giving the right to the plaintiff to impose the LAD at the rate of 2% per month on the outstanding principal for RPS 2 and accrued dividends, if an event of default (which includes failure to redeem RPS 2 and pay dividends for RPS 2) is not remedied. [42] The court had found that the defendants are not entitled to argue that the redemption of RPS 1 and RPS 2 would be a contravention of sections 72(4), 131 and 132 of the CA 2016. As such, the defendants had committed an event of default under section 8 of the SA and SA 2, which has not been remedied. [43] Following the failure to remedy the default, pursuant to clause 8(E) of the SA read with clause 2.02(ii) of the Third Supplemental SA, and clause 8(D) of SA 2, the plaintiff is entitled to impose the LAD, at the rate of 2% per month on the outstanding principal for RPS 1 and RPS 2 and 17! ! accrued dividends, until the date of the redemption of RPS 1 and RPS 2 and the payment of dividends. F. Issue 3: Are The 1st Defendant’s Letters Admissible In Court, And If So, Are They Admissions By the Defendants? [44] The 1st Defendant’s Letters are part of a series of correspondences, which began with a letter dated 17 January 2022 from the plaintiff’s former solicitors, WCP, to the 1st defendant. In the letter dated 17 January 2022, which was marked “without prejudice”, the plaintiff recorded the breaches committed by the 1st defendant, including failing to redeem RPS 1 and RPS 2. The plaintiff demanded amounts which it claimed were due from the 1st defendant. [45] Multiple letters were then exchanged between the plaintiff and the 1st defendant. In these letters, the 1st defendant proposed payment plans, and the plaintiff responded by rejecting the proposals. The plaintiff also demanded outstanding amounts due from the 1st defendant. The plaintiff’s letters were issued by WCP, and were all marked “without prejudice”. [46] The letters issued by the 1st defendant in response to WCP’s letters include the 1st Defendant’s Letters. In these letters, the 1st defendant proposed payment plans to the plaintiff to settle the amounts outstanding. [47] These letters were sought to be admitted by the plaintiff during trial, arguing that the letters constituted admissions of liability of the defendants. The defendants in turn argued that the letters are inadmissible, as they are without prejudice communications. 18! ! [48] Both counsel for the plaintiff and the defendants however agreed for the issue of admissibility of the letters to be determined by this court once parties have submitted on this issue after the conclusion of the trial. [49] I considered the 1st Defendant’s Letters, and find them to be without prejudice communications, as they were issued in response to the plaintiff’s letters which were marked “without prejudice”. It has been held that if a letter is marked “without prejudice”, the protection afforded over the communication is extended to all subsequent correspondences (see Dusun Desaru Sdn Bhd v Wang Ah Yu [1999] 5 MLJ 449 and Hadi bin Hassan v Suria Records Sdn Bhd [2005] 3 MLJ 522). [50] In Dusun Desaru, the court held as follows at page 454I: “… To me, without prejudice communications can be said to be privileged or for a better nomenclature privileged communications. Two common features must be present before this privileged communications could be activated:

some individuals must be in dispute and that dispute led them to negotiate with one another; and

the communication between the parties must contain suggested terms that would finally lead to the settlement of the dispute.” [51] The 1st Defendant’s Letters meet these requirements, as they are issued by parties in dispute, and contain proposed terms of payment that 19! ! could lead to a settlement of the dispute between the plaintiff and the defendants. [52] The plaintiff argued that the letters issued by WCP to the 1st defendant are letters of demand, which cannot be cloaked with the protection given to without prejudice communications. I am unable to agree with this argument, given that the plaintiff’s letters were expressly marked “without prejudice”. It is therefore disingenuous for the plaintiff to later contend that the 1st defendant’s letters issued in response to its letters were not issued on a “without prejudice” basis. [53] In view thereof, the court finds the 1st Defendant’s Letters are without prejudice communications, which are not admissible in court. They were not considered as evidence in the determination of this suit. G.

[54] From the considerations and findings as set out, and notwithstanding the non-admission of the 1st Defendant’s Letters, the court finds that the plaintiff has proven its claim. [55] The plaintiff’s claim is allowed, with costs. Dated 2 April 2025 ADLIN ABDUL MAJID Judge High Court of Malaya Kuala Lumpur Counsel: Plaintiff : Shaikh Abdul Saleem (together with Teoh Jo Vi) of Messrs. Shaikh David & Co Defendants : Edward Kuruvilla of Messrs. Kuruvilla, Yeoh & Benjamin