Koperasi Islah Malaysia Berhad v Rohana Binti Mahmood (No. K/P: 540613-05-5360) (W-02(NCC)(A)-2154-10/2017)

1 IN THE COURT OF APPEAL OF MALAYSIA [APPELLANT JURISDICTION ] CIVIL APPEAL NO: W-02(NCC)(A)-2154-10/2017 BETWEEN KOPERASI ISLAH MALAYSIA BERHAD (KOOP NASIONAL NO. 15) … APPELLANT AND

1. ROHANA BINTI MAHMOOD (MO. K/P: 540613-05-5360)

2. CHAN WENG FAI (NO. K/P: 740329-14-5437)

3. ALI HANSEN BIN NOH (NO. K/P: 650626-07-5333)

4. SREEDHARA NAIDU A/L SREE RAMALU NAIDU (NO. K/P: 680706-08-5539)

5. IRVIN HOH CHEE SENG (NO. K/P: 781223-08-5929 … RESPONDENTS (In the High Court of Malaya at Kuala Lumpur In the Federal Territory, Malaysia Originating Summons No: WA-24NCC-406-09/2016 2 In the matter of the Company Consobiz Ventures Sdn Bhd (No. Syarikat: 439678-A) And In the matter of Section 304(1) Companies Act 1965 And In the matter of Order 88 Rule 2 Rules of Court 2012 And In the matter of Consent judgment dated 21/11/2014 recorded in the High Court of Malaya at Kuala Lumpur in Civil No. 22NCC-280- 08/2014 Between Koperasi Islah Malaysia Berhad (Koop Nasional No. 15) … Plaintif And 3

1. Rohana binti Mahmood (No. K/P: 540613-05-5360)

2. Chan Weng Fai (No. K/P: 740329-14-5437)

3. Ali Hansen Bin Noh (No. K/P: 650626-07-5333)

4. Sreedhara Naidu A/L Sree Ramalu Naidu (No. K/P: 680706-08-5539)

5. Irvin Hoh Chee Seng (No. K/P: 781223-08-5529) …Defendants HEARD TOGETHER WITH IN THE COURT OF APPEAL OF MALAYSIA [APPELLANT JURISDICTION ] CIVIL APPEAL NO: W-02(NCC)(A)-2162-10/2017 BETWEEN KOPERASI ISLAH MALAYSIA BERHAD (KOOP NASIONAL NO. 15) … APPELLANT AND

1. ROHANA BINTI MAHMOOD (MO. K/P: 540613-05-5360)

2. CHAN WENG FAI (NO. K/P: 740329-14-5437)

3. ALI HANSEN BIN NOH (NO. K/P: 650626-07-5333)

4. SREEDHARA NAIDU A/L SREE RAMALU NAIDU (NO. K/P: 680706-08-5539)

5. IRVIN HOH CHEE SENG (NO. K/P: 781223-08-5929 … RESPONDENTS 4 (In the High Court of Malaya at Kuala Lumpur In the Federal Territory, Malaysia Originating Summons No: WA-24NCC-406-09/2016 In the matter of the Company Consobiz Ventures Sdn Bhd (No. Syarikat: 439678-A) And In the matter of Section 304(1) Companies Act 1965 And In the matter of Order 88 Rule 2 Rules of Court 2012 And In the matter of Consent judgment dated 21/11/2014 recorded in the High Court of Malaya at Kuala Lumpur in Civil No. 22NCC-280- 08/2014 Between 5 Koperasi Islah Malaysia Berhad (Koop Nasional No. 15) … Plaintif And

1. Rohana binti Mahmood (No. K/P: 540613-05-5360)

2. Chan Weng Fai (No. K/P: 740329-14-5437)

3. Ali Hansen Bin Noh (No. K/P: 650626-07-5333)

4. Sreedhara Naidu A/L Sree Ramalu Naidu (No. K/P: 680706-08-5539)

5. Irvin Hoh Chee Seng (No. K/P: 781223-08-5529) …Defendants CORAM: VERNON ONG LAM KIAT, JCA YEW JEN KIE, JCA HAS ZANAH BINTI MEHAT, JCA GROUNDS OF JUDGMENT

1. Two appeals before us are as follows: a. Rayuan Sivil No. W-02(NCC)(A)-2154-10/2017 [“Appeal No. 2154”], which is the Appellant’s appeal against the decision of the High Court Kuala Lumpur, given on 31.7.2018, in dismissing the Originating Summons; b. Rayuan Sivil No. W-02(IM)(NCC)-2162-10/2017 [“Appeal No. 2162”], which is the Appellant’s appeal against the decision of the High Court Kuala Lumpur, given on 31.7.2018, in dismissing 6 the Appellant’s Application under O.28 r. 8 (1) of the Rules of Court 2012 [Enclosure 19] for leave to convert the Kuala Lumpur High Court Originating Summons No. WA-24NCC-406-09/2016 into Writ.

2. By consent of the parties, the two appeals were heard together.

3. The Appellant is the Plaintiff in the High Court action and the Respondents, the Defendants. They will be referred to as in the High Court action. Background facts and pertinent events in chronological order

4. Between 2012-2013, upon request of one Consobiz Veture Sdn. Bhd. [“CVSB”], the Plaintiff agreed to sell and provide raw materials to CVSB for a production project and CVSB agreed to pay the Plaintiff upon receipt of the raw materials.

5. At the material time, CVSB was under the directorship and management of one Johari, Laili and Mimi.

6. The total amount of invoices issued was RM8,822,542.40 and CVSB only paid RM6,325,073.98 to the Plaintiff, leaving an outstanding balance of RM2,497,488.00.

7. The Plaintiff filed an action in High Court Kuala Lumpur vide Civil Suit No. 22NCC-280-08/2014 claiming against CVSB inter alia for the outstanding balance due and owing to the Plaintiff. 7

8. On 21.11.2014, a Consent Judgment was recorded whereby CVSB agreed to pay the Plaintiff the sum of RM2,497,488.00 as full and final settlement vide post-dated cheque in the course of three years.

9. At the material time of the Consent Judgment dated 21.11.2014, the Defendants were holding the following positions in CVSB: a. 1st Defendant - director; b. 2nd Defendant - the alternate director of the 4th Defendant; c. 3rd Defendant - director; d. 4th Defendant – director; e. 5th Defendant – representative of RM Capital Partners.

10. On 10.12.2014, during the Board of Directors meeting No. 5/2014, the 2nd Defendant proposed a Proposed Internal Restructuring Plan to restructure CVSB whereby a new subsidiary company would be set up to acquire the business of CVSB including the transfer of personnel, contracts, license and selected assets and liabilities.

11. On 10.12.2014, RMCP Baby Products was incorporated.

12. On 12.2.2015, CVSB, CVSB International and members of Johari’s family and company related to the Johari Family entered into a Settlement Agreement of the idem date.

13. On 28.5.2015, the 2nd Defendant resigned as CVSB’s Director.

14. On 30.6.2015, CVSB and RMCP Baby Product entered into the Sale of Assets Agreement of idem date1 whereby the assets of 1 2nd Respondent’s Core Bundle , Pages 59-99. 8 CVSB were sold at RM5,772,954.00 to RMCP Baby Product in return for 10 Million Irredeemable Preference Shares.

15. On 30.6.2015, CVSB and RMCP Baby Produces entered into the Sale of Business and Undertaking Agreement of idem date 2 whereby assets of CVSB were sold at RM4,227,052 to RMCP Baby Produces in return of 10 Million Irredeemable Preference shares.

16. In August 2015, postdated cheques for August until December 2015 were taken back by CVSB. CVSB failed to deliver the replacement cheques.

17. CVSB failed to pay the installments pursuant to the Consent Judgment dated 21.11.2014 once the transfer of assets and business to RMCP Baby Products was completed.

18. On 3.3.2016, the Plaintiff filed a winding up petition of idem date. In opposing the winding up petition, the then Director of CVSB informed the Plaintiff that CVSB no longer owned any assets to settle the outstanding sum owing to the Plaintiff and other creditors as they have been sold and/or transferred to a third party.

19. On 28.9.2016, the Plaintiff filed the Originating Summons in the High Court Kuala Lumpur.

20. On 23.3.2017, the Plaintiff filed the application for leave to convert the Originating Summons into a Writ action [“Conversion Application”]. 2 2nd Respondent’s Core Bundle, Pages 100-171. 9 Originating Summons Plaintiff’s case 21. The Originating Summons which was premised on section 304(1) of the Companies Act 1965 [“CA 1965”] contained the following allegations:

(ii) Laili bin Ismail [Johari’s first wife]; and

(iii) Mimi Maharajni Diaz Café, also known as Mimi Abdul Rashid [“Johari’s third wife’].

25. On 29.5.2019, we heard and allowed Appeal No. 2162 and struck out Appeal No. 2154.

26. The Plaintiff raised six triable issues in justifying the Conversion Application, namely: 13

(ii) How the positive value of the Net Tangible Assets of CVBS can be achieved after entering the Settlement Agreement dated 12/2/2015?

(iii) Why the current liabilities listed in the two Agreements dated 30/6/2015 did not take into consideration existing liabilities including the debts due and owing to the Plaintiff which amounts to more than RM10 million?

(iv) Whether Crowe Horwath was supplied with true information in preparation for the valuation report of CVSB?

(vi) Why CVSB proceeded with the sale of assets, business and undertaking to RMCP Baby Products if CVSB has achieved NTA positive after entering the said Settlement Agreement, if it was not the intention to CVSB’s creditors?”

27. At the High Court, the learned Judge dismissed the Conversion Application on the following grounds: 14 a. There was an inordinate delay of four months given that the Plaintiff could have filed the application earlier after the first round of affidavit in November 2016 but chose not to and instead filed the Conversion Application only after hearing of the Originating Summons was fixed, citing Tan Mei Li & 2 Ors v Bluefire Development Sdn. Bhd. & Anor.3 b. The nature of the allegation does not determine the form of action. c. There was no necessity for a trial and cross-examination of witness as the issue of fraud and issue of whether the Defendants intended to defraud the creditors can be determined on the undisputed documents. d. Further, oral evidence is not permitted to contradict the terms of the agreement, namely, Subscription Agreement, the shareholders’ Agreement and the Settlement Agreement by virtue of ss 91 and 92 of the Evidence Act 1950. e. The Plaintiff’s purported triable issues are but a fishing expedition based on bare assertions and bare denials which would not warrant the additional inconvenience and expense of a trial; and f. The question of whether the restructuring amounts to fraudulent trading under the purview of section 304(1) of the Companies Act 1965 is a matter of law to be decided with reference to 3 [2014] 1 LNS 1887. 15 undisputed facts, the Defendant’s explanation on the restructuring scheme and any credible evidence to refute the same. Our Decision

28. The Plaintiff’s claim against the Defendants under Section 304(1) of the Companies Act 1965 was initiated by way of Originating Summons by virtue of O. 88 r. 2 Rules of Court 2012, which states: Except for the proceedings specified in Appendix C relating to the winding up of companies and capital reduction under the Act, proceedings under the Act shall be commenced by Originating Summons.

29. O. 28 r.8(1) of the rules of court 2012, under which the Conversion Application is brought, states: Where, in the case of a cause or matter begun by originating summons, it appears to the court at any stage of the proceedings that the proceedings should for any reason be continued as if the cause or matter had been begun by writ, it may order the proceedings to continue as if the cause or matter had been so begun and may, in particular, order that pleadings shall be delivered or that any affidavits shall stand as pleadings, with or without liberty to any of the parties to add thereto or to apply for particulars thereof. 16

30.

Pursuant to O. 28 r. 8 of the Rules of Court 2012, conversion can be made at any stage. However, it was decided in Commercial Property Sdn. Bhd. v Bangsar Trade Centre Sdn. Bhd. & Ors4 that even though the law allows for interlocutory application to be made at any stage, its cannot be construed as giving parties a carte blanche to act as and when they wish.

31. In Blue Valley Plantation Bhd v Periasamy kuppannan & Ors5 [relied by the learned Judge in Tan Mei Li, supra], it was held: [15] The courts do not encourage parties to delay making any interlocutory application because by delaying such applications the final decision of the court will also be delayed. It had been the practice of some plaintiffs or defendants to wait until the last minute to file all sorts of interlocutory applications. Today the Malaysian courts are discouraging these practices. Parties, particularly now, should not delay proceedings by filing interlocutory applications when the substantive hearing can be fixed by the trial courts early. There is therefore no need to apply for striking off petitions to wind up a company (or for that matter, any pleadings) when the same issues could be raised in the hearing of the petition (or the action) and the matter to be finally determined. These expedition disposals have been proven by the practice of our New Commercial Courts and the New Civil Courts, where 4 [2016] MLJU 1392 [HC]. 5 [2011] 5 CLJ 481 [FC] 17 there are close monitoring of actions filed in that court and cases targeted to be completed within a year from filing. [16] The Court of Appeal and this court (including any appellate court) abhor appeals in respect of interlocutory applications when issues raised in such application could be finally heard and disposed in the main suit. To me, seeking for certain interlocutory orders are sometimes merely delaying tactics taken up by a party who do not have a strong case. In some cases, delaying tactics can be taken up by a party to tire out his opponent with a view to forcing that opponent to an unfair settlement. Delay can cause injustice to a party particularly when he has a strong case. A company which is made a subject of winding up petition can suffer huge losses pending hearing of the petition, more so when a provisional liquidator has been appointed. As we know the service charges of a provisional liquidator can be very high. They will eat into assets of the company to the detriment of the bona fide creditors or the shareholders of the company.

32. We however certainly do not find any delay tactics on the part of the Plaintiff in filing the Conversion Application. While it may be true that the Defendant’s explanation on the grounds of the restructuring scheme should have been apparent to the Plaintiff at the outset upon the filing of the affidavit in reply affirmed by Dato' Rohana binti Mahmood affirmed on 25.11.2018 on behalf of the 1st, 18 3rd and 5th Defendant, and that the Plaintiff could have thereafter immediately filed the Conversion Application, it is also not wrong for the Plaintiff to wait until the exhaustion of the affidavit before filing the Conversion Application. Under O 28 r 8 of the Rules of Court 2012 clearly provides that conversion application may be made at any stage of the proceedings.

33. We observed that although the Plaintiff had filed the Conversion Application in March 2017, it was only heard in July 2017 coinciding with the hearing of the Originating Summons. In our view, the hearing of the Conversion Application should be heard separately not coinciding with the hearing of the OS hearing, as it would make the hearing of conversion redundant.

34. Be that as it may, we find that an action founded in section 304 of the Companies Act 1967 should be tried in a full trial and not on affidavit alone. Our position is fortified by the high authority in Ting Ling Kiew & Anor v Tang Eng Iron Works Co Ltd, 6 where the facts are similar to the present case. The respondents in that case took out an originating summons under O 70 r 26 of the Rules of the High Court 1980('RHC') in an application under s 304(1) of the Act seeking, inter alia, declarations that the business of HLE has been carried on with intent to defraud creditors; and the first and second appellants be personally responsible, without any limitation of liability, for all of the debts or other liabilities of HLE. The learned judge held that the provisions of s 304 of the Act were satisfied and accordingly made the order in terms of the originating summons (see [1990] 2 MLJ 440). The appellants appealed. On appeal it 6 [1992] 2 MLJ 217. 19 was submitted for the appellants, inter alia, that the learned trial judge erred in law in dealing with the application summarily by an originating summons under O 88 r 2(1) when he should have resorted to O 28 r 8(1) of the RHC, especially in the light of the plea of fraud and the conflicting affidavit evidence.

35. The supreme Court held, allowing the appeal:

(1) Apart from the various inconsistencies in the affidavits of the appellants and respondents in the court below, there were other matters which had not been satisfactorily explained in the affidavits and could be resolved if the proceedings had been begun by writ.

(2) The conflicts in the evidence could only be properly and satisfactorily resolved if oral evidence was adduced and witnesses cross-examined on their evidence which, however, was not possible in proceedings begun by originating summons. In any case it was most inappropriate and iniquitous to decide disputed facts summarily by relying simply on affidavit evidence.

(3) In such a case as the present where fraud or intention to defraud was the central issue, particulars of fraud must be specifically pleaded and it was obvious that such particulars were absent in the affidavit of the manager of the respondent company.

(4) The matter was dealt with in a very unsatisfactory and summary manner, thereby causing grave injustice to the appellants. 20

(5) In light of the view taken by the court and the uncertainties of the various facts as were made available to the court, and in view of the authorities cited, the better decision was to allow the appeal, and pursuant to O 28 r 8(1) of the RHC order the proceedings to continue as if begun by writ, and the parties to deliver their pleadings in accordance with O 18 of the RHC.

36. With respect, we are unable to agree that the issue of whether the restructuring amounts to fraudulent trading within the purview of section 304 of the CA is a matter of law to be decided in the light of the undisputed facts and undisputed contemporaneous documents including the Sale of Assets Agreement and Sale of Business and Undertaking Agreement and Directors’ Resolution dated 2.2.2014, and the Defendant’s explanation on the restructuring scheme. This issue is a question of mixed law and fact.

37. The Defendants have explained in their affidavits as to why CVSB entered into the Sale of Assets Agreement and Sale of Business and Undertaking Agreement with RMCP Baby Produces. Essentially, the promotor had misrepresented the business performance of CVSB. After the subscriber had become shareholders, the CVSB’s audited financial statement for Year ended 31/12/2013 disclosed a shocking negative shareholding equity of RM16.35 million i.e. a net loss in equity value of RM27.61 million in a year. The Auditors remarked that the company had defaulted on creditors in 2013 and its business continuity is dependent on shareholders’ continued financial support. As a result, the RM7 million cash which was meant to be working capital 21 for CVSB in order to kick-start its business was however used to settle outstanding debt incurred pursuant to hidden labilities. In the circumstances, CVSB required further funding in order to sustain and grow its business. In this respect, CVSB’s board minutes dated 10.12.2014 revealed that the investment committee RMCP One Sdn. Bhd. would only inject additional funding to CVSB if it undertakes a restructuring exercise, and that the restructuring plan was made solely “based on commercial purpose and considerations”.

38. It is significant to note that the BOD No. 5/2014 was held on 10.12.2014, which was 19 days after the Consent Order was entered. It transpired from the minutes of the said BOD meeting that Mr Lim Cheng Bok from Messrs. Cheah Teh & Su [the Solicitors appointed by CVSB to draft all the agreement documents related for the transfer of assets, business, undertaking and good will of CVSB to RMCP Baby Produces] warned the BOD regarding the risk of breaching s 304 of the Companies Act 1965, that is, the directors should not incur debts with the knowledge that there was no reasonable prospect of the creditors being paid. It was within the knowledge of then Directors that a Consent Order had just been recorded between CVSB and the Plaintiff.

39. From the series of correspondences exchanged between Messrs. Cheah Teh & Su [acting for CVSB] and Messrs. S. Ravichandaran & Anuar [acting for the Plaintiff]7, it clearly revealed that it was CVSB who initiated the proposal to settle the Plaintiff’s claim on monthly basis due to CVSB’s “cash flow constraints and numerous 7 Rekod Rayuan Jilid 2(7)(13) for Appeal No. 2154, pages 1170 - 1192. 22 outstanding liabilities” and that CVSB offered the Plaintiff “a reasonable settlement proposal” so that CVSB would be able to recoup the amount claimed by the Plaintiff.

40. From the letter dated 21/8/2015 written by the Plaintiff to CVSB8, it showed that the payment due on 7/8/2014 was overdue by 14 days. The 3rd paragraph thereof showed that by CVSB’s email dated 6/8/2015, CVSB required to change the cheque due to the change of signatories of the post-dated cheque which were provided to the Plaintiff prior. However, the post-dated cheques for August until December 2015 which were returned were never replaced after that.

41. It can be seen that after the completion of the taking over, CVSB stopped paying under the Consent Order. Not only the Plaintiff ceased receiving payment under the Consent Order, it is significant that the current liabilities listed in the Sale of Assets Agreement and Sale of Business and Undertaking Agreement did not take into consideration the existing liabilities including the debt due and owing to the Plaintiff amounting to more than RM 10 million.

42. When the Plaintiff petitioned to wind up CVSB, the Plaintiff was informed by the Director of CVSB that the Company does not own any asset to be sold to settle the outstanding sum owing to the Plaintiff and the other creditors as they have been sold and/or transferred to the third party. 8 Rekod Rayuan Jilid 2(7)(13) for Appeal No. 2154, page 1207. 23

43. When the above circumstances surrounding the restructuring exercise are considered in totality, it is fair for the Plaintiff to question, notwithstanding the explanation given by the Defendant and the undisputed documents they relied upon, whether all these were done with the knowledge of the Defendants that they were not going to pay the Plaintiff in full and whether the Plaintiff had been induced to enter the Consent Order. The core issue is whether the Defendants had the mala fide intention to avoid payment of debt.

44. The determination of this core issue involved unearthing facts which can only achieved through cross-examination of the Defendants and their witnesses in a full blown trial. In view of the serious allegations and the issues involved which would require a thorough evaluation and examination of both oral and documentary evidence, we therefore find that the learned Judge erred in finding that the Plaintiff was embarking on a fishing expedition in seeking to cross-examine on the triable issues raised by the Plaintiff and for dismissing the Conversion Application. In our view, the Conversion Application ought to have been allowed in the first instance.

45. For the reasons given above, we unanimously allowed the Appeal No. 2162 with costs of RM10,000.00 each for each set of respondents subject to allocator. The order of the High Court is set aside. We ordered that the Plaintiff to file writ and statement of claim within 30 days. 24 Appeal No. 2154 in respect of the Originating Summons

46. Upon application by the Plaintiff and with no objections from the Defendants, this appeal is struck out with no order as to costs. Dated: 30 September 2019 Sgd YEW JEN KIE (delivering judgment of the court) Court of Appeal Judge Putrajaya For Appellants : Alex De Silva, Ravichandran Selliah & Saresh Mahendaren (S RAVICHANDARAN & ANUAR) For Respondents :

1. Keith Kwan Tjee Kin & Rachel Maryanne Verghis (TUAN MOHD ZAIN & CO)

2. Peter Justin Skelchy & Joyce Pang Tui Yi (CHEAH TEH & SU) Notice: This copy of the court’s reasons for judgment is subject to editorial revision.