Ods Construction Chemicals Sdn Bhd v Pembinaan Legenda Unggul Sdn Bhd (WA-12BNCVC-71-06/2017)

PEMBINAAN LEGENDA UNGGUL SDN BHD (No. Syarikat: 416296-K)

ENCORP CONSTRUCTION & INSFRASTRUCTURE SDN BHD (No. Syarikat: 262911-M)

MOHD IBRAHIM BIN MASRAKIN (No. Syarikat: 610210-01-5605)

DATO’ KHAIRUL YUSNI BIN MD YUSOF (No. K/P: 570513-08-7063)

ZAKARIA BIN NORDIN, HAJI (No. K/P: 580315-05-5297) 2

MOHD ZAID BIN ABDUL JALIL (No. K/P: 710820-07-5363)

AZAHAR HOLLIS BIN ABDULLAH (No. K/P:610909-13-5547)

JAYARATNAM A/L KUMARASAMY (No. K/P: 620225-08-6253) ...RESPONDENTS Dalam Mahkamah Sesyen di Kuala Lumpur Dalam Wilayah Persekutuan, Malaysia Saman No: WA-B52BCVC-147-04/2016 Antara ODS Construction Chemicals Sdn Bhd Plaintif (No. Syarikat: 358425-M)

Pembinaan Legenda Unggul Sdn Bhd (No. Syarikat: 416296-K)

Encorp Construction & Infrastructure Sdn Bhd (No. Syarikat: 262911-M)

Mohd Ibrahim bin Masrakin (No. Syarikat: 610210-01-5605)

Dato’ Khairul Yusni bin Md Yusof (No. K/P: 570513-08-7063)

Zakaria bin Nordin, Haji (No. K/P: 580315-05-5297) 3

Mohd Zaid bin Abdul Jalil (No. K/P: 710820-07-5363)

Azahar Hollis bin Abdullah (No. K/P:610909-13-5547)

Jayaratnam a/l Kumarasamy (No. K/P: 620225-08-6253) Responden-Responden

Before me is an appeal against the decision of the learned Sessions Court Judge (“SCJ”) dated 30.5.2017 dismissing the appellant’s claim against the respondents and allowing the 1st respondent’s counterclaim for the sum of RM96,644.20 against the appellant after a full trial. The appellant, ODS Construction Chemicals Sdn Bhd, was the plaintiff at the court below while the respondents were the defendants.

For convenience, parties will be referred to as they were at first instance.

The facts of the case as summarised by the learned SCJ are as follows. The plaintiff was the sub-contractor appointed by the 1st defendant to execute four separate works (“the said projects”) where the 1st defendant was the main contractor. The 1st defendant was a wholly-owned subsidiary of the 2nd defendant, Encorp Construction and Infrastructure Sdn Bhd (“ECI”) until it was disposed of to one 4 Senandung Serbajuta Sdn Bhd (“Senandung Serbajuta”) on 3.9.2015. ECI, in return is a subsidiary of Encorp Berhad, a company listed in Bursa Malaysia.

The 3rd to 6th defendants were at one time or the other the directors of the 1st defendant until they respectively resigned on 3.9.2015

It is not in dispute that the 1st defendant was an unprofitable concern. On 8.10.2015, the new directors of the 1st defendant had passed a resolution under s 254(1) of the then Companies Act 1965 (“CA”) that the 1st defendant should be wound up voluntarily by reason of its inability to pay its debt.

Pursuant to s 255(1) the two new directors of the 1st defendant, the 7th and 8th defendants respectively, had made a statutory declaration of the inability of the company to continue business and that subsequently a meeting between the 1st defendant and its creditors was scheduled on 2.11.2015.

At the meeting of the creditors held on 2.11.2015, it was resolved inter alia that one Dato’ Adam Primus Varghese bin Abdullah was nominated as liquidator for the purpose of creditor’s voluntary winding up of the 1st defendant.

The plaintiff is one of the creditors of the 1st defendant and on 27.10.2015 had filed its proof of debt with the liquidator for the sum 5 of RM404,482.08 for “labour serviced rendered and goods sold and delivered”.

I will deal with the plaintiff’s claim and the 1st defendant’s counterclaim separately.

The plaintiff’s claim against the 2nd to 8th defendants was that they had conspired to defraud the plaintiff for the sum of RM403,858.08 by paralysing the 1st defendant and diverting the monies and assets of the 1st defendant at the expense of the plaintiff.

The trial went on for 6 days where 13 witnesses had testified. The finding of the learned SCJ can be summarised thus:

The plaintiff’s cause of action was premised on tort for fraud and fraudulent acts and not for breach of contract on the part of the 1st defendant. This according to the learned SCJ, was reflected in paras 15 to 19 of the statement of claim. In the circumstances, it was incumbent on the plaintiff to prove:

Fraudulent trading by the 2nd to 8th defendants to defraud the creditors of the 1st defendant; and

(ii) The existence of conspiracy amongst the defendants to carry out the alleged fraud;

That the learned SCJ had no jurisdiction to make any declaration for “fraudulent trading” because of the word 6 “court” in s 304 of the CA refers to “High Court”. S 4 of the CA defines “Court” as the “High Court or a judge thereof”;

In any event, it was the finding of the learned SCJ that the 1st defendant and the remaining defendants had not made any false representation for the plaintiff to act on the same to the detriment of the plaintiff;

The plaintiff was claiming for the outstanding sums for the work done under the said Projects. However, these sums were not losses incurred by the plaintiff as a result of the alleged false representation made by the defendants. For the purpose of the said sum, the plaintiff had filed its proof of debt accordingly and therefore it is up to the liquidator to determine whether the plaintiff was entitled to the same;

The voluntary winding up of the 1st defendant according to the learned SCJ was an ordinary event that happened regularly in the corporate world. It could not be construed as a conspiracy to defraud the plaintiff. He said this at para 20 of his grounds of judgment: Perlu diingat Plaintif hanyalah merupakan salah satu pemiutang Defendan 1 dan terdapat ramai lagi pemiutang lain. Malah jumlah keberhutangan Plaintif belum diputuskan oleh Pelikuidasi. Oleh kerana tuntutan Plaintif ini adalah untuk bayaran bagi kerja-kerja yang telah dilakukan, Plaintif perlu menunggu pengesahan Pelikuidasi untuk menentukan jumlah keberhutangan yang sebenar. 7

The plaintiff highlighted a few incidences that purportedly lent credence to the argument that the allegations of fraud and conspiracy existed. They were:

The changing of the 1st defendant’s name from

(ii) The changing of 1st defendant’s members of the board of directors;

(iii) The loan taken by the 1st defendant for the sum of RM21m from Maybank Berhad (“Maybank”);

(iv) The novation contract to a company known as Konsortium Ipmines Merz Sdn Bhd (“Konsortium Ipmines”); and

The utilisation of the plaintiff’s retention monies However the learned SCJ found that the aforesaid incidences did not establish fraud and conspiracy between the defendants so as to cause losses to the plaintiff.

That the 7th and 8th defendants could not have conspired with the other former directors of the 1st defendant since they only came on board after the 3rd to 6th defendants had resigned. In fact, in their testimonies, the 7th and 8th defendants stated that 8 they did not even know the former directors of the 1st defendant.

Finally, the plaintiff did not plead for the corporate veil to be lifted contrary to the proposition as stated in Mackt Logistics

(M) Sdn Bhd v Malaysian Airlines System Bhd [2014] 2 MLJ 516 CA.

For the reasons aforesaid, the learned SCJ held that on the balance of probabilities, the plaintiff had failed to prove its case. The plaintiff’s claim was then dismissed with costs.

Before me, learned counsel for the plaintiff argued that the plaintiff had placed detailed and substantial documents before the Court at first instance to establish the actual amount owing by the 1st defendant. The statement of claim indicated that the cause of action seemed to suggest that it was premised on a contractual claim. In fact, having read the Appeal Record, I could not help but notice that the plaintiff had spent considerable time to explain how it arrived at the figure as claimed.

Since it is not disputed that the plaintiff had filed its proof of debt with the liquidator of the 1st defendant, it is therefore up to the liquidator to make the determination on the plaintiff’s claim. R 92 of the Companies (Winding-Up) Rules 1972 (“the 1972 Rules”) provides as follows: 9 The liquidator shall examine every proof of debt lodged with him and the grounds of the debt, and shall in writing admit or reject it, in whole or in part, or require further evidence in support of it. If he rejects a proof he shall state in writing in Form 59 to the creditor the grounds of the rejection. Only if the plaintiff is dissatisfied with the decision of the liquidator that it could apply to High Court either to reverse or vary in accordance with r 93 of the 1972 Rules.

The due process is that, the liquidator must have made a decision one way or the other. It is only after the decision is made would there be a cause of action. Even then, the cause of action would be against the liquidator by way of a formal application to the Court. To file an action now, prior to the decision of the liquidator on the validity of the proof of debt would be premature. On the allegation of fraud and conspiracy

Learned counsel for the plaintiff has attracted my attention to the case of Auto Emasjaya Sdn Bhd & Anor v Ng Kong Ngai [2016] 5 CLJ 783 which is an authority for the proposition that intent to defraud under s 304(1) of the CA is generally proven by evidence of a conduct dealing with the company, which leads to a preferential payment or undue/unfair advantage to other individuals, other than the company's creditors, which fraudulently deprives the company's creditors their rights to payment. 10

The learned SCJ made it very clear that by virtue of s 304 of the CA, he did not have the jurisdiction to make a ruling on allegations made under the same. However, in para 1 of the Memorandum of Appeal (“MOA”), the plaintiff sought to underscore that its claim was not premised on s 304 of the CA. This is of course in contrast with what learned counsel informed the learned SCJ at the trial that the plaintiff’s case was based on s 304 of the CA.

With respect, the plaintiff is not permitted to ‘approbate and reprobate’. If any authority is needed for the aforesaid doctrine, it can be seen in the judgment of the Court of Appeal in Fawziah Holdings Sdn Bhd v Metramac Corp Sdn Bhd (formerly known as Syarikat Teratai Kg Sdn Bhd) and another appeal [2006] 1 MLJ 505 CA. Gopal Sri Ram JCA (later FCJ) explained the principle as follows: In the second place, the right to avoid a transaction carries with it some limitations. You cannot affirm so much of a transaction as benefits you and seek to avoid that part of it that imposes a burden. You cannot pick and choose. You must either affirm the whole transaction or avoid the whole of it. There is no half-way house. Take the present instance. There are many clauses in the sale and purchase agreement. Some confer benefits on the defendant. Others may appear burdensome. Also, there are several interlocking agreements entered into between the parties. Again, some may be beneficial and others burdensome. What the defendant is seeking to do here is to avoid selected parts of the transaction. It is seeking to approbate and reprobate. It cannot do that. 11

The question that follows is if the plaintiff did not premise its claim on s 304 of the CA, under what law then would the claim be based? I must, however, underline that this Court is troubled with the line of argument of the plaintiff at this appeal since at para 9.3 of the plaintiff’s written submission, learned counsel had referred to the Court of Appeal case of JCT Limited v Muniandy Nadasan & Ors and Another Appeal [2016] 3 CLJ 692 CA which involved a claim for inter alia a declaration that the business was carried on with intent to defraud the creditors of CNLT, including the respondents, pursuant to s. 304 of the CA.

I am of the considered opinion that the learned SCJ was right in his finding that he did not have the necessary jurisdiction to make a declaration under s 304 of the CA and I so hold. On this ground alone, the appeal must be dismissed in limine. For the sake of completeness, I will, however, make some observations on other grounds of appeal. On the Maybank loan and Novation Agreement

It is the contention of the plaintiff that the evidence did establish that the Maybank loan was not utilised by the 1st defendant to pay any of the contractors to whom the money was owed including the plaintiff. However, SD9 who was the general finance manager of Encorp Berhad, explained in great detail as to how the facility was utilised in Q&A 8 of his witness statement. I have gone through his evidence and the relevant documents cross-referred to therein and on the balance of probabilities could not find anything mysterious or aggressive about those payments so as for me to conclude that 12 there was fraudulent trading; see Sinnaiyah & Sons Sdn Bhd v. Damai Setia Sdn Bhd [2015] 7 CLJ 584 FC.

In any event, I take cognisance of two other pertinent points. First is that the Maybank loan is not a fresh one. It was a renewal of the existing facility which purpose was for the working capital of the 1st defendant. Secondly, the facility was paid in full by way of uplifting the fixed deposit used as security and also by payment made by Encorp Berhad as the corporate guarantor for the loan.

On the novation agreement between the 1st defendant and Konsortium Ipmines, SD9 explained that the 1st defendant could not meet the work demands and as a result, it had the financial impact on the 1st defendant to honour the performance bonds. According to SD9 the 1st defendant’s contractors could not meet the demands of the project's contracts resulting in the determination of the 1st defendant’s employment.

In any event, there was no evidence that the novation agreement attempted to release the 1st defendant from all its obligations and liabilities that the 1st defendant may have with its creditors. SD9 confirmed that whatever payments made to Konsortium Ipmines were for debts accrued before the said novation agreement.

I find the explanation to be reasonable and I so hold. On the allegation of conspiracy

On the allegation of conspiracy amongst the remaining defendants, it must be established that there must be an unlawful object, or that 13 it must be brought about by unlawful means. Since I agree with the finding of the learned SCJ that the allegation under s 304 of the CA was not being proved by the plaintiff, the question of the unlawful object and unlawful means does not arise. I need only refer to the Court of Appeal judgment in Abu Bakar Mohd Kassim & Ors v Mohd Yusoff Mohd Kassim [2016] 4 MLRA 264 CA, where Prasad Sandosham Abraham JCA (later FCJ) in delivering the decision of the Court said: The tort of conspiracy is not constituted by the conspiratorial agreement alone. For conspiracy to take place, there must also be an unlawful object, or, if not in itself unlawful, it must be brought about by unlawful means: See Davies v. Thomas [1920] 2 Ch 189 per Warrington LJ, and Seah Siang Mong v. Ong Ban Chai & Another Case [1998] 1 CLJ Supp 295 HC per Ghazali J (now FCJ).

It is clear that the very first element to be shown must be an agreement between two or more persons for the purpose of injuring the plaintiff. It must be shown that there was a combination of efforts of the alleged co-conspirators, in the instant appeal, the 3rd to 8th defendants. After that, it must also be shown or at least alleged that acts were done in execution of that agreement which resulted in damage to the plaintiff. In this case, the acts allegedly done by the 3rd to 8th defendants would have to be unlawful; see per KN Segara JCA in Renault Sa v Inokom Corporation Sdn Bhd & Nor and other applications [2010] 5 CLJ 32 CA.

The Court of Appeal in Renault Sa reiterated the proposition that: 14 It is trite law that the agreement to injure must come first (in other words the agreement should have crystallized), before the alleged unlawful acts are done in execution or pursuant to the agreement. I have gone through the appeal record and could not find therein any evidence of any agreement to injure the plaintiff, let alone through unlawful means. As to the representation, I agree with the learned SCJ that there was no evidence of any false representation on the part of the defendants either.

Learned counsel for the plaintiff submitted that the learned SCJ had failed to appreciate that the 1st defendant had kept an appearance through the 2nd to 6th defendants of a “going concern” until the 1st defendant suddenly put into liquidation through the assistance of 7th and 8th defendants.

I do not think that the evidence supports the contention that the voluntary winding-up was made “suddenly” as learned counsel for the plaintiff urged me to conclude. From the testimony of SD3, Adam Primus Varghese, who is a chartered accountant, the whole exercise was part of the rationalisation process involving the Encorp group.

The rationalisation exercise can be summarised thus. The shares in the 1st defendant hitherto held by the 2nd defendant would be disposed of to a special purpose vehicle (“SPV”) which was to be managed by independent third-party professionals who would then undertake the liquidation process of the 1st defendant. 15

SD3 in his witness statement confirmed that the exercise and disposal was duly announced by Encorp Berhad on Bursa Malaysia on 3.9.2015. It was therefore in the public domain. It could not be true that the winding-up was made “suddenly” since it was first preceded with the proper announcement by Encorp Berhad. On the retention monies

On the allegation of dissipation of the retention monies, I agree with learned counsel for the 2nd to 6th defendants that the plaintiff had not led any evidence that the plaintiff had a retention sum of RM2,742,226.09 being held by the 1st defendant and that the remaining defendants had participated in the alleged disposal of the same.

I also find it strange that the proof of debt did not include the alleged RM2,742,226.09 of the retention monies.

If indeed the claim involved the aforesaid sum, surely the plaintiff would have filed the claim in the High Court instead of the Sessions Court. Conclusion so far

For the aforesaid reasons, I am entirely in agreement with the finding of the learned SCJ in dismissing the plaintiff’s claim. I also agree with the submission of learned counsel for the 1st defendant that the plaintiff was actually inviting the court to infer that the rationalisation exercise as a scheme which is loaded with fraudulent in nature and intent when it was, in fact, ordinary transaction of 16 business and commerce; see Formis Resources Bhd. & Ors. v Risk Management and Safety System Pty Ltd. & Ors. [2016] 9

To summarise, my findings are as follows:

The learned SCJ was right in holding that he did not have the necessary jurisdiction under s 304 of the CA;

Since the plaintiff had filed its proof of debt against the 1st defendant, it is only right to wait for the outcome of the examination of the same by the liquidator;

Any claim made at this stage would be premature;

In any event, there was no evidence of fraudulent trading on the part of the 1st defendant neither was there any evidence of conspiracy on the part of the remaining defendants;

The learned SCJ was right in his findings that the Maybank loan, the alleged retention sums and the novation agreement did not amount to any fraudulent misrepresentations on the part of the defendants; and

The rationalisation exercise conducted by Encorp Berhad was part and parcel of ordinary transaction of business and commerce devoid of any fraudulent nature and intent. 17

I therefore find that the decision of the learned SCJ in dismissing the plaintiff’s claim was made with sufficient judicial appreciation of facts and law that would not warrant any appellate intervention in what the Federal Court in Dream Property Sdn Bhd v Atlas Housing Sdn Bhd [2015] 2 CLJ 453 FC referred to as the “plainly wrong test” principle.

In view of my decision, I will not deliberate and determine on the issues of the Salomon doctrine and the lack of particulars on the allegation of fraud in the statement of claim.

My approach to the counterclaim made against the plaintiff is simple. What is sauce for the goose is sauce for the gander. If the 1st defendant has any counterclaim against the plaintiff it should present the same to the liquidator. Under r 92 of the 1972 Rules, the liquidator has the power to accept or reject the proof of debt, in whole or in part at the examination of the proof of debt.

If the 1st defendant has any sum to set-off by way of a counterclaim, it should have informed the same to the liquidator who will act on the same accordingly.

In the result, the appeal is partly allowed. The decision of the learned SCJ in dismissing the plaintiff’s claim is affirmed. But the judgment entered in the counterclaim is set aside. 18

There will be no order as to cost against the 1st defendant.

But I order for the plaintiff to pay costs to the remaining defendants for the sum of RM10,000 individually subject to allocatur. Dated: 2 April 2018 (DATO’ WAN AHMAD FARID BIN WAN SALLEH) Judicial Commissioner High Court Kuala Lumpur