Can contributory of a wound-up company apply for sanction to commence a suit against another company?

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Can contributory of a wound-up company apply for sanction on behalf of the company to commence a suit against another company. Does he or she have the locus standi to do so?

TLDR- yes. The long answer can be found in the Court of Appeal case of Leopad Holdings Sdn Bhd v Asian Shield Warehousing Sdn Bhd and Another Appeal. We will briefly look at it below.

Brief facts of the case

Asian Shield Warehousing commenced legal action against Leopad Holdings. However, at the time of filing the suit, Asian Shield Warehousing was wound up  by the court in another separate suit. 

To continue the suit against Leopad Holdings, one of its contributory (who herself is an undischarged bankrupt, shareholder, and former director of Asian Shield Warehousing) applied for a sanction with the Director-General of Insolvency (DGI) so that Asian Shield Warehousing can continue its suit against Leopad Holdings.

This was met with vigorous opposition by Leopad Holdings. They applied for the suit to be strike-out.

The parties’ contention

Leopad Holdings contended (amongst others) that 

  1. The contributory does who was an undischarged bankrupt did not have the locus to apple for the company unless she herself had the previous or prior sanction of the DGI to do so (based on section 38(1)(a) of the Bankruptcy Act). Essentially, what Leopad Holdings is saying is this: the contributory should have applied for sanction from the DGI to act on her own behalf first before applying for sanction on behalf of Asian Shield Warehousing; and
  2. Since the contributory ‘directly or indirectly take part in the management of a company’ (as per the Actas contended by Leopad Holdings) by applying for a sanction to allow Asian Shield Warehousing to continue its suit against Leopad Holdings, a proper sanction must be obtained under section 38(1)(d) of Act.

In response, Asian Shield Warehousing contended that:

  1. There is no provision in the law that the concerned contributory must first obtain sanction before she could obtain sanction for Asian Shield Warehousing which has been wound up to commence the suit against Leopad Holdings; and
  2. Section 38(1)(d) of the Act applies only to a solvent company, whereas in this case, Asian Shield Warehousing was in liquidation. Hence, only a liquidator can run and manage the company- every single decision will be decided by the liquidator, leaving no room for the involvement of the contributory in the management of the company either directly or indirectly.

For context purposes, section 38(1)(a) and section 38(1)(d) of the Act read as follows:

  1. “Where a bankrupt has not obtained his discharge, the bankrupt shall be incompetent to maintain any action (other than an action for damages in respect of an inquiry to his person) without the previous sanction fo the Director General of Insolvency (section 38(1)(a)).”; and
  2. “Where a bankrupt has not obtained his discharge, the bankrupt shall not, except with the previous permission of the Director General of Insolvency or of the court, enter into or carry on any business either alone or in partnership, or become a director of any company or otherwise directly or indirectly take part in the management or any company (section 38(1)(d)).” 

The court’s decision

The High Court dismissed the striking-out suit by Leopad Holdings. On appeal, the Court of Appeal affirmed the decision of the High Court

The court’s rationale

  1. nce a company is wound up, the management of the company has been taken over by the liquidator, and the board of directors is now ‘functus officio’ i.e. no longer having any authority to manage the company and the management of the wound-up company is by the liquidator.
  2. The contributory will only ‘directly or indirectly take part in the management of the company’ if she is invited by the liquidator for certain purposes as provided in the Companies Act. The solitary act of the contributory in applying for the sanction did not amount to her directly or indirectly involving herself in the management of the company. 
  3. What contributes to the act of ‘directly or indirectly taking part in the management of the company’ are acts that involve some form of financial implications against the company, such as a stay of a winding up order against the company or an application to question the exercise of powers by the liquidator. 
  4. There was no basis to sustain Leopad Holding’s contention that the contributory had no locus to apply for sanction for the respondent. She was not affirming an affidavit or holding herself out as a director or officer of the respondent in any affidavit or cause paper to support the respondent company’s action in court.

It was on this basis that the Court of Appeal upheld the decision of the High Court.

Make an appointment with Company Secretary and Business Lawyer for advice and consultation regarding Winding Up Company in Malaysia:

Under section 492 of the Companies Act 2016.

Under section 492 of the Companies Act 2016.