Company 101 – Can A Breach Of Statutory Requirements Be A Basis To Wound Up A Company?

The short answer is this: it all depends on what is the breach/ what particular section of a statutory requirement it has breached. The long answer can be seen in the recent Federal Court case of Tan Keen Keong @ Tan Eng Hong Paper & Stationery Sdn Bhd & Ors And Other Appeals. We will briefly look at the case below.

Brief fact of the case

The Tan family owns at least 13 companies. Central to this suit are 3 of the companies, namely, Tan Eng Hong Paper & Stationery Sdn Bhd (TEH Paper), Tan Eng Hong Holdings Sdn Bhd (TEH Holdings), and Peace Centre Sdn Bhd (Peace Centre). 

Essentially, what transpired is this: Keen Keong, one of the minority shareholders in the company, applied for a winding-up petition against all three companies (and in the process, named some of the directors/ shareholders of the companies as party as well), citing the fact that the affairs of the company had been conducted in an unfair, unjust and inequitable manner by the persons in control of the companies i.e. the majority shareholders of the company.

Keen Keong’s complaints are as follows:

  1. Contrary to an agreement and understanding between the shareholders of TEH Holdings that its business is carried on as a family business and as a quasi partnership based on mutual trust and confidence with each family having a representative decided solely by that family, he had been denied his legitimate rights and expectations in TEH Holdings;
  2. The affairs of these companies had been conducted in an unfair, unjust, and inequitable manner by the persons in control;
  3. He had not been re-appointed as director after 1996;
  4. He had been excluded from their management;
  5. He had not been paid any reasonable dividend;
  6. TEH Holdings paid salaries, bonuses, allowances, and other benefits to the other families but not to him;
  7. The land belonging to the company had been let out at grossly undervalued rates;
  8. Some of the directors acted in their/his own interest(s) as opposed to those of the companies;
  9. Financial affairs of one of the TEH Holdings’ subsidiaries were conducted in a wrongful and non-transparent manner as evidenced by a penalty imposed by the Inland Revenue Board in 1996;
  10. The three companies were involved in ‘certain nefarious accounting practices which have been described as ‘under counter activities’ carried out to deceive the Inland Revenue Department (‘IRD’) as to the true income of TEH Paper and TEH Holdings and its subsidiaries;
  11. Main assets of TEH Paper were destroyed in a fire; and
  12. There was a breakdown of mutual confidence and good faith amongst the Tan families and its directors as well as amongst the shareholders.

The opposing contentions

Keen Keong’s contention were opposed on the following grounds: 

  1. The petition is an abuse of the court process;
  2. The petitions were for collateral purposes;
  3. It was a selective prosecution;
  4. There was a delay, waiver, acquiescence, and/or limitation and laches in initiating the case;
  5. There was no quasi partnership;
  6. There is no legitimate expectation to be a director;
  7. There is no legitimate right or expectation in the participation of the management of the companies;
  8. No dividend was declared partly because of the uncertainty of shareholding within Keen Keong’s family members;
  9. Rentals at the discounted rates were not grossly undervalued while the valuation report prepared was unsafe to be relied on;
  10. There was no ‘family fund’ in Peace Centre;
  11. There was no destruction or loss of the corporate substratum; and
  12. It is not just and equitable to wind up the companies.

The decision of the High Court and the Court of Appeal

Both the High Court and the Court of Appeal allowed the winding up of both TEH Paper and TEH Holdings (they however dismissed the application to wind up Peace Centre) despite finding that: 

  1. The grounds relied upon by Keen Keong in his petition were not made out;
  2. The evidence given by Keen Keong and his prime witness adduced was not credible;
  3. The petitions were an abuse of process because they were made to achieve collateral purposes (in this case, obtaining a share buy-out); and
  4. There was an inordinate and fatal delay in the filing of the petitions and Keen Keong himself condoned the matters he complained of. 

The basis for the winding up, as both courts noted via their own findings, was that TEH Paper and TEH Holdings had committed “illegalities” i.e. breached various laws, namely:

  1. Section 136, 169, 171, and 364(2) of the Companies Act;
  2. Section 193, 199, and 200 of the Penal Code; and
  3. Section 114 of the Income Tax Act.

The decision and rationale of the Federal Court

The court reversed the findings of both the High Court and the Court of Appeal. In coming to its decision, the court noted that (amongst others):

  1. The court must be satisfied that the illegality or contravention of law was related, or bore sufficient nexus, to the activities or business of the company and/or for which the company was incorporated. Not all breaches of statutory requirements would result in a company being wound up even if the breaches attracted criminal sanctions, otherwise, there would be chaos in commerce and business; 
  2. Although the court would act where there was illegality, it must be where the illegality was ex facie and where facts in relation to the illegality or contravention of the law were uncontroverted. In the matter of liquidation of a corporate sole, winding-up orders should only be granted where the cessation of the illegality complained of could only be achieved through or by the dissolution of the company itself and there was no other avenue or recourse available but to wound up the company in order to stop the illegality i.e. such as imposing a penalty/ fine against the directors of the company or to put them in jail, depending on the laws in relation to the illegality involved; 
  3. Where companies were fraudulently established and were themselves engines of fraud, their continued existence had to be immediately apprehended. And, it was in that sense that the court would not hesitate to wound them up to put an end to the unlawfulness. However, in this instance, none of the companies were formed with an illicit purpose or intent of circumventing any law, be it the Companies Act, the Income Tax Actor the Penal Code- they merely breach some of the provisions of the laws; and
  4. The court can only wind up a company if it contravenes section 218(1)(b)-(d) of the Companies Act. Those grounds cannot be expanded and the court will always be slow to import into the ‘just and equitable ground, the right to wind up a company for contraventions of other provisions of the CA unless such breaches could be co-related with any of the other grounds in section 218(1) of the Companies Act.

Does this mean that there are no remedies in this case? The answer is no- Keen Keong, as the court noted, should have pursued a minority oppression suit against the three companies. However, the success of the application is still dependent on the evidence put before the court. 

And there you have it, hopefully, you learned something new today!!