A. Court-ordered receivership
Receivership is a dangerous word for any company. Its merest sniff causes an invariably negative knee-jerk response in both creditors and financiers.
Directors must know that receivership has dire consequences for the administration and workings of a company. To quote the Supreme Court of Victoria, “the receiver is often seen not as the company director but as the undertaker, so that a blow is struck to the standing and credit of the defendants" (per Kaye, Murphy and Brooking JJ in Bond Brewing Holdings v National Australia Bank [1990] 1 ACSR 445).
The biggest drawback to the appointment of a Receiver would be the insertion of a third-party into the workings of a company; all inflow and outflow of funds must be notified to the Receiver and receive his approval.
In addition, the letterhead of the company will carry the term “IN RECEIVERSHIP”; a better prelude to insolvency would be difficult to come by. It is of the imperative that any application to appoint a Receiver be firmly dealt with.
Receivers may also be appointed to administrate estates (In the matter of Ang Kui Hua, patient [2011] 9 MLJ 530; Siv Anendran S/O Markandoo v Dr Mahendran A/L V Markandoo [1988] 2 MLJ 169).
Receivership is not limited to small and medium-sized companies; Hanjin Shipping Co’s saga is indicative of the fact that even the mightiest can and will often fall.
For the purposes of this article, I intend to discuss Court-ordered Receivers over companies.
B. The 4 forms of receivership
Receivership takes on 4 general forms:
a. Court-ordered receivership:
i. Receiver; ii. Receiver-Manager.
b. Receivership under a debenture: i. Receiver; ii. Receiver-Manager.
The general difference is that a Receiver-Manager’s responsibilities extend to the continuation and management of the business.
In contrast, a Receiver is meant to receive payments into the company and channel the same to existing creditors. A succinct explanation as to the distinction was provided by the Singaporean Court of Appeal in Astrata (Singapore) v Portcullis Escrow [2011] 3 SLR 386:
[47] We do not agree that the commentary referred to is relevant to Tridex's case as it is concerned with the functions of a receiver and manager appointed by a debenture holder, and not a receiver appointed by a court. Such a receiver and manager is a different creature from a receiver appointed by a court under O 30 of the Rules of Court (Cap 322, R 5, 2006 Rev Ed). A court-appointed receiver is merely a passive and neutral custodian of the property entrusted to him, pending the resolution of the dispute between the claimants to the property. In contrast, a receiver and manager appointed under a debenture has many more functions and duties. He has a duty to bring in the assets subject to the debenture under which he was appointed, and to realise those assets for the benefit of the debenture holder. If those assets include choses-in-action he can bring actions to enforce them.
Refer further:
• Re Fraser Valley Arenas (1975) [1979] BCLRBD No. 59 • Re Weldco [1991] 12 CLRBR (2d) 133 • Re Don Rawlins Pontiac Buick [1983] BCLRBD No. 53
C. The Malaysian position
Malaysian courts tend to utilise the term Receiver and Receiver-Manager interchangeably (Ng Yong Long v Qua Hock Leong [2006] MLJU 227).
Notwithstanding the above, the Courts recognize that the appointment of a Receiver pursuant to a debenture, as opposed to a Court order, entails a different allotment of rights (to the Receiver).
It is possible for the Courts to appoint a Receiver over a public-listed company (Jenkins v Enterprise Gold Mines (1992) 6 ACSR 539).
Distingusihing Court-appointed Receivers and Receivers appointed under debentures
Where a Receiver is appointed pursuant to a debenture, he acts as an agent of the company (K Balasubramaniam, Liquidator for Kosmopolitan Credit & Leasing v MBF Finance [2005] 2 MLJ 201 (FC); Score Option v Duar Tuan Kiat [2012] 7 MLJ 768).
In contrast, a Receiver appointed pursuant to a Court order is an officer of the Court. To initiate any action against a Court-appointed Receiver would first necessitate a party to obtain the leave of Court (Tai Kwong Goldsmiths & Jewellers (Under Receivership) v Yap Kooi Hee [1995] MLJ 1 (SC); Zainal Abidin Putih v Che Wan Development [1992] 2 MLJ 233 (SC); Tan Jiak Chye v Tan Toh Hua [2003] 5 MLJ 160).
D. Order 30 of the Rules of Court 2012- Receivership
Any application to Court for the appointment of a Receiver (not being a Receiver appointed under a debenture) must be made via Notice of Application (NOA).
The NOA should be moved pursuant to O. 30 of the Rules of Court 2012, Paragraph 6 of the Schedule to the Courts of Judicature Act 1964 and Section 43 of the Specific Relief Act 1950. For good measure, the NOA should also be moved pursuant to the inherent jurisdiction of the Court.
As is par for the course, the Affidavit in Support accompanying the NOA must be filed.
Inter partes
Of utmost importance would for any application to appoint a Receiver to be moved inter partes (i.e., between the parties and with notice to all). Failing to give notice is fatal to any application to appoint a Receiver.
O. 30 ROC 2012 is worded rather deceptively, though. It states as follows:
Application for receiver and injunction (O. 30 r. 1) (1) An application for the appointment of a receiver may be made by notice of application. (2) An application for an injunction ancillary or incidental to an order appointing a receiver may be joined with the application for such order. (3) Where the applicant intends to apply for the immediate grant of such injunction, he may do so ex parte by a notice of application supported by an affidavit.
The High Court has clarified that only the application for the granting of an injunction (an injunction moved pursuant to O. 30, r. 1(2) ROC 2012 would justify an ex parte application.
The application to appoint a Receiver must, in and of itself, be moved inter partes (United Engineers v Seow Boon Cheng [2001] 6 MLJ 511; Sime Bank v Lal Bhojraj Khanchandani [1998] MLJU 660; Yeoh Eng Kong v Dato’ Nik Ismail Bin Nik Yusoff [2016] MLJU 529).
E. The 3 criteria for appointing a Receiver
In determining an application to appoint a Receiver, the case of Lim Poh Choo v Absolute Ascend [2008] 3 MLJ 740 is the first port of call.
This seminal case outlined the THREE (3) main considerations that a Court would be required to undertake in all applications to appoint a Receiver. As put by His Lordship Ramly Ali (now FCJ):
[15] An appointment for the object of preserving property pending the determination of a cause or matter is clearly within the jurisdiction of the court under the Judicature Acts. Any property may be made the subject matter of the appointment, so long as it forms a part of the subject matter of the proceedings. [16] The appointment will be made by the courts at the instance of a shareholder where there is some legal or equitable right that ought to be protected and there is no other available remedy adequate for that purpose. This proposition has been clearly recognised by the Court of Appeal in Australia in Bond Brewing Holdings Ltd v National Australia Bank Ltd [1990] 1 ACSR 445 [17] An appointment should be ordered if there is ample evidence to suggest that the assets of the company would be dissipated or depleted or if substantial loss would be sustained by the continued mismanagement of its property to the detriment of the plaintiff.
In summary, His Lordship set-out the following test for determining when a Receiver ought to be appointed:
(i) there is a good prima facie claim of title by the plaintiffs; (ii) the property is in jeopardy; and (iii) the applicants would be in a worse position if the appointment is delayed.
If the 3 circumstances outlined above may be proven to the satisfaction of the Court, then there is a reasonable prospect of securing the appointment of a Receiver.
If, on the other hand, the applicant is unable to satisfactorily prove that the above 3 instances are present, the application will fail.
His Lordship noted that the circumstances justifying the appointment of a Receiver are not exhaustive; the Court is empowered to look into all the facts presented to it.
Lim Poh Choo built on the curated jurisprudence of Matang Holdings v Dato’ Lee San Choon [1985] 2 MLJ 406 to develop a succinct field map for practitioners.
Refer further:
• Saling Bin Lau Bee Chiang v Kanawagi A/L Seperumaniam [2010] 8 CLJ 347 • Dato’ Seri Yusof Dato’ Biji Sura @ Mohamad v Dato’ Seri Yong Tu Sang [2013] 1 LNS 964
F. Refining of Lim Poh Choo
Very recently (July 2016), the High Court further refined Lim Poh Choo via Yeoh Eng Kong v Dato’ Nik Ismail Bin Nik Yusoff [2016] MLJU 529. In an absorbing judgment, Mohd Nazlan Bin Mohd Ghazali JC outlined the circumstances in which a Receiver may be appointed by the Court.
The factual matrix of Yeoh Eng Kong saw a shareholder attempting to appoint a Receiver and Manager to avoid the delisting of a company’s shares. In dismissing the application, the learned Judicial Commissioner reiterated that Lim Poh Choo was still the test to be applied. However, certain refinements were specified:
What is the Property in Jeopardy & in need of Protection? [36] Of central importance to any application for the appointment of receiver and manager in the context relevant to this case, and any injunction application ancillary thereto, both of which surfaced in enclosure 3 in the instant case, must be the property that is claimed to be in jeopardy and thus required preservation. It is trite that the property over which the receiver and manager is appointed must be identified and described in the order itself or by reference to the pleadings or documents where details of the property are set out. However it will be readily recalled that the enclosure 3 made reference to two points of relevance. First, the receiver was proposed to be appointed over the entire undertakings and assets of the ninth defendant company. Secondly, the grounds stated in enclosure 3 to support such application is almost unmistakably wholly concerning the need to preserve only the listing status of the ninth defendant company. [37] I find this to be wholly disproportionate, if not patently irreconcilable at the same time. It is difficult to fathom how a concern about the possible loss of listing status could justify a receiver and manager be appointed over the entire undertaking and assets of the ninth defendant company. If the argument was really more on the alleged mismanagement of the ninth defendant by the director defendants, this is at this stage not apparent and entirely unproven based on the affidavits and pleadings by the plaintiff. [38] In any event, what exactly are the assets of the ninth defendant requiring protection in the instant case? Enclosure 3 is silent on this apart from the grounds in support of the application which refer to the listing status of the ninth defendant. The grounds specifically provided that the intervention by this Court to appoint the receiver and manager over the entire assets of the ninth defendant and to manage the ninth defendant “is necessary because if Bursa Malaysia were to delist SCAN shares on 18.5.2016, all SCAN shares would be rendered worthless.” Further, it was stated that without the intervention, “SCAN’s assets would be in jeopardy….if SCAN shares were to be delisted by Bursa Malaysia…” … Lack of Substantive Nexus between Receiver Application and Main Claim [53] Like most similar applications, the very nature of the application to appoint a receiver and manager in the instant case is manifestly interim, and is designed to maintain status quo of certain asset pending the hearing of the underlying action. It can thus be stated that in such a situation a proposition to be applied is that there must be a substantive connection between the property sought to be preserved in the receiver application and the reliefs prayed for in the main action. In the instant case, enclosure 3 speaks much of the need to protect the listing status as the raison d’etre of the proposed appointment. The statement of claim of the plaintiff on the other hand however focuses on the alleged wrongdoing of mainly the director defendants in the form of deceit, misrepresentation, conspiracy and breach of fiduciary and statutory duties, among others. [54] Consequently therefore, as stated earlier in this judgment, the reliefs claimed for include declarations on the various alleged violations and for damages. They do not however include any relief against the ninth defendant company. This is unsurprising since there are in fact no allegations of wrongdoing pleaded by the plaintiff against the ninth defendant who may be deemed as a nominal defendant in these proceedings. What I however find incongruous is that the premise for the appointment of receiver and manager application bears little relevance to the claims contained in the main suit filed by the plaintiff. What the plaintiff purportedly seek to protect via the receiver application has little to do with the true reliefs he had pleaded in the statement of claim. [55] If the allegations against the defendants sans the ninth defendant on the alleged wrongdoing can be proven, the issue of whether or not the listing of the ninth defendant is maintained is almost irrelevant and of no consequence. Preserving the listing status has got little to do with proving the claims of the plaintiffs against the other defendants. The receiver application does not raise a sufficient basis to establish the requisite nexus with the writ action. This thus suggests the lack of substance, on the facts and under the law, in respect of both the First and the Second Applications. … Damages an Adequate Remedy and No Worse Off position [57] Furthermore, it is quite clear that the principal relief prayed for by the plaintiff in the underlying action is damages. This is unsurprising since the dispute is essentially concerning shareholding and the purported threat of loss of value in relation to the alleged mismanagement and possible delisting. The plaintiff can be said to be concerned with monetary yield. In the circumstances, damages should rightfully be considered as an adequate remedy. This thus fortifies the challenge against the order for the appointment of a receiver and manager on the basis that since such appointment being an equitable remedy, and as damages are adequate, the Court would not be readily moved to exercise its jurisdiction to grant such remedies (see Bond Brewing Holdings Ltd v National Australia Bank Ltd [1990] 1 ACSR 445), in much the same way it is settled law that the Courts would be reluctant to grant any interlocutory injunction order for the same reason of adequacy of damages.
G. Takeaways from Yeoh Eng Kong
From the above, it is clear that any application to appoint a Receiver (in addition to the Lim Poh Choo requirements) must also contain:
• An element of proportionality; • A specific list of the property in jeopardy; • Nexus between the pleadings (Statement of Claim) and the application to appoint a Receiver (i.e., that the application to appoint a Receiver is sufficiently pleaded); • Consideration as to the adequacy of damages.
If these issues are not considered, then an application to appoint a Receiver should rightfully fail.
H. What can directors do to minimise the risk of a Receiver being appointed?
Directors and shareholders are in a unique position. They are the rudders that guide the direction of a company and in the event a Receivership application is filed, they stand to lose the most.
To ensure that Receivership applications are defeated, persons representing the company must ensure that the property being disputed is not at stake. This may be done by providing a written undertaking in the affidavit in reply (see The New Straits Times Press v Ahiruddin Bin Attan [2008] 1 MLJ 814 for the effect of an undertaking).
This should effectively safeguard the property. In addition, the affidavit in reply must outline why the applicant does not have a good, prima facie claim of title.
Finally, the persons representing the company must show that the applicant will be in a worse situation should a Receiver be appointed. In the case of a boardroom tussle, this may be shown by highlighting the fact that in Facility Agreements taken out by the company (if any), there will be a standard clause saying that all Personal Guarantees will become due upon a Receiver being appointed.
Persons representing the company must also highlight the considerations stated in Yeoh Eng Kong.
Conclusion
Receivership is an onerous, dangerous application. If not handled with the utmost care, a wrongfully appointed Receiver will wreak havoc in a company.
By the time the Court of Appeal remedies the matter, the company may be a worthless husk. It pays for directors to be fully aware of the ramifications of Receivership and to be vigilant in the handling of the company’s administration. Accounts must be kept vigilantly and it is important for all systems to be in healthy order.
For ease of reference, a PowerPoint Presentation may be found here: court-ordered-receivership
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