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Can Receivers and Managers Appointed Pursuant to Debentures Be Injuncted From Exercising Their Powers?







Recently, the High Court dismissed an interim injunction application by a pharmaceutical company (Borrower) to restrain its receivers and managers (R&Ms) from exercising their powers over the Borrower. The R&Ms were appointed by a bank (Bank) pursuant to debentures.


The Bank was successfully represented by our Firm’s Disputes Resolution Partner, Syafinaz Vani together with associates, Elani Mazlan and Rakkshanaa Samasundaram.


This alert will discuss the key aspects of the case.


Brief Facts

 

The Borrower was in the business of manufacturing pharmaceutical products and was under the Ministry of Finance’s programme ‘Skim Anak Angkat/Skim Panel Pembuat Bumiputera, Konsesi Perkhidmatan Logistik Bekalan Perubatan’. The Bank provides financial services and assistance to small and medium scale enterprises.


Between 2006 and 2009, the Bank had granted several financing facilities to the Borrower (Financings). However, in 2015, the Borrower had defaulted on the Financings to which the Bank subsequently issued notices terminating the Financings (Termination Notices). In 2016, the Bank proceeded to obtain judgments against the Borrower for the amount due and owing (Judgments).


Despite the Judgments, the Borrower still failed to settle the amount due and owing and had only made part-payments thereof. The Borrower continued to ask for time and indulgence from the Bank to make repayments and had even entered into settlement negotiations with the Bank. Nevertheless, the negotiations failed.


In view of this, the Bank filed several applications for leave to commence with the execution of the Judgments (Applications for Leave). The Applications for Leave were filed by the Bank at the respective court of original jurisdiction, and are currently pending hearing.


Further, on 23.8.2023, the Bank proceeded to appoint the R&Ms pursuant to three debentures executed between the parties in its efforts to recover the amount due and owing under the Financings of about RM15.8 million (Debentures).


Shortly after, the Borrower initiated a suit against the Bank seeking, among others, declarations that the appointment of the R&Ms is void and that it is not indebted to the Bank. The Borrower also named the R&Ms as well as the signatory of the Bank’s notice of appointment of the R&Ms in the suit. The Borrower filed its interim injunction application on the same day.


The Borrower's Contention

 

The Borrower disputed the appointment of the R&Ms and argued that the R&Ms should be restrained from exercising their duties pending the disposal of the suit on the following grounds:


(a) There are purportedly serious issues to be tried as to the validity of the appointment of the R&Ms:


  • The Judgments against the Borrower were obtained by the Bank in 2016 and as such, more than 6 years has lapsed since then.

  • Order 46 Rule 2(1)(a) of the Rules of Court 2012 (ROC 2012) provides that a writ of execution to enforce a judgment may not be issued without the leave of the Court where a period of 6 years has lapsed since the date of the judgment. Therefore, the Borrower is not legally indebted to the Bank unless and until leave of Court to enforce the Judgments is first obtained.

  • The appointment of the R&Ms must be made pursuant to the existence of a legally enforceable debt. As the Bank has not obtained leave to enforce the Judgments, the Bank does not have any basis to appoint the R&Ms.

  • The Termination Notices had merged into the Judgments as the former had resulted in the latter. Thus, no separate actions can be taken on the Termination Notices as the Bank had elected to enforce the Judgments. The doctrine of merger had extinguished the rights of the Bank to recover the debt owed by the Borrower under the Debentures.


(b) The balance of convenience lies in favour of the Borrower as there is no urgency in the appointment of the R&Ms to recover the amount due and owing. Further, the R&Ms do not have any interest in running the operations of the company.


(c) Damages are not an adequate remedy and the Borrower’s rights and interests would be prejudiced permanently should the R&Ms be allowed to deal with the affairs of the Borrower. The appointment of the R&Ms would restrict the Borrower from fulfilling its contractual obligations.


The Bank's Contention


The submission of the Bank can be summarised as follows:

(a)      There are no serious issues to be tried as:

  • The appointment was made pursuant to the Debentures which were duly executed by the Borrower as security for the Financings granted by the Bank, in accordance with Section 375 of the Companies Act 2016. The Borrower has benefitted from and enjoyed the Financings.

  • The terms of the Debentures clearly provide that the Bank is entitled to appoint the R&Ms where there is debt payable by the Borrower to the Bank under the Financings.

  • The Debentures are duly registered in the Register of Charges pursuant to Section 108 of the Companies Act 1965 as admitted by the Borrower itself.

  • The appointment of the R&Ms pursuant to the Debentures is separate and independent from the Bank’s execution of the Judgments.

  • The terms of the Debentures are also clear that the Bank is entitled to exercise all its rights and remedies available including appointing the R&Ms simultaneously and concurrently with exercising its right to obtain leave to execute the Judgments. The Borrower cannot now disregard and reconstruct the terms of the Debentures to its advantage and allege that the Bank is prevented from exercising any of their rights under the Debentures without leave of court to execute the Judgments.

  • The Borrower had also made a part-payment of RM200,000 to the Bank during the course of negotiations and thus, clearly indicates that the Borrower admits to its indebtedness to the Bank as per Section 26 of the Limitation Act 1953.

 (b) Damages are an adequate remedy to compensate the Borrower for any alleged loss or damage that it may suffer. In fact, the Borrower in its statement of claim claims for damages to be assessed.


(c) The balance of justice and convenience tilts in favour of the Bank for the interim injunction application to be refused as:

 

  • There is a risk that the Borrower will deal with its assets and thereafter, deprive the Bank of its rights to recover the amount due and owing.

  • The status quo to be preserved is the circumstances when the cause papers and interim injunction application papers were served on the Bank i.e. after the appointment of the R&Ms.

 

(d) The Borrower’s undertaking as to damages is a meaningless and bare undertaking as the Borrower is unable to make repayments to the Bank.

 

(e) The Borrower has failed to make full and frank disclosure as required under Order 29 Rule 1(2A) of the ROC 2012 in failing to disclose to the Court that it had made withdrawals of monies and removed goods from its premises after being notified of the appointment of the R&Ms.

 

High Court Ruling


Upon hearing the submissions of both parties, the High Court dismissed the Borrower’s application for interim injunction and ruled that the Bank’s appointment of the R&Ms pursuant to the Debentures were indeed valid.


16 February 2024

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