Removal Of Liquidators On Cause Shown
June 29, 2020
When a company undergoes winding up, whether compulsory or voluntary, a liquidator will be appointed to manage the liquidation process. A liquidator’s primary role is to realise the assets of the company and accordingly distribute the proceeds to the company’s creditors. If there is any surplus, the liquidator must then distribute the remaining sum to the contributories of the company and bring an end to the liquidation process. In managing the winding up process, the liquidator must also ensure that he is fulfilling his statutory obligations including, but not limited to, keeping proper books and papers, and the lodging of accounts of the liquidator’s receipts and payments.
However, in the event a company and/or its interested parties wish to remove the liquidator, the Companies Act 2016 allows the aggrieved party to apply to the Court to do so. Specifically, sections 453(2) and 482(b) of the Companies Act 2016 provide that the Court may, on cause shown, remove a liquidator.
The focal point of this article is on the operative keywords ‘cause shown’. What are the causes that must be shown for a Court to order the removal of a liquidator? We will be analysing decisions of the Court to further understand their application of these statutory provisions.
Landmark English Cases
The ‘cause shown’ test is not new. It is a longstanding principle in English law that cause must be shown to remove a liquidator from a company’s winding up process as can be traced back to section 141 of the then Companies Act 1862. The English Court of Appeal case of In re Sir John Moore Gold Mining Company (1879) 12 Ch Div 325, which involves an application by a contributory to remove a liquidator who refused to bring investigations against the company’s director, reflects this. In this particular case, the possibility of the liquidator’s interest being in conflict with his duties had resulted in the application being allowed by the Court. In coming to this decision, the Court demonstrated that its jurisdiction in determining ‘cause shown’ is not merely confined to cases where there is personal unfitness of the liquidator but is extended to cases where the unfitness is occasioned by his connection with other parties.
The Court laid down the following principle:
“… as a general rule, they point to some unfitness of the person – it may be from personal character, or from his connection with other parties, or from circumstances in which he is mixed up – some unfitness in the wide sense of the term.”
In another English case, Adam Eyton Limited Exparte Charlesworth (1887) 36 Ch Div 299, it was held that where the Court is satisfied on the evidence before them that it is against the interest of the liquidation that a particular person should be made liquidator, then the Court has power to remove the present liquidator and appoint some other person in his place5. It is important to note that what constitutes as ‘against the interest of liquidation’ was explained by Cotton L.J. to mean against all those who are interested in the company being liquidated. Essentially, this means that sufficient cause is shown where the continuing appointment of a liquidator would be against the interest of all those interested in the company being liquidated.
Local Jurisprudence
In the High Court case of Ng Yok Gee & Anor v CTI Leather Sdn Bhd; Metro Brilliant Sdn Bhd [2006] 7 MLJ 28, Ramly Ali J referred to, with approval, the principles laid down by the two English cases cited above. In doing so, this case magnified the importance of showing that all parties interested in the liquidation, that is to say all creditors and contributories, are in support of the application to remove the liquidator. It held the following:
“As a matter of law, it is not a sufficient ground for removal of a liquidator that a substantial minority or even majority of the shareholders wants the liquidators to be removed. It is not a popularity contest.”
The High Court in that case also set out other relevant legal principles that it will apply in assessing whether sufficient cause is shown. This includes the principle that the Court does not have an unfettered discretion in removing a liquidator. Moreover, it also explained that the normal ground for removal is where a liquidator has a personal unfitness, has failed to act impartially or is in a position where his duty and interest are in conflict. Where there is a conflict of interest, the applicant must show that it is a real and not merely theoretical possibility of a conflict.
The significance of this High Court judgment is evident as the Federal Court in the case of Wong Sin Fan & Ors v Ng Peak Yam & Ors [2013] 3 CLJ 17 followed and reiterated those principles.
It is crucial to note that the Court will strictly not condone behaviour of liquidators that are against the interest of the liquidation. For instance, in the case of TR Hamzah & Yeang Sdn Bhd v City Centre Sdn Bhd [2012] 1 MLJ 383, the Court held that the liquidator had acted not in accordance with the spirit and intent of the several provisions of the Companies Act 1965. In this instance, the liquidator, being an officer of Court, was in gross contempt and/or disrespectful to the Court when he proceeded to act in the absence of the Committee of Inspection. Not only that, he had also failed to obtain the sanction of the creditors and/or contributories, omitted to exercise his statutory duties, and failed to seek appropriate directions from the court for just, expeditious and economical disposal of the liquidation process. Furthermore, in the case of Yeo Ann Kiat v Hong Leong Bank Berhad [2016] 9 CLJ 207, the High Court’s decision to refuse removal of the liquidator was reversed as the Court of Appeal held that the liquidators had deviated from the primary duty of winding up the company in attempting to revive the company’s abandoned project. It was found that it is not in the business of the liquidators in a compulsory winding up to engage in activities that runs counter to the objective of winding up the affairs of the company. Not only that, it was also emphasised that a liquidator must fulfil his obligations with due despatch and diligence. In that same case, the Court held that removal of the liquidator was necessary due to the fact that the liquidators had delayed the liquidation process by 8 years, which was deemed as inordinate and unreasonable.
However, it has to be noted that failure by a liquidator to carry out his duties does not necessarily amount to sufficient cause shown. The Court will look at all the circumstances of the case including the costs that will be incurred in carrying out such duties, the stage of the winding-up proceedings, the familiarity of the liquidator with the business and affairs of the company, and whether the mistakes were made in good faith. In the case of RHB Bank Berhad v Gula Perak Bhd [2016] 1 LNS 1404, the alleged failure of a liquidator to fulfil its statutory obligation to call for a creditors/contributories meeting did not amount to sufficient cause shown. This is because the Court acknowledged that in doing so, the liquidator would have incurred massive expense which would exacerbate the financial state of the wound-up company and so, would jeopardise the interests of the liquidation.
The Courts have also held that errors of a liquidator, if made in good faith and have not seriously prejudiced the company, may not necessarily amount to sufficient cause shown, as evidenced in the Singaporean case of Procam (Pte) Ltd v Nangle & Anor [1990] 3 MLJ 269.
Generally, the Courts are reluctant to interfere with decisions made by the liquidator. In the case of Andrew Christopher Chuah Choong Eng Chuan v Ooi Woon Chee & Anor [2007] 2 MLJ 12, the Court of Appeal stated that Courts will only interfere with the decisions of a liquidator if it is so unreasonable and absurd that no reasonable person would have acted in that way. Hence, this is also a factor that Courts will take into consideration in determining whether cause is shown. However, parties aggrieved by decisions of liquidators are not left without redress. The legislation provides relief to parties who are of the opinion that their rights and interests have been infringed upon. For example, sections 510 and 517 of Companies Act 2016 are avenues wherein these parties are able to seek remedy for decisions of the liquidator which they deem unfair and unreasonable.
Notwithstanding the above, it has to be highlighted that the Court may remove a liquidator even without there being any misconduct alleged against him. It may still be appropriate to remove a liquidator although nothing can be said against him, either personally or through his conduct of the particular liquidation, if it appears on the whole that it is for the benefit of the company in liquidation that he should be removed. In the case of Chi Liung Holdings Sdn Bhd v Soon Kok Keng [1996] 3 CLJ 86, it was held that Courts need only be satisfied that it is for the general advantage of those interested in the assets of the company that the liquidator be removed.
Conclusion In sum, what constitutes ‘cause shown’ is not a closed category and depends on the circumstances of each case. While the Companies Act 2016 provides aggrieved parties who are interested in the winding-up process a right to apply to remove the liquidators, such right is limited and can only be exercised by the Courts once cause is shown, as exemplified in the cases above. Courts will not extend their discretion to arbitrarily remove a liquidator, and thus, the onus falls on the applicant to prove that there is sufficient cause shown to justify the removal. On one hand, this provision grants protection to the applicant (members and contributories of the company) to protect their interests in the liquidation. This is so that the interested parties in the liquidation receive their entitled dues accordingly. However, on the other hand, it also ensures that liquidators are not removed unreasonably and unnecessarily. It prevents the improper interference of third parties and promotes a smooth-sailing winding up process. Hence, it can be said that this statutory provision is a shield for both the liquidator and the interested parties of a winding up. Its dual function is imperative for the efficient and proper management of winding up process of companies.