Tax Authority’s Application To Reinstate A Company Dismissed By The High Court
Recently, the High Court dismissed an action commenced by the Director General of Inland Revenue (DGIR) among others against the liquidator and the former directors of a dissolved company. The action was brought by the DGIR to set aside the voluntary dissolution of the company in order to recover unpaid taxes amounting to nearly RM 300 million.
The liquidator of the company was successfully represented by the firm’s Senior Partner, Datuk D.P. Naban together with senior associate, Hayden Tan Chee Khoon.
On 8.3.2016, a resolution was passed for the company to be voluntarily wound up. Via a letter dated 15.3.2016, the liquidator informed the DGIR of the voluntary winding up and requested for a tax clearance letter.
The DGIR then issued a tax clearance letter confirming that the company had no outstanding tax liability and that the liquidator could proceed with the voluntary winding up. Subsequently, the liquidator through a letter dated 25.5.2016, notified the DGIR that the winding up was completed and requested the DGIR to close the company’s tax file. The company was officially dissolved on 20.8.2016.
A few years later, in 2016, the DGIR alleged that the dissolved company had understated its tax liabilities for the years of assessment (YAs) 2012 and 2013 amounting to RM294,850,256.00. The DGIR claimed that the tax clearance letters that it issued earlier were forged. On this basis, the DGIR commenced a court action seeking the following reliefs:
(i) A declaration under Section 535(1) of the Companies Act 2016 (CA 2016) that the dissolution of the company was illegal and void.
(ii) The status of the dissolved company in the registration record of Companies Commission of Malaysia is restored from dissolved to an existing or a wound up company.
(iii) The liquidator of the dissolved company was to be restored to his status as the liquidator of the dissolved company as though the company has never been dissolved to enable the DGIR to raise the additional taxes.
Section 535(1) reads as follows:
“Where a company has been dissolved, the Court may, at any time within two years after the date of dissolution, on an application of the liquidator of the company or of any other person who appears to the Court to be interested, make an order upon such terms as the Court thinks fit declaring the dissolution to have been void, and such proceedings may be taken as might have been taken if the company had not been dissolved.”
The DGIR’s Case
It was argued by the DGIR that a purposive approach must be taken to interpret Section 535(1) of the CA 2016. In this regard, Section 535(1) does not require a declaration to be made within two years from the date of dissolution. Rather, it merely requires an application for a declaration to be made within two years from the date of dissolution.
On the other hand, the liquidator contended that Section 535(1) is clear and unambiguous and therefore, should be interpreted using the literal approach. Accordingly, a declaration under Section 535(1) may only be made within two years from the date of dissolution and the court is not empowered to extend the two year period.
Additionally, the DGIR argued that the court has inherent power under Order 92 of the Rules of the High Court 1980 and paragraph 8 Schedule 2 of the Courts of the Judicature Act 1964 to abridge the time.
Further, it was argued by the DGIR that its pleadings are sufficient to make out a case for fraud. Following Yap Sau Choon @ Yap Bee Yong & Anor v Cheong Hong Mun  MLJU 1203, it was not necessary that the causes of action be explicitly listed in the pleadings. The DGIR argued that it sufficed that the facts pleaded would make up a legal case for the cause of action.
The DGIR also contended that the former directors of the dissolved company will not be prejudiced as the liquidator will be answerable to all the outstanding taxes claimed by the DGIR. The DGIR added that the former directors were not able to rely on prejudicial effect argument as their defence as they did not come with clean hands. On the other hand, the DGIR had been deprived of its right to exercise its statutory duty to collect tax on the dissolved company.
The Liquidator And The Former Directors’ Contentions
The liquidator and the former directors contended that it would be unfair, unjust and prejudicial for the DGIR to now seek to reverse the dissolution of the dissolved company. When the dissolved company advertised about its winding up, the alleged falsification or forgery would have been detected and revealed. Thereafter, the liquidator could have been alerted and paused the winding up, liquidation and distribution of the assets. The dissolved company and its former directors could have taken steps to quickly retrieve any documentary evidence or potential witnesses in the preparation of its defence against any tax assessments.
Most importantly, the DGIR has not proved the alleged falsification of forgery of the Disputed Letters on a balance of probabilities.
The High Court’s Decision
The High Court considered the following issues and dismissed the DGIR’s action:
(1)Whether the dissolved company or its liquidator was entitled to rely on the disputed tax clearance letters.
(2) Whether the DGIR was entitled to void or reverse the dissolution of the dissolved company more than two years ago.
(3) Whether the court has jurisdiction under Section 535 to void or reverse the dissolution of the dissolved company more than two years ago.
The High Court held that the DGIR failed to prove the allegation of fraud, falsification or forgery of the disputed tax clearance letters on a balance of probabilities. In addition, it was trite law that parties were confined to their pleadings. In the present matter, the DGIR did not plead nor prove that the dissolved company, its liquidator or former directors were responsible for the alleged forged letters of clearance.
The High Court held that in order to be entitled to a declaration under Section 535 that the dissolution of the dissolved company is void, the DGIR must show that it falls within Section 91(3) of the ITA. In the present case, the DGIR has failed to do so and therefore, is not entitled to void or reverse the dissolution of the dissolved company more than two years ago.
In the event the dissolved company’s dissolution was declared void by the High Court, the dissolved company and its former directors would suffer prejudice. Following the dissolution of the dissolved company, the assets of the dissolved company were distributed. It left the dissolved company with no financial resources and access to records to satisfy any tax liabilities, or to even defend any assessment effectively. In such circumstances, the former directors could also be potentially liable under Section 75A of the ITA.
The High Court opined that the language employed in Section 535 of the CA 2016 is clear and unambiguous. As such, the High Court adopted literal approach and held that Section 535(1) of the CA 2016 refers to the time limit for courts to make a declaration as opposed to the time limit to make an application to void the dissolution. Accordingly, the court has no jurisdiction to void or reverse the dissolution of the dissolved company more than two years ago. The court’s inherent powers cannot also be invoked to abridge the time.
Following the issuance of the disputed letters, the dissolved company was made to believe that there was no outstanding tax payable and that it may proceed with its winding up. However, the DGIR then sought to set aside the dissolution of the dissolved company as the DGIR’s aim was to raise the additional assessment against the liquidator,
Although the DGIR is empowered under Section 91(3) of the ITA to raise an additional assessment at any time if it appears to the DGIR that there is any form of fraud, wilful default or negligence, the DGIR in this matter had not shown that it comes within Section 91(3) of the ITA. Accordingly, the DGIR is not entitled to the declaration under Section 535(1) of the CA 2016.
Further and in any event, Section 535(1) provides that the Court may at any time within two years make an order declaring the dissolution of a dissolved company to have been void. This means that the dissolution of the dissolved company can only be declared void within two years from the date of dissolution. Given that the time has lapsed, the dissolution of the dissolved company cannot now be declared void.
This is the first case where the High Court decided on the interpretation of Section 535(1) of the CA 2016, making it clear that the dissolution of a company can only be declared void or reversed within two years from the date of dissolution. Where more than two years has lapsed, the other court has no jurisdiction to void or reverse the dissolution, nor does it have inherent power to abridge the time.
12 April 2023