Directors of a company under receivership may still initiate legal action if it serves the company's interest and does not compromise the position of debenture holders, contingent on new legal precedents.

Abdul Hamid Mohamad Chief Justice (delivering judgment of the court):

[1]Simpang Empat Plantation Sdn Bhd (‘Simpang Empat’) the respondent herein was the registered owner of the land in question. In 1990 it obtained a loan from the fourth appellant (‘MBf Finance Bhd’) for RM2.5m. The loan was secured by a debenture and a charge under the National Land Code (‘ NLC ’). In May 1992, MBf Finance Bhd recalled the loan and appointed the first three appellants as receivers and managers of Simpang Empat pursuant to the debenture. Simpang Empat then filed a writ against the first four appellants ie, MBf Finance Bhd and the receivers and managers claiming that the receivers had no power of sale over the said plantation. Simpang Empat also asked for an injunction to be granted against the receivers to restrain them from proceeding with the sale of the said plantation. This suit is Kuala Lumpur High Court Civil Suit No D4-22-1289 of 1992. Subsequently, Simpang Empat filed an ex parte application in the same civil suit to restrain the receivers and managers from entering into any sale, disposal or other forms of conveyance whatsoever in respect of the said land. At the hearing of the application inter partes, learned counsel for the receivers and managers raised a preliminary objection that the directors of Simpang Empat had no right to bring the action in the name of the company because it was under receivership. He argued that the proper persons who had the power to bring the action were the receivers and managers. The learned High Court judge, Dato' Dr Zakaria M Yatim (as he then was) agreed with the submission and ruled that the directors had no power to institute the action because the receivers and managers were already appointed.

[2008] 4 MLJ 813 at 821

[2]However, in his written judgment given subsequently, the learned judge was of the view that he was wrong in holding that the receivers had the power to sell the property.

[3]However, on appeal to the then Supreme Court in Supreme Court Civil Appeal No 02-45 of 1994, the court which by then had been renamed ‘Federal Court’ upheld the High Court judge's ruling on the said preliminary objection and dismissed the appeal. The Federal Court gave the following reasons, which is quoted in full:

After considering submissions by both counsel and the facts and circumstances of the case, we are of the unanimous view that the appeal be dismissed with costs to the respondents to be taxed if not agreed. Deposit to account of costs.

The appointment of receivers pursuant to a debenture does not, in itself, prevent the directors of the company creating the debenture from pursuing a right of action. The directors can pursue if in doing so, it would be in the interest of the company and would not impinge prejudicially upon the position of the debenture holders by threatening or imperilling the assets which are subject of the charge. Much depends on the facts and circumstances of each case.

In the present case, it has not, in our view, been shown that the action would benefit the company thereby justifying the action. Also, the directors had not given indemnity for costs. The appeal is dismissed.

[4]That case will be referred to as ‘Simpang Empat No 1.

[5]In 1996, Simpang Empat filed an originating summons at the High Court at Ipoh vide Originating Summons No 25-54 of 1996. Besides the four defendants in Simpang Empat No 1, (ie, MBf Finance Bhd and the receivers and managers), Simpang Empat added two new defendants as the fifth and the sixth defendants (the fifth and sixth appellants herein). The fifth appellant was the purchaser of the said land at a price of RM4.8m