Interim Receivers in Company Law

An Overview of Court-appointed Receivers in a Company pending a suit

We often hear of legal disputes arising between the members / directors where there is disagreement or a lack of trust and confidence between them resulting in a deadlock in management.

In such situations, a disgruntled shareholder / director may seek relief by applying to the Court (pursuant to Order 30 of the Rules of Court 2012) for the appointment of an interim Receiver in the event he feels that he is not in a position to ‘check and balance’ the management of the company pending the determination of a suit.

Note: A Receiver is to be distinguished from a Liquidator. The Receiver’s scope of duty often involves entering the Company and taking charge of its assets for a specific purpose (as set out in the Court Order, Debenture or any other Agreement appointing the Receiver to office). Receivers tend to keep a company going pending the fulfillment of that purpose. On the other hand, a liquidator is appointed when the company needs to be shut down. In such a situation, the liquidator’s responsibility is simply to gather all the company’s assets, sell them off at the best price, and then divide the proceeds fairly between the company’s creditors.

Purpose

An application to appoint an Interim Receiver in a company pending the disposal of a suit is a form of interim relief often used by litigants in company disputes for the purposes of gaining control or preserving the assets of the company in circumstances where it is unreasonable / ‘dangerous’ for the directors to be entrusted with managing the company’s assets.

The rationale for this is to protect the applicant’s interest in the Company’s assets where there is a risk that the same may be disposed of by the directors in charge of the company before the conclusion of the suit and so leave the applicant with little or nothing in the event the applicant becomes the successful party in the suit.

If the application is successful, the Court appointed Receiver will enter the company as an independent party and restrict the management powers of the company’s directors to the extent limited in the Court Order appointing the Receiver.

As Receivers are first and foremost independent officers of the Court, they are legally bound to act fairly and impartially for the benefit of all parties interested in the assets of the company (and not for any one particular party alone, even if it is the applicant). As an officer of the Court, any interference with the Receiver’s powers by the directors will amount to a contempt of Court.

The Receiver sought to be appointed must usually be an independent and experienced insolvency practitioner whereby the scope of the Receiver’s duties, powers and duration of appointment is required to be expressly set out in the application by the party seeking the Receiver’s appointment.

Often, the Court will also require the Receiver to furnish some security (in the form of a guarantee or undertaking) to account for the company’s assets subject to the receivership, prior to the Receiver taking office.

Legal Conditions for the Appointment of a Receiver

In the Malaysian High Court decision of Saling bin Lau Bee Chiang v Kanawagi a/l Seperumaniam [2010] 8 CLJ 347, it was held by Justice Vernon Ong that in order to succeed in an application to appoint an interim Receiver, an applicant must satisfy the Court that:

There is a good prima facie claim of title (to the property / assets sought to be preserved) by the applicant; and

The property / assets are in jeopardy or that the applicant would be in a worse of position if the appointment of a Receiver is delayed.

In the Malaysian High Court decision of Ng Yong Long v Qua Hock Leong & Ors, Justice Abdul Wahab Said Ahmad in dismissing an application to appoint a Receiver held that mere assertions by the applicant that the assets of the company are in jeopardy are not sufficient to justify the appointment of a Receiver. There must be credible and solid evidence to substantiate that risk.

In the Singaporean decision of Rajabali Jumabhoy and Ors v Ameerali R Jumabhoy & Ors, the Singaporean High Court held that the mere existence of acrimony amongst the board of directors or that the applicant disagrees or is dissatisfied with the management decisions taken by the majority directors is not sufficient to justify the appointment of a Receiver. What the Court has to determine is simply whether there is a working majority so that the company is capable of managing its own affairs. If there is, it is not for the Court to second guess the management of the company as to what course of action would be in the company’s best interest.

Another important factor which the Court would bear in mind in determining whether to appoint a Receiver is the effect that such appointment would have on the company. In the Australian Supreme Court of Victoria decision of Bond Brewing Holdings Ltd & Ors v National Australian Bank Ltd & Ors, it was held that the appointment of a Receiver is a drastic remedy which ought to be exercised only when it is absolutely necessary to prevent imminent danger and loss to the company.

This principle has also been adopted by the High Court in Malaysia in Dato’ Sri Andrew Kam Tai Yeow v Tan Sri Dato’ Kam Woon Wah & Ors which held that the balance of justice often lies against the appointment of Receiver in view of the serious and irreparable commercial implications that it would have on the company.

Often the appointment of a Receiver may lead to the foreclosure of the company’s securities, the disruption to the company’s flow of operations and business and result in injury to the company’s reputation and creditworthiness. If the company is in possession of a banking facility, most of the banking facility agreements will contain a default clause that will trigger the termination of the facility and cause all sums due and owing by the company under the facility to be immediately repayable to the bank. This may lead to the crippling of the company in the event it does not have the financial capacity to repay the same.

Conclusion

There are many factors which must be weighed in deciding whether the benefits of the appointment of a Receiver will outweigh the potential harm it may have on the company.

For now, it remains an increasingly powerful tool used by litigants to protect their interest in the Company’s assets in situations where the same are in obvious jeopardy, although it will be interesting to see how its use and scope develops further in the future.