A 3 Min Read On ISM Sdn Bhd v Queensway Nominees (Asing) Sdn Bhd & Ors And Other Suits
**In this article, we will only focus on one aspect of the case, namely- whether a quasi-partnership relationship can exist between parties to a joint-venture agreement.
Case summary
The director and owner of ISM, Dato Cheah was approached in 2006 to assist in the rehabilitation of an abandoned project called CN Gallery. An idea was conceived whereby the adjoining lots around CN Gallery could be acquired in one shot to develop the entire land into a large-scale integrated commercial development.
For this idea to work, Dato Cheah:
- Approached MHPB Capital (a parent company of Queensway Nominees who currently owns the land) to enter into a joint venture with ISM to develop the land. In this regard:
- ISM would hold 30% of the equity in any joint venture company incorporated to undertake the project, while MPHB would hold the remaining 70%; and
- The funding for the joint venture companies was to be divided into a cash portion and a loan portion, apportioned on a 30:70 basis, in which ISM would be liable to contribute only 30% of the cash portion and the rest (including the total loan portion at a rate of interest of 8% pa.) will be funded by MHPB Capital and its subsidiaries.
- Acquired the adjoining lots using MHPB Capital subsidiaries (the parties being sued in this matter. This acquisition exercise took almost 6 years to complete;
- Using yet another subsidiary to acquire all the lands that were acquired by the rest of the subsidiaries; and
- Formalize ISM and MHPB Capital’s relationship by negotiating a shareholders’ agreement (which ultimately did not materialize and they relied heavily on oral agreements between them).
All was well until:
- There were alleges of instances of oppression against ISM and Dato Cheah;
- MHPH suddenly ordered its subsidiaries to conduct a rights issue exercise which had the effect of diluting ISM’s shares in the subsidiary companies to fractions of one percent;
- MHPB Capital demanded ISM contribute a certain sum of the purchase price for certain land that was acquired by MHPB Capital subsidiaries;
- ISM claims that the cash portion should be free of interest while MHPB Capital claims otherwise, citing the fact that the listing requirements of Bursa Malaysia and the relevant transfer pricing guidelines would have prevented MPHB from lending to a subsidiary or related company without charging interest.
To resolve this matter, Dato Cheah was made a director in all of the subsidiary companies. In due time, he requested the financial records and supporting documents of the subsidiary companies to determine whether the rights issue exercise was conducted appropriately during the extraordinary general meetings. This request was never fully complied with by the subsidiary companies.
Aggrieved by what had transpired, Dato Cheah sued.
What does the court have to say about this issue?
The court noted that:
“…while I accept that co-venturers may owe one another, for example, a duty of fidelity as part of the fiduciary duties that are imposed upon them by law, I cannot accept that the mere fact that they have entered into a joint venture agreement meant that the relationship was a quasi-partnership.”
The court continues on to say that:
“A simple illustration will demonstrate the fallacy of this proposition: an entirely commercial relationship between two large corporations undertaking a joint venture may be documented in a joint venture agreement. In such a case, the scope and limits of the relationship between them will be governed entirely by the terms of the joint venture agreement, read together with the articles of association of the joint venture company, and not by reference to equitable principles. The relationship is patently not a quasi-partnership.”
Simply put – whether there exists an element of quasi-partnership in a joint venture is dependent on the facts and circumstances of each case.
Once that was out of the way, the court noted that there is the element of quasi-partnership in this case. In this regard, the court states that:
“I found that the relationship between ISM on the one hand and MPHB on the other in relation to their joint venture in each of the JV companies was one that was based on mutual trust and confidence that justified the imposition of equitable principles — the JV companies were, in other words, quasi-partnerships…”
The why behind the what
In coming to its decision, the court pointed to the fact that the relationship between the parties, in this case, was forged upon a handshake. This, as the court noted, was based on the fact(s) that:
- even though the draft shareholders’ agreement had not been signed between the parties, Dato Cheah and MHPB had nonetheless proceeded with their business relationship, as can be seen in some of the examples below:
- The acquisition of the first plot of land proceeded (in 2007) way before a draft shareholder agreement was presented to Dato Cheah (in 2009);
- The business relationship had been run on the basis of a consensus between the parties, with Dato Cheah taking the lead on the tactical acquisitions of the target real estate and MPHB proving the bulk of the financial backing to the venture;
- The acquisition of lands in some instances had been undertaken (Dato Cheah even put the deposits down out of his own funds for some of the acquisitions) even before ISM became a shareholder in the relevant JV company; and
- In meetings with third parties and advisors, MPHB had consistently characterized Dato Cheah as a ‘partner’ in connection with the Imbi Project.
Therefore, the short answer is this- a quasi-partnership relationship may or may not exist between parties to a joint-venture agreement. It all boils down to the facts and circumstances of each case.
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