A 3 min read on ISM Sdn Bhd v Queensway Nominees (Asing) Sdn Bhd & Ors And Other Suits
Today, we will briefly look at the High Court case of ISM Sdn Bhd v Queensway Nominees (Asing) Sdn Bhd & Ors And Other Suits. In particular, we will ask ourselves this while briefly sharing the case: do parties to a joint venture agreement automatically owe a fiduciary duty to one another?
Brief facts of the case
Dato Cheah, owner, and director of ISM was approached in 2006 to assist in the rehabilitation of an abandoned project located in KL called CN Gallery. As the land of the project was too small to be developed into a mixed-use commercial development of significant value, Dato Cheah conceived a plan by which the adjoining lots could be acquired (along with the CN Gallery land) and developed into a large-scale integrated commercial development. To achieve this, Dato Cheah:
- Approach MHPB Capital (a parent company of Queensway Nominees and the rest of the companies sued by ISM), a company that gave loan facilities to the proprietor of CN Gallery Land and now owns the land (via one of its subsidiaries) as a result of the proprietor od CN Gallery land failing to settle its debt to enter into a joint venture with ISM to develop the land, in which:
- 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 relationship by negotiating a shareholders’ agreement (which ultimately did not materialize and they relied heavily on oral agreements between them).
The dispute arose when (amongst others):
- There were allegations 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.
Dato Ray was then made a director in all of the subsidiary companies. He proceeded with requesting 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. Long story short, it was never fully complied with by the subsidiary companies. Hence the current grievance (amongst many other claims in the suit).
Aggrieved, ISM sued and claimed that (amongst others) breach of their fiduciary duty that they owed to ISM and Dato Ray by:
- Suppressing documents; and/or
- Failing to provide adequate disclosure of information to ISM (in relation to the rights issue exercise).
The court’s decision
The court sided with ISM with most of its claim. However, the court says that the directors of the subsidiary companies do not owe any fiduciary duty to Dato Ray to disclose the information mentioned above.
The court’s rationale
This is what the court has to say: In order to establish the fact that both parties owe a fiduciary duty to one another, parties to a proceeding not only must show that:
- The transaction in question did, in fact, arise out of some special relationship between the parties; and
- The relationship was a fiduciary one,
Above all, the parties must also show that the fiduciary relationship was of such a character as to warrant the interference of the Court.
This can be seen in the judgment, where the court noted that:
“While I accept that parties to a joint venture do indeed owe fiduciary duties to each other, the scope of those duties are very much dependent on the particular nature of the fiduciary relationship in question. Just because a person is a fiduciary does not mean, for example, that he is accountable as though he were a trustee…Thus, the fiduciary duties imposed on a solicitor in a solicitor-client relationship will differ from the fiduciary obligations owed by a director to the company of which he or she is a director, even if there may be certain duties that would be common to both categories. The label ‘fiduciary’ does not come with a standardized bundle of obligations that apply in all cases; the incidence and scope of the duties of a fiduciary will vary with each category of fiduciary, and the categories of fiduciaries are not closed.”
Why did the court say what it said?
At the end of the day, the flexible approach was adopted and preferred by the courts to ensure that the court is able to cater a tailored solution to the case on hand.
For example, in this case, ISM’s claim (in relation to fiduciary duty) has 0% impact on its other claim, namely, ISM’s claim for damages or its prayer for an order that its shares be bought out.
As the court noted, even if the directors had not provided information that had been requested by the ISM, it would not have changed anything at all (in this case, the outcome of the rights issue)- ISM was not misled by the lack of information to vote in favor of the rights issue. Also, even if the information had not been provided, it would not have changed the fact that MPHB would have voted in favor of the rights issue.
So, to answer the question at the beginning of this article- no, parties to a joint venture agreement do not automatically owe a fiduciary duty to one another. It is all dependent on the facts of each case.
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