Is The Court Bound By Reliefs Granted Under The Statute For An Oppression Suit?

Is a court bound by relief granted in the Companies Act in an oppression case (specifically, section 346(2) of the Companies Act? This was discussed in the Federal Court case of Auspicious Journey Sdn Bhd v Ebony Ritz Sdn Bhd & Ors. Let us have a look at it.

Brief facts of the case

1. Auspicious Journey entered into a joint-venture agreement with Hoe Leong Corporation Ltd (a Singapore-registered entity) to form a joint-venture company, namely Ebony Ritz.
2. The goal was to acquire 49% shares in Semua International Sdn Bhd,  a subsidiary of Sumatec Resources Bhd so both Auspicious Journey and Hoe Leong could gain a foothold in the oil-tanker chartering business.
3. Out of the 49% that was acquired, Auspicious Journey and Ebony Ritz were to hold 20/80 of the shares respectively. 
4. Ebony Ritz also entered into another agreement with Sumatec. Essentially, the agreement dictates that Sumatec will make good any shortfall if Semua International’s audited profit after taxation fell short of the financial representations that Sumatec had made. 
5. If the shortfall is not coughed up by Sumatec, Ebony Ritz was given the call option to require the remainder shares in Semua International which Sumatec still holds- 2% to Ebony Ritz and the remainder 49% to Auspicious Journey.
6. Ebony Ritz directors are composed of two representatives from Hoe Leong and one from Auspicious Journey. 
7. In fact, that was what happened. However, instead of receiving the shares, Auspicious Journey discovered that: 
   1. Hoe Leong had secretly entered into a conditional sale and purchase agreement with Setinggi Holdings (its nominee), Ebony Ritz, and Sumatec behind its back under which balance 51% shares in Semua International was to be acquired by both Hoe Leong and Setinggi (2/49 respectively); and
   2. Under the conditional SPA, Ebony Ritz had waived or relinquished its rights under the second agreement and also provided Sumatec an indemnity indemnifying it against all claims while dividends payable to Ebony Ritz had been reassigned. 

Auspicious Journey filed a minority oppression suit against Ebony Ritz, Hoe Leong’s director in Ebony Ritz, Sumatec, and Setinggi for what has transpired against them.  

Auspicious Journey’s claim

Auspicious Journey contended that Hoe Leong had exercised its majority powers in a way that was detrimental to its minority shareholders (i.e. stripping off their shares altogether behind their back). As a solution (and since the relationship between them has turned sour), Auspicious Journey suggested that Hoe Leong is to buy out the portion of their shares in Ebony Ritz and allow Hoe Leong to manage Ebony Ritz as it sees fit.

Hoe Leong’s claim

Hoe Leong claimed that Auspicious Journey cannot do so- it cannot extricate itself from a bad bargain and recover its investment by having the court order Hoe Leong to buy over Auspicious Journey’s shares in Ebony Ritz. 

The decision of the court

The High Court, amongst others, held that Ebony Ritz should be wound up given its poor financial state, the fact that the relationship between its shareholders had completely broken down, and that the purpose of the joint venture was no longer achievable. Also, to allow the buy-out will also essentially means that Ebony Ritz will be breaching the Merchant Shipping Ordinance in broad daylight (the ordinance states that any company involved in the oil-tanker industry in Malaysia is to be held majorly by a Malaysian company instead of a foreign company).

Auspicious Journey appealed, claiming that the High Court did not follow the reliefs granted in the Act. However, the Court of Appeal did not entertain their claim. The same happened in the Federal Court.

The court’s rationale

The court noted that the reliefs granted in an oppression suit must be tailored to the situation and circumstances of each case. Otherwise, the reliefs that are granted will be pointless and meaningless i.e. only for show.

So why did the court order Ebony Ritz to be wound up instead of pursuing other alternatives? 

1. There is a breakdown in the relationship between the parties. It was pointless to continue on with the joint venture as no business can be run properly in such a situation.
2. Ebony Ritz will be in contravention with the Ordinace if a buyout were to be ordered by the court.
3. Auspicious Journey should not be insulated from the risk arising out of an investment that they willingly made; and
4. As Ebony Ritz was a failed joint-venture and insolvent, a buy-out would not yield a fair price.

In conclusion, the court can go beyond the scope of reliefs granted in the statute, provided it will solve the dispute between the parties in a fair and reasonable way.