Pang Huey Lynn writes about this novel decision where a party filed a suit against a judicial manager.

The High Court in the case of Demeter O&G Supplies Sdn Bhd v Datuk Stephen Duar Tuan Kiat (as judicial manager of Scomi Oiltools Sdn Bhd and Scomi KMC Sdn Bhd) (grounds of judgment dated 30 November 2021) allowed the judicial manager’s application to strike out the civil suit filed against him.

One of the key issues was whether a party could file a suit against a judicial manager without first obtaining permission from the judicial management court.

Summary of the Decision and Significance

Decision by: Adlin binti Abdul Majid JC

As a first level of protection for a judicial manager, the Court held that a litigant had to obtain leave from the judicial management court before filing a legal suit against a judicial manager. This is because a judicial manager is an officer of the court and the court would protect its officers from spurious, vexatious and frivolous litigation.

The second level of protection is that a judicial manager would ordinarily only act as the agent of the company placed in judicial management. Further, the judicial manager would be able to disclaim personal liability and a litigant should instead be suing the company itself.

Finally, the judicial manager would not owe any general duty of care to the unsecured creditors of a company in judicial management. Hence, where the suit was also based on negligence, there was no cause of action for negligence.

Brief Facts

The plaintiff, Demeter, is in the business of supplying fluids and chemicals in the oil and gas (O&G) industry.

The defendant was the judicial manager of Scomi KMC Sdn Bhd (SKMC) and Scomi Oiltools Sdn Bhd (SOSB). Demeter, SOSB and SKMC worked together on a project.

In April 2020, SOSB issued two letters appointing Demeter as the purchasing representative for the project.

Demeter claimed that a constructive trust had arisen from this agreement with SKMC and SOSB. Essentially, Demeter claimed that the payments received by SKMC were held for the benefit of both SOSB and Demeter.

In August 2020, the judicial manager was appointed. Upon his appointment, the judicial manager issued a disclaimer letter to Demeter to disclaim all personal liability under the agreement.

Subsequently, the judicial manager held a proof of debt exercise. In October 2020, Demeter submitted its proof of debt form to the judicial manager.

In June 2021, Demeter filed a suit against the judicial manager. Demeter claimed that the judicial manager breached the constructive trust and/or was negligent, in failing to make inquiries and give effect to the constructive trust.

The judicial manager applied to strike out Demeter’s suit.

Decision

Judicial Commissioner Adlin binti Abdul Majid struck out Demeter’s suit.

First, Demeter had not obtained leave from the judicial management court to file the suit against the judicial manager.

The Court held that judicial managers are officers of the court. Having established that, the Court next considered whether leave was necessary to sue a judicial manager. The Court relied on the principles applicable to leave being required to sue court-appointed liquidators and receivers. Officers of the Court are to be protected from spurious, vexatious and frivolous litigation. Crucially, the Court held that failure to obtain leave is fatal.

“The court is of the view that the reasoning in these cases, which relate to court-appointed receivers and liquidators, would also apply to judicial managers, as they are appointed by the court to fulfil the statutory purposes of judicial management. Thus, the court holds that leave is required to commence an action against the defendant as judicial manager and as an officer of the court.

Failure to obtain leave is fatal…

In this case, it is undisputed that leave was not obtained by the plaintiff before commencing this action against the defendant. This is fatal to the plaintiff’s action against the defendant.”

 

Second, the judicial manager is statutorily an agent of the company by virtue of section 416(1)(a) of the Companies Act 2016 (CA 2016): “[t]he judicial manager … of a company … shall be deemed to be the agent of the company.” Therefore, Demeter should have sued the principal being the company itself and not the judicial manager.

Further, the judicial manager had disclaimed personal liability for the contract between the company and Demeter. This is allowed for under section 416(2) of the CA 2016: “the judicial manager … may, by notice given to the other party, disclaim any personal liability under the contract.” The Court held that the judicial manager could not be held liable under the terms of the contract having disclaimed all liability.

Third, the Court found no trust arrangement to form the basis of the alleged breach of constructive trust.

The Court held that the payment clause in the contract in question merely provided that payments are to be made on a back-to-back basis. The clause could not in any way have led to the creation of a trust. Crucially, the plaintiff itself had taken the position that the amount outstanding is a debt due from the company to Demeter. Demeter had filed with the judicial manager its proof of debt form and hence, Demeter had already taken the position that it was an unsecured creditor of the company.

Fourth, the Court held that the judicial manager did not owe a duty of care to Demeter and therefore could not be in breach of the duty of care.

Fifth, the Court held that absent any other special relationship, the judicial manager owes no general duty of care to the unsecured creditors of the company in relation to his conduct in the judicial management (see Kyrris v Oldham and others; Royle v Oldham and others [2003] EWCA Civ 1506). The Court held that it did not see a reason to depart from this position under the CA 2016.

Sixth, the Court considered Demeter’s argument that the judicial manager had failed to carry out due inquiry in determining whether the monies were indeed held on trust for Demeter. Demeter argued that this duty of inquiry arose from section 429 of the CA 2016. This section essentially provides that upon the application by the judicial manager, the Court may summon any person to provide an account of his dealings with the company.

The Court disagreed with this interpretation and found that section 429 of the CA 2016 cannot be read to impose a positive duty or obligation on a judicial manager to apply to the Court for an inquiry.

The Court allowed the striking out and awarded costs of more than RM58,000 on an indemnity basis to the judicial manager.

Commentary

This is the first Malaysian decision to decide that leave is required to sue a judicial manager. The CA 2016 is silent on whether such leave is necessary or not.

Nonetheless, this decision has applied the principles applicable to officers of the court, where leave is first required before suing an officer of the court.

As a matter of commercial reality, appropriate protection of the judicial managers is necessary. Based on this decision, protection is afforded to judicial managers through four levels:

  1. First, prior leave of Court must first be obtained before suing a judicial manager. This allows a mechanism to weed out scandalous, frivolous or vexatious litigation.
  2. Second, the Court’s recognition of the agency status of a judicial manager.
  3. Third, the importance of the judicial manager utilising the disclaimer of personal liability under section 416 of the CA 2016.
  4. Fourth, absent any other special relationship, the judicial manager owes no general duty of care to the unsecured creditors of the company in relation to his conduct in the judicial management.

This decision will be useful precedent to fill any uncertainty in the CA 2016 in terms of the protection to judicial managers. These same principles would also apply to interim judicial managers.

If there was no such Court protection, a judicial manager would take on an unduly high risk of being held personally liable for decisions made during the judicial management period.

Creditors’ interests will still be protected within the judicial management framework. For example, section 425 of the CA 2016 allows for the Court in judicial management proceedings to make certain relief if there has been unfairly prejudicial conduct.

Demeter has filed an appeal against this High Court decision.

Lynn is an associate with Lim Chee Wee Partnership. Her portfolio of work focuses on restructuring and insolvency matters.

The post Case Update: Court Protection for Judicial Managers, Being Officers of the Court appeared first on The Malaysian Lawyer.