THE STATUS OF A COMPANY’S FINANCIAL ACCOUNTS PREPARED PURSUANT TO MALAYSIAN COMPANIES ACT & ITS RELEVANCE TO THE DOCTRINE OF SEPARATE LEGAL ENTITY AND PRINCIPLE OF PRIVITY OF CONTRACT

1. Can a company’s financial accounts be considered as final, conclusive and binding?

The High Court has held that the Annual Financial Statement (AFS) and Management Accounts of a company cannot be taken as final, conclusive and binding. Authorities for this position in law are as follows:

• Soo Boon Siong @ Saw Boon Siong v Saw Fatt Seong & Soo Hock Seang (As Estate Representative of Soo Boon Kooi @ Saw Boon Kooy (Deceased)) & Ors [2008] 1 MLJ 27, Court of Appeal, Mokhtar Sidin JCA, pages 22-23 paragraphs 79-82

The principle is that a summary of accounts does not prove the facts and particulars stated therein. The fact that the summary of the particulars was made could not be taken as correct and that the maker needs to be called to explain the facts and basis.

Further, it is accepted that a company’s accounts statutorily confirmed by the directors aare made pursuant to section 169 (5) and (16) of the Companies Act 1965. These accounts are not conclusive and not an indication of any intention on the part of the company. The accounts are signed and approved by the directors; hence it may be binding on those directors, but not binding for all purposes. It is undoubted that statute and public policy do not prohibit a director from challenging the very accounts that have been confirmed, accepted and signed under the provisions of the Companies Act. Is it also pertinent to understand that the burden of proof to prove the reliance on the AFS and Management Accounts is on the party who asserts the statement(s) to be true.

• Dato’ Seri Timor Shah Rafiq v Nautilus Tug & Towage Sdn Bhd [2018] 8 MLJ 394, High Court, Darryl Goon Siew Chye J, page 110 paragraph 18

The directors of the company possess the inspection rights over the company’s books and these rights could not be precluded just because the directors had signed the directors’ reports in the company’s accounts.

• Lee Song Chai v Ting Sheng Jewelry Marketing Sdn Bhd [2017] 1 LNS 1495, High Court, Justice Lim Chong Fong, page 1495 paragraph 27

Despite the directors’ statements in the audited accounts, the fact that the debt is acknowledged in the audited accounts is not conclusive and binding in every respect. The directors are not estopped from resiling and challenging the directors’ statement endorsed in the audited accounts.

2. Can a company waive or write off debts by its debtors according to its whim and fancy?

There MUST be a directors’ resolution or even a shareholders’ resolution to prove waiver or write off a debt. In the circumstance where the party to the litigation failed to offer such evidence, it shall be concluded that the party failed to discharge the burden of proof on this point.

3. Does a write-off or waiver of debt constitute a cancellation of that debt?

Writing off and impairment of debts are internal financial matters of a company that do not extinguish the right to claim a debt owing. Writing-off means that the debt is not expected to be recovered. More importantly, a debtor may not rely on entries in the AFS and even Management Accounts as a basis to contend that they need not repay a debt merely because a debt had been written off or treated as own expenses in the said accounts.

• OCBC Bank (Malaysia) Bhd v Tan Chong Keat & Anor [2005] 8 CLJ 418, High Court, Mohd Noor Abdullah J, page 421 paragraph h

Writing off does not affect the rights and obligations of the parties to the debt and the debt is not extinguished.

4. Can the Principle of Privity of Contract apply to non-parties eventhough that party may benefit from such a contract?

It is pertinent to note that the terms of an agreement in which a company is not a party to it cannot be enforced against that company nor could the agreement be enforced for their  benefit. In order to enforce the terms of the agreement against that non-party company, the other party(ies) ought to have ensured that company was made a party to the agreement.

• Boustead Naval Shipyard Sdn Bhd v Dynaforce Corp Sdn Bhd [2015] 1 MLJ 284, Court of Appeal, Abdul Malik Ishak JCA, page 306-308 paragraphs 63-70

“The law is clear. A person who is not a party to a contract has no right to sue on a contract.”

“The doctrine of privity of contract is here to stay. In Murphy v Bower (1866) IR 2 CL 506, the court categorically stated that, ‘no stranger to the consideration can take advantage of a contract, although made for his benefit.’ Bluntly put, only the parties to the contract have enforceable rights and obligations under the contract.”

• Tan Poh Yee v Tan Boon Thien & Other Appeals [2017] 2 CLJ 569, Court of Appeal, Rohana Yusuf JCA, page 582 paragraph 18

“The fundamental principle of law on this point has been constantly followed and repeated by our courts that only a party to a contract can sue on it and only the parties to the contract have enforceable rights and obligations under the such contract…”

5. Is the Doctrine of Separate Legal Entity applicable to holding company/subsidiary company relationships?

This principle of separate legal entities is applicable in deciding the understandings or contractual arrangements between the holding company with its subsidiaries. The authority below was upheld by the Court of Appeal and never challenged further.

• Tan Sri Dato’ Tajuddin Ramli v Rego Multi-Trades Sdn Bhd [2018] 7 CLJ 197, Court of Appeal, Hamid Sultan Abu Backer JCA, page 215 paragraph 65

“We are in full agreement with the Judge who held in TRI, as a holding company, and its wholly-owned subsidiary company, the Respondent, are separate legal entities. There is a plethora of cases which have decided that even in a group of companies, each company is a separate legal entity possessed of separate legal rights and liabilities. A board resolution of a parent or holding company cannot bind a subsidiary or wholly-owned company of that parent or holding company.”

CONCLUSION

It was the unanimous decision of the Court of Appeal that the abovementioned principles relied upon by the Learned High Court Judge in the aforementioned case are sound and relevant for the outcome of the case. Needless to say, the Defendant in the High Court (Appellant in the appeal) failed in their appeal when they relied their defence almost entirely on the audited financial statements of the Plaintiffs (Respondents in the appeal). Additionally, the Defendant failed in the appeal when they their reliance on a contract entered into between the Defendant and a third party was binding on the Plaintiffs who were strangers to the said contract.