C.K. Kok discusses the recent High Court decision in Securities Commission v Omega Holdings Bhd & Ors  2 CLJ 747
An application was submitted by Omega Holdings Bhd, the 1st defendant, to the plaintiff, the Securities Commission ("SC"), for a scheme of arrangement ("Scheme") under which the 1st defendant's listing status would be assumed by Energro Berhad ("Energro").
The Scheme was approved by the SC. As part of the Scheme –
(a) new Energro shares were issued to the 2nd defendant, Milan Auto, in consideration for the sale by Milan Auto of its subsidiary to Energro;
(b) the 2nd defendant sold some of the Energro shares issued to it to investors ("Milan Private Investors") and the sale consideration was paid to the 2nd defendant;
(c) fourteen bumiputra investors ("Bumiputra Subscribers") collectively paid RM30 million to Affin Merchant Bank ("Affin"), the placement agent for Energro, and were issued new Energro shares; and
(d) the creditors of the 1st defendant ("Omega Creditors") were issued new Energro shares in satisfaction of the debts owing to them by the 1st defendant.
The SC subsequently withdrew its approval on grounds of a material misrepresentation and obtained a Court order under S.100(1)(hh) of the Securities Industry Act 1983 ("SIA") declaring void ab initio the contracts relating to the sale, offer for sale or subscription of Energro shares under the Scheme ("Scheme Contracts").
At the time of the declaration, the RM30 million paid by the Bumiputra Subscribers was held by AmTrustee. The Milan Private Investors, the Bumiputra Subscribers and the Omega Creditors (collectively "New Investors") all claimed to be entitled to these moneys.
THE PLAINTIFF'S APPLICATION
As there were insufficient funds to pay every New Investor for the Energro shares issued to them, the SC applied to Court for an order for the distribution of the moneys held by AmTrustee.
The SC submitted that the moneys should be distributed proportionately to all the New Investors. The basis for the SC's contention was that the Energro shares had been allocated, hence the moneys paid for such shares had become part of the assets of Energro, from which all the New Investors would share. The SC also relied on the maxim in equity that "equality is equity".
THE COURT'S DECISION
The Court held that only the Bumiputra Subscribers were entitled to the moneys held by AmTrustee.
The Court rejected the basis of distribution advocated by the SC. First, the Court proceeded to examine the effect of an order made under S.100(1)(hh) of the SIA which provides as follows –
"an order declaring the whole or any part of a contract relating to securities, including a contract for the acquisition or disposal of securities, to be void, and if the High Court thinks fit, to have been void ab initio or at all times on or after a specified date before the order is made;"
The judge noted that the order obtained by the SC was not that the Scheme Contracts were void but were void ab initio. This meant that the shares that were issued under the Scheme Contracts had never been validly issued from the beginning.
The learned judge then held that the principles of restitution contained in S.66 of the Contracts Act 1950 would apply to a contract that has been declared void, namely that "any person who has received any advantage under the agreement or contract is bound to restore it, or to make compensation for it, to the person from whom he received it".
Having laid down the legal principles, the learned judge then examined the rights of each category of New Investors.
The Milan Private Investors
These investors had purchased the Energro shares that had been issued to Milan Auto. The payments for the shares had been made to and were received by Milan Auto and not Energro. When the Scheme Contracts were declared void ab initio, the Energro shares failed totally as consideration. Therefore, the Milan Private Investors were entitled to recover the payments made by them to Milan Auto.
The Bumiputra Subscribers
This group paid moneys to Affin to subscribe for new Energro shares. As Affin was at all material times the placement agent of Energro, the moneys received by them were held for Energro.
The judge also held that as the Scheme Contracts had been declared null and void, the payments made by the Bumiputra Subscribers did not become part of the capital or assets of Energro.
As the Scheme Contracts (including those under which new Energro shares were issued to the Bumiputra Subscribers) had been declared void, Energro was obliged to restore any advantage received by it from the Bumiputra Subscribers for those shares.
The Omega Creditors
The Omega Creditors had accepted new Energro shares in satisfaction of debts owed to them by Omega. In other words, Energro had bought over the debts of Omega and had settled the same by the issue of new Energro shares.
When the SC withdrew its approval of the Scheme and the Scheme Contracts were declared void ab initio, the Scheme ceased to exist. The consideration for the issue of new Energro shares to the Omega Creditors had failed totally. The Omega Creditors were therefore entitled to be restored to the position before the new Energro shares were issued to them. In other words, their claims against Omega for the debts owing to them were restored.
The Court held that the application of the maxim "equality is equity" without taking into consideration the material differences would have been an overly simplistic and erroneous approach.
The Omega Securities Case is noteworthy as it is the first reported case (and probably the first case) where the SC has applied to Court for an order relating to the distribution of moneys in consequence of a failed restructuring scheme.
It is submitted that the judge has applied the correct legal principles in determining the rights of the various categories of claimants to the moneys held by the trustee.
KOK CHEE KHEONG (