Lessons from the Federal Court’s decision to validate shares issued without prior approval of company’s shareholders

03 November 2025

The Federal Court in the recent case of WTK Realty Sdn Bhd v Kathryn Ma Wai Fong & Anor and Other Appeals) [2025] 8 CLJ 988 validated the shares issued by three companies without the prior approval of their shareholders.

Facts

WTK Realty Sdn Bhd (“WTK Realty”), Southwind Plantation Sdn Bhd (“Southwind”) and Ocarina Development Sdn Bhd (“Ocarina”) (collectively the “companies”) were founded by Wong Tuong Kwong. After the founder’s death, the companies were managed by his three sons, Wong Kie Nai (“WKN”), Wong Kie Yik (“WKY”) and Wong Kie Chie (“WKC”). Between 2005 and 2007, WTK Realty, Southwind and Ocarina issued and allotted 4.0 million, 3.0 million and 1.5 million new shares respectively to WKN (collectively “impugned shares”).

WKN died in 2013. The request by Kathryn Ma (“Kathryn”) for the impugned shares to be registered in her name as the executrix of WKN’s estate was refused by WKY and WKC. WKN and WKY then filed three suits in the High Court to nullify the issuance of the impugned shares to WKN on the grounds that: (i) the issuance of the impugned shares was in breach of section 132D of the Companies Act 1965 (“CA 1965”) as they were carried out without the prior approval of the shareholders of the respective companies; and (ii) certain provisions of the articles of association (“AA”) of the respective companies were not complied with (“nullification suits”).

In response, Kathryn filed three suits seeking court orders to validate the issuance of the impugned shares under sections 63 and/or 355 of the CA 1965 in the event the Court found that the provisions of section 132D of the CA 1965 and the AA had not been complied with (“validation suits”).

Decision of the High Court

The High Court allowed the nullification suits holding, inter alia, that: (i) the issuance of the impugned shares was null and void as it breached section 132D, which requires prior shareholders’ approval; (ii) subsequent knowledge or consent of the shareholders, inferred from documents like audited accounts, could not be equated with the mandatory ‘prior approval’ required by law; and (iii) the required informal assent must be obtained explicitly as laid down in In Re Duomatic Ltd [1969] 2 Ch 365 (“Duomatic”).

The High Court declined to issue the validation orders sought by Kathryn under the validations suits, principally on the grounds that such orders would cause injustice to the companies and WKY and WKC whose shareholding in the companies had been diluted.

Decision of the Court of Appeal

The Court of Appeal allowed Kathryn’s appeal. The main grounds of the Court of Appeal’s decision were: (i) the High Court had misdirected itself on the application of the Duomatic principle in holding that assent only applies if it was given before the impugned shares were issued; (ii) various documents since 2005 pointed to the fact that there was knowledge of the impugned shares being issued and acknowledged by the shareholders of the companies, which amounted to approval of the issuance of the impugned shares; (iii) the companies were family-owned businesses and there were prior instances when shares were issued by the companies in breach of section 132D without objections.

Decision of the Federal Court

Leave was granted to the appellants to appeal on four questions of law. The only one of relevance is the following:

Question 3:
Can the court depart/derogate from the mandatory statutory requirement of prior shareholders’ approval to allow subsequent approval of the shareholders for the issuance/allotment of shares?

Analysis of the Federal Court

The Federal Court noted that the High Court had held that informal consent under the Duomatic principle must occur prior to the issuance of the impugned shares whilst the Court of Appeal held that the informal consent could occur after the share issuance.

According to Datuk Vazeer FCJ, the common and central issue in the appeals is whether there has been a contravention of section 132D(1) of the CA 1965, and the issuance of the impugned shares in the companies are null and void; and if so, whether the court ought to validate the allotment and issuance of the impugned shares to WKN under sections 63 and/or 355 of the CA 1965.

Having outlined the central issue, His Lordship found the approach taken by both the High Court and the Court of Appeal wanting. Having ascertained that the issuance of the impugned shares breached section 132D(1) for lack of prior consent of the shareholders, the next question to ask is whether such a breach renders the issuance a nullity or is curable. The clear answer to this is that it is not a nullity as there are provisions in the CA 1965, particularly, sections 63 and 355 that allow the court to validate such share issuance.

As there are statutory mechanisms available in the CA 1965 to cure the breach of section 132D(1) of the CA 1965, the validation of the issuance must be done in accordance with these provisions, and not by reference to the Duomatic principle under English common law. This is particularly so as section 5(1) of the Civil Law Act 1956, inter alia, provides that English law on corporations shall not apply where provision has been made on the subject matter under written law in Malaysia. Accordingly, the learned Judge was of the view that both the High Court and Court of Appeal had erred in applying the Duomatic principle. According to the learned Judge, the proper approach would have been to apply the specific statutory provisions in the CA 1965 that deal with validation by the courts, namely sections 63 and/ or 355.

Sections 63 and 355 of the CA 1965 are summarised below.

Section 63
Where a company has issued or allotted shares that are invalid by reason of any provision of the CA 1965 or of the company’s memorandum or articles, the Court may issue an order validating the issue or allotment of those shares upon its being satisfied that in all the circumstances it is just and equitable so to do.

Section 355
(1) No proceeding under the CA 1965 shall be invalidated by any defect, irregularity or deficiency of notice or time unless the Court is of opinion that substantial injustice has been or may be caused thereby which cannot be remedied by any order of the Court.

(2) The Court may if it thinks fit order that the proceeding is valid notwithstanding any such defect, irregularity or deficiency.

(3) Without affecting the generality of subsections (1) and (2) or of any other provision of the CA 1965, where any omission, defect, error or irregularity has occurred in the management or administration of a company whereby any breach of the CA 1965 has occurred, or whereby there has been default in the observance of the company’s memorandum or articles, the Court:

(a) may make such order as it thinks fit to rectify or to negative or modify the consequences in law of any such omission, defect, error or irregularity, or to validate any act, matter or thing rendered invalid by or as a result of any such omission, defect, error or irregularity; and

(b) shall, before making any such order, satisfy itself that such an order would not do injustice to the company or to any member or creditor thereof;

According to the Federal Court, the court’s paramount consideration in validating an otherwise invalid share issuance pursuant to section 63 and/or section 355 of the CA 1965 is whether under the circumstances of the facts of the case it would be just and equitable to do so and whether substantial injustice would be caused by any such validation.

His Lordship noted that the High Court had failed to take into consideration the following highly relevant factors raised by Kathryn:

WKC’s admission that not all shares issued in the corporate history of WTK Realty had complied with the strict formalities under section 132D(1) of the CA 1965.
The evidence showed that the respective boards of the companies had consistently approved the directors’ reports and audited accounts of their company from 2005 to 2011 which showed the issuance of the impugned shares to WKN, thus indicating the appellants’ knowledge and acquiescence of the issue of the impugned shares.
The shareholders of WTK Realty, including WKC and WKY, had voted in favour of a shareholders’ resolution’s at an EGM held on 6 April 2013, to approve the conversion and capitalisation of the convertible preference shares, including the issued shares. This must be treated as an affirmation or ratification.
At an EGM of WTK Realty held on 6 April 2023 (well after WKN’s death), the appellants, in particular WKC and WKY, had acknowledged and acted on all the 4 million shares issued in WTK Realty to WKN by utilising the 4 million shares as part of the paid up capital when WTK Realty was required by its bank (“bank”) to increase its share capital to 19.15 million shares as a condition for granting a loan to WTK Realty. Hence, the appellants had recognised the issuance of the 4 million shares as valid and had derived benefit from the said shares by using them as part of the issued share capital to fulfil the conditions precedent for the disbursement of the loan by the bank.
The companies had used the subscription moneys paid by WKN for the impugned shares since 2005 and 2007 respectively to date. The companies have not offered to refund these monies to Kathryn despite contending that the share issuance is null and void and refusing her request for the shares be transmitted to her as the executrix of WKN’s estate. The companies continue to derive benefit by using these funds as capital, and meeting the condition for the increased share capital imposed by the bank.
The Court could not countenance the delay by WKC and WKY in seeking declaratory reliefs, which were commenced almost six to seven years after the impugned shares were issued to WKN, despite knowledge and acquiescence on their part. The Court should be vigilant and less inclined to grant declaratory orders where the party seeking such equitable relief is guilty of laches.
In 2007, the three Wong brothers, who were acting in concert, applied to the Securities Commission Malaysia (“SC”) for exemption under the Takeover Code from making a mandatory offer. Their application to the SC included the impugned shares. In the application to the SC, the appellants had acknowledged the validity of the share issuances. If the declaratory relief is granted to invalidate the share issuances, this would amount to the appellants having knowingly made a false declaration to the SC.
In 2009, in a proposed general mandate for recurrent related party transaction, the impugned shares were reflected in a circular from WTK Holdings Bhd, a listed company where WKC and WKY were directors, to its shareholders. The circular stated that the directors had reviewed and approved and accepted full responsibility for the information contained within.
In 2009 and 2011, Southwind paid a dividend to its shareholders WTK Realty and WTN¹, at the material time. The tax voucher for the 2011 dividend was signed by WKY.²
The return of allotment of shares (Form 24) for Southwind dated 5 July 2005 was signed by WKN and WKY, indicating they had knowledge of the share issuance from as early as July 2005.

The Federal Court said that the High Court had failed to take all this evidence when deciding whether to validate the issuance of the impugned shares and had only focused on the impugned shares diluting the shareholding of WKY and WKC. These pieces of evidence, said Justice Vazeer FCJ, are highly relevant and important in determining whether it would be just and equitable to order the validation under section 63 and/or 355 of the CA 1965. The Court added that there is clear and compelling evidence that WKC and WKY’s knowledge and acquiescence of the share issuances and they did not raise any objections to the share issuances for so long, and had in fact derived benefit
from the capital injection by WKN through the issuance of the impugned shares. The Federal Court concluded that the failure by the High Court to consider these facts clearly indicated a lack of judicial appreciation of the evidence, which is an appealable error that warrants appellate intervention.

The Federal Court noted that although the Court of Appeal had considered those facts, it had relied on the Duomatic principle instead of section 63 and/or 355 of the CA 1965 to allow Kathryn’s appeal. The Court opined that if the Court of Appeal had considered the validation applications under sections 63 and/or 355, the outcome would be the same, as a validation order would be issued as it would be just and equitable to do so, given the facts and circumstances of the case. If the High Court order was upheld, it would have caused substantial injustice to WKN and his estate, particularly when the High Court did not order a refund of subscription monies paid by WKN for the share issuances.

In the premises, the Federal Court answered leave Question No. 3 in the affirmative, and determined that the other leave questions need not be answered. The Federal Court then dismissed the appellants’ appeal and affirmed the orders issued by the Court of Appeal, albeit for entirely different reasons.

Comments

Although the Federal Court’s decision in WTK Realty is not novel and has been preceded by other cases relating to validation under sections 63 and/or 355 of the CA 1965 for shares issued in breach of section 132D(1) of the CA 1965, there are nonetheless four noteworthy points in this decision.

First, although the CA 1965 has been repealed by the Companies Act 2016 (“CA 2016”), the Federal Court’s decision in this case remains relevant to the interpretation of the following provisions of the CA 2016 - sections 75 and 76 (section 132D CA 1965), section 108 (section 63 CA 1965) and section 582 (section 355 CA 1965) as the new provisions are either in pari materia or substantially in pari materia with the repealed provisions.

Second, parties seeking to challenge the validity of a share issues for non-compliance with section 132D (or 75 of CA 2016) must act promptly upon discovery of the alleged non-compliance as delay in doing so could be construed against them.

Third, although the decision in WTK Realty is largely fact-centric, the factors identified by the Federal Court as relevant in determining whether or not to issue a validation order provide helpful guidance to an applicant as to the evidence that may be produced to persuade the court that it is just and equitable in the circumstances to issue a validation order when the application is contested by other shareholders.

Fourth, and most significantly, the Federal Court has categorically ruled that the Duomatic principle under English law should not be applied to cases involving the validation of share issuances, and in light of section 5(1) of the Civil Law Act 1956, such applications must be considered under section 108 (section 63 CA 1965) and/or section 582 (section 355 CA 1965) of the CA 2016. In this regard, the Federal Court’s decision in this case follows the views expressed in Detik Ria Sdn Bhd v Prudential Corporation Holdings Limited & Anor [2025] 3 MLJ 22, where Nallini Pathmanathan FCJ cautioned that cases on restitution of advantage received under a void agreement or a voidable contract that becomes void, must be considered under section 66 of the Contracts Act 1950, and that the principles laid down in the common law cases such as Patel v Mirza [2016] UKSC 42 should only be adopted if they are in consonance with section 66.

Case commentary by To’ Puan Janet Looi (Partner & Division Head) and Tham Zhi Jun (Associate) of the Corporate Division of Skrine.

¹ It is unclear from the judgment who WTN is. It may be a typographical error for “WKN”.

² Although not expressly stated in the judgment, presumably the dividend was also paid on the Southwind shares whose validity is disputed by the appellants.

This article/alert contains general information only. It does not constitute legal advice nor an expression of legal opinion and should not be relied upon as such. For further information, kindly contact skrine@skrine.com.

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Lessons from the Federal Court’s decision to validate shares issued without prior approval of company’s shareholders