You picked a bad business partner. Can Malaysian law help save your business?

This article was written by Dinesh Sadhwani, a practicing advocate and solicitor of the High Court of Malaya.

In one sense, business relationships are like romantic relationships. When we enter into a new romantic relationship, we initially look at everything with misty eyes and it all seems hunky dory. However, it is challenging for these sentiments to last forever - any relationship will have its ups and downs.

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The same goes with business relationships. When running a business, we may decide to collaborate (e.g. through a partnership or joint venture) with people that share our vision or bring additional resources or expertise to grow the business. At the outset, the parties usually can't wait to get the collaboration started and everyone is initially very enthusiastic and optimistic. Unfortunately, sometimes, not all remains smooth. Cracks start to appear in the relationship. Differences arise, arguments happen and, worst of all, the partners stop cooperating - sometimes irreconcilably, despite the parties' best efforts in negotiating an amicable settlement.

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What can you do when this happens? Let's take a look at two separate scenarios further below and the possible remedies.

Before doing that, a quick technical clarification on the scenarios. We usually refer to "company" and "partnership" interchangeably. However, legally speaking, they are different. A company is governed by the Companies Act 2016 whereas a conventional partnership is subject to the Partnership Act 1961. This will be discussed further in the scenarios discussed below.

Scenario 1 - Fighting Partners & Co (Conventional partnership)

Background

Under this scenario, let's imagine that you are in partnership with another person (let's call him Mr. PE) and jointly running a business under this partnership (let's call it Fighting Partners & Co). You and Mr. PE are joint signatories to Fighting Partners & Co's bank accounts i.e. every cheque requires both your and PE's signatures. Your relationship with Mr. PE unfortunately sours to the point where Mr. PE refuses to sign cheques. This of course starts to cause problems to the business (e.g. salaries, rental, suppliers, etc are not paid).

Possible solution - Dissolve the partnership under Section 37 of the Partnership Act

What can you do in this case? In the case of a partnership, the possible remedy is to apply to the court under section 37 of the Partnership Act for an order to dissolve the partnership.

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The relevant part of section 37 reads as follows:

On application by a partner, the court may decree a dissolution of the partnership in any of the following cases -

[...]

(c) when a partner, other than the partner suing, has been guilty of such conduct as, in the opinion of the court, regard being had to the nature of the business, is calculated to affect prejudicially the carrying on of the business;

[...]

In simple English, this provision can be used where the partner in question has done something (or purposefully did not do something which should have been done) and this has affected the partnership’s business or even brought it to an effective halt. We could argue that this is precisely the situation here. By not signing the cheques, Mr. PE is causing the business to choke and come to a standstill - while being fully aware that this will happen.

Scenario 2 - Fighting Partners Sdn Bhd (Company)

Background

Let's imagine that you are a shareholder and director of a company (let's call it Fighting Partners Sdn Bhd) together with another person (let's call him Mr. CE) and carry on business through the company. You and CE are also joint signatories to Fighting Partners Sdn Bhd's bank accounts. Similar to the above scenario, the relationship sours and CE holds up the business.

What can you do? In the case of a company, there are two possible options here.

The first possible solution: Breach of director's duties under Section 213 of the Companies Act

The first option is to try to use section 213 of the Companies Act. Pursuant to the Companies Commission of Malaysia Act 2001, the power to administer and prosecute offences under the Companies Act lies with the Companies Commission of Malaysia. The relevant parts of section 213 read as follows:

(1) A director of a company shall at all times exercise his powers in accordance with this Act, for a proper purpose and in good faith in the best interest of the company.

[ ... ]

(3) A director who contravenes this section commits an offence and shall, on conviction, be liable to imprisonment for a term not exceeding five years or to a fine not exceeding three million ringgit or to both.

You could try to invoke section 213(1) and argue that Mr. CE is not acting in good faith in the best interests of the company as he is causing a hold-up to the company's business for reasons that are irrelevant to his duty as a director (i.e. the breakdown of his relationship with you). By trying to “sabotage” you, he is effectively “sabotaging” the company.

However, it's also possible for Mr. CE to come up with ingenious counter arguments - for example, that he is blocking payments as you are not managing the company well and he is merely "doing his duty" as a director to "safeguard the company's assets". Whether CE's counter-argument can hold water depends, of course, on the evidence that he can present.

The second possible solution: Oppressive conduct under Section 346 of the Companies Act

The second option is to apply to the court under section 346(1) of the Companies Act. The relevant part of section 346(1) reads as follows:

(1) Any member or debenture holder of a company may apply to the Court for an order under this section on the ground -

(a) that the affairs of the company are being conducted or the powers of the directors are being exercised in a manner oppressive to one or more of the members or debenture holders including himself or in disregard of his or their interests as members, shareholders or debenture holders of the company; or

[ ... ]
 

In a nutshell, section 346 allows a shareholder to seek a remedy from the court if the shareholder has been oppressed, prejudiced or unfairly discriminated against or his interests have been disregarded. In the landmark decision Re Kong Thai Sawmill (Miri) Sdn Bhd) [1978] 2 MLJ 227, which involved the equivalent provision to section 346 in the old Companies Act 1965, the court held that this provision catches a wide range of actions, including directors' neglect of duty.

It is to be noted that, pursuant to section 347, a person may bring an action for oppression in the name of the company (compared to the individual shareholder in the previous paragraph). However, this can only be done with the court's permission. A section 347 action may be relevant if the company (but not the other / minority shareholders) is aggrieved by the actions of a particular shareholder (who is the majority shareholder and in control of the company).

What can the court do if you can establish a case under section 346(1) ? Let's look at section 346(2) of the Companies Act:

(2) If on such application the Court is of the opinion that either of those grounds is established, the Court may make such order as the Court thinks fit with the view to bringing to an end or remedying the matters complained of, and without prejudice to the generality of subsection (1), the order may —

(a) direct or prohibit any act or cancel or vary any transaction or resolution;

(b) regulate the conduct of the affairs of the company in the future;

(c) provide for the purchase of the shares or debentures of the company by other members or debenture holders of the company or by the company itself;

(d) in the case of a purchase of shares by the company, provide for a reduction accordingly of capital of the company; or

(e) provide that the company be wound up.
 

Essentially, under section 346(2), the court has wide powers to make an order which the court thinks fit with the view of solving the issue. Items (a) - (e) set out above are a non-exhaustive list of the court's powers. Note that the court's powers include ordering for the company to be wound up, which is of course the most drastic remedy.

A well-written agreement will save you a lfot of headache

As the saying goes, there is no point in crying over split milk. Once the damage has been done, the mess has to be cleaned up - and this may sometimes require a time consuming and costly dispute resolution process.

Having said that, the irresistible question that is likely to arise in the minds of those of you who have been fortunate enough not to have fallen into this problem or even those of you who are seeking to rebound from a business arrangement gone wrong - how can we avoid getting into this problem in the first place?

Before entering into the relationship with your fellow partner or shareholder, it is always best to sign a comprehensive and well drafted agreement (e.g. partnership agreement or shareholders' agreement) to regulate the relationship. The agreement should clearly mention each party’s rights and obligations. No doubt that there are potential remedies in law as we discussed above – however, the existence of a clear agreement makes it easier to argue and hopefully avoid a protracted battle. This is course hinges on a fundamental assumption - that a party who signs an agreement will honour his or her end of the bargain. Otherwise, the parties may have to still see each other in court!

This article is for informational purposes only and should not be taken as legal advice. Every situation is unique and dependent on the facts (ie, the circumstances surrounding your individual case) so we recommend that you consult a lawyer before considering any further action. All articles have been scrutinized by a practicing lawyer to ensure accuracy.