Kwan Hung Cheong v Kwan Chee Hang Sdn Bhd & Anor [2019] MLJU 1735 Malayan Law Journal Unreported

HIGH COURT () CHRISTOPHER CHIN SOO YIN JC COMPANIES WINDING-UP PETITION NO SDK-28NCC-6/8-2018 25 November 2019

Chan Kok On (Grace Chan & Assoc) for the petitioner. Grace Chaw (Grace Chaw & Co); Nobert Yapp (Norbert Yapp & Assoc) for the respondent.

Christopher Chin Soo Yin JC: GROUNDS OF JUDGEMENTSynopsis

[1]On the 14.01.2019 the learned Judicial Commissioner in granted an order for the winding up of 1st Respondent (“the Company”). In coming to his decision the learned JC found that; a) There was an irretrievable breakdown of relationship between the shareholders and the directors; b) The transactions of the Company were for the benefit of the directors; c) Failure of the sub-stratum as a family company; d) Exclusion of the Petitioner from management of a quasi-partnership.

(“the Winding-Up Order”)

[2]In coming to his findings, the learned JC had first ruled that the then Respondent’s Affidavit in Opposition (Enc 15) was inadmissible as it was filed late and no application for extension of time was agreed or made. This fact is important as the present Applicants are now saying that the late filing was curable and the fact that it (Enc 15) was not admitted meant that they were denied the rules of natural justice.

[3]The Notes of Proceedings recorded by the Learned JC on the 13.12.2018 orders the following: -

“In the absence of any AIR to the AIO, the contents of the AIO are deemed admitted by the respondents.

In view thereof and based on the AIO, the service of the petition is regular.

I find no merits in the Respondents’ arguments in respect of striking out the Petition. Enclosure 16 is dismissed with costs of RM2,000.00.”

[4]The JC accepted the reasons for the Company to be wound up in his grounds dated 11.03.19 (Enc 49 at Line 90 to 95) being:- (a) Irretrievable breakdown of the relationship between the shareholders and/or between the petitioner and the directors; (b) The Company is being run and transactions are being carried for the personal benefit of the directors; (c) Failure of substratum as a family company; and (d) Exclusion of the petitioner from management of a quasi-partnership.

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[5]Dissatisfied with the order of the learned JC the Applicants have appealed to the Court of Appeal, which hearing is now pending.

Application

[6]After appealing to the Court of Appeal against the decision of the learned JC in granting the Winding Up Order, the Applicants now seek to stay the Winding Up Order. The Petitioner is resisting the stay.

Family Disputes

[7]The purpose of the incorporation of the Company can be found in paragraph 7 of the petition for the Winding Up order (Enc 1):-

“7. The Company was incorporated on 14.09.1981. Its intended purpose/founding rationale was to become a family- controlled investment holding company to be operated for the benefit of the family of the late Kwan Chee Hang as a quasi- partnership….”

[8]The parties to this action are no strangers to litigation. Matters relating to the corporate affairs and the management of the Company at its subsidiary level have been the subject of legal suits which have escalated to the corridors of the Federal Court. See Enc 17 para 15 being the Affidavit of the one of the Respondents/Applicants Kwan Hiuang @ Kwan Huang Cheng who averred, paraphrasing: -

“…apart from the fact that the Company had been or is involved in litigation at its subsidiaries level, there is no dispute as such between the shareholders of the Company pertaining to the affairs of the Company. The Petitioner himself is contending that the Company has no direct or indirect interest in its subsidiaries whom are involved in litigation.”

And later down in paragraph 17 of the same enclosure 17:-

“…To this end it should be noted that the Petition is filed to neutralise and/or defuse the effect of the Federal Court Order dated 7.10.2013 which ordered that……”

[9]The Board as well as the members of the Company are part of the same family but where the family bonds have disintegrated in the light of disputes and allegations about the manner the family’s wealth held in the Company and/or its subsidiaries, were managed or otherwise. This is best illustrated in the following excerpt from the affidavit of Kwan Hung Cheong, the petitioner for the Winding Up Order in Enclosure 21 at paragraph 19 and the vitriol in paragraph 22 is obvious: -

“19. Among the serious allegations made in the Petition are the failure of the Respondents to provide explanation for the various suspiciously large expenditure in the audited accounts, the suspicious disposal of the Mile 3 land; and the numerous hostile litigation and police reports made against myself-occurring after 2013.”

“21. In any event, the fact remains that all of the other shareholders of the 1st Respondent (the Company) have personally lost trust and confidence in myself, and vice versa. The feeling is mutual, and the respondents cannot be allowed to blow hot and cold. Such personal feelings cut across all companies, whether within the 1st Respondent (the Company) or elsewhere.”

[10]This narrative of the existing relationship (or the lack of it) amongst the family members has a bearing in this Court’s decision in the present stay application.

Decision

[11]I heard arguments by counsel for the parties in Sandakan on the 23rd September 2019 and reserved my ruling to the 1st November 2019 in .

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[12]On the 1st November I informed counsels that their respective submissions had scant information or details as to how the Winding - Up Order or its stay would affect the people who matter most - the shareholders or contributories. I requested that they submit to me on this point and I will rule on the 25th November 2019 in Sandakan.

[13]On the 25th November 2019, I then ruled that the application for the stay was not successful and therefore denied the stay of the Winding Up order. The following are my reasons.

The Main Arguments of the Applicants

[14]A summary of the Applicants’ grounds for the stay are as follows:- (a) First, the Honourable Court’s jurisdiction to stay a winding up order pending appeal pursuant Section 73 of the Courts of Judicature Act (“CJA”) and in its inherent jurisdiction. (b) Second, the test governing a stay of a winding up order is the “less stringent approach”. The test is whether appeal would be rendered nugatory - per His Lordship David Wong Dak Wah J (as he then was) in Yu Chee Lieng v Khing Tung Realty Sdn Bhd (No 2) [2008] 10 CLJ 697 (High Court). (c) Third, applying the less stringent approach of His Lordship David Wong Dak Wah J (as he then was), this submission will demonstrate the 3 grounds warranting a stay of the winding up order: 1. The Winding Up Order was granted summarily without hearing on the merits. (a) At the outset, the Winding Up Petition was taken out under sections 465(1)(f) & (h) of the Companies Act 2016 upon disputed facts and issues alleged by the Petitioner. Both the 1st and 2nd Respondents were deprived of their right to be heard because their Affidavit in Opposition to the Petition was filed 5 days prior to the hearing date for the Petition instead of 7 days as required under Rule 30 of the Companies (Winding-Up) Rules 1972. (b) In the circumstances, if a stay of the Winding Up Order is not granted, the Civil Appeal by the 1st and 2nd Respondents which is pending before the Court of Appeal, would be rendered nugatory and/or academic. (c) Further, there is reasonable and good prospect of success in the appeal based on the decision of the Federal Court in Kilo Asset Sdn Bhd v. Hew Tai Hong [2016] 2 CLJ 365 held that non- compliance with Rule 30 of the Companies (Winding-Up) Rules 1972 is curable and not fatal. This principle was reaffirmed by the Court of Appeal in Hock Seng Lee Timber Sdn Bhd v. Yii Chi Hau & Anor [2017] 3 CLJ 104 which set aside a winding-up order under similar circumstances. 2. Breach of natural justice The 2nd and 3rd Applicants were neither cited as parties to the Winding-Up Petition nor served with the cause papers. The 2nd and 3rd Applicants had no notice of the winding up proceedings and were denied the right to be heard. In Ng King Chong & Anor v. Ooi Kim Geik & Ors [2019] 2 CLJ 246, the Court of Appeal set aside a winding-up order due to the failure of the petitioner to serve the contributories where allegations of misconduct were made against them in the petition. 3. Balance of Convenience favours the Applicants (a) The execution of and/or all proceedings pursuant to the Winding Up Order will cause irreparable harm to the Applicants and the Company; (b) The Official Receiver is appointed as its interim liquidator. In the event that any of the properties are disposed of by interim liquidator, the Applicants and the Company will sustain serious and irreparable damage. The Company is a holding company and its subsidiaries owned plantations lands and other landed properties. Damages are inadequate to compensate for loss of immovable properties and/or the winding up of a company.

Additional Submissions by the Applicants/Respondents

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[16]] The Applicants additionally submitted in (Enc 77) the case of Vijayalashmi Devi Nadchatiram Dr Nadchatiram & Ors [1995] 3 CLJ 493 where the Federal Court laid down the following principles as consideration for stay:- (a) “The granting of a stay is discretionary and the onus is on the party seeking a stay to make out a positive or sufficient case; (b) The attitude of the creditors, contributories and the liquidator is a relevant consideration; (c) In exercising its discretion, the court will consider not only the interest of the creditors but also whether it is conducive or detrimental to commercial morality and the interests of the public at large; and (d) A stay will be refused if there is evidence of misfeasance or irregularities demanding investigation.”

[17]The Applicants reiterated their grounds for the stay in this same Enclosure:- (a) “The three Applicants and the Petitioner are immediate family members namely, wife (a co-founder), daughter and two sons of the late father and founder of the Company; (b) The Class A contributories have spoken unequivocally in favour of the preservation of the Company

[The Company then had an issued and paid up capital of RM7,000,700 made up of 7,000,700 shares of RM1.00 each. The Petitioners held 1,400,000 shares. The bulk of the shares were held by Rockwills Trustee Berhad in 5.6 million shares];

(c) The allegations in support of the grounds of the winding up of the Company had not been heard on the merits and therefore the reply to the allegations of alleged misfeasance or irregularities demanding investigation have not been ventilated; (d) In the inters of creditors and conducive to commercial morality that the Winding Up Order be stayed; (e) In any event the stay may be temporary pending the decision of the Court of Appeal in the pending appeal; (f) the appeal would be rendered nugatory.”

Main Arguments by the Petitioner

[18]It is misleading for Applicants (in Enc 72 paragraph 9, 12, 13, 14.1 etc) to rely on pre-Companies Act 2016 authorities on the stay of winding up orders. This is because a “stay” of the winding up order under the new Companies Act 2016 (temporary) is completely different from a “stay” the old Act (permanent).

[19]As pointed out by the Applicants’ own authority, Equitycorp Holdings [2007], paragraph 6:

“…[Section 243(1) of the 1965 Act] is designed to perpetually stay all proceedings under a winding up for the purpose of resuscitating the subject company… These were all discussed by the Federal Court in Vijayalakshmi Devi v. Dr Mahadevan [1995] 3 CLJ 493:-

“…The above principles have been summarized by the learned editors of 1 Palmer’s Company Law (24th Ed) para 88-28 at p 1390 as follows:

“In exercising this discretion the court will be guided by the analogy of the former practice in bankruptcy in rescinding a receiving order - that is to say, it will consider the interests of commercial morality and not merely the wishes of creditors, and will refuse a stay if there is evidence of misfeasance or of irregularities demanding investigation.”

[20]In other words, a “stay” under the old law is to treat the winding up order as being rescinded or cancelled, as if it had never been granted in the first place. The company is thereby resuscitated. This is totally different from a temporary stay under the new law - which is merely to stop the execution of the order, and the order still remains intact.

[21]Unfortunately, when referring to the old authorities, Enc 72 has made no such distinction at all (even though it

GRACE CHAW Page 5 of 9 Kwan Hung Cheong v Kwan Chee Hang Sdn Bhd & Anor .... had referred to Kathryn Ma Wai Fong [2019] and Taman Rimba [2018], where the distinction from the new temporary stay was discussed).

[22]The correct test for the new, temporary stay is therefore not the “less stringent approach”. Rather, it is the “special circumstances” test, where merits of the decision (Enc 72 paragraph 15-20) are irrelevant (Enc 70 paragraph 3 and 8), which is correctly conceded by Enc 72 paragraph 21-22.

[23]Hence, it is misguided for Enc 72 to keep attacking the alleged mishandling of the hearings of the Petition (paragraph 16-17, 24-25), i.e. merits (or lack thereof), which should be ignored by this court.

[24]In any event, for the record, it must be pointed out that there was absolutely no “breach of natural justice” as alleged (Enc 72 paragraph 16-17, 24-25).

[25]It is clear from the learned JC’s Grounds of Decision (Enc 54 Exhibit KH-16, page 1-4) and Notes of Proceedings (Enc 54 Exhibit KH-15) that it was the Respondent’s advocates who had failed or neglected to avail themselves of the opportunity to be heard, on both 13 December 2018 (on the striking out application) and 14 January 2019 (on the substantive Petition itself), and by being late in filing and serving the affidavit in opposition (Enc 15) and then late again in belatedly applying for extension of time (6 days after Enc 15 had been disallowed, and was therefore already academic; see Enc 72 page 12).

[26]Therefore, it was the Respondents’ advocates who had “deprived” themselves from being heard, not the learned JC (as alleged in Enc 72 paragraph 16, etc).

[27]To satisfy the “special circumstances” test for stay, the Applicants ought to have explained how the winding up order would affect the Company. However, the Applicants’ affidavits have not put forward such materials at all. It is only at the Submission stage, at Enc 72 paragraph 26-30, that the Applicants’ counsel now belatedly attempts to put forward, as an afterthought, evidence from the bar under the heading of “Balance of Convenience” - which cannot be considered by this court. In any event, “Balance of Convenience” is a relevant factor to be considered in an application for interlocutory injunction, but not for stay.

[28]On the other hand, the effect of granting a stay of execution would be highly prejudicial to the Petitioner, because it would defeat the purpose of this Petition. As we have pointed out in Enc 53 paragraph 24-27 and Enc 70 paragraph 15, there are serious misfeasance or irregularities demanding investigation to be carried out urgently by the liquidator. If the stay is granted, it would mean that the directors (against whom allegations of misconduct have been made by the Petitioner and upheld by this court) would still be in charge of the company’s management.

Additional Arguments by the Petitioner

[29]The petitioner raised the following additional arguments upon the Court’s invitation in Enclosure 81: a) The effect of granting a stay of execution would be highly prejudicial to the Petitioner, because it would defeat the purpose of this Petition. There are serious misfeasance or irregularities demanding investigation to be carried out urgently by the liquidator. If the stay is granted, it would mean that the directors (against whom allegations of misconduct have been made by the Petitioner and upheld by this court) would still be in charge of the company’s management.” b) It must not be forgotten that this Petition was founded on the complaints that the Respondents had been acting unfairly and selfishly in their own interests, to the prejudice of the Petitioner (see Enc 51, paragraph 7). Given that this Petition has been found to have merits, the winding up of the 1st Respondent must be carried out urgently, in order to investigate the misconduct and wrongdoings of the directors in enriching themselves (in particular, see Petition paragraph 27, 59 and 63(e)-(i)). c) the auditors for the 1st Respondent, M/s C. Ho & Co. of Sandakan, had been charged with misconduct in relation to their auditing of the 1st Respondent’s accounts, etc. d) The 1st Respondent’s audited financial statements were all qualified accounts from the financial years 2007 to 2015 (see Petition paragraph 71-72, and its “Annexure 18”), shows that its directors have not been able or willing to manage the Company properly and to account for the Company’s affairs truthfully and transparently.

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e) Therefore, it is imperative that the control and management of the 1st Respondent must be removed from the directors immediately, and that its winding up be carried out expeditiously. A stay of execution would defeat the whole purpose of this Petition.”

[30]That to satisfy the “special circumstances” test for stay, the Applicants ought to have explained how the winding up order would affect the Company itself. Hence, the effect of a winding up on the contributories (separate legal entities from the Company) is actually irrelevant in law, to the question of stay.

[31]The question posed by this court is akin to a “Balance of Convenience” test in law, comparing the adverse effects to both sides, which would be a relevant factor to be considered in an application for interlocutory injunction, but not for stay. Even if the effects on “both sides” are somehow relevant, only the effects on the Petitioner and the 1st Respondent company would be relevant, not the contributories who are not parties to this petition at all.

Reasoning of this CourtSpecial Circumstances and who to prove

[32]The need for the Applicants to establish the existence of special circumstances to enable the court to grant a stay of execution has been well established in this country. In Kosma Palm Oil Mill Sdn Bhd & Ors -V- Koperasi Serbausaha Makmur Bhd [2003] 4 CLJ 1. The Federal Court decided that (in paragraph 18)(emphasis added): -

“It is therefore clear beyond doubt that there are many factors that may constitute special circumstances and the fact that an appeal would be rendered nugatory if stay was refused is the most common one. It is an example of special circumstances. In other words, special circumstances is the genus of which nugatoriness is a species. If it has been shown that an appeal would be rendered nugatory if the stay was refused what it means is that a special circumstance has been established. Thus, they cannot be treated as separate heads and one cannot be an alternative to the other.”

(applied recently in Genisys Intergrated Engineers Pte. Ltd. V UEM Genisys Sdn. Bhd. & Ors [2019] 1 LNS 761).

What is “special circumstances”

[33]An attempt was made to define special circumstances by Raja Azlan Shah (As His Majesty then was) in the case of Leong Poh Shee v. Ng Kat Chong [1966] 1 MLJ 86, viz:

“Special circumstances, as the phrase implies, must be special under the circumstances as distinguished from ordinary circumstances. It must be something exceptional in character, something that exceeds or excels in some way that which is usual or common.”

[34]As Abdul Hamid Mohamad JCA (as he then was) said in Ming Ann Holdings Sdn Bhd v. Danaharta Urus Sdn Bhd [2002] 3 CLJ 380 at p. 403:

“The weight of authorities appears to me to say that the special circumstances must be special, not ordinary, common or usual circumstances and that go to the execution of the judgment and not to the validity or correctness of the judgment (or merits of the appeal)..”

Burden and manner of proving “special circumstances”

[35]The burden of proving the existence of ‘special circumstances’ is on the Applicants as mentioned by the Federal Court in the case of Kosma Palm Oil Mill Sdn Bhd & Ors (above). Here the Federal Court held that (emphasis added) :

“… The onus is on the applicants to demonstrate the existence of special circumstances to justify the grant of a stay of execution. The reasons must relate to the enforcement of judgment. They must be deposed in the affidavit filed in support of the application…”

[36]Again in the case of Ming Ann Holdings Sdn Bhd V Danaharta Urus Sdn. Bhd. [2002] 3 MLJ 49:-

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“The approach taken by most judges appears to be that a successful litigant should not be deprived of the fruits of a judgment obtained in his favour, unless there are special circumstances (or special grounds) that justify a stay of execution to be granted.

The weight of authorities appears to me to say that the special circumstances must be special, not ordinary, common or usual circumstances and that go to the execution of the judgment and not to the validity or correctness of the judgment (or merits of the appeal).

Many judges considered the question whether the appeal, if successful, is rendered nugatory under the head of special circumstances. (Sometimes, the phrase used is whether the Defendant, if successful, can be restored to its former position). The general view appears to be that that is the more, if not the most, important factor of all.

Of course, no one ever attempts to define special circumstances, for good reasons. It is also a common view that it depends on the facts of a particular case. Thus, “business realities” has been taken into consideration, I believe under this head.

It is a common view that merits of the appeal (or correctness or validity of the judgment) is not special circumstances. Some judges do not use the term “special circumstances”. They straight away consider whether the appeal, if successful, would be rendered nugatory. Examples are Mohamed Mustafa and Gentali (M) Sdn. Bhd. v. Kawasaki Sunrock Sdn. Bhd. [1996] 3 MLJ 597 (CA) and the term was used “in the sense that the Defendant is deprived of the fruits of his success.”

I think it does not matter whether the nugatory factor is considered under the head “special circumstances” or not, so long as it is considered.

[37]It is therefore clear that the door is not closed on what may constitute “special circumstances”.

What Special Circumstances within the facts of this case

[38]I am not satisfied that the Applicants have established “special circumstances” in this case to justify the stay. I have considered the fact that the non-granting of the stay would render the appeal to the Court of Appeal to be nugatory. As will be shown later I have taken into account this issue and all the other circumstances in this case in deciding if the stay should be granted.

[39]What I think the “special circumstance” that would have swayed this Court in in this case granting the stay was that the Winding Up Oder was directly detrimental to the interest of the shareholders/contributories of the Company with evidence in support introduced by affidavits as per Kosma Palm Oil case (see excerpt in para 35).

[40]In addition, it would have helped if it was shown that the Company was a viable commercial enterprise capable of operating in the ordinary course of business to meet the objects for which it was incorporated and with no impediments by way irresolvable Boardroom or members’ squabbles. In other words, to would be commercially moral to preserve the Company as an ongoing concern.

[41]Having ploughed through the myriad of submissions and affidavits I cannot find any satisfactory evidence of this. Given the background of the Company and the underlying acrimonious family disputes and the finding of the Learned JC that the sub-stratum of this family Company had gone, justice in this case tips in favour of maintaining the Winding Up Order as opposed to its stay and that it is just and equitable to do so.

No deprivation of the fruits of litigation and appeal does not make stay automatic

[42]I am also mindful of the basic principle that a successful litigant should not be deprived of the fruits of his litigation for no good reason. The fact that the appeal would be rendered nugatory is not the sole criteria for granting a stay or that the stay would be automatic.

These was clearly established in Wu Shu Chen v Raja Zainal Abidin bin Raja Huissin & Anor [1996] 2 CLJ 353 and based on section 73 of the Courts of Judicature Act and Order 55 r 16 of the Rules of Court 2012.

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The impact on the Contributories of the Company

[43]The Company was wound up not because of insolvency (see para 1 above). The Company was a holding company with subsidiaries laden with assets. The learned JC held that it was just and equitable to grant the Winding Up Order and stated in his grounds that the substratum of the Company had gone, among other factors.

[44]The Petitioner argues that the Court would be wrong to weigh the impact on the contributories in deciding whether a stay should be granted, and that the only impact which is relevant would be against the Petitioner as well as the 1st Respondent (the Company) (see paras 30 and 31 above). I disagree with this contention. The Company exists only at the instance and desire of its shareholders as its promoter. What happens to the Company ultimately affects the shareholders and the final step in the dissolution of the Company by winding up or otherwise ends with the shareholders as well.

[45]In this case, it is obvious the shareholders and their nominees (if any) on the Board of the Company cannot work together. Not only can they not work together, some of them are engaged in litigation inter se.

[46]In this case there is no evidence that the Company can be commercially resuscitated and there are scant details from the Applicants to convince this Court that the Company can be so resuscitated and that the shareholders holding the majority equity in the Company desire such. I note here that the majority of the shares are held by one, Rockwills Trustee Berhad holding about 80% of the issued share capital of the Company.

[47]In the circumstances it is in the interest of the shareholders that the Company be wound up and as soon as possible so that the assets of the Company held either by the Company itself or indirectly through its subsidiaries can be liquidated, and distributed and the shareholders can go their own way free from the angst and family attrition they now suffer.

[48]I am thus guided by the words of Vincent Ng J (as he then was) in Jaya Harta Realty Sdn Bhd v Koperasi Kemajuan Pekerja-Perkeja Ladang Bhd. [2000] 3 CLJ 361: -

“The justice of the case on stay is arrived at by striking a judicious and equitable balance between the principle that the successful party in the litigation ought to be allowed to reap the fruits of that litigation and not obtain a mere brazen success, and the countervailing principle that should the unsuccessful party in litigation be ultimately successful in his appeal, he ought not be deprived of the fruits of his litigation due to the result of his appeal being rendered nugatory.”

[49]I see strong parallels in the facts in the instant case when compared with the facts in Varusay Mohamad Shaik Abdul Rahman v SVK Patchee Brothers () Sdn. Bhd. [2002] 3 CLJ 741. Here the company was characterised as a quasi-partnership company and there was lack of probity in the management of the affairs of the company. As a result, there was a breakdown of mutual confidence and good faith amongst the parties. The Court of Appeal held that the learned trail judge had exercise his discretion on the wrong ground in refusing to wind up the company merely because it was profitable and the winding up would cause hardship to workers. It was said:

“….convincing evidence of the breakdown of mutual confidence and good faith among the parties justify the winding-up on the just and equitable ground. We are fortified in our view by what was deposed by SD2 who is the head of the other faction when questioned by the Court. He said:

Varusay…is our cousin brother, his relationship is not good with me and my whole family. We are not on speaking terms since 1922. It is a family problem, we can’t work together.”…

That statement sealed the fate of the company. [see Corporate Powers Accountability (Third Edition - Lexis Nexis) Loh Siew Cheang at page 1260].

Order

[50]Taking all the above authorities and reasoning into consideration it is my decision that the application for stay of the Winding Up Order is not allowed with costs to the Petitioner of RM5,000.00.

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Notice: This copy of the Court’s Grounds of Decision is subject to editorial revision.

End of Document

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